UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORMForm 10-K

 

xANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
¨TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

☒   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018

OR

☐   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year-ended December 31, 2016transition period from _______ to ________

Commission file number 000-30234number: 001-36492

 

 AGEAGLE AERIAL SYSTEMS INC.

(Exact name of registrant as specified in its charter)

 

ENERJEX RESOURCES, INC.
(Exact name of registrant as specified in its charter)

Nevada88-0422242
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
  
4040 Broadway117 South 4th Street, Neodesha, Kansas
Suite 508
San Antonio, Texas7820966757
(Address of principal executive offices)(Zip Code)

 

(210) 451-5545
(Registrant’s telephone number, including area code)

Registrant’s telephone number, including area code:(316) 202-2076

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

Name of each exchange on which registered:

Title of each className of each exchange on which registered
Common Stock, par value $0.001 per shareNYSE American LLC

 

Securities registered pursuant to Section 12(g) of the Exchange Act:

Common Stock, $0.001 par value 10% Series A Cumulative Redeemable Perpetual Preferred Stock, $0.001 par value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

¨ Yes  x  No  ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

¨ Yes  x  No  ☒

 

Indicate by checkmarkcheck mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒  No  ☐

x   Yes          ¨   No

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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

x Yes  ¨  No  ☐

 

Indicate by checkmarkcheck mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, , in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “emerging growth company” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨Accelerated filer  ¨
Non-accelerated filer  ¨   (Do not check if a smaller reporting company)Smaller reporting company  x

Large accelerated filer  ☐  Accelerated filer  ☐  Non-accelerated filer  ☐  Emerging growth company  ☐  Smaller reporting company  ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨ Yes  x  No  ☒  

 

State theThe aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: approximately $2.4 million based on a share value of $.28.quarter was $7,805,401.

 

Indicate the number Asof shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 8,423,936March 27, 2019, there were 14,382,763 shares of common stock, $0.001Common Stock, par value outstanding on March 31, 2017.$0.001 per share, issued and outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

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AGEAGLE AERIAL SYSTEMS INC.

 

List hereunder the following documents if incorporated by reference and the PartTable of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).Contents

 

NONE.

ENERJEX RESOURCES, INC.

FORM 10-K

TABLE OF CONTENTS

Page
PART I 4
ITEMS 1 AND 2.ITEM 1.BUSINESS AND PROPERTIES4
ITEM 1A.RISK FACTORS11
ITEM 1B.UNRESOLVED STAFF COMMENTS19
ITEM 2.PROPERTIES20
ITEM 1B.UNRESOLVED STAFF COMMENTS34
ITEM 3.LEGAL PROCEEDINGS3420
ITEM 4.MINE SAFETY DISCLOSUREDISCLOSURES3520
PART II 3521
ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES3521
ITEM 6.SELECTED FINANCIAL DATA3621
ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS3722
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK4328
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA4428
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE4428
ITEM 9A9A.CONTROLS AND PROCEDURES4529
ITEM 9B.OTHER INFORMATION4529
PART III 4630
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE4630
ITEM 11.EXECUTIVE COMPENSATION4634
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS4639
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE4644
ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES4645
PART IV 4746
ITEM 15.EXHIBITS, FINANCIAL STATEMENTSTATEMENTS, SCHEDULES4746
INDEX TO FINANCIAL STATEMENTSF-1


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FORWARD-LOOKING STATEMENTS

PART I

 

This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. The statements contained in this document that are not purely historical arereport may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statementsPrivate Securities Litigation Reform Act of 1995. Investors are statements regarding future events, our future financial performance, and include statements regarding projected operating results. Thesecautioned that such forward-looking statements are based on current expectations,our management’s beliefs intentions, strategies, forecasts and assumptions and on information currently available to our management and involve a number of risks and uncertaintiesuncertainties. Forward-looking statements include statements regarding our plans, strategies, objectives, expectations and intentions, which are subject to change at any time at our discretion. Forward-looking statements include our assessment, from time to time of our competitive position, the industry environment, potential growth opportunities and the effects of regulation. Forward-looking statements include all statements that could cause actual results to differ materially from those anticipatedare not historical facts and can be identified by these forward-looking statements. We have attempted to identify forward-looking statements by terminology includingterms such as “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “hopes,” “intends,” “may,” “plans,” “potential,” “predicts”“predicts,” “projects,” “should,” “will,” “would” or “should” or the negative of these terms orsimilar expressions.

Forward-looking statements involve known and unknown risks, uncertainties and other comparable terminology. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for us to predict all risk factors nor can we address the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual results, performance or achievements to differbe materially different from those contained in any future results, performance or achievements expressed or implied by the forward-looking statements. AllWe discuss many of these risks in greater detail in “Risk Factors.” Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements included in this document are based on information available to us onrepresent our management’s beliefs and assumptions only as of the date of this Annual Report on Form 10-K,report. You should read this report and the documents that we reference in this report and have filed as exhibits to the report completely and with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update any suchthese forward-looking statements except as may otherwise be required by law.

Ourpublicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

ITEM 1.BUSINESS

Overview

AgEagle Aerial Systems Inc. (“AgEagle,” “the Company,” “we,” “our” or “us”) was created to pioneer, innovate and advance aerial imaging data collection and analytics technologies capable of addressing the impending food and environmental sustainability crises that threaten our planet. Our daily efforts are focused on delivering the metrics, tools and strategies necessary to define and implement intelligent sustainability and precision farming solutions that solve important problems confronting the agricultural industry. Since our founding in 2010, we have been intent on becoming a trusted partner to major food manufacturers and precision growers seeking to adopt and support productive agricultural approaches to better farming practices which limit the impact on our natural resources, reduce reliance on inputs and materially increase crop yields and profits.

Our Unmanned Aerial Vehicles Business

We design, produce, distribute and support technologically-advanced small unmanned aerial systems (UAVs or drones) that we offer for sale commercially to the precision agriculture industry. Additionally, we recently announced a new service offering using our leased UAVs and associated data processing services for the sustainable agriculture industry.

Our first commercially available product was the AgEagle Classic which was followed shortly thereafter by the RAPID System. As we improved and matured our product, we launched the RX-60 and subsequently our current product, the RX-48. The success we have achieved with our legacy products, which we believe has carried over into the continued improvement of the RX-60 and RX-48, stems from our ability to invent and deliver advanced solutions utilizing our proprietary technologies and trade secrets that help farmers, agronomists and other precision agricultural professionals operate more effectively and efficiently. Our core technological capabilities, developed over five years of research and innovation, include a lightweight laminated shell that allows the UAV platform to perform under challenging flying conditions, a camera with a Near Infrared (NIR) filter, a rugged foot launcher (RX-60), and high-end software that automates drone flights and provides geo-referenced data.

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Our UAV is an advanced fixed wing drone. Its design is based upon the years of experience our management has with aircraft and composite parts construction. All of our UAVs are electrically powered, weigh approximately six pounds fully loaded, are capable of flying over approximately 400 acres (roughly 60 minutes of airtime) per flight from their launch location, and are configured to carry a camera with our NIR filter that uses near infrared images to capture crop data. We believe that these characteristics make our UAVs well suited for providing a complete aerial view of a farmer’s field to help precisely identify crop health and field conditions faster than any other method available.

Our UAVs were initially specifically designed to help farmers increase profits by pinpointing areas where nutrients or chemicals need to be applied, as opposed to traditional widespread land application processes, thus decreasing input costs, reducing the amount of chemicals applied and potentially increasing yields. Our products were designed for busy agriculture professionals who do not have the time to process images on their computers, which some of our competitors require. The software can automatically take pictures from the camera, stitch the photos together through the cloud, and deliver a geo-referenced, high quality aerial map to the user’s desktop or tablet device using specialty precision agriculture software such as SST Software, SMS Software or most other agricultural software solutions. The result is a prescription or zone map that can then be used in a field computer that is typically found in a sprayer or applicator designed to drive through fields to precisely apply the amount of nutrients or chemicals required to continue or restore the production of healthy crops.

In addition to UAV sales, in late 2018, we introduced a new drone-leasing program, alleviating farmers and agribusinesses from significant upfront costs associated with purchasing a drone, while also relieving them from ongoing drone maintenance and support requirements. Additionally, the new program provides the option of engaging a trained AgEagle pilot to operate the drone and manage the entire image collection process, creating a truly turnkey aerial imagery capture solution for our customers.

Research and development activities are integral to our business and we follow a disciplined approach to investing our resources to create new technologies and solutions.

Acquisition of Agribotix

On August 28, 2018, we closed the transactions contemplated by the Asset Purchase Agreement (the “Purchase Agreement”) dated July 25, 2018 with AgEagle Aerial, Inc., a wholly-owned subsidiary of the Company; Agribotix, LLC, a Colorado limited liability company (“Agribotix” or the “Seller”); and the other parties named therein. Pursuant to the Purchase Agreement, we acquired all right, title and interest in and to all assets owned by Agribotix and utilized in their business of providing integrated agricultural drone solutions and drone-enabled software technologies and services for precision agriculture, except for certain factors, including thoseexcluded assets as set forth in the Purchase Agreement. At closing, we also assumed certain commitments under various third-party contracts pursuant to the terms of the Purchase Agreement.

We believe that purchasing Agribotix’s primary product,FarmLens™, will benefit us and our shareholders by developing important vertically integrated products and services.FarmLens is a subscription cloud analytics service that processes data, primarily collected with a drone such as ours, and makes such data actionable by farmers and agronomists.FarmLens is currently sold by us as a subscription service and offered either standalone or in a bundle with drone platforms manufactured by leading drone providers like AgEagle, DJI and senseFly.

TheFarmLens platform extends our reach as a business through key partnerships with, and direct integration into offerings by leading agricultural companies, including John Deere and The Climate Corporation, a subsidiary of Bayer. In October 2018, AgEagle announced that we were expanding on Agribotix’s existing partnership with The Climate Corporation’sFieldView™platform, enabling farmers to share images fromFarmLens to theirFieldView accounts and compare them alongside other valuable metrics, including planting and yield data. To date, Agribotix has processed agricultural imagery for approximately 1.3 million acres of crops and analyzed data for over 50 different crop types from over 50 countries around the world.

In December 2018, we unveiled our plans to develop aFarmLens Mobile app, extending the numerous benefits of theFarmLensplatform to mobile devices. TheFarmLens Mobile app will be commercially launched toward the end of the second quarter 2019 and available for download on any iPhone, iPad or Android device.

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Our Sustainability Platform

The negative impact of agriculture on both the environment and society has been widely documented with unsustainable farming practices serving to confound land conversion and habitat loss, wasteful water consumption, soil erosion and degradation, pollution and climate change. It has been reported that agricultural production is believed to be responsible for 70% of river and stream pollution from chemicals, silt and animal waste (source: Food and Agriculture Organization of the United Nations). Moreover, agriculture is the largest consumer of the Earth’s available freshwater: 70% of withdrawals from watercourses and groundwater are for agricultural usage, three times more than 50 years ago. By 2050, the global water demand of agriculture is estimated to increase by a further 19% due to irrigational needs (source: GlobalAgriculture.org).

Left unchecked, many believe that farming practiced without care presents the greatest global threat to species and ecosystems, especially given that demand for more food - and healthier food - is rising exponentially. According to the World Resources Institute, our planet will need 70 percent more food to feed a global population of 9.6 billion by 2050. In view of looming environmental and social crises facing our planet, both consumer packaged goods companies and their supply chain partners recognize the need ​to accelerate their shift towards greater transparency in their sustainability practices and policies as they assume greater responsibility for mitigating the use of chemicals in crop production and preserving natural resources.

We believe AgEagle to be the nation’s first drone-based aerial imagery company to utilize leading-edge data capture technology and customized analytics solutions to help promote and proactively support corporate and farming sustainability initiatives. In support of our efforts to promote our sustainability platform, in October 2018 we became a corporate partner of the Cool Farm Alliance (CFA), a non-profit organization promoting sustainability in the agriculture industry. Through the CFA’s Cool Farm Tool, businesses can utilize farming data to collaborate and develop sustainability metrics that provide the necessary insights to decrease their impact on the environment. By combining AgEagle’s technological capabilities and the unique data we can collect with the knowledge and expertise of the CFA team, we see an opportunity to measurably contribute to the establishment of a gold industry standard for sustainable agriculture.

In November 2018, we announced an agreement with one of the largest specialty crop producers in North America as our first customer on our sustainability platform and drone leasing program for the 2019 crop season. As part of the agreement, we are providing access to UAVs equipped with sensors for the growing season, along with access to data connected devices for farms covering thousands of acres in the United States. We are also setting up a network of soil moisture monitoring devices with rain gauges and soar sensors to provide in-depth data analytics at the field level. All of this is expected to culminate in a sustainability dashboard and scorecard that will provide data to assess and affirm soil health, water utilization efficiency and pest and disease control; which will, in turn, aid this specialty crop producer in showcasing its sustainability efforts and results to its customers and supply chain partners.

Our Growth Strategy

We intend to grow our business by achieving greater market penetration of the growing precision agriculture marketplace; by promoting our new service targeting the sustainable agriculture marketplace for the 2019 growing season; and by creating new, easier to use and higher value products that position AgEagle as a leading innovator and trusted solutions provider in the markets we serve. We may also elect to pursue additional opportunities in other industries outside of agriculture and its related areas.

Key components of our growth strategy include the following:

Build a strong worldwide distribution network to offer a best-in-class precision agriculture platform.We believe we can establish our flying wing product and systems as leading technologies in the precision agriculture marketplace. We will work to identify and establish relationships with dealers and customers in key agricultural regions worldwide, which will help make it possible for every farmer in those markets to have access to the AgEagle platform. Potential distributors are spread across six continents, covering a majority of the world’s major regions including the U.S., Canada, South America, Eastern and Western Europe, Southeast Asia and Oceania.

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Launch and market our new UAV-based monitoring service for large food manufacturers desiring to achieve and maintain optimal sustainability practices on their farms.We are in the process of launching a new service for the 2019 growing season targeted towards large food manufacturers that are being pressured by consumers to create food products with less chemicals that are more sustainably sourced. We believe our current technology, combined with other available third-party platforms/solutions via a well-defined modern RESTful API, will allow us to offer a product to these food manufacturers that will serve to accelerate business growth faster than if we just focused on growth opportunities within the precision agriculture marketplace.
Continue to explore partnerships with companies that can expand our offerings. We intend to expand our product offerings by building relationships and partnerships with companies that have vertical, synergistic technologies. In addition, other technology alliances may include the acquisition or development of other electronics, software, sensors or more advanced aerial platforms. We are constantly meeting and in discussions with groups that could fill these roles and collaborate with us on new development ideas.
Support and expand our University Drone Program.Subsequent to the end of 2018, we introduced our new University Drone Program providing for AgEagle’s aerial imaging collection and data processing systems to be purchased and utilized by colleges and universities to enhance the curriculum of their agriculture technology departments – including in precision ag, agronomy, plant science and mapping, among other related study areas. In January 2019, we announced that both Arkansas State University-Newport (ASU) and Modesto Junior College (MJC) in California have teamed with our Company to provide students with hands-on training and experience properly operating drones, creating digital aerial maps through the AgEagleFarmLens platform, and using data collected to achieve sustainable farming objectives. We believe that our University Drone Program not only represents a new revenue channel for us, but it will serve as a powerful brand-building opportunity for AgEagle among those who are studying to become commercial growers, agronomists and precision and sustainability ag experts and specialists.
Deliver new and innovative solutions in the precision agriculture space. Our research and development efforts are the foundation of our Company, and we intend to continue investing in our own innovations, pioneering new and enhanced products and solutions that enable us to satisfy our customers – both in response to and in anticipation of their needs. We believe that by investing in research and development, we can be a leader in delivering innovative products that address market needs within our current target markets, enabling us to create new opportunities for growth.
Pursue the expansion of the AgEagle platform of products and solutions into other industries besides agriculture.We may investigate and pursue opportunities outside of agriculture as we continue to expand and grow the AgEagle platform. We are confident in the UAV products and solutions we offer today and believe that these products and solutions could provide other industries the same kind of optimization we are currently providing the agriculture industry. These industries have yet to be identified by the AgEagle team but may include verticals such as land surveying and scanning, insurance, inspections and search and rescue.

Competitive Strengths

We believe the following attributes and capabilities provide us with long-term competitive advantages:

Proprietary Technology and Trade Secrets -We believe our unique design and in-house manufacturing of key aerospace components differentiates our product in the market place. We are confident that our UAVs are industry-leading in durability due to the lightweight laminated shell of the wing, which is made using a proprietary manufacturing process innovated over five years of research and development. This process, which hardens the material used to build the shell, allows the UAV to perform in harsh weather conditions (with wind speeds up to 30 miles per hour) and bring itself to an unassisted landing, all at a total weight of about six pounds. This design is an important trade secret, and we have non-disclosure agreements with our employees in order to keep it unique to our Company.

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Product has Global Appeal-We believe that our technology addresses a need for better data in the agriculture industry worldwide. Given our global distribution platform, we believe that we are well-positioned for our advanced products to be effectively marketed and sold to farmers worldwide.
Increased Margins for Farmers -We believe our UAVs will directly enhance margins for our customers by reducing the amount of nutrients and chemicals needed to manage their farms. The software equipped on our UAVs deliver a high-quality aerial map upon completion of the flight, allowing the user to accurately identify the specific areas that are malnourished. This software is compatible with precision applicator tractors, which assist users in applying a precise amount of nutrients in only the areas it is needed.
Increased Transparency for Food Manufacturers -We believe our UAVs and the data platform we continue to advance present us a unique opportunity to be one of the first companies to offer major food manufacturers a way to connect to the sustainable efforts being made by the farmers from whom they purchase ingredients for their food products. This would allow food manufacturers to confidently claim their food products are made with less chemicals on their packaging and in their marketing.
Empower Customers Through Our Self-Serve Platform -Our UAVs are specially designed to provide users with a portable and easy to operate device, which can be controlled with a hand-held unit or tablet. Through ourFarmLens™ platform, users will be able to plan and track an efficient flight path for their UAV. The UAVs are equipped with a camera and NIR filter whose images provide a holistic aerial view of the fields, along with meaningful data that is uploaded and delivered to the user within a very short time frame. As a result, this platform allows users to quickly detect any issues in their crops, which enables them to address such issues in a timely manner before any damage, or further damage, may affect their crops.
All Manufacturing of our Products is Completed in the United States -As of today, we manufacture all of our products at our manufacturing facility in Neodesha, Kansas, which allows us to avoid many of the potential difficulties that may arise if our manufacturing facilities were otherwise located outside the U.S. In addition, all our UAVs are designed and assembled here in the U.S.

Government Regulation

Our products are subject to regulations of the FAA. On June 21, 2016, the FAA announced it had finalized the first operational rules for routine commercial use of small Unmanned Aerial Systems (UAS), which for purposes of the regulations are unmanned aircraft weighing less than 55 pounds that are conducting non-hobbyist operations. UAS operators-for-hire will have to pass a written test and be vetted by the TSA, but no longer need to be airplane pilots as current law requires. The rules went into effect on August 20, 2016. Among other things, the new regulations require

preflight inspection by the remote pilot in command;
minimum weather visibility of three miles from the control station;
visual line-of-sight to the aircraft from the pilot and person manipulating the controls;
prohibit flying the aircraft over any persons not directly participating in the operation, not under a covered structure or not inside a covered stationary vehicle;
daylight or civil twilight operations (30 minutes before official sunrise to 30 minutes after official sunset, local time);

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maximum groundspeed of 100 mph (87 knots); and
maximum altitude of 400 feet above ground level or, if higher than 400 feet above ground level, the aircraft must remain within 400 feet of a structure.

The new regulations also establish a remote pilot in command position. A person operating a small unmanned aircraft must either hold a remote pilot airman certificate with a small unmanned aircraft system rating or be under the direct supervision of a person who does hold a remote pilot certificate (remote pilot in command). A pilot’s license is no longer required. To qualify for a remote pilot certificate, a person must: demonstrate aeronautical knowledge by either passing an initial aeronautical knowledge test at an FAA-approved knowledge testing center; or hold a part 61 pilot certificate other than student pilot, complete a flight review within the previous 24 months, and complete a small UAS online training course provided by the FAA. The person must also be vetted by the TSA and be at least 16 years old. Applicants will obtain a temporary remote pilot certificate upon successful completion of TSA security vetting. The FAA anticipates that it will be able to issue a temporary remote pilot certificate within 10 business days after receiving a completed remote pilot certificate application.

The regulations do not require the use of a visual observer. In addition, FAA airworthiness certification is not required. However, the remote pilot in command must conduct a preflight check of the small UAS to ensure that it is in a condition for safe operation.

Most of the restrictions can be waived by the FAA if the applicant demonstrates that his or her operation can safely be conducted under the terms of a certificate of waiver. The FAA maintains an online portal where a company or individual can apply for a certificate of waiver.

Manufacturing

As of today, we manufacture all of our products at our manufacturing facility in Neodesha, Kansas. We believe our current facilities are sufficient to adapt to our growth plans for the next two to three years and we have no current plans to expand our manufacturing capabilities.

Suppliers

Currently, we have strong relationships established with companies that provide many of the parts and services necessary to construct our advanced fixed wing and newly introduced UAVS drones, such as Botlink, MicaSense and 3DR. As our Company grows, we expect to pursue additional supplier relationships from which we can source cheaper and better supplies to stay ahead of the needs of the market.

Our flight planning and photo stitching software is provided by Pix4D and flight planning is QGroundControl an open source application. We have worked closely with software partners to optimize their software to work with our platform. We consider our relationships with Pix4D to be good; however, a loss of this relationship would have a short-term adverse effect on our product offerings and results of operations, as we look to an alternative provider for our photo stitching software.

Revenue Mix

The table below reflects our revenue for the periods indicated by product mix

  For the Year Ended December 31,
Type 2018 2017
Product Sales  87%  100%
Subscription Sales  13%   

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Research and Development

Research and development activities are part of our business and we follow a disciplined approach to investing our resources to create new technologies and solutions. A fundamental part of this approach is a well-defined screening process that helps us identify commercial opportunities that support current desired technological capabilities in the precision agriculture space. Our research includes the expansion of our wing products, providing for developing a portfolio of UAVs, as well as other solutions to problems with which agriculture professionals struggle.

Risks Relating to Our Business

Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors” sectionfound in Part I, Item 1A ofwithin this Annual Report on Form 10-K and elsewhere in this document. The factors impacting10-K. Some of these risks and uncertainties include, but are not limited to:to, risks associated with:

 

·inability to attract and obtainour need for additional development capital;funding;
 ·inability
our ability to achieve sufficient future sales levels or other operating results;protect our intellectual property rights;
 ·inability to efficiently manage our operations;
rapid technological changes in the industry;
 ·effect of
governmental policies and regulations regarding our hedging strategies on our results of operations;industry;
 ·potential default under our secured obligations or material debt agreements;
·estimated quantitiesour ability to maintain strong relationships with our customers, suppliers and quality of oil and gas reserves;
·declining local, national and worldwide economic conditions;
·fluctuations in the price of oil and natural gas;
·continued weather conditions that impact our abilities to efficiently manage our drilling and development activities;
·the inability of management to effectively implement our strategies and business plans;
·approval of certain parts of our operations by state regulators;
·inability to hire or retain sufficient qualified operating field personnel;
·increases in interest rates or our cost of borrowing;
·deterioration in general or regional (Colorado, Western Nebraska, Eastern Kansas and South Texas) economic conditions;
·adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations;
·the occurrence of natural disasters, unforeseen weather conditions, or other events or circumstances that could impact our operations or could impact the operations of companies or contractors we depend upon in our operations;
·inability to acquire mineral leases at a favorable economic value that will allow us to expand our development efforts;distributors; and
 ·changes in U.S. GAAP or
worldwide and domestic economic trends and financial market conditions, including an economic decline in the legal, regulatory and legislative environments in the markets in which we operate.agricultural industry.

 

All references in this report to “we,” “us,” “our,” “company” and “EnerJex” refer toOrganizational History

On March 26, 2018, our predecessor company, EnerJex Resources, Inc. (“EnerJex”), a Nevada company, consummated the transactions contemplated by the Agreement and our wholly-owned operating subsidiaries, EnerJex Kansas,Plan of Merger (the “Merger Agreement”), dated October 19, 2017, pursuant to which AgEagle Merger Sub, Inc., Black Sable Energy, LLC, Working Interest, LLC,a Nevada corporation and Black Raven Energy,a wholly-owned subsidiary of EnerJex, merged with and into AgEagle Aerial Systems Inc., unlessa privately held company organized under the context requires otherwise. We report our financial information onlaws of the basisstate of Nevada (“AgEagle Sub”), with AgEagle Sub surviving as a December 31st fiscal year end. We have provided definitions forwholly-owned subsidiary of EnerJex (the “Merger”). In connection with the oilMerger, EnerJex changed its name to AgEagle Aerial Systems Inc. (the “Company, “we,” “our,” or “us”) and gas industry terms used in this report in the “Glossary” beginning on page 15 of this report.AgEagle Sub changed its name to “Eagle Aerial, Inc.”

 

AVAILABLE INFORMATION

We file annual, quarterly and other reports and other information with the SEC. You can read these SEC filings and reports over the Internet at the SEC’s website atwww.sec.gov or on our website atwww.enerjex.com . You can also obtain copies of the documents at prescribed rates by writingPrior to the Public Reference Section of the SEC at 100 F Street, NE, Washington, DC 20549 on official business days between the hours of 10:00 am and 3:00 pm. Please call the SEC at (800) SEC-0330 for further information on the operations of the public reference facilities. We will provide a copy of our annual report to security holders, including audited financial statements, at no charge upon receipt to of a written request to us atMerger, EnerJex Resources, Inc., 4040 Broadway, Suite 508, San Antonio, Texas 78209.

INDUSTRY AND MARKET DATA

The market data and certain other statistical information used throughout this report are based on independent industry publications, government publications, reports by market research firms or other published independent sources. In addition, some data are based on our good faith estimates.


PART I

ITEMS 1 AND 2. BUSINESS AND PROPERTIES.

Company History

We werewas formerly known as Millennium Plastics Corporation (“Millennium) and werewas incorporated in the State of Nevada on March 31, 1999. We abandoned a prior business plan focusing on the development of biodegradable plastic materials. In August 2006, weMillennium acquired Midwest Energy, Inc., a Nevada corporation pursuant to a reverse merger. After thesuch merger, Midwest Energy became a wholly-owned subsidiary, and as a result of thesuch merger, the former Midwest Energy stockholders controlled approximately 98% of our outstanding shares of common stock. WeCommon Stock. Midwest then changed ourits name to EnerJex Resources, Inc. a Nevada corporation,, (“EnerJex”) in connection with thethis merger, and in November 2007, weit changed the name of Midwest Energy (now(one of our wholly-owned subsidiary)subsidiaries) to EnerJex Kansas, Inc. a Nevada corporation ("(“EnerJex Kansas"Kansas”). All of our currentits operations are conducted prior to this merger were through EnerJex Kansas, Inc., Black Sable Energy, LLC, a Texas limited liability company (“Black Sable”) and Black Raven Energy, Inc. a Nevada corporation ("(“Black Raven"Raven”). Our leasehold interests arewere held in our wholly-owned subsidiaries Black Sable, Working Interest, LLC, (“Working Interest”) EnerJex Kansas and Black Raven.

 

LiquidityOn July 25, 2018, we entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Eagle Aerial Systems, Inc., our wholly-owned subsidiary; Agribotix, LLC, a Colorado limited liability company (“Agribotix” or the “Seller”); and Abilitythe other parties named therein. Pursuant to Continue as a Going Concern

As discussed under “Item 9B — Other Information” the continued low oil and natural gas prices during 2015 and 2016 have had a significant adverse impactPurchase Agreement, we acquired, on our business, and, as a result of our financial condition, substantial doubt exists that we will be able to continue as a going concern.

In addition, as discussed below under "Significant Developments in 2016 and Recent Developments"August 28, 2018, the Company's lender sold our loan on February 10, 2017.

We agreed with the successor lender to several simultaneous transactions –

1.the successor lender would agree to forgive our existing secured loan in the approximate principal amount of $17,295,000, and in exchange enter int™o a secured promissory note (which we refer to as the "restated secured note") in the original principal amount of $4,500,00.

2.we would:

a.convey our oil and gas properties and associated performance and surety bonds in Colorado, Texas, and Nebraska, and

b.all of our shares of Oakridge Energy, Inc. (together, the "conveyed oil and gas assets"); and

c.retain our assets in Kansas and continue as a going concern. The Kansas assets currently provide most of our current operating revenue.

The restated secured note shall: 

a.be secured by a first-priority lien in the Company’s oil and gas producing assets situated in the State of Kansas,

b.evidence accrued interest on the $4,500,000 principal balance at a rate of 16% per annum,

c.bear interest from and after May 1, 2017, at a rate of 16.0% per annum,

d.be pre-payable in full at a discount at any time during the term of the restated secured note upon Enerjex's paying $3,300,000 to successor lender, and

e.mature and be due and payable in full on November 1, 2017.

We will have 2 options to extend the maturityclosing date of the restated secured note by 90 days each upon payment of an extension fee of $100,000, which shall be applied against the principal balance of the note.

So long as we repay the $3,300,000 in indebtedness on or prior to the maturity date, as extended,such transaction, all other amounts payable under the restated secured note shall be forgiven.

We are required to obtain stockholder approval of this proposed transaction.

Significant Developments in 2016 and Recent Developments

The following briefly describes our most significant corporate developments occurring in 2016:

On April 1, 2016 the Company informed Texas Capital Bank (“TCB”) that it would cease making the mandatory monthly borrowing base reduction payments and did not make the required April 1, 2016 payment. The Company made its mandatory quarterly interest payments on April 6, 2016, and May 2, 2016. On April 7, 2016 the Company entered into a Forbearance Agreement whereby TCB agreed to not exercise remedies and rights afforded it under the Amended and Restated Credit Agreement for thirty days. The 30-day period was to be used by the Company to pursue strategic alternatives.

On April 28, 2016 TCB informed the Company that it would extend the above Forbearance Agreement period to May 31, 2016 upon effecting a principal reduction of $125,000. On May 31, 2016, the Company and TCB amended the Forbearance Agreement to extend the forbearance period to August 31, 2016. On July 29, 2016, the Company and TCB amended the Forbearance Agreement to extend the forbearance period to October 1, 2016.

On October 1, 2016, the Company and TCB could not reach an agreement to extend the Third Amendment to the Forbearance Agreement. Following this outcome, the Company decided to discontinue payment of interest on its outstanding loan obligations with TCB. The Company continued to evaluate plans to restructure, amend or refinance existing debt through private options.


On October 26, 2016 the NYSE delisted our Series A preferred stock from the NYSE MKT due to the failure to maintain a market capitalization of above $1 million. On January 11, 2017, we announced that we received a letter of noncompliance from the NYSE by reason to hold an annual meeting for the fiscal year ended December 31, 2015. On January 17, 2017, we announced that the NYSE had accepted our plan to restore compliance with certain NYSE regulations on or before March 31, 2017. The NYSE has granted an extension due to the inability to complete this Annual Report on Form 10K in time to have a stockholder meeting by that date. The holding of this stockholder meeting is part of our plan to restore compliance.

On February 10, 2017, the Company, TCB and IberiaBank (collectively, "Sellers"), and PWCM Investment Company IC LLC, and certain financial institutions (collectively, "Buyers") entered into a Loan Sale Agreement ("LSA"), pursuant to which Seller sold to Buyers, and Buyers purchased from Sellers, all of Sellers' right, title and interest in and to all assets owned by the Seller utilized in the Seller’s business of providing integrated agricultural drone solutions and drone-enabled software technologies and services for precision agriculture, except for certain excluded assets as set forth in the Purchase Agreement (the “Purchased Assets”). At closing, we assumed certain liabilities under various third-party contracts pursuant to the Credit Agreement and Loan Documents, in exchange for (i) a cash payment of $5,000,000 (the "Cash Purchase Price"), (ii) a Synthetic Equity Interest equal to 10%terms of the Proceeds, after Buyer's realization of 150% return on the Cash Purchase Price within five (5) years of the Closing Date, with payment being distributed 65.78947368% to TCB and 34.21052632% to IberiaBank, and (iii) at any time prior to February 10, 2022, Buyer may acquire the interest in clause (ii) above. In connection with the LSA, the Company release Sellers and its successors as holders of the rights under the Credit Agreement and Loan Documents, including Buyers, from any and all claims under the Credit Agreement and Loan Documents.Agreement.

 

Also on February 10 2017, the Company and its subsidiaries, and successor lender entered into a binding letter agreement dated February 10, 2017, which was subsequently amended on March 30, 2017 (as amended, the “letter agreement”) pursuant to which:

1.the successor lender would agree to forgive our existing secured loan in the approximate principal amount of $17,295,000, and in exchange enter into a secured promissory note (which we refer to as the "restated secured note") in the original principal amount of $4,500,000.

2.we would:

a.convey our oil and gas properties and associated performance and surety bonds in Colorado, Texas, and Nebraska, and

b.all of our shares of Oakridge Energy, Inc. (together, the "conveyed oil and gas assets"); and

c.retain our assets in Kansas and continue as a going concern. The Kansas assets currently provide most of our current operating revenue.

The restated secured note shall:

a.be secured by a first-priority lien in the Company’s oil and gas producing assets situated in the State of Kansas,

b.evidence accrued interest on the $4,500,000 principal balance at a rate of 16% per annum,

c.bear interest from and after May 1, 2017, at a rate of 16.0% per annum,

d.be pre-payable in full at a discount at any time during the term of the restated secured note upon EnerJex's paying $3,300,000 to successor lender, and

e.mature and be due and payable in full on November 1, 2017.

We will have 2 options to extend the maturity dateTable of the restated secured note by 90 days each upon payment of an extension fee of $100,000, which shall be applied against the principal balance of the note.Contents

So long as we repay the $3,300,000 in indebtedness on or prior to the maturity date, as extended, all other amounts payable under the restated secured note shall be forgiven.

The Closing is expected to occur on or before May 1, 2017 (the February 10, 2017 letter agreement provided for a Closing on or before April 30, 2017. This was amended to May 1, 2017 in the amendment).


Our Business

 

Our principal strategy is to acquire, develop, explore and produce domestic onshore oil and natural gas properties. Our business activities are currently focused in Kansas, Colorado, Nebraska, and Texas.Headquarters

 

Our total net proved oilprincipal executive offices are located at 117 S. 4th Street, Neodesha, Kansas 66757 and gas reserves asour telephone number is 316-202-2076. Our website address is www.ageagle.com. The information contained on, or that can be accessed through, our website is not a part of December 31, 2016 were 1.6 million barrels of oil equivalents (BOE), of which 64.1% was natural gas. Of the 1.6 million BOE of total proved reserves, approximately 12.2% are classified as proved developed producing, approximately 42.3% are classified as proved developed non-producing, and approximately 45.5% are classified as proved undeveloped.

The total PV10 (present value) ofthis Annual Report. We have included our proved reserves as of December 31, 2016 was approximately $3.4 million. “PV10” means the estimated future gross revenue to be generated from the production of proved reserves, net of estimated production and future development and abandonment costs after giving consideration of salvage value there were no material abandonment costs included in future development costs, using prices and costs in effect at the determination date, before income taxes, and without giving effect to non-property related expenses, discounted to a present value using an annual discount rate of 10% in accordance with the guidelines of the SEC. PV10 is a non-GAAP financial measure and generally differs from the standardized measure of discounted future net cash flows, the most directly comparable GAAP financial measure, because it does not include the effects of income taxes on future net revenues. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Reserves” page 36, for a reconciliation to the comparable GAAP financial measure.

Except where noted, the discussion regarding our businesswebsite address in this Annual Report on Form 10-K issolely as of December 31, 2016.an inactive textual reference.

 

Our Colorado Properties

The table below summarizes our current Colorado and Nebraska acreage by project name as of December 31, 2016.

Project Name Developed Acreage(1)  Undeveloped Acreage  Total Acreage 
  Gross  Net(2)  Gross  Net(2)  Gross  Net(2) 
Adena  18,280   18,280   -   -   18,280   18,280 
Hereford  -   -   3,400   3,400   3,400   3,400 
Seven Cross  640   544   -   -   640   544 
Niobrara  21,773   21,010   12,167   10,315   33,940   31,325 
Total  40,693   39,834   15,567   13,715   56,250   53,549 

(1)Developed acreage includes all acreage that was held by production as of December 31, 2016.

(2)Net acreage is based on our net working interest as of December 31, 2016.

Adena Field Project

The Adena Field Project is located in the Denver-Julesburg (“D-J”) Basin in Morgan County, Colorado, where we owned a 100% working interest in 18,280 gross acres as of December 31, 2016. Our acreage position covers the majority of Adena Field, which is the third largest oil field ever discovered in Colorado behind Rangely Field and Wattenberg Field. The Adena Field has cumulatively produced 75 million barrels of oil and 125 billion cubic feet of natural gas since its discovery in the early 1950s. Our acreage in this project is currently held-by-production (see “Glossary” on page 15 for definition of held-by-production). The majority of the producing wells in the Adena Field were temporarily abandoned or shut-in during the mid-1980’s when oil prices collapsed, and a relatively small number of wells have been produced since that time.

Approximately 112 wells on our acreage are currently shut-in or temporarily abandoned. Our current understanding of the field indicates that most of the remaining 97 shut-in oil wells are candidates for reactivation, recompletion or use in a larger scale EOR project. The same is true for the remaining 14 shut-in injection wells.  We have a significant EOR project study under way at the present time and have begun field sampling and EOR flood modeling for each project. We intend to reactivate vintage secondary recovery injection wells simultaneously with the reactivation and/or recompletion of producer wells. Recompletions and reactivations are expected to cost approximately $200,000 to $250,000 per well and are expected to result in stabilized production rates of approximately 10 barrels of oil per day. We have also identified a number of wells on our acreage that are prospective for natural gas production from the J-Sand and D-Sand formations.Employees

 

As of December 31, 2016, the Adena Field Project was producing approximately 75 gross barrels of oil per day from 9 J-Sand wells2018, we employed 5 full-time and 2 D-Sand wells at a depth of approximately 5,500 feet. One J sand gas producer was temporarily shut-in because of low natural gas prices and due to reservoir management practices.  Multiple wells are off production because they require maintenance work; however, we have delayed maintenance expenditures due to low commodity prices. We intend to pursue our reactivation and recompletion strategy once oil prices recover.1 part-time employee.

 

Our working interest inIntellectual Property

We currently have a registered trademark on the Adena Field ProjectAgEagle andFarmLens name and logo. We also plan to file provisional patents on certain aspects of our current and future technology. Finally, we consider our UAV manufacturing process to be a trade secret and have non-disclosure agreements with current employees to protect those and other trade secrets held by the Company.

Where You Can Find Additional Information

The Company is subject to a 30% reversionary working interest that will be assigned to an unrelated third party after payout of all acquisition, operating, development, and financing costs including interest (approximately $39.5 million at December 31, 2016).

Niobrara – Colorado & Nebraska

Our Niobrara Project is located in the northeastern portion ofreporting requirements under the D-J Basin, where we owned a 100% working interest in approximately 34,000 gross acres as of December 31, 2016. Our acreage is located in Phillips and Sedgwick Counties, Colorado, and Perkins County, Nebraska.

Approximately 21,000 developed acres in this project are held by production and approximately 12,000 undeveloped acres are held by leases. As of December 31, 2016, we owned a 100% working interest in 24 Niobrara gas wells and we owned approximately a 6% overriding royalty interest in 180 Niobrara gas wells that are operated by Titan Energy. All of these wells are located in Amherst Field in Phillips and Sedgwick Counties, Colorado. As of December 31, 2016, we produced approximately 90 net mcf of natural gas per day from the Niobrara formation at a depth of approximately 2,500 feet.

Our existing Niobrara acreage was high-graded based on structural features identified through analysis of 114 miles of 2D and 165 square miles (105,000 acres) of 3D seismic data on our original position of 330,000 net acres. We have identified more than 150 highly-ranked Niobrara drilling locations on our acreage based on 3D seismic analysis, which has historically yielded success rates of approximately 90% in this play. Our acreage is well situatedExchange Act. The Company files with, direct accessor furnishes to, the Cheyenne Hub market in immediate proximitySEC quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports and will furnish its proxy statement. These filings are available free of charge on the Company’s website, wwwageagle.com, shortly after they are filed with, or furnished to, the 1,679-mile Rocky Mountain Express pipelineSEC. The SEC maintains an Internet website, www.sec.gov, which contains reports and the 436-mile Trailblazer pipeline.

DJ Basin Resource Play Exposure

Other operators in the DJ basin have recently permitted, drilledinformation statements and tested numerous wells on trend with our Niobrara Project acreage and our Adena Field Project acreage. These operators are targeting oil production from conventional reservoirs and unconventional resource plays in Permian and Pennsylvanian aged carbonates and shales. These plays are in the early stages of exploration and development, and widespread economic success has not yet been established. We continue to monitor these exploration efforts closely and we currently own and control all depths that are prospective for these plays under all of our current acreage position.


Our Kansas Properties

The table below summarizes our current Kansas acreage by project name as of December 31, 2016.

Project Name Developed Acreage(1)  Undeveloped Acreage  Total Acreage 
  Gross  Net(2)  Gross  Net (2)  Gross  Net(2) 
Mississippian Project  4,365   3,492   -   -   4,365   3,492 
Other  584   146   -   -   584   146 
Total  4,949   3,638   -   -   4,949   3,638 

(1)Developed acreage includes all acreage that was held by production as of December 31, 2016.

(2)Net acreage is based on our net working interest as of December 31, 2016.

Mississippian Project

Our Mississippian Project is located in Woodson and Greenwood Counties in Southeast Kansas, where we own a 90% working interest in 4,949 gross acres. Approximately 73.5% of the gross leased acres in this project are currently held-by-production.

As of December 31, 2016, our Mississippian Project was producing approximately 100 gross barrels of oil per day from the Mississippian formation at a depth of approximately 1,700 feet.

Cherokee Project

On August 12, 2015, EnerJex Resources, Inc., through its subsidiaries, EnerJex Kansas, Inc., and Working Interest, LLC, sold the Cherokee Project for approximately $2.8 million to Haas Petroleum, LLC, BAM Petroleum, LLC and MorMeg, LLC. The effective date of the sale was July 1, 2015.


Our Texas Properties

The table below summarizes our current Texas acreage by project name as of December 31, 2016.

Project Name Developed Acreage(1)  Undeveloped Acreage  Total Acreage 
  Gross  Net(2)  Gross  Net(2)  Gross  Net(2) 
El Toro Project  458   275   -   -   458   275 
Total  458   275   -   -   458   275 

(1)Developed acreage includes all acreage that was held by production as of December 31, 2016.
(2)Net acreage is based on our net working interest as of December 31, 2016.

El ToroProject

Our El Toro Project is located in Atascosa and Frio Counties in South Texas. As of December 31, 2016 we owned a 60% working interest in 458 gross acres. As of December 31, 2016, this project was producing approximately 7 gross barrels of oil per day from the Olmos formation at a depth of approximately 4,500 feet.


Our Business Strategy

Our principal strategy focuses on the development of oil and gas properties that have low production decline rates and offer drilling opportunities with low risk profiles. Our oil and gas operations are in Kansas, Colorado, Nebraska, and Texas. The principal elements of our business strategy are:other information regarding issuers.

 

·ITEM 1A.Develop Our Existing Properties.   Creating production, cash flow, and reserve growth by developing our inventory of hundreds of drilling locations that we have identified on our existing properties.

·Maximize Operational Control.   We seek to operate and maintain a substantial working interest in the majority of our properties. We believe the ability to control our drilling inventory will provide us with the opportunity to more efficiently allocate capital, manage resources, control operating and development costs, and utilize our experience and knowledge of oil and gas field technologies.

·Reduce Unit Costs Through Economies of Scale and Efficient Operations.   As we increase our oil and gas production and develop our existing properties, we expect that our unit cost structure will benefit from economies of scale. In particular, we anticipate reducing unit costs by greater utilization of our existing infrastructure over a larger number of wells.RISK FACTORS

 

The risk factors discussed below could cause our actual results to differ materially from those expressed in any forward-looking statements. Although we have attempted to list comprehensively these important factors, we caution you that other factors may in the future prove to be important in affecting our results of operations. New factors emerge from time to time and it is not possible for us to predict all of these factors, nor can we assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement.

The risks described below set forth what we believe to be the most material risks associated with the purchase of our Common Stock. Before you invest in our Common Stock, you should carefully consider these risk factors, as well as the other information contained in this prospectus.

Risks Related to Our future financial resultsBusiness and Industry

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We have a limited operating history and there can be no assurance that we can achieve or maintain profitability.

Through our wholly-owned subsidiary, Eagle Aerial Systems, Inc. (“AgEagle Sub”), we have been operating for approximately eight years. However, AgEagle Sub has only been in the UAV business for half of that time. We are currently in the business development stage and have limited commercial sales of our products and, accordingly, we cannot guarantee that we will become profitable. Moreover, even if we achieve profitability, given the competitive and evolving nature of the industry in which we operate, we may be unable to sustain or increase profitability and its failure to do so would adversely affect its business, including its ability to raise additional funds.

We will need substantial additional funding and may be unable to raise capital when needed, which would force us to delay, curtail or eliminate one or more of our research and development programs or commercialization efforts.

Our operations have consumed substantial amounts of cash since inception. We expect to continue to depend on:spend substantial amounts on product development. We will require additional funds to support continued research and development activities, as well as the costs of commercializing, marketing and selling any new products resulting from those research and development activities. We have based this estimate, however, on assumptions that may prove to be wrong, and we could spend available financial resources much faster than we currently expect.

Until such time, if ever, that we can generate a sufficient amount of product revenue and achieve profitability, we expect to seek to finance future cash needs through equity or debt financings or corporate collaboration and strategic arrangements. We currently have no other commitments or agreements relating to any of these types of transactions and cannot be certain that additional funding will be available on acceptable terms, or at all. If we are unable to raise additional capital, we may have to delay, curtail or eliminate commercializing, marketing and selling one or more of our products.

Product development is a long, expensive and uncertain process.

The development of both UAV software and hardware is a costly, complex and time-consuming process, and investments in product development often involve a long wait until a return, if any, can be achieved on such investment. We might face difficulties or delays in the development process that will result in our inability to timely offer products that satisfy the market, which might allow competing products to emerge during the development and certification process. We anticipate making significant investments in research and development relating to our products and services, but such investments are inherently speculative and require substantial capital expenditures. Any unforeseen technical obstacles and challenges that we encounter in the research and development process could result in delays in or the abandonment of product commercialization, may substantially increase development costs, and may negatively affect our results of operations.

Successful technical development of our products does not guarantee successful commercialization.

Although we have successfully completed the technical development of our two original UAV systems, as well as the new RX-60 and RX-48 systems, we may still fail to achieve commercial success for a number of reasons, including, among others, the following:

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·failure to obtain the market pricerequired regulatory approvals for oil, gas and natural gas liquids;their use;
   
·our abilityrapid evolvement of the product due to preserve sufficient working capital and maintain access to capital resources;new technologies;

 ·our ability to cost effectively manage our operations;

prohibitive production costs;
 ·our ability to source and evaluate potential projects;

competing products;
 ·our ability to discover and exploit commercial quantities
lack of oil and gas;product innovation;

 ·
unsuccessful distribution and marketing through our ability to implementsales channels;
insufficient cooperation from our supply and distribution partners; and
product development program.that does not align with or meet customer needs.

 

We cannot guaranteeOur success in the market for the products and services we develop will depend largely on our ability to properly demonstrate their capabilities. Upon demonstration, our platform of systems may not have the capabilities they were designed to have or that we will succeedbelieved they would have. Furthermore, even if we do successfully demonstrate our products’ capabilities, potential customers may be more comfortable doing business with a competitor; or may not feel there is a significant need for the products we develop. As a result, significant revenue from our current and new product investments may not be achieved for a number of years, if at all.

If we fail to protect our intellectual property rights, we could lose our ability to compete in the marketplace.

Our intellectual property and proprietary rights are important to our ability to remain competitive and successful in the development of our products and our business. Patent protection can be limited and not all intellectual property can be patented. We expect to rely on a combination of patent, trademark, copyright, and trade secret laws as well as confidentiality agreements and procedures, non-competition agreements and other contractual provisions to protect our intellectual property, other proprietary rights and our brand. As we currently do not have any granted patent, trademark or copyright protections, we must rely on trade secrets and nondisclosure agreements, which provide limited protections. Our intellectual property rights may be challenged, invalidated or circumvented by third parties. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by employees or competitors.

Furthermore, our competitors may independently develop technologies and products that are substantially equivalent or superior to our technologies and products, which could result in decreased revenues. Litigation may be necessary to enforce our intellectual property rights, which could result in substantial costs to us and substantial diversion of management attention. If we do not adequately protect our intellectual property, our competitors could use it to enhance their products. Our inability to adequately protect our intellectual property rights could adversely affect our business and financial condition, and the value of our brand and other intangible assets.

Other companies may claim that we infringe their intellectual property, which could materially increase our costs and harm our ability to generate future revenue and profit.

We do not believe that our technologies infringe on the proprietary rights of any third party, however claims of infringement are becoming increasingly common and third parties may assert infringement claims against us. It may be difficult or impossible to identify, prior to receipt of notice from a third party, the trade secrets, patent position or other intellectual property rights of a third party, either in the United States or in foreign jurisdictions. Any such assertion may result in litigation or may require us to obtain a license for the intellectual property rights of third parties. If we are required to obtain licenses to use any third-party technology, we would have to pay royalties, which may significantly reduce any profit on our products. In addition, any such litigation could be expensive and disruptive to its ability to generate revenue or enter into new market opportunities. If any of these respects. Further,our products were found to infringe other parties’ proprietary rights and we cannot knoware unable to come to terms regarding a license with such parties, we may be forced to modify our products to make them non-infringing or to cease production of such products altogether.

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The nature of our business involves significant risks and uncertainties that may not be covered by insurance or indemnification.

We have developed and sold products and services in circumstances where insurance or indemnification may not be available; for example, in connection with the collection and analysis of various types of information. In addition, our products and services raise questions with respect to issues of civil liberties, intellectual property, trespass, conversion and similar concepts, which may create legal issues. Indemnification to cover potential claims or liabilities resulting from the failure of any technologies that we develop or deploy may be available in certain circumstances but not in others. Currently, the unmanned aerial systems industry lacks a formative insurance market. We may not be able to maintain insurance to protect against all operational risks and uncertainties that our customers confront. Substantial claims resulting from an accident, product failure, or personal injury or property liability arising from our products and services in excess of any indemnity or insurance coverage (or for which indemnity or insurance coverage is not available or is not obtained) could harm our financial condition, cash flows and operating results. Any accident, even if fully covered or insured, could negatively affect our reputation among our customers and the pricepublic, and make it more difficult for us to compete effectively.

We may incur substantial product liability claims relating to our products.

As a manufacturer of crude oilUAV products, and natural gas prevailing at the timewith aircraft and aviation sector companies under increased scrutiny, claims could be brought against us if use or misuse of production will be at a level allowing for profitable production,one of our UAV products causes, or thatmerely appears to have caused, personal injury or death. In addition, defects in our products may lead to other potential life, health and property risks. Any claims against us, regardless of their merit, could severely harm our financial condition, strain our management and other resources. We are unable to predict if we will be able to obtain additional funding at terms favorable to us to increase our capital resources. A detailed description of these and other risksor maintain product liability insurance for any products that could materially impact our actual results is in “Risk Factors” under ITEM 1A.may be approved for marketing.

 

Drilling ActivityIf we not able to recruit and retain key management, technical and sales personnel, our business would be negatively affected.

For our business to be successful, we need to attract and retain highly qualified technical, management and sales personnel. The failure to recruit additional key personnel when needed, with specific qualifications, on acceptable terms and with an ability to maintain positive relationships with our partners, might impede our ability to continue to develop, commercialize and sell our products and services. To the extent the demand for skilled personnel exceeds supply, we could experience higher labor, recruiting and training costs in order to attract and retain such employees. The loss of any members of our management team may also delay or impair achievement of our business objectives and result in business disruptions due to the time needed for their replacements to be recruited and become familiar with our business. We face competition for qualified personnel from other companies with significantly more resources available to them and thus may not be able to attract the level of personnel needed for our business to succeed.

If our proposed marketing efforts are unsuccessful, we may not earn enough revenue to become profitable.

Our future growth depends on our gaining market acceptance and regular production orders for our products and services. Our marketing plan includes attendance at trade shows, making private demonstrations, advertising, promotional materials and advertising campaigns in print and/or broadcast media. In the event we are not successful in obtaining a significant volume of orders for our products and services, we will face significant obstacles in expanding our business. We cannot give any assurance that our marketing efforts will be successful. If they are not, revenue may not be sufficient to cover our fixed costs and we may not become profitable.

Our operating margins may be negatively impacted by reduction in sales or products sold.

Expectations regarding future sales and expenses are largely fixed in the short term. We maintain raw materials and finished goods at a volume we feel is necessary for anticipated distribution and sales. Therefore, we may not be able to reduce costs in a timely manner to compensate for any unexpected shortfalls between forecasted and actual sales.

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We face a significant risk of failure because we cannot accurately forecast our future revenues and operating results.

 

The following table sets forthrapidly changing nature of the markets in which we compete makes it difficult to accurately forecast our revenues and operating results. Furthermore, we expect our revenues and operating results to fluctuate in the future due to a number of our drilling activities,factors, including both oil and gas production wells and water injection wells that were drilled and completed during the year ended December 31, 2016 and the year ended December 31, 2015.following:

Drilling Activity
  Gross Wells  Net Wells(1) 
Fiscal Year Total  Successful  Dry  Total  Successful  Dry 
                   
2016 - Development  -   -       -   -     
2015 - Development  -   -   -   -   -   - 
2015 - Exploratory  2   -   2   1.0   -   1.0 
                         
2016 - Recompletion  -   -   -   -   -   - 
2015 - Recompletion  -   -   -   -   -   - 

 

(1)Net wells are based onthe timing of sales of our net working interest at the end of each respective year.

Net Production, Average Sales Price and Average Production and Lifting Costs

The table below sets forth our net oil and gas production (net of all royalties, overriding royalties and production due to others) for the years ended December 31, 2016 and 2015, the average sales prices, average production costs and direct lifting costs per unit of production.

  Year ended December 31, 
  2016  2015 
Net Production        
Crude oil (bbl)  58,123   96,244 
Natural gas liquids (bbl)  530   6,045 
Natural gas (mcf)  47,554   188,408 
         
Average Sales Prices        
Crude oil ($ per bbl)  40.75   44.24 
Natural gas liquids ($ per bbl)  7.02   4.01 
Natural gas (per $ mcf)  1.51   1.88 
         
Average Production Cost(1)  $  per BOE  43.79   41.96 
Average Lifting Costs(2) $ per BOE  39.97   33.67 

(1)Production costs include all operating expenses, depreciation, depletion and amortization, lease operating expenses (including price differentials) and all associated taxes. Impairment of oil and gas properties is not included in production costs.products;
 (2)Direct lifting
unexpected delays in introducing new products;
increased expenses, whether related to sales and marketing, or administration; and
costs do not include impairment expense or depreciation, depletion and amortization, but do include transportation costs, which are paidrelated to our purchasers as a price differential.possible acquisitions of businesses.

 

Results of Oil and Gas Producing Activities

The following table showsRapid technological changes may adversely affect the results of operations from our oil and gas producing activities from the years ended December 31, 2016 and 2015. Results of operations from these activities have been determined using historical revenues, production costs, depreciation, depletion and amortization of the capitalized costs subject to amortization. General and administrative expenses and interest expense have been excluded from this determination.

  Year Ended  Year Ended 
  December 31,  December 31, 
  2016  2015 
Production revenues $2,461,727  $4,878,722 
Production costs  (2,661,258)  (4,501,940)
Depreciation, depletion and amortization  (254,329)  (1,108,039)
Results of operations for producing activities $(453,860) $(731,257)

Active Wells

The following table sets forth the number of wells in which we owned a working interest that were actively producing oil and gas or actively injecting water as of December 31, 2016.

  Active 
Project Gross  Net(1) 
Crude Oil        
El Toro Project  12   7.2 
Mississippian Project  244   219.6 
Adena Field Project  27   27.0 
Other  3   2.6 
Total Oil  286   256.4 
         
Natural Gas        
Niobrara Project  24   24.0 
         
Total Gas  24   24.0 

(1)Net wells are based on our net working interest as of December 31, 2016.

Reserves

Proved Reserves

The estimated total PV10 (present value)market acceptance of our proved reserves as of December 31, 2016 was $3.4 million, compared to $8.8 million as of December 31, 2015. Our total net proved oilproducts and gas reserves as of December 31, 201 were 1.6 million BOE (64.1% natural gas), compared to 2.6 million BOE (59.4% oil) as of December 31, 2015. Of the 1.6 million net BOE of total proved reserves at December 31, 2016, approximately 12.2% are classified as proved developed producing, approximately 42.3% are classified as proved developed non-producing, and approximately 45.5% are classified as proved undeveloped. See “Glossary” on page 17 for our definition of PV10.

The estimated PV10 of the 1.6 million BOE is set forth in the following table. The PV10 is calculated using an average net oil price of $37.36 per barrel, an average net natural gas price of $1.65 per mcf and an average natural gas liquids price of $8.55 per barrel, and by applying an annual discount rate of 10% to the forecasted future net cash flow.

In 2016 the Company invested approximately $17,100 in its oil and gas properties. These reduced expenditures were in response to extremely low commodity prices. The Company has approximately $1.7 million of current asset on hand and important infrastructure in Colorado completed which will facilitate the exploitation and development of proved undeveloped reserves over the next five years. At year end the Company’s review of proved undeveloped reserves revealed challenges but the Company maintains its belief that reserves will be developed within five years of their initial recording as a proved undeveloped reserve. In addition it believes it has the financial wherewithal to develop all it’s proved undeveloped reserves within the five year time frames required; utilizing its balance sheet, to borrow funds as needed and it has the ability to joint venture any of its assets.

Summary of Proved Oil and Gas Reserves

December 31, 2016

  Gross  Net    
     Natural
Gas 
     Oil      Natural
Gas 
    Oil     
Proved Reserves Crude Oil  Liquids  Natural Gas  Equivalents  Crude Oil  Liquids  Natural Gas  Equivalents  PV 10(2) 
Category BBL’s  BBL’s  MCF’s  BOE’s  BBL’s  BBL’s  MCF’s  BOE’s(1)  (before tax) 
Proved, Developed  488,580   56,320   4,827,420   1,349,470   372,140   44,780   2,686,800   864,720   2,120,330 
Proved, Undeveloped  196,860   -   4,176,000   892,860   152,610   -   3,422,170   722,970   1,316,700 
Total Proved  685,440   56,320   9,003,420   2,242,330   524,750   44,780   6,108,970   1,587,690   3,437,030 

(1)Net BOE is based upon our net revenue interest
(2)See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Reserves” page 34 for a reconciliation to the comparable GAAP financial measure.

Oil and Gas Reserves Reported to Other Agencies

We did not file any estimates of total proved net oil and gas reserves with, or include such information in reports to any federal authority or agency, other than the SEC, during the year ended December 31, 2016.

Title to Properties

We believe that we have satisfactory title to or rights in all of our producing properties. As is customary in the oil and gas industry, minimal investigation of title is made at the time of acquisition of undeveloped properties. In most cases, we investigate title and obtain title opinions from counsel or have title reviewed by professional landmen only when we acquire producing properties or before we begin drilling operations. However, any acquisition of producing properties without obtaining title opinions is subject to a greater risk of title defects.

Our properties are subject to customary royalty interests, liens under indebtedness, liens incident to operating agreements and liens for current taxes and other burdens, including mineral encumbrances and restrictions. Further, our debt is secured by liens substantially on all of our assets. These burdens have not materially interfered with the use of our properties in the operation of our business to date, though there can be no assurance that such burdens will not materially impact our operations in the future

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Saleof Oil and Gas

We do not intend to refine our oil production. We expect to sell all or most of our production to a small number of purchasers in a manner consistent with industry practices at prevailing rates by means of long-term and short-term sales contracts, some of which may have fixed price components. In 2016, we sold oil to ARM Energy Management LLC, Coffeyville Resources, Inc., and Sunoco Logistics, Inc. on a month-to-month basis (i.e., without a long-term contract). We sold our natural gas to United Energy Trading on a month-to-month basis and Western Operating Company under a long-term contract. Under current conditions, we should be able to find other purchasers, if needed. All of our produced oil is held in tank batteries. Each respective purchaser picks up the oil from our tank batteries and transports it by truck to refineries. In addition, our Board of Directors has implemented a crude oil and gas hedging strategy that will allow management to hedge the majority of our net production in an effort to mitigate our exposure to changing oil and natural gas prices in the intermediate term. We had an ISDA master agreement and a deferred premium put options with BP through December 31, 2016. 

Secondary Recovery and Other Production Enhancement Strategies

When an oil field is first produced, the oil typically is recovered as a result of natural pressure within the producing formation, often assisted by pumps of various types. The only natural force present to move the crude oil to the wellbore is the pressure differential between the higher pressure in the formation and the lower pressure in the wellbore. At the same time, there are many factors that act to impede the flow of crude oil, depending on the nature of the formation and fluid properties, such as pressure, permeability, viscosity and water saturation. This stage of production is referred to as “primary production”, which typically only recovers 5% to 15% of the crude oil originally in place in a producing formation.

Production from oil fields can often be enhanced through the implementation of “secondary recovery”, also known as water flooding, which is a method in which water is injected into the reservoir through injector wells in order to maintain or increase reservoir pressure and push oil to the adjacent producing wellbores. We utilize water flooding as a secondary recovery technique for the majority of our oil properties in Kansas, even in the early stages of production and we use a secondary recovery technique in parts of the Adena Field Project in Colorado.

As a water flood matures over time, the fluid produced contains increasing amounts of water and decreasing amounts of oil. Surface equipment is used to separate the produced oil from water, with the oil going to holding tanks for sale and the water being re-injected into the oil reservoir.

In addition, we may utilize 3D seismic analysis, horizontal drilling, and other technologies and production techniques to improve drilling results and oil recovery, and to ultimately enhance our production and returns. We also believe use of such technologies and production techniques in exploring for, developing, and exploiting oil properties will help us reduce drilling risks, lower finding costs and provide for more efficient production of oil from our properties.

Markets and Marketing

The oil and gas industry has experienced dramatic price volatility in recent years. As a commodity, global oil prices respond to macro-economic factors affecting supply and demand. In particular, world oil prices have risen and fallen in response to political unrest and supply uncertainty in the Middle East, and changing demand for energy in rapidly emerging market economies, notably India and China. North American prospects became more attractive as oil prices rose worldwide. Escalating conflicts in the Middle East and the ability of OPEC to control supply and pricing are some of the factors impacting the availability of global supply. As a commodity, natural gas prices respond mainly to regional supply and demand imbalances. Factors that affect the supply side include production of natural gas, levels of natural gas imports and fluctuations in underground storage. Factors that affect the demand side include peak demand brought on by winter heating and summer cooling requirements and increasing demand from the petrochemical industry for their produced products such as plastics, fertilizers, paints, soaps etc. The costs of steel and other products used to construct drilling rigs and pipeline infrastructure, as well as, drilling and well-servicing rig rates, are impacted by the commodity price volatility.

Our market is affected by many factors beyond our control, such as the availability of other domestic production, commodity prices, the proximity and capacity of oil and gas pipelines, and general fluctuations of global and domestic supply and demand. In 2016 we had month-to-month sales contracts with ARM Energy Management LLC, Coffeyville Resources, Inc., Sunoco Logistics, Inc., United Energy Trading and Western Operating Company and we do not anticipate difficulty in finding additional sales opportunities, as and when needed.

Oil and gas sales prices are negotiated based on factors such as the spot price or posted price for oil and gas, price regulations, regional price variations, hydrocarbon quality, distances from wells to pipelines, well pressure, and estimated reserves. Many of these factors are outside our control. Oil and gas prices have historically experienced high volatility, related in part to ever-changing perceptions within the industry of future supply and demand.


Competition

The oil and gas industry is intensely competitive and we must compete against larger companies that may have greater financial and technical resources than we do and substantially more experience in our industry. These competitive advantages may better enable our competitors to sustain the impact of higher exploration and production costs, oil and gas price volatility, productivity variances between properties, overall industry cycles and other factors related to our industry. Their advantage may also negatively impact our ability to acquire prospective properties, develop reserves, attract and retain quality personnel and raise capital.

Research and Development Activities

We have not spent a material amount of time or money on research and development activities in the last two years.

Governmental Regulations

Our oil and gas exploration, production and related operations, when developed, are subject to extensive rules and regulations promulgated by federal, state, tribal and local authorities and agencies that impose requirements relating to the exploration and production of oil and natural gas. For example, laws and regulations often address conservation matters, including provisions for the unitization or pooling of oil and gas properties, the spacing, plugging and abandonment of wells, rates of production, water discharge, prevention of waste, and other matters. Prior to drilling, we are often required to obtain permits for drilling operations, drilling bonds and file reports concerning operations. Failure to comply with any such rules and regulations can result in substantial penalties. Moreover, laws and regulations may place burdens from previous operations on current lease owners that can be significant.

The public attention on the production of oil and gas will most likely increase the regulatory burden on our industry and increase the cost of doing business, which maycould adversely affect our profitability. Although we believe we are currently in substantial compliance with all applicable laws and regulations, because such rules and regulations are frequently amended or reinterpreted, we are unable to predict the future cost or impact of complying with such laws. Significant expenditures may be required to comply with governmental laws and regulations and may have a material adverse effect on ourbusiness, financial condition and results of operations.

 

The pricemarket in which we compete is subject to technological changes, introduction of new products, change in customer demands and evolving industry standards. Our future success will depend upon our ability to keep pace with technological developments and to timely address the increasingly sophisticated needs of our customers by supporting existing and new technologies and by developing and introducing enhancements to our current products and new products. We may not be successful in developing and marketing enhancements to our products that will respond to technological change, evolving industry standards or customer requirements. In addition, we may receiveexperience difficulties internally or in conjunction with key vendors and partners that could delay or prevent the successful development, introduction and sale of such enhancements and such enhancements may not adequately meet the requirements of the market and may not achieve any significant degree of market acceptance. If release dates of our new products or enhancements are delayed or, if when released, they fail to achieve market acceptance, our business, operating results and financial condition may be adversely affected.

Our products are subject to regulations of the Federal Aviation Administration (the “FAA”).

In August 2016, regulations from the saleFAA relating to the commercial use of oilUAVs in the United States became law. As a result, users of systems like ours are only required to take a knowledge exam at an approved FAA testing station similar to an automobile driver’s license exam. Prior to the new law, users had to hold a pilot’s license, have an observer present and gas willfile various documents before flights. In the event new FAA rules or regulations are promulgated or current rules are revised that may negatively affect commercial usage of our UAVs, such rules and laws could adversely disrupt our operations and overall sales.

Our future results may be affected by various legal and regulatory proceedings and legal compliance risks, including those involving product liability, antitrust, intellectual property, environmental, regulations of the costFAA, the U.S. Foreign Corrupt Practices Act and other anti-bribery, anti-corruption, or other matters.

The outcome of transporting productsany future legal proceedings may differ from our expectations because the outcomes of litigation, including regulatory matters, are often difficult to markets. Effective January 1, 1995, FERC implemented regulations establishing an indexing systemreliably predict. Various factors or developments can lead us to change current estimates of liabilities and related insurance receivables where applicable; or make such estimates for transportation rates for oil and gas pipelines, which, generally, would indexmatters previously not susceptible of reasonable estimates, such rates to inflation, subject to certain conditions and limitations.as a significant judicial ruling or judgment, a significant settlement, significant regulatory developments or changes in applicable law. A future adverse ruling, settlement or unfavorable development could result in future charges that could have a material adverse effect on our results of operations or cash flows in any particular period. We are not ablecurrently involved in or subject to predict with certaintyany such legal or regulatory proceedings, but we cannot guarantee that such proceedings may not occur in the effect, if any, of these regulations on our intended operations. However, the regulations may increase transportation costs or reduce well head prices for oil and natural gas.


Environmental Mattersfuture.

 

Our operations

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If we do not receive the governmental approvals necessary for the sales or export of our products, or if our products are not compliant in other countries, our sales may be negatively impacted. Similarly, if our suppliers and properties are subjectpartners do not receive government approvals necessary to extensiveexport their products or designs to us, our revenues may be negatively impacted and changing federal, statewe may fail to implement our growth strategy.

A license may be required in the future to initiate marketing activities. We may also be required to obtain a specific export license for any hardware exported. We may not be able to receive all the required permits and locallicenses for which we may apply in the future. If we do not receive the required permits for which we apply, our revenues may be negatively impacted. In addition, if government approvals required under these laws and regulations relatingare not obtained, or if authorizations previously granted are not renewed, our ability to environmental protection, includingexport our products could be negatively impacted, which may have a negative impact on our revenues and a potential material negative impact on our financial results.

We may pursue additional strategic transactions in the generation, storage, handling, emission, transportationfuture, which could be difficult to implement, disrupt our business or change our business profile significantly.

We intend to consider additional potential strategic transactions, which could involve acquisitions of businesses or assets, joint ventures or investments in businesses, products or technologies that expand, complement or otherwise relate to our current or future business. We may also consider, from time to time, opportunities to engage in joint ventures or other business collaborations with third parties to address particular market segments. Should our relationships fail to materialize into significant agreements, or should we fail to work efficiently with these companies, we may lose sales and dischargemarketing opportunities and its business, results of materials into the environment,operations and relating to safety and health. The recent trend in environmental legislation and regulation generally is toward stricter standards, and this trend will likely continue.financial condition could be adversely affected.

 

These lawsactivities, if successful, create risks such as, among others: (i) the need to integrate and regulations may:manage the businesses and products acquired with our own business and products; (ii) additional demands on our resources, systems, procedures and controls; (iii) disruption of our ongoing business; (iv) potential unknown or unquantifiable liabilities associated with the target company; and (v) diversion of management’s attention from other business concerns. Moreover, these transactions could involve: (a) substantial investment of funds or financings by issuance of debt or equity securities; (b) substantial investment with respect to technology transfers and operational integration; and (c) the acquisition or disposition of product lines or businesses. Also, such activities could result in one-time charges and expenses and have the potential to either dilute the interests of our existing shareholders or result in the issuance of, or assumption of debt. Such acquisitions, investments, joint ventures or other business collaborations may involve significant commitments of financial and other resources. Any such activities may not be successful in generating revenue, income or other returns, and any resources we committed to such activities will not be available to us for other purposes. Moreover, if we are unable to access the capital markets on acceptable terms or at all, we may not be able to consummate acquisitions, or may have to do so on the basis of a less than optimal capital structure. Our inability to take advantage of growth opportunities or address risks associated with acquisitions or investments in businesses may negatively affect our operating results.

 

·require the acquisition of a permit or other authorization before construction or drilling commences and for certain other activities;

Additionally, any impairment of goodwill or other intangible assets acquired in an acquisition or in an investment, or charges to earnings associated with any acquisition or investment activity, may materially reduce our earnings. Future acquisitions or joint ventures may not result in their anticipated benefits and we may not be able to properly integrate acquired products, technologies or businesses with our existing products and operations or successfully combine personnel and cultures. Failure to do so could deprive us of the intended benefits of those acquisitions.

·limit or prohibit construction, drilling and other activities on certain lands; and

·impose substantial liabilities for pollution resulting from its operations, or due to previous operations conducted on any leased lands.

 

The permits required forBreaches of network or information technology security could have an adverse effect on our operationsbusiness.

Cyber-attacks or other breaches of network or IT security may cause equipment failures or disrupt our systems and operations. We may be subject to revocation, modificationattempts to breach the security of our networks and renewal by issuing authorities. Governmental authoritiesIT infrastructure through cyber-attack, malware, computer viruses and other means of unauthorized access. The potential liabilities associated with these events could exceed the insurance coverage we maintain. Our inability to operate our facilities as a result of such events, even for a limited period of time, may result in significant expenses or loss of market share to other competitors in the defense electronics market. In addition, a failure to protect the privacy of customer and employee confidential data against breaches of network or IT security could result in damage to our reputation. To date, we have the power to enforce their regulations, and violations arenot been subject to finescyber-attacks or injunctions, or both. In the opinion of management, we are in substantial compliance with current applicable environmental laws and regulations, and have no material commitments for capital expenditures to comply with existing environmental requirements. Nevertheless, changes in existing environmental laws and regulationsother cyber incidents which, individually or in interpretations thereof could havethe aggregate, resulted in a significant impactmaterial adverse effect on us, as well as the oilour business, operating results and gas industry in general.financial condition.

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The Comprehensive Environmental, Response, Compensation,preparation of our financial statements involves use of estimates, judgments and Liability Act,assumptions, and our financial statements may be materially affected if our estimates prove to be inaccurate.

Financial statements prepared in accordance with generally accepted accounting principles in the United States require the use of estimates, judgments, and assumptions that affect the reported amounts. Different estimates, judgments, and assumptions reasonably could be used that would have a material effect on the financial statements, and changes in these estimates, judgments, and assumptions are likely to occur from period to period in the future. These estimates, judgments, and assumptions are inherently uncertain, and, if they prove to be wrong, then we face the risk that charges to income will be required.

Our results could be adversely affected by natural disasters, public health crises, political crises, or other catastrophic events.

Natural disasters, such as amended (“CERCLA”), and comparable state statutes impose strict, joint and several liability on owners and operators of sites and on persons who disposed of or arranged for the disposal of “hazardous substances” found at such sites. It is not uncommon for the neighboring land ownershurricanes, tornadoes, floods, earthquakes, and other third parties to file claims for personal injuryadverse weather and property damage allegedly caused by the hazardous substances released into the environment. The Federal Resource Conservationclimate conditions; unforeseen public health crises, such as pandemics and Recovery Act,epidemics; political crises, such as amended (“RCRA”),terrorist attacks, war, labor unrest, and comparable state statutes govern the disposal of “solid waste” and “hazardous waste” and authorize the imposition of substantial fines and penalties for noncompliance. Although CERCLA currently excludes petroleum from its definition of “hazardous substance,” state laws affectingother political instability; or other catastrophic events, such as disasters occurring at our operations may impose clean-up liability relating to petroleum and petroleum related products. In addition, although RCRA classifies certain oil and gas field wastes as “non-hazardous”, such exploration and production wastesmanufacturing facilities, could be reclassified as hazardous wastes thereby making such wastes subject to more stringent handling and disposal requirements.

The Federal Water Pollution Control Act of 1972, as amended (“Clean Water Act”), and analogous state laws impose restrictions and controls on the discharge of pollutants into federal and state waters. These laws also regulate the discharge of storm water in process areas. Pursuant to these laws and regulations, we are required to obtain and maintain approvals or permits for the discharge of wastewater and storm water and develop and implement spill prevention, control and countermeasure plans, also referred to as “SPCC plans”, in connection with on-site storage of greater than threshold quantities of oil and gas. The EPA issued revised SPCC rules in July 2002 whereby SPCC plans are subject to more rigorous review and certification procedures. We believe that our operations are in substantial compliance with applicable Clean Water Act and analogous state requirements, including those relating to wastewater and storm water discharges and SPCC plans.

The Endangered Species Act, as amended (“ESA”), seeks to ensure that activities do not jeopardize endangered or threatened animal, fish and plant species, nor destroy or modify the critical habitat of such species. Under ESA, exploration and production operations, as well as actions by federal agencies, may not significantly impair or jeopardize the species or its habitat. ESA provides for criminal penalties for willful violations of the Act. Other statutes that provide protection to animal and plant species and that may apply to our operations include, but are not necessarily limited to, the Fish and Wildlife Coordination Act, the Fishery Conservation and Management Act, the Migratory Bird Treaty Act and the National Historic Preservation Act. Although we believe that our operations will be in substantial compliance with such statutes, any change in these statutes or any reclassification of a species as endangered could subject us to significant expenses to modifydisrupt our operations or the operations of one or more of our vendors. In particular, these types of events could force usimpact our product supply chain from or to discontinue certainthe impacted region and could impact our ability to operate. In addition, these types of events could negatively impact consumer spending in the impacted regions. Disasters occurring at our manufacturing facilities could impact our reputation and our customers’ perception of our brands. To the extent any of these events occur, our operations altogether.and financial results could be adversely affected.

 

PersonnelWorldwide and domestic economic trends and financial market conditions, including an economic decline in the agricultural industry, may adversely affect our operating performance.

 

We currentlyintend to distribute in a number of countries and derive revenues from both inside and outside the United States. We expect our business will be subject to global competition and may be adversely affected by factors in the United States and other countries that are beyond our control, such as disruptions in financial markets, economic downturns in the form of either contained or widespread recessionary conditions, elevated unemployment levels, sluggish or uneven recovery, in specific countries or regions, or in the agricultural industry; social, political or labor conditions in specific countries or regions; natural and other disasters affecting our operations or our customers and suppliers; or adverse changes in the availability and cost of capital, interest rates, tax rates, or regulations in the jurisdictions in which we operate. Unfavorable global or regional economic conditions, including an economic decline in the agricultural industry, could adversely impact our business, liquidity, financial condition and results of operations.

For certain of the components included in our products there are a limited number of suppliers we can rely upon and if we are unable to obtain these components when needed we could experience delays in the manufacturing of our products and our financial results could be adversely affected.

We acquire most of the components for the manufacture of our products from suppliers and subcontractors. We have 10 full-time employees, two temporary employeenot entered into any agreements or arrangements with any potential suppliers or subcontractors. Suppliers of some of the components may require us to place orders with significant lead-times to assure supply in accordance with its manufacturing requirements. Our present lack of working capital may cause us to delay the placement of such orders and one part-time employee including field personnel. As productionmay result in delays in supply. Delays in supply may significantly hurt our ability to fulfill our contractual obligations and drilling activities increase or decrease,may significantly hurt our business and result of operations. In addition, we may havenot be able to continue to adjust our technical, operational and administrative personnel as appropriate. We are using and will continue to use independent consultants and contractors to perform various professional services, particularly in the area of land services, reservoir engineering, geology, drilling, water hauling, pipeline construction, well design, well-site monitoring and surveillance, permitting and environmental assessment. We believe that this use of third-party service providers may enhance our ability to contain operating and general expenses, and capital costs.

Facilities

Executive offices are maintained at 4040 Broadway, Suite 508, San Antonio, Texas 78209 under a lease expiring November 2017.  We also have a field office located at 165 South Union Blvd, Suite 410, Lakewood Colorado 80228, under a lease which expires October 2019.


GLOSSARY

TermDefinition
Barrel (Bbl)The standard unit of measurement of liquids in the petroleum industry, it contains 42 U.S. standard gallons. Abbreviated to “bbl”.
BasinA depression in the crust of the Earth, caused by plate tectonic activity and subsidence, in which sediments accumulate. Sedimentary basins varyobtain such components from bowl-shaped to elongated troughs. Basins can be bounded by faults. Rift basins are commonly symmetrical; basins along continental margins tend to be asymmetrical. If rich hydrocarbon source rocks occur in combination with appropriate depth and duration of burial, then a petroleum system can develop within the basin.
BOEAbbreviation for a barrel of oil equivalent and is a term used to summarize the amount of energy that is equivalent to the amount of energy found in a barrel of crude oil. On a BTU basis 6,000 cubic feet of natural gas is the energy equivalent to one barrel of crude oil. A conversion ratio of 6:1 is used to convert natural gas measured in thousands of cubic feet into an equivalent barrel of oil.
BOPDAbbreviation for barrels of oil per day, a common unit of measurement for volume of crude oil. The volume of a barrel is equivalent to 42 U.S. standard gallons.
Carried Working InterestThe owner of this type of working interest in the drilling of a well incurs no capital contribution requirement for drilling or completion costs associated with a well and, if specified in the particular contract, may not incur capital contribution requirements beyond the completion of the well.
Completion/CompletingThe activities and methods of preparing a well for the production of oil and gas or for other purposes such as injection.
DevelopmentThe phase in which a proven oil or natural gas field is brought into production by drilling development wells.
Development DrillingWells drilled during the Development phase.
Division OrderA directive signed by all owners verifying to the purchaser or operator of a well the decimal interest of production owned by the royalty owner and other working interest owners. The Division Order generally includes the decimal interest, a legal description of the property, the operator’s name, and several legal agreements associated with the process. Completion of this step generally precedes placing the royalty owner or working interest owner on pay status to begin receiving revenue payments.
DrillingAct of boring a hole through which oil and natural gas may be produced.
Dry WellsA well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes.
ExplorationThe phase of operations which covers the search for oil and gas generally in unproven or semi-proven territory.

Exploratory DrillingDrilling of a relatively high percentage of properties which are unproven.
Farm OutAn arrangement whereby the owner of a lease assigns all or some portion of the lease or licenses to another company for undertaking exploration or development activity.
Fixed Price SwapA derivative instrument that exchanges or “swaps” the “floating” or daily price of a specified volume of oil or natural gas over a specified period, for a fixed price for the specified volume over the same period (typically three months or longer).
Gross AcreThe number of acres in which the Company owns any working interest.
Gross Producing WellA well in which a working interest is owned and is producing oil or gas. The number of gross producing wells is the total number of wells producing oil or gas in which a working interest is owned.
Gross WellA well in which a working interest is owned. The number of gross wells is the total number of wells in which a working interest is owned.
Held-By-Production (HBP)Refers to an oil and gas property under lease, in which the lease continues to be in force, because of production from the property.
Horizontal drillingA drilling technique used in certain formations where a well is drilled vertically to a certain depth and then turned and drilled horizontally. Horizontal drilling allows the wellbore to follow the desired formation.
In-Fill WellsIn-fill wells refers to wells drilled between established producing wells; a drilling program to reduce the spacing between wells in order to increase production and recovery of in-place hydrocarbons.
Oil and Gas LeaseA legal instrument executed by a mineral owner granting the right to another to explore, drill, and produce subsurface oil and gas. An oil and gas lease embodies the legal rights, privileges and duties pertaining to the lessor and lessee.
Lifting CostsThe expenses of producing oil and gas from a well. Lifting costs are the operating costs of the wells including the gathering and separating equipment. Lifting costs do not include the costs of drilling and completing the wells or transporting the oil and gas.
MCFAn abbreviation for one thousand cubic feet of natural gas.
Net AcresDetermined by multiplying gross acres by the working interest that the Company owns in such acres.
Net Producing WellsThe number of producing wells multiplied by the working interest in such wells.
Net Revenue InterestA share of production revenues after all royalties, overriding royalties and other non-operating interests have been taken out of production for a well(s).
OperatorA person, acting for itself, or as an agent for others, designated to conduct the operations on its or the joint interest owners’ behalf.

Overriding RoyaltyOwnership in a percentage of production or production revenues, free of the cost of production, created by the lessee, company and/or working interest owner and paid by the lessee, company and/or working interest owner out of revenue from the well.
Probable ReservesProbable reserves are additional reserves that are less certain to be recovered than proved reserves but which, together with Proved reserves, are as likely as not to be recovered.
Proved Developed ReservesProved reserves that can be expected to be recovered from existing wells with existing equipment and operating methods. This definition of proved developed reserves has been abbreviated from the applicable definitions contained in Rule 4-10(a) (2-4) of Regulation S-X.
Proved Developed Non-ProducingProved developed reserves expected to be recovered from zones behind casings in existing wells or from future production increases resulting from the effects of water flood operations.
Proved ReservesProved reserves are estimated quantities of crude oil and gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic, operating methods, and government regulations prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.
Proved Undeveloped ReservesProved undeveloped reserves are the portion of proved reserves which can be expected to be recovered from new wells on undrilled proved acreage, or from existing wells where a relatively major expenditure is required for completion. This definition of proved undeveloped reserves has been abbreviated from the applicable definitions contained in Rule 4-10(a) (2-4) of Regulation S-X.
PV10PV10 means the estimated future gross revenue to be generated from the production of proved reserves, net of estimated production and future development and abandonment costs, using prices and costs in effect at the determination date, before income taxes, and without giving effect to non-property related expenses, discounted to a present value using an annual discount rate of 10% in accordance with the guidelines of the SEC. PV10 is a non-GAAP financial measure.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Reserves” on page 33 for a reconciliation to the comparable GAAP financial measure.
ReactivationAfter the initial completion of a well, the action and techniques of reentering the well and redoing or repairing the original completion to restore the well’s productivity.
RecompletionCompletion of an existing well for production from one formation or reservoir to another formation or reservoir that exists behind casing of the same well.
ReservoirThe underground rock formation where oil and gas has accumulated. It consists of a porous rock to hold the oil and gas, and a cap rock that prevents its escape.

Secondary RecoveryThe stage of hydrocarbon production during which an external fluid such as water or natural gas is injected into the reservoir through injection wells located in rock that has fluid communication with production wells. The purpose of secondary recovery is to maintain reservoir pressure and to displace hydrocarbons toward the wellbore.  The most common secondary recovery techniques are natural gas injection and water flooding. Normally, natural gas is injected into the natural gas cap and water is injected into the production zone to sweep oil and gas from the reservoir.  A pressure-maintenance program can begin during the primary recovery stage, but it is a form of enhanced recovery.
Stock Tank Barrel or STBA stock tank barrel of oil and gas is the equivalent of 42 U.S. Gallons at 60 degrees Fahrenheit.
Undeveloped AcreageLease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas regardless of whether such acreage contains proved reserves.
Unitize, UnitizationWhen owners of oil and gas reservoir pool their individual interests in return for an interest in the overall unit.
Water floodThe injection of water into an oil and gas reservoir to “push” additional oil and gas out of the reservoir rock and into the wellbores of producing wells. Typically a secondary recovery process.
Water Injection WellsA well in which fluids are injected rather than produced, the primary objective typically being to maintain or increase reservoir pressure, often pursuant to a water flood.
Water Supply WellsA well in which fluids are being produced for use in a water injection well.
WellboreA borehole; the hole drilled by the bit. A wellbore may have casing in it or it may be open (uncased); or part of it may be cased, and part of it may be open. Also called a borehole or hole.
Working InterestAn interest in an oil and gas lease entitling the owner to receive a specified percentage of the proceeds of the sale of oil and gas production or a percentage of the production, but requiring the owner of the working interest to bear the cost to explore for, develop and produce such oil and gas.

ITEM 1A. RISK FACTORS.

In the course of conducting our business operations, we are exposed to a variety of risks that are inherent to the oil and gas industry. The following discusses some of the key inherent risk factors that could affect our business and operations. Other factors besides those discussed below or elsewhere in this report also could adversely affect our business and operations, and these risk factors should not be considered a complete list of potential risks that may affect us.

Risks Related to Recent Developments

Due to our substantial liquidity concerns, we may be unable to continue as a going concern.

On February 10, 2017, our lender sold our secured loan to PWCM Investment Company IC LLC, and certain financial institutions (collectively, the "successor lender") pursuant to a loan sale agreement between Enerjex, our former lender, and the successor lender. The successor lender purchased from our prior lender allsuppliers on satisfactory commercial terms. Disruptions of its right, title and interest in,manufacturing operations would ensue if we were required to and under our credit agreement and loan documents, in exchange for (i) a cash payment of $5,000,000, (ii) a synthetic equity interest equal to 10% of the proceeds, after successor lenders realization of a 150% return on the cash purchase price within 5 years of the closing date, and (iii) at any time prior to February 10, 2022, Buyer may acquire the synthetic equity interest above. In connection with the loan sale agreement, we released our prior lender and its successors, including the successor lender,obtain components from any and all claims under the credit agreement and loan documents. The Company is seeking stockholder approval of this transaction at the annual meeting of its stockholders to be held on April 27, 2017.

Also on February 10, 2017, we and our subsidiaries and the successor lender entered into a binding letter agreement dated February 10, 2017, pursuant toalternative sources, which the successor lender would agree to forgive our existing secured loan in the approximate principal amount of $17,295,000, and in exchange enter into a secured promissory note (which we refer to as the "restated secured note") in the original principal amount of $4,500,000. So long as we repay the $3,300,000 in indebtedness on or prior to the maturity date, as extended, all other amounts payable under the restated secured note shall be forgiven.

As consideration for the loan forgiveness, and subject to obtaining stockholder approval prior to the closing, we agreed to convey to successor lender all of our right, title, and interest, in and to all real property leases and oil and gas producing properties and other assets situated in the States of Colorado, Texas and Nebraska, including all our equipment and tangible personal property owned and used in connection with our ownership and operation of those real property leases and oil and gas producing properties. The assets we are conveying (i) shall include our assets in the Adena Field, the NECO Project, Weld County, East Crown and certain other oil and gas plugging, lease and other bonds. Subject to obtaining shareholder approval prior to the closing, we will also transfer to successor lender all of our right, title, and interest in and to all our Oakridge Energy, Inc. shares.

If this transaction closes, we will retain the Kansas-based assets, which currently generate a majority of our revenue and cash flow from operations, and the successor lender will agree that the conveyance of all of our other oil and gas assets, the Oakridge Energy shares, and the restated secured note in the principal amount of $4,500,000, payable with a discount at $3,300,000 provided the loan is paid in full prior to the maturity date November 1, 2017, subject to extension. We are seeking stockholder approval of that transaction at the annual meeting of its stockholders scheduled for April 27, 2017.

Due to our indebtedness, liquidity issues and the potential for restructuring transactions, there is risk that, among other things:

·it may become more difficult to retain, attract or replace key employees;
·employees could be distracted from performance of their duties or attracted to other career opportunities; and
·our suppliers, hedge counterparties, vendors and service providers could renegotiate the terms of our arrangements, terminate their relationship with us or require financial assurances from us.

The occurrence of certain of these events has already negatively affected our business and may continue to have a materialan adverse effect on our business, results of operations and financial condition.

 

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The Closing is expectedWe indemnify our officers and directors against liability to occur on or before May 1, 2017.us and our security holders, and such indemnification could increase our operating costs.

 

Should weOur bylaws allow us to indemnify our officers and directors against claims associated with carrying out the duties of their offices. Our bylaws also allow us to reimburse them for the costs of certain legal defenses. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our officers, directors or control persons, the SEC has advised that such indemnification is against public policy and is therefore unenforceable.

Risks Associated with Our Capital Stock

One of our stockholders beneficially owns a significant percentage of our outstanding capital stock and will have the ability to control our affairs.

Our Chairman of the Board and President, Bret Chilcott, currently owns approximately 46.2% of our issued and outstanding capital stock. By virtue of his holdings, he may have significant influence over the election of the members of our board of directors, our management and our affairs, and may make it difficult for us to consummate corporate transactions such as mergers, consolidations or the sale of all or substantially all of our assets that may be favorable from our standpoint or that of our other stockholders.

The market price of our securities may be volatile and may fluctuate in a way that is disproportionate to our operating performance.

Our securities may experience substantial volatility as a result of a number of factors, including, among others:

sales or potential sales of substantial amounts of our Common Stock;
announcements about us or about our competitors or new product introductions;
developments concerning our product manufacturers;
the loss or unanticipated underperformance of our global distribution channel;
litigation and other developments relating to our patents or other proprietary rights or those of our competitors;
conditions in the UAV industry;
governmental regulation and legislation;
variations in our anticipated or actual operating results;
changes in securities analysts’ estimates of our performance, or our failure to meet analysts’ expectations;
foreign currency values and fluctuations; and
overall political and economic conditions.

Many of these factors are beyond our control. The stock markets have historically experienced substantial price and volume fluctuations. These fluctuations often have been unrelated or disproportionate to the operating performance of these companies. These broad market and industry factors could reduce the market price of our securities, regardless of our actual operating performance.

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We do not intend to pay cash dividends. As a result, capital appreciation, if any, will be ableyour sole source of gain.

We intend to close this transaction,retain future earnings, if any, to fund the development and growth of our business. In addition, the terms of existing and future debt agreements could create issues as principal and interest payments become due andmay preclude us from paying dividends. As a result, capital appreciation, if any, from the debt matures thatsale of our Common Stock will threaten our ability to continue as a going concern. We will likely seek bankruptcy protection if this transaction is not approved bybe your sole source of gain for the stockholders.foreseeable future.

 

Until we repay the full amountProvisions in our articles of incorporation, our by-laws and Nevada law might discourage, delay or prevent a change in control of our outstanding credit facility, we may continue to have substantial indebtedness, which is secured by substantially allcompany or changes in our management and, therefore, depress the trading price of our assets.Common Stock.

 

WhileProvisions of our bank sold its rights underArticles of Incorporation, our credit facility toBy-Laws and Nevada law may have the successor lender, and the successor lender has agreed toeffect of deterring unsolicited takeovers or delaying or preventing a transactionchange in control of our company or changes in our management, including transactions in which we can contribute certainour stockholders might otherwise receive a premium for their shares over then current market prices. In addition, these provisions may limit the ability of our assets, our sharesstockholders to approve transactions that they may deem to be in Oakridge Energy, and reduce our loan amount from $17,925,000 to a restated note in the original principal amount of $4,500,000, subject to a $1,200,000 discount provided that we repay the successor lender $3,300,000 prior to the maturity date of November 1, 2017 (subject to extension). In exchange we can retain our Kansas oil and gas assets. Unless and until this transaction closes (which is dependent on the approval of our stockholders), we will remain in default on our obligations, and the successor lender may enforce its rights as secured parties and we will likely lose all of our Kansas assets and may be forced to liquidate the Company.

We are unable to fulfill our obligations under our credit facility which is adversely affecting our business.

As of December 31, 2016, we had total indebtedness of $17,925,000 under the credit facility and our borrowing base was $17,925,000. Our substantial indebtedness, and the related interest expense, could have important consequences to us, including:their best interests. These provisions include:

 

·ourthe inability of stockholders to call special meetings; and
the ability to borrow additional amounts for working capital, capital expenditures, debt service requirements, execution of our business strategy,board of directors to designate the terms of and issue new series of preferred stock without stockholder approval, which could include the right to approve an acquisition or other general corporate purposes;
·being forcedchange in our control or could be used to use cash flow to reduce our outstanding balanceinstitute a rights plan, also known as a resultpoison pill, that would work to dilute the stock ownership of an unfavorable borrowing base redetermination;
·our ability to use operating cash flow in other areas of our business because we must dedicate a substantial portion of these funds to service our indebtedness;
·increasing our vulnerability to general adverse economic and industry conditions;
·placing us at a competitive disadvantage as compared to our competitorspotential hostile acquirer, likely preventing acquisitions that have less leverage;
·not been approved by our ability to capitalize on business opportunities and to react to competitive pressures and changes in government regulation;
·our ability to, or increasing the costboard of refinancing our indebtedness; and
·our ability to enter into marketing, hedging, optimization and trading transactions by reducing the number of counterparties with whom we can enter into such transactions as well as the volume of those transactions.directors.

 

The covenantsexistence of the forgoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our Common Stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your Common Stock in an acquisition.

FINRA sales practice requirements may limit a stockholder’s ability to buy and sell our securities.

The Financial Industry Regulatory Authority, Inc. (“FINRA”) has adopted rules that a broker-dealer must have reasonable grounds for believing that an investment recommended to a customer is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives, and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for certain customers. FINRA requirements will likely make it more difficult for broker-dealers to recommend that their customers buy our Common Stock, which may have the effect of reducing the level of trading activity in the shares, resulting in fewer broker-dealers may be willing to make a market in our Credit Facility impose significant operatingshares, potentially reducing a stockholder’s ability to resell our securities.

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our shares or if our results of operations do not meet their expectations, the price of our securities and financial restrictions on us.trading volume could decline.

The credit facility imposes significant operatingtrading market for our securities will be influenced by the research and financial restrictions on us. These restrictions limitreports that industry or securities analysts publish about us or our ability and the abilitybusiness. We do not have any control over these analysts. If one or more of these analyst’s cease coverage of our subsidiaries, among other things, to:company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations, the price of our securities could decline.

 

·ITEM 1B.incur additional indebtedness and provide additional guarantees;
·pay dividends and make other restricted payments;
·create or permit certain liens;
·use the proceeds from the sales of our oil and gas properties;
·use the proceeds from the unwinding of certain financial hedges;
·engage in certain transactions with affiliates; and
·consolidate, merge, sell or transfer all or substantially all of our assets or the assets of our subsidiaries.UNRESOLVED STAFF COMMENTS

 

The credit facility also contains various affirmative covenants with which we are required to comply. With the signing of the “Eleventh Amendment” on November 13, 2015 certain covenants were waived until December 31, 2016. With these covenants waived, we were incompliance with the affirmative covenant provisions of the credit facility.Not applicable.

 

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ITEM 2.PROPERTIES

We are currently unable to comply with some or all of these covenants. If we do not obtain waivers fromhave one leased facility located at 117 South 4thStreet, Neodesha, Kansas 66757. This serves as the successor lender, we would be unable to make additional borrowings under these facilities; our indebtedness under these agreements would remain in defaultcorporate headquarters and repayment of debt could be accelerated. If our indebtedness is accelerated, we will not be able to repay our indebtedness or borrow sufficient funds to refinance it. In addition, if we incur additional indebtedness in the future, we may be subject to additional covenants, which may be more restrictive than those to which we are currently subject.


Our 2016 oil and gas reserve report shows a material decline in our estimated reserves, which will have adverse implications to our business.

Our 2016 oil and gas reserve report shows a material decline in our estimated reserves. There are numerous uncertainties inherent in estimating quantities of proved oil and natural gas reserves and in projecting future rates of production and timing of development expenditures, including many factors beyond our control. For example, estimates of quantities of proved reserves and their PV10 value are affected by changes in crude oil and gas prices, because estimates are based on prevailing prices at the time of their determination. Further, reserve engineeringmanufacturing facility. The facility is a subjective processlease of estimating underground accumulations4,000 square feet at a cost of oil and natural gas that cannot be measured in any exact way, and$500 per month. Monthly rent increases $100 every year until the accuracy of any reserve estimate is a functionexpiration of the qualitylease in September 30, 2018. On August 22, 2018, the Company executed an amendment to the lease to renew the term of available data andthe lease for an additional one year, terminating on September 30, 2019 with no option to renew unless approved by our landlord the city commission of engineering and geological interpretation and judgment. Neodesha.

As a result estimates made by different engineers often vary from one another.

The reduction in our reserve estimates is likely to change the schedule of future production and development drilling that was contemplated in our 2015 reserve report. Reserve estimates are generally different, and often materially so, from the quantities of oil and natural gas that are ultimately recovered. Furthermore, estimates of quantities of proved reserves and their PV10 value may be affected by changes in crude oil and gas prices because the Company’s estimates are based on prevailing prices at the time of their determination.

Current volatile market conditions and significant fluctuations in energy prices may continue indefinitely, negatively affecting our business prospects and viability.

The oil and gas markets are very volatile, and we cannot predict future oil and natural gas prices. Historically, oil and natural gas prices have been volatile and are subject to fluctuations in response to changes in supply and demand, market uncertainty and a variety of additional factors that are beyond our control. Further declines in the price of oil and natural gas will have a material adverse effect on our planned operations and financial condition. Additionally, the amount of any royalty payment we receive from the production of oil and gas from our oil and gas interests will depend on numerous factors beyond our control.

We may continue to incur substantial write-downs of the carrying valueAgribotix acquisition, we assumed a lease for offices in Boulder, Colorado for $2,000 per month. The lease, providing for 1,000 square feet of our oiloffice space, ends on May 31, 2019 and gas properties, which would adversely impact our earnings.has an option to terminate at any time with a 30-day prior notice period.

 

We review the carrying value ofbelieve that our oilexisting facilities are suitable and gas properties under the full cost method of accounting. Under the full cost method of accounting, the net book value of oil and gas properties, less deferred income taxes, may not exceed a calculated “ceiling.” The ceiling limitation is (a) the present value of future net revenues computed by applyingadequate to meet our current prices of oil & gas reserves (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil & gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves computed using a discount factor of 10 percent and assuming continuation of existing economic conditionsplus (b) the cost of properties not being amortizedplus (c) the lower of cost or estimated fair value of unproven properties included in the costs being amortizedless (d) income tax effects related to differences between book and tax basis of properties. Future cash outflows associated with settling accrued retirement obligations are excluded from the calculation. Estimated future cash flows are calculated using end-of-period costs and an un-weighted arithmetic average of commodity prices in effect on the first day of each of the previous 12 months held flat for the life of the production, except where prices are defined by contractual arrangements. 

Any excess of the net book value of proved oil and gas properties, less related deferred income taxes, over the ceiling is charged to expense and reflected as additional DD&A in the statement of operations. The ceiling calculation is performed quarterly. For the year ended December 31, 2015 impairment charges of $48,930,087 were recorded. For the year ended December 31, 2016 impairment charges of $8,032,670 were recorded.

Our stock price has declined below $1.00 per share. If the average closing price of our common stock is less than $1.00 per share for a period of over 30 consecutive trading days, the NYSE could delist our common stock.

The NYSE requires that the average closing price of a listed company’s common stock not be less than $1.00 per share for a period of over 30 consecutive trading dates. Under NYSE rules, a company can avoid delisting, if, during the six month period following receipt of the NYSE notice and on the last trading day of any calendar month, a company’s common stock price per share and 30 trading-day average share price is at least $1.00. During this six month period, a company’s common stock will continue to be traded on the NYSE, subject to compliance with other continued listingbusiness requirements.

In the future, if our common stock ultimately were to be delisted for any reason, it could negatively impact us by (i) reducing the liquidity and market price of our common stock; (ii) reducing the number of investors willing to hold or acquire our common stock, which could negatively impact our ability to raise equity financing; (iii) limiting our ability to use a registration statement to offer and sell freely tradeable securities, thereby preventing us from accessing the public capital markets; and (iv) impairing our ability to provide equity incentives to our employees.

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Risks Associated with our Industry

Oil and gas prices are volatile. Future price volatility may negatively impact cash flows which could result in an inability to cover our operating and/or capital expenditures.

Our future revenues, profitability, future growth and the carrying value of our properties depend substantially on the prices we realize for our oil and gas production. Our realized prices may also affect the amount of cash flow available for operating and/or capital expenditures and our ability to borrow and raise additional capital.

Oil and gas prices are subject to wide fluctuations in response to relatively minor changes in or perceptions regarding supply and demand. Historically, the markets for oil and gas have been volatile, and they are likely to continue to be volatile in the future. Among the factors that can cause this volatility are:

 

·ITEM 3.commodities speculators;
·local, national and worldwide economic conditions;
·worldwide or regional demand for energy, which is affected by economic conditions;
·the domestic and foreign supply of oil and gas;
·weather conditions;
·natural disasters;
·acts of terrorism and war;
·domestic and foreign governmental regulations and taxation;
·political and economic conditions in oil and gas producing countries, including those in the Middle East and South America;
·impact of the U.S. dollar exchange rates on oil and gas prices;
·the availability of refining capacity;
·actions of the Organization of Petroleum Exporting Countries, or OPEC, and other state controlled oil and gas companies relating to oil and gas price and production controls; and
·the price and availability of other fuels.LEGAL PROCEEDINGS

 

It is impossible to predict oil and gas price movements with certainty. A drop in oil and gas prices may not only decrease our future revenues on a per unit basis but also may reduce the amount of oil and gas that we can produce economically. A substantial or extended decline in oil and gas prices would materially and adversely affect our future business enough to potentially force us to cease our business operations. In addition, our reserves, financial condition, results of operations, liquidity and ability to finance and execute planned capital expenditures will also suffer in such a price decline.Legal Proceedings

 

Declining economic conditionsFrom time to time, we may become involved in lawsuits and worsening geopolitical conditions could negatively impact our business.

Our operations are affected by local, national and worldwide economic conditions. Marketslegal proceedings which arise in the United Statesordinary course of business. However, litigation is subject to inherent uncertainties, and elsewhere have been experiencing volatility and disruption for more than 5 years, due in part to the financial stresses affecting the liquidity of the banking system and the financial markets generally. The consequences of a potential or prolonged recession may include a lower level of economic activity, decreasing demand for petroleum products and uncertainty regarding energy prices and the capital and commodity markets.

In addition, actual and attempted terrorist attacks in the United States, Middle East, Southeast Asia and Europe, and war or armed hostilities in the Middle East, the Persian Gulf, North Africa, Iran, North Korea or elsewhere, or the fear of such events, could further exacerbate the volatility and disruption to the financial markets and economies.

While the ultimate outcome and impact of the current economic conditions cannot be predicted, a lower level of economic activity mightan adverse result in a decline in energy consumption, which may materially adversely affect the price of oil and gas, our revenues, liquidity and future growth.  Instability in the financial markets, as a result of recession or otherwise, also may affect the cost of capital and our ability to raise capital.

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The oil and natural gas business involves numerous uncertainties and operating risks that can prevent us from realizing profits and can cause substantial losses.

Our development, exploitation and exploration activities may be unsuccessful for many reasons, including weather, cost overruns, equipment shortages and mechanical difficulties. Moreover, the successful drilling of a well does not ensure a profit on investment. A variety of factors, both geological and market-related, can cause a well to become uneconomical or only marginally economical. In addition to their cost, unsuccessful wells can hurt our efforts to replace reserves.

The oil and natural gas business involves a variety of operating risks, including:

·unexpected operational events and/or conditions;
·reductions in oil and natural gas prices;
·limitations in the market for oil and natural gas;
·adverse weather conditions;
·facility or equipment malfunctions;
·title problems;
·oil and gas quality issues;
·pipe, casing, cement or pipeline failures;
·natural disasters;
·fires, explosions, blowouts, surface cratering, pollution and other risks or accidents;
·environmental hazards, such as oil spills, pipeline ruptures and discharges of toxic gases;
·compliance with environmental and other governmental requirements; and
·uncontrollable flows of oil or natural gas or well fluids.

If we experience any of these problems, it could affect well bores, gathering systems and processing facilities, which could adversely affect our ability to conduct operations. We could also incur substantial losses as a result of:

·injury or loss of life;
·severe damage to and destruction of property, natural resources and equipment;
·pollution and other environmental damage;
·clean-up responsibilities;
·regulatory investigation and penalties;
·suspension of our operations; and
·repairs to resume operations.

Because we use third-party drilling contractors to drill our wells, we may not realize the full benefit of worker compensation laws in dealing with their employees. Our insurance does not protect us against all operational risks. We do not carry business interruption insurance at levels that would provide enough funds for us to continue operating without access to other funds. For some risks, we may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. If a significant accident or other event occurs and is not fully covered by insurance, it could impact our operations enough to force us to cease our operations.

Approximately 45.5% of our total proved reserves as of December 31, 2016 consist of undeveloped reserves, and those reservesmatters may not ultimately be developed or produced.

Our estimated total proved PV10 (present value) before tax of reserves as of December 31, 2016 was $3.4 million, versus $8.8 million as of December 31, 2015.  Of the 1.6 million BOE of total proved reserves, approximately 12.2% are classified as proved developed producing, approximately 42.3% are classified as proved developed non-producing, and approximately 45.5% are classified as proved undeveloped.

Assuming we can obtain adequate capital resources, we plan to develop and produce all of our proved reserves, but ultimately some of these reserves may not be developed or produced. Furthermore, not all of our undeveloped or developed non-producing reserves may be produced in the time periods we have planned, at the costs we have budgeted, or at all. For further information please see the disclosures in Footnote 14 to the Notes to the Financial Statements.


Because we face uncertainties in estimating proved recoverable reserves, you should not place undue reliance on such reserve information.

Our reserve estimates and the future net cash flows attributable to those reserves at December 31, 2016 were prepared by Cobb & Associates, Inc., an independent petroleum consultant.  There are numerous uncertainties inherent in estimating quantities of proved reserves and cash flows from such reserves, including factors beyond our control and the control of these independent consultants and engineers. Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that can be economically extracted, which cannot be measured in an exact manner. The accuracy of an estimate of quantities of reserves, or of cash flows attributable to these reserves, is a function of the available data, assumptions regarding future oil and gas prices, expenditures for future development and exploitation activities, and engineering and geological interpretation and judgment. Reserves and future cash flows may also be subject to material downward or upward revisions based upon production history, development and exploitation activities and oil and gas prices. Actual future production, revenue, taxes, development expenditures, operating expenses, quantities of recoverable reserves and value of cash flows from those reserves may vary significantly from the assumptions and estimates in our reserve reports. Any significant variance from these assumptions to actual figures could greatly affect our estimates of reserves, the economically recoverable quantities of oil and gas attributable to any particular group of properties, the classification of reserves based on risk of recovery, and estimates of the future net cash flows. In addition, reserve engineers may make different estimates of reserves and cash flows based on the same available data. The estimated quantities of proved reserves and the discounted present value of future net cash flows attributable to those reserves included in this report were prepared by Cobb & Associates, Inc. in accordance with rules of the Securities and Exchange Commission, or SEC, and are not intended to represent the fair market value of such reserves.

The present value of future net cash flows from our proved reserves is not necessarily the same as the current market value of our estimated reserves. We base the estimated discounted future net cash flows from our proved reserves on prices and costs. However, actual future net cash flows from our oil and gas properties also will be affected by factors such as:

·geological conditions;
·assumptions governing future oil and gas prices;
·amount and timing of actual production;
·availability of funds;
·future operating and development costs;
·actual prices we receive for oil and gas;
·changes in government regulations and taxation; and
·capital costs of drilling new wells

The timing of both our production and our incurrence of expenses in connection with the development and production of our properties will affect the timing of actual future net cash flows from proved reserves, and thus their actual present value. In addition, the 10% discount factor we use when calculating discounted future net cash flows may not be the most appropriate discount factor based on interest rates in effectarise from time to time and risks associated with our business or the oil and gas industry in general.

The differential between the New York Mercantile Exchange, or NYMEX, or other benchmark price of oil and gas and the wellhead price we receive could have a material adverse effect on our results of operations, financial condition and cash flows.

The prices that we receive for our oil production in Texas, Colorado and Kansas are typically based on a discount to the relevant benchmark prices, such as NYMEX, that are used for calculating hedge positions. The prices we receive for our natural gas production in Colorado is based upon local market conditions but generally we receive a discount to Henry Hub. The difference between the benchmark price and the price we receive is called a differential.  We cannot accurately predict oil and gas differentials. In recent years for example, production increases from competing North American producers, in conjunction with limited refining and pipeline capacity have widened this differential. Recent economic conditions, including volatility in the price of oil and gas, have resulted in both increases and decreases in the differential between the benchmark price for oil and gas and the wellhead price we receive.  These fluctuations could have a material adverse effect on our results of operations, financial condition and cash flows by decreasing the proceeds we receive for our oil and gas production in comparison to what we would receive if not for the differential.


The oil and gas business involves numerous uncertainties and operating risks that can prevent us from realizing profits and can cause substantial losses.

Our development, exploitation and exploration activities may be unsuccessful for many reasons, including weather, cost overruns, equipment shortages and mechanical difficulties. Moreover, the successful drilling of an oil and gas well does not ensure a profit on investment. A variety of factors, both geological and market-related, can cause a well to become uneconomical or only marginally economical. In addition to their cost, unsuccessful wells can hurt our efforts to replace reserves.

The oil and gas business involves a variety of operating risks, including:

·unexpected operational events and/or conditions;
·reductions in oil and gas prices;
·limitations in the market for oil and gas;
·adverse weather conditions;
·facility or equipment malfunctions;

·title problems;
·oil and gas quality issues;
·pipe, casing, cement or pipeline failures;
·natural disasters;
·fires, explosions, blowouts, surface cratering, pollution and other risks or accidents;
·environmental hazards, such as oil spills, pipeline ruptures and discharges of toxic gases;
·compliance with environmental and other governmental requirements; and
·uncontrollable flows of oil and gas or well fluids

If we experience any of these problems, it could affect well bores, gathering systems and processing facilities, which could adversely affect our ability to conduct operations. We could also incur substantial losses as a result of:

·injury or loss of life;
·severe damage to and destruction of property, natural resources and equipment;
·pollution and other environmental damage;
·clean-up responsibilities;
·regulatory investigation and penalties;
·suspension of our operations; and
·repairs to resume operations

Because we use third-party drilling contractors to drill our wells, we may not realize the full benefit of worker compensation laws in dealing with their employees. Our insurance does not protect us against all operational risks. We do not carry business interruption insurance at levels that would provide enough funds for us to continue operating without access to other funds. For some risks, we may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. If a significant accident or other event occurs and is not fully covered by insurance, it could impact our operations enough to force us to cease our operations.

Drilling wells is speculative, and any material inaccuracies in our forecasted drilling costs, estimates or underlying assumptions will materially affectharm our business.

Developing Although we currently maintain liability insurance coverage intended to cover professional liability and exploring for oil and gas involves a high degree of operational and financial risk, which precludes definitive statements as to the time required and costs involved in reaching certain objectives. The budgeted costs of drilling, completing and operating wells are often exceeded and can increase significantly when drilling costs rise due to a tightening in the supply of various types of oil and gas field equipment and related services. Drilling may be unsuccessful for many reasons, including geological conditions, weather, cost overruns, equipment shortages and mechanical difficulties. Moreover, the successful drilling of an oil and gas well does not ensure a profit on investment. Exploratory wells bear a much greater risk of loss than development wells. A variety of factors, both geological and market-related, can cause a well to become uneconomical or only marginally economic. Our initial drilling and development sites, and any potential additional sitesother claims, we cannot assure that may be developed, require significant additional exploration and development, regulatory approval and commitments of resources prior to commercial development. If our actual drilling and development costs are significantly more than our estimated costs, we may not be able to continue our business operations as proposed and would be forced to modify our plan of operation.

Development of our reserves, when established, may not occur as scheduled and the actual results may not be as anticipated. Drilling activity and lack of access to economically acceptable capital may result in downward adjustments in reserves or higher than anticipated costs. Our estimatesinsurance coverage will be based on various assumptions, including assumptions over which we have control and assumptions required by the SEC relatingadequate to oil and gas prices, drilling and operating expenses, capital expenditures, taxes and availabilitycover liabilities arising out of funds. We have control over our operations that affect, among other things, acquisitions and dispositions of properties, availability of funds, use of applicable technologies, hydrocarbon recovery efficiency, drainage volume and production decline rates that are part of these estimates and assumptions and any variance in our operations that affects these items within our control may have a material effect on reserves.  The process of estimating our oil and gas reserves is extremely complex, and requires significant decisions and assumptions in the evaluation of available geological, geophysical, engineering and economic data for each reservoir. Our estimates may not be reliable enough to allowclaims asserted against us to be successful in our intended business operations. Our actual production, revenues, taxes, development expenditures and operating expenses will likely vary from those anticipated. These variances may be material. In 2015 we had a carried interest in the drilling of two exploratory wells and we drilled no developmental wells.

Unless we replace our oil and gas reserves, our reserves and production will decline, which would adversely affect our cash flows and income.

Unless we conduct successful development, exploitation and exploration activities or acquire properties containing proved reserves, our proved reserves will decline as those reserves are produced. Producing oil and gas reservoirs generally are characterized by declining production rates that vary depending upon reservoir characteristics and other factors. Our future oil and gas production, and, therefore our cash flow and income, are highly dependent on our success in efficiently developing and exploiting our current reserves and economically finding or acquiring additional recoverable reserves. We may be unable to make such acquisitions because we are:

·unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts with them;
·unable to obtain financing for these acquisitions on economically acceptable terms; or
·outbid by competitors.

If we are unable to develop, exploit, find or acquire additional reserves to replace our current and future production, our cash flow and income will decline as production declines, until our existing properties would be incapable of sustaining commercial production.

In order to exploit successfully our current oil and gas leases and others that we acquire in the future we will needwhere the outcomes of such claims are unfavorable to generate significant amounts of capital.

The oil and gas exploration, development and production business is a capital-intensive undertaking. In order for us to be successful in acquiring, investigating, developing, and producing oil and gas from our current mineral leases and other leases that we may acquire in the future, we will need to generate an amount of capitalus. Liabilities in excess of that generated from our results of operations. In order to generate that additional capital, we may need to obtain an expanded debt facility and issue additional shares of our equity securities. There can be no assurance that we will be successful in either obtaining that expanded debt facility or issuing additional shares of our equity securities, and our inability to generate the needed additional capital may have a material adverse effect on our prospects and financial results of operations. If we are able to issue additional equity securities in order to generate such additional capital, then those issuances may occur at prices that represent discounts to our trading price, and will dilute the percentage ownership interest of those persons holding our shares prior to such issuances. Unless we are able to generate additional enterprise value with the proceeds of the sale of our equity securities, those issuances may adversely affect the value of our shares that are outstanding prior to those issuances.


A significant portion of our potential future reserves and our business plan depend upon secondary recovery techniques to establish production. There are significant risks associated with such techniques.

We anticipate that a significant portion of our future reserves and our business plan will be associated with secondary recovery projects that are either in the early stage of implementation or are scheduled for implementation subject to availability of capital. We anticipate that secondary recovery will affect our reserves and our business plan, and the exact project initiation dates and, by the very nature of water flood operations, the exact completion dates of such projects are uncertain. In addition, the reserves and our business plan associated with these secondary recovery projects, as with any reserves, are estimates only, as the success of any development project, including these water flood projects, cannot be ascertained in advance. If we are not successful in developing a significant portion of our reserves associated with secondary recovery methods, then the project may be uneconomic or generate less cash flow and reserves than we had estimated prior to investing the capital. Risks associated with secondary recovery techniques include, but are not limited to, the following:

·higher than projected operating costs;
·lower-than-expected production;
·longer response times;
·higher costs associated with obtaining capital;
·unusual or unexpected geological formations;
·fluctuations in oil and gas prices;
·regulatory changes;
·shortages of equipment; and
·lack of technical expertise.

If any of these risks occur, it could adversely affect our financial condition or results of operations.

Any acquisitions we complete are subject to considerable risk.

Even if we make acquisitions that we believe are good for our business, all acquisitions involve potential risks, including, among other things:

·the validity of our assumptions about reserves, future production, revenues and costs, including synergies;
·an inability to integrate successfully the businesses we acquire;
·a decrease in our liquidity by using our available cash or borrowing capacity to finance acquisitions;
·a significant increase in our interest expense or financial leverage if we incur additional debt to finance acquisitions;
·the assumption of unknown liabilities, losses or costs for which we are not indemnified or for which our indemnity is inadequate;
·the diversion of management’s attention from other business concerns;
·an inability to hire, train or retain qualified personnel to manage the acquired properties or assets;
·the incurrence of other significant charges, such as impairment of goodwill or other intangible assets, asset devaluation or restructuring charges;
·unforeseen difficulties encountered in operating in new geographic or geological areas; and
·customer or key employee losses at the acquired businesses.

Our decision to acquire a property will depend in part on the evaluation of data obtained from production reports and engineering studies, geophysical and geological analyses and seismic and other information, the results of which are often incomplete or inconclusive.

Our reviews of acquired properties can be inherently incomplete because it is not always feasible to perform an in-depth review of the individual properties involved in each acquisition. Even a detailed review of records and properties may not necessarily reveal existing or potential problems, nor will it permit a buyer to become sufficiently familiar with the properties to assess fully their deficiencies and potential. Inspections may not always be performed on every well, and environmental problems, such as ground water contamination, plugging or orphaned well liability are not necessarily observable even when an inspection is undertaken.

We must obtain governmental permits and approvals for drilling operations, which can result in delays in our operations, be a costly and time consuming process, and result in restrictions on our operations.

Regulatory authorities exercise considerable discretion in the timing and scope of permit issuances in the regions in which we operate. Compliance with the requirements imposed by these authorities can be costly and time consuming and may result in delays in the commencement or continuation of our exploration or production operations and/or fines. Regulatory or legal actions in the future may materially interfere with our operations or otherwise have a material adverse effect on us. In addition, we are often required to prepare and present to federal, state or local authorities data pertaining to the effect or impact that a proposed project may have on the environment, threatened and endangered species, and cultural and archaeological artifacts. Accordingly, the permits we need may not be issued, or if issued, may not be issued in a timely fashion, or may involve requirements that restrict our ability to conduct our operations or to do so profitably.

Due to our lack of geographic diversification, adverse developments in our operating areas would materially affect our business.

We currently only lease and operate oil and gas properties located in Colorado, Nebraska, Kansas and Texas. As a result of this concentration, we may be disproportionately exposed to the impact of delays or interruptions of production from these properties caused by significant governmental regulation, transportation capacity constraints, curtailment of production, natural disasters, adverse weather conditions or other events which impact this area.

We depend on a small number of customers for all, or a substantial amount of our sales. If these customers reduce the volumes of oil and gas they purchase from us, our revenue and cash flow will decline to the extent we are not able to find new customers for our production.

In Kansas, we sell oil to Coffeyville Resources. There are approximately six potential purchasers of oil in Kansas. If a key purchaser were to reduce the volume of oil it purchases from us, our revenue and cash available for operations will decline to the extent we are not able to find new customers to purchase our production at equivalent prices.

We currently sell oil to Sunoco Logistics, Inc. in Texas. There are numerous purchasers in Texas, but increased production volumes from extensive shale drilling activity in the area could result in reduced purchases by several of our purchasers.

In Colorado we sell oil to ARM Energy Management LLC. There are a number of potential purchasers of our oil in Colorado but increased production volumes from the DJ basin could result in reduced purchases by our purchasers. If a key purchaser were to reduce the volume of oil it purchases from us, our revenue and cash available for operations will decline to the extent we are not able to find new customers to purchase our production at equivalent prices.

We sell natural gas to United Energy Trading and Western Operating Company in Colorado. There are other purchasers for our natural gas in Colorado. If a key purchaser were to reduce the volume of gas it purchases from us, our revenue and cash available for operations will decline to the extent we are not able to find new customers to purchase our production at equivalent prices.


We are not the operator of some of our properties and we have limited control over the activities on those properties.

We are not the operator of our Mississippian Project, and our dependence on the operator of this project limits our ability to influence or control the operation or future development of this project. Such limitations could materially adversely affect the realization of our targeted returns on capital related to exploration, drilling or production activities and lead to unexpected future costs.

We may suffer losses or incur liability for events for which we or the operator of a property have chosen not to obtain insurance.

Our operations are subject to hazards and risks inherent in producing and transporting oil and gas, such as fires, natural disasters, explosions, pipeline ruptures, spills, and acts of terrorism, all of which can result in the loss of hydrocarbons, environmental pollution, personal injury claims and other damage to our and others’ properties. As protection against operating hazards, we maintain insurance coverage, against some, but not all, potential losses. In addition, pollutionincluding coverage for professional liability and environmental risks generally are not fully insurable. As a result of market conditions, existing insurance policies may not be renewed andcertain other desirable insurance may not be available on commercially reasonable terms, if at all. The occurrence of an event that is not covered, or not fully covered, by insuranceclaims, could have a material adverse effect on our business, financial condition and results of operations.

 

ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

20 

Table of Contents


PART II

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our business depends in partCommon Stock is currently quoted on processing facilities owned by others. Any limitation in the availability of those facilities could interfere with our ability to market our oil and gas production and could harm our business.NYSE American under the symbol “UAVS.”

 

The marketabilityfollowing table sets forth, for the period indicated, the quarterly high and low per share sales prices (per share of our oil and gas production will depend in part onCommon Stock for each quarter during our last two fiscal years as reported by the availability, proximity and capacity of pipelines and oil and gas processing facilities. The amount of oil and gas that can be produced and sold is subject to curtailment in certain circumstances, such as pipeline interruptions due to scheduled and unscheduled maintenance, excessive pressure, physical damage or lack of available capacity on such systems. The curtailments arising from these and similar circumstances may last from a few days to several months. In many cases, we will be provided only with limited, if any, notice as to when these circumstances will arise and their duration. Any significant curtailment in pipeline capacity or the capacity of processing facilities could significantly reduce our ability to market our oil and gas production and could materially harm our business.


Cost and availability of drilling rigs, equipment, supplies, personnel and other services could adversely affect our ability to execute on a timely basis our development, exploitation and exploration plans.New York Stock Exchange.

 

Shortages or an increase in cost of drilling rigs, equipment, supplies or personnel could delay or interrupt our operations, which could impact our financial condition and results of operations. Drilling activity in the geographic areas in which we conduct drilling activities may increase, which would lead to increases in associated costs, including those related to drilling rigs, equipment, supplies and personnel and the services and products of other vendors to the industry. Increased drilling activity in these areas may also decrease the availability of rigs. We do not have any contracts for drilling rigs and drilling rigs may not be readily available when we need them. Drilling and other costs may increase further and necessary equipment and services may not be available to us at economical prices.

Our exposure to possible leasehold defects and potential title failure could materially adversely impact our ability to conduct drilling operations.

We obtain the right and access to properties for drilling by obtaining oil and gas leases either directly from the hydrocarbon owner, or through a third party that owns the lease. The leases may be taken or assigned to us without title insurance. There is a risk of title failure with respect to such leases, and such title failures could materially adversely impact our business by causing us to be unable to access properties to conduct drilling operations.

Our reserves are subject to the risk of depletion because many of our leases are in mature fields that have produced large quantities of oil and gas to date.

A significant portion of our operations are located in or near established fields in Colorado, Nebraska, Kansas and Texas. As a result, many of our leases are in, or directly offset, areas that have produced large quantities of oil and gas to date.  As such, our reserves may be negatively impacted by offsetting wells or previously drilled wells, which could significantly harm our business.

Our lease ownership may be diluted due to financing strategies we may employ in the future.

To accelerate our development efforts we may take on working interest partners who will contribute to the costs of drilling and completion operations and then share in any cash flow derived from production. In addition, we may in the future, due to a lack of capital or other strategic reasons, establish joint venture partnerships or farm out all or part of our development efforts. These economic strategies may have a dilutive effect on our lease ownership and could significantly reduce our operating revenues.

We may face lease expirations on leases that are not currently held-by-production.

We have numerous leases that are not currently held-by-production, some of which have near term lease expirations and are likely to expire. Although we believe that we can maintain our most desirable leases by conducting drilling operations or by negotiating lease extensions, we can make no guarantee that we can maintain these leases.

We are subject to complex laws and regulations, including environmental regulations, which can adversely affect the cost, manner or feasibility of doing business.

Development, production and sale of oil and gas in the United States are subject to extensive laws and regulations, including environmental laws and regulations. We may be required to make large expenditures to comply with environmental and other governmental regulations. Matters subject to regulation include, but are not limited to:

·location and density of wells;
·the handling of drilling fluids and obtaining discharge permits for drilling operations;
·accounting for and payment of royalties on production from state, federal and Indian lands;
·bonds for ownership, development and production of oil and gas properties;
·transportation of oil and gas by pipelines;
·operation of wells and reports concerning operations; and
·taxation.

Under these laws and regulations, we could be liable for personal injuries, property damage, oil and gas spills, discharge of hazardous materials, remediation and clean-up costs and other environmental damages. Failure to comply with these laws and regulations also may result in the suspension or termination of our operations and subject us to administrative, civil and criminal penalties. Moreover, these laws and regulations could change in ways that substantially increase our costs. Accordingly, any of these liabilities, penalties, suspensions, terminations or regulatory changes could materially adversely affect our financial condition and results of operations enough to possibly force us to cease our business operations.


Our operations may expose us to significant costs and liabilities with respect to environmental, operational safety and other matters.

We may incur significant costs and liabilities as a result of environmental and safety requirements applicable to our oil and gas production activities. We may also be exposed to the risk of costs associated with Kansas Corporation Commission, the Texas Railroad Commission and the State of Colorado Oil and Gas Conservation Commission requirements to plug orphaned and abandoned wells on our oil and gas leases from wells previously drilled by third parties. In addition, we may indemnify sellers or lessors of oil and gas properties for environmental liabilities they or their predecessors may have created. These costs and liabilities could arise under a wide range of federal, state and local environmental and safety laws and regulations, including regulations and enforcement policies, which have tended to become increasingly strict over time. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, imposition of cleanup and site restoration costs, liens and to a lesser extent, issuance of injunctions to limit or cease operations. In addition, claims for damages to persons or property may result from environmental and other impacts of our operations.

Strict, joint and several liability may be imposed under certain environmental laws, which could cause us to become liable for the conduct of others or for consequences of our own actions that were in compliance with all applicable laws at the time those actions were taken. New laws, regulations or enforcement policies could be more stringent and impose unforeseen liabilities or significantly increase compliance costs. If we are not able to recover the resulting costs through insurance or increased revenues, our ability to operate effectively could be adversely affected.

We operate in a highly competitive environment and our competitors may have greater resources than do we.

The oil and gas industry is intensely competitive and we compete with other companies, many of which are larger and have greater financial, technological, human and other resources. Many of these companies not only explore for and produce crude oil and gas but also carry on refining operations and market petroleum and other products on a regional, national or worldwide basis. Such companies may be able to pay more for productive oil and gas properties and exploratory prospects or define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. In addition, such companies may have a greater ability to continue exploration activities during periods of low oil and gas market prices. Our ability to acquire additional properties and to discover reserves in the future will be dependent upon our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. If we are unable to compete, our operating results and financial position may be adversely affected.

Risks Associated with our Stock

We have ceased paying dividends on our Series A preferred stock, causing the trading price of the preferred stock to dramatically decline

On November 4, 2015, we announced that we would not be declaring the monthly dividend for the month of November 2015 on our 10.00% Series A Cumulative Redeemable Perpetual Preferred Stock in order to preserve our cash resources. We have not declared the monthly dividend since, and do not expect to do so in the near future. The failure to declare and pay monthly dividends on our preferred stock caused its trading price to decline substantially.

We do not expect to pay dividends to holders of our common stock because of the terms of our debt facility, and our need to reinvest cash flow from operations in our business.

It is unlikely that we will pay any dividends to the holders of our common stock in the foreseeable future. The terms of our debt facility require that the lender approve any such distributions, and the lender is unlikely to provide that consent so long as we have significant unpaid indebtedness outstanding.

Ownership of our common stock is highly concentrated, and such concentration may prevent other stockholders from influencing significant corporate decisions and may result in conflicts of interest that could cause our stock price to decline.

Our directors, officers and principal stockholders (stockholders owning 10% or more of our common stock) and their affiliates beneficially owned approximately 3,973,168 shares or 47.17% of the outstanding shares of common stock, stock options, and derivatives that could have been converted to common stock at December 31, 2016, and as of the filing of this Annual Report on Form 10-K. Such stockholders will have significant influence over the outcome of all matters submitted to our stockholders for approval, including the election of directors and other corporate actions.

Two of our Directors, Ryan A. Lowe and Lance W. Helfert, served on the investment committee of West Coast Asset Management, Inc. West Coast Asset Management was the managing member of West Coast Opportunity Fund, LLC, a private investment vehicle formed for the purpose of investing in a wide variety of securities and financial instruments. West Coast Opportunity Fund, LLC was terminated in July 2015 and all of the assets of the fund, including EnerJex common and preferred shares were distributed to the shareholders of that fund. West Coast Asset Management’s principals also manage Montecito Venture Partners, LLC. Montecito Venture Partners, LLC beneficially owned 1.53% of our common stock and .7% of our Series A preferred stock at December 31, 2016 and as of the date of this filing.West Coast Asset Management, Inc. was dissolved in September 2016.

In addition, we engage from time to time in transactions with certain of these significant stockholders.

2019 High Low
First Quarter(through March 26, 2019) $.47  $.45 
         
2018 High Low
First Quarter $5.65  $3.55 
Second Quarter $2.04  $1.78 
Third Quarter $1.73  $1.62 
Fourth Quarter $0.59  $0.53 
         
2017  High   Low 
First Quarter $9.48  $8.55 
Second Quarter $8.38  $7.13 
Third Quarter $7.57  $7.50 
Fourth Quarter $5.75  $4.95 

 

As stated above, Montecito Venture Partners affiliatesof March 19, 2019, we had approximately 378 individual shareholders of record of our directors Mr. Lowe and Mr. Helfert, beneficially own, asCommon Stock. We believe that the number of December 31, 2016, 1.53%beneficial owners of our common stock and .7%Common Stock is greater than the number of our Series A preferred stock. The interestsrecord holders, because a number of Montecito Venture Partners, and their affiliates, may differ from those of our other stockholders. Montecito Venture Partners, and their affiliates are in the business of making investments in companies and maximizing the return on those investments. They currently have, and may from time to time in the future acquire, interests in businesses that directly or indirectly compete with certain aspects of our business or our suppliers’ or customers’ businesses.


We have derivative securities currently outstanding and we may issue derivative securities in the future. Exercise of the derivatives will cause dilution to existing and new stockholders.

The exercise of our outstanding options and warrants, will cause additional shares of common stock to be issued, resulting in dilution to our existing and future common stockholders

We have the ability to issue additional shares of our common stock and preferred stock without asking for stockholder approval, which could cause your investment to be diluted.Common Stock is held through brokerage firms in “street name.”

 

Our amended and restated articles of incorporation authorize the board of directors to issue up to 250,000,000 shares of common stock and 25,000,000 shares of preferred stock.   The power of the board of directors to issue shares of common stock, preferred stock or warrants or options to purchase shares of common stock or preferred stock is generally not subject to shareholder approval.  Accordingly, any additional issuance of our common stock, or preferred stock that may be convertible into common stock, or debt instruments that may be convertible into common or preferred stock, may have the effect of diluting one’s investment.

Although our common stock is traded on the NYSE MKT and our Series A preferred stock is traded on the OTC PINK, daily trading volumes are small making it difficult for investors to sell their shares.

Our common stock and our Series A preferred stock trade under the symbol “ENRJ,” and “ENRJP,” respectively but trading volume has been minimal. Therefore, the market for our common stock is limited. The trading price of our stock could be subject to wide fluctuations. Investors may not be able to purchase additional shares or sell their shares within the time frame or at a price they desire.

The price of our common stock and Series A preferred stock may be volatile and you may not be able to resell your shares at a favorable price.

Regardless of whether an active trading market for our stock develops, the market price of our stock may be volatile and you may not be able to resell your shares at or above the price you paid for such shares. Many factors beyond our control, including but not limited to the following factors could affect our stock price:

·our operating and financial performance and prospects;
·quarterly variations in the rate of growth of our financial indicators, such as net income or loss per share, net income or loss and revenues;
·changes in revenue or earnings estimates or publication of research reports by analysts about us or the exploration and production industry;
·potentially limited liquidity;
·actual or anticipated variations in our reserve estimates and quarterly operating results;
·changes in oil and gas prices;
·sales of our common stock by significant stockholders and future issuances of our common stock;
·increases in our cost of capital;
·changes in applicable laws or regulations, court rulings and enforcement and legal actions;
·commencement of or involvement in litigation;
·changes in market valuations of similar companies;
·additions or departures of key management personnel;
·general market conditions, including fluctuations in and the occurrence of events or trends affecting the price of oil and gas; and
·domestic and international economic, legal and regulatory factors unrelated to our performance.

Our amended and restated articles of incorporation, restated bylaws and Nevada Law contain provisions that could discourage an acquisition or change of control of us.

Our amended and restated articles of incorporation authorize our board of directors to issue preferred stock and common stock without stockholder approval. The election by our board of directors to issue Series A preferred stock, and any future election to issue more preferred stock, could make it more difficult for a third party to acquire control of us. In addition, provisions of the articles of incorporation and bylaws could also make it more difficult for a third party to acquire control of us. In addition, Nevada’s “Combination with Interested Stockholders’ Statute” and its “Control Share Acquisition Statute” may have the effect in the future of delaying or making it more difficult to effect a change in control of us.

These statutory anti-takeover measures may have certain negative consequences, including an effect on the ability of our stockholders or other individuals to (i) change the composition of the incumbent board of directors; (ii) benefit from certain transactions which are opposed by the incumbent board of directors; and (iii) make a tender offer or attempt to gain control of us, even if such attempt were beneficial to us and our stockholders. Since such measures may also discourage the accumulations of large blocks of our common stock by purchasers whose objective is to seek control of us or have such common stock repurchased by us or other persons at a premium, these measures could also depress the market price of our common stock. Accordingly, our stockholders may be deprived of certain opportunities to realize the “control premium” associated with take-over attempts.

We have no plans to pay dividends on our common stock. You may not receive funds without selling your stock.Dividend Policy

 

We do not anticipate paying anyintend to pay cash dividends onto our common stockstockholders in the foreseeable future. We currently intend to retain all of our available funds and future earnings, if any, to finance the expansiongrowth and development of our business. OurAny future determination related to our dividend policy with regard to our common stock is within the discretion of our board of directors and will depend upon various factors, including our business, financial condition, results of operations, capital requirements, investment opportunities and restrictions contained in current or future financing instruments, including the consent of debt holders and holders of Series A Shares, if applicable at such time, and other factors our Board of Directors deems relevant.

Additional Risks and Uncertainties

We are an oil and gas acquisition, exploration and development company. If any of the risks that we face actually occur, irrespective of whether those risks are described in this section or elsewhere in this report, our business, financial condition and operating results could be materially adversely affected.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

Not applicable.

ITEM 3. LEGAL PROCEEDINGS.

On September 23, 2016 the Company, American Standard Energy Corporation, Baylor Operating LLC, Bernard Given and Loeb & Loeb LLP were sued by Geronimo Holdings Corporation and Randal Capps in the 143rd Judicial District Court located in Pecos, Texas. The suit among other things, seeks damages for an alleged unlawful sale of properties in Crockett County Texas and for alleged unpaid royalties. The Company believes the suit is without merit and will vigorously defend itself. The Company has faith that it will prevail and at December 31, 2016 no reserve for potential losses arising from this matter has been recorded. Additionally under its agreement with Baylor Operating LLC, Baylor has agreed to indemnify and defend the Company against all lawsuits and claims including this one.

On April 26, 2016 C&F Ranch, LLC sued the Company in Allen County Kansas for alleged breach of contract related to the rental of certain lands located on the C&F Ranch. The Company believes that has paid all rents owe to C&F Ranch LLC and will vigorously defend itself. The Company has faith that it will prevail and at December 31, 2016 no reserve for potential losses arising from this matter has been recorded.


ITEM 4. MINE SAFETY DISCLOSURE

None

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information for Common Stock

Our common stock trades on the NYSE MKT under the symbol “ENRJ.” The following table lists the quotations for the high and low sales prices of our common stock for the years ended December 31, 2015 and December 31, 2016. The market price of our common stock has been volatile. For an additional discussion, see “Item 1A: Risk Factors” of this Annual Report on Form 10-K.  

  High  Low 
Year Ended December 31, 2015        
Quarter ended March 31, 2015 $3.44  $1.21 
Quarter ended June 30, 2015 $2.19  $1.25 
Quarter ended September 30, 2015 $1.53  $.49 
Quarter ended December 31, 2015 $.93  $.30 
Year Ended December 31, 2016        
Quarter ended March 31, 2016 $.38  $.20 
Quarter ended June 30, 2016 $.38  $.23 
Quarter ended September 30, 2016 $.61  $.25 
Quarter ended December 31, 2016 $.40  $.26 

Holders

As of March 31, 2017, there were 341 holders of record of our common stock, and 9 holders of record of our Series A preferred stock.


Dividends

We have never paid or declared any cash dividends on our common stock. Through October 2015, we paid a monthly dividend of $.20833 per share or $2.50 annual dividend per share on the Company’s non-convertible 10.0% Series A Cumulative Redeemable Perpetual Preferred Stock. On November 4, 2015 the Company suspended the monthly dividend for the month of November 2015 on its 10.00% Series A Cumulative Redeemable Perpetual Preferred Stock (“Series A Preferred Stock”) in order to preserve its cash resources. Payment of future dividends on the Series A Preferred Stock will be determined by the Company’s Board of Directors.

Under the terms of the Series A Preferred Stock, the dividend for the month of November 2015, and any future unpaid dividends, will accumulate. If the Company does not pay dividends on its Series A Preferred Stock for six monthly periods (whether consecutive or non-consecutive), the dividend rate will increase to 12.0% per annum and the holders of the Series A Preferred Stock will have the right, at the next meeting of stockholders, to elect two directors to serve on the Company’s Board of Directors along with other members of the Board, until all accumulated accrued and unpaid dividends are paid in full.

We do not expect to pay any cash dividends on our common stock in the foreseeable future. Additionally, we are contractually prohibited by the terms of our outstanding debt from paying cash dividends on our common stock. Payment of future dividends on common stock, if any, will bemade at the discretion of our Board of Directors and will depend onupon, among other factors, our financial condition, results of operations, financial condition, capital requirements, contractual restrictions, contained in current or future financing instruments, including the consent of debt holders and holders of Series A Preferred Stock, if applicable at such time,business prospects and other factors our Boardboard of Directors deemsdirectors may deem relevant.

 

Securities Authorized for Issuance under

Equity Compensation PlansPlan

 

The following table sets forthprovides information as of fiscal year ended December 31, 2016, regarding outstanding options granted under2018 about our stock option plansequity compensation plan and options reserved for future grant under the plans.arrangements .

 

     Number of shares 
  Number     remaining available for 
  of shares to be issued     future issuance under 
  upon exercise of  Weighted-average  equity compensation 
  outstanding options,  exercise price of  plans (excluding shares 
  warrants and rights  outstanding options,  reflected in column (a) 
Plan Category (a)  warrants and rights (b)  (c) 
Equity compensation plans approved by stockholders  207,665  $9.69   507,825 
Plan category Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
 Weighted-average
exercise price of
outstanding options,
warrants and rights
 Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders  1,287,103  $0.46   712,897 
Equity compensation plans not approved by security holders  207,055   0.06    
Total  1,494,158  $0.46   712,897 

 

Recent Sales of Unregistered Securities

 

None.None

 

Issuer

Purchases of Equity Securities by Issuer and Its Affiliates

None.

 

ITEM 6. SELECTED FINANCIAL DATA.

Not applicable.


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .

ITEM 6.SELECTED FINANCIAL DATA

 

This Management’s Discussionitem is not required for Smaller Reporting Companies.

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ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion highlights the principal factors that have affected our financial condition and Analysisresults of Financial Conditionoperations as well as our liquidity and Results of Operations sectioncapital resources for the periods described. This discussion should be read in conjunction with our Consolidated Financial Statements and the other sectionsrelated notes included in Item 8 of this Form 10-K. This discussion contains forward-looking statements. Please see the explanatory note concerning “Forward-Looking Statements” in Part I of this Annual Report on Form 10-K including “Items 1 and 2. Business and Properties” and “Item 8: Financial Statements and Supplementary Data”. This section includes forward-looking statements within the meaning of Section 27AItem 1A. Risk Factors for a discussion of the Securities Act, and Section 21E of the Exchange Act. Forward-looking statements such as “will”, “believe,” “are projected to be” and similar expressions are statements regarding future events or our future performance, and include statements regarding projected operating results. These forward-looking statements are based on current expectations, beliefs, intentions, strategies, forecastsuncertainties, risks and assumptions and involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated byassociated with these forward-looking statements. These risks include, but areThe operating results for the periods presented were not limited to: our ability to deploy capital in a manner that maximizes stockholder value; the ability to identify suitable acquisition candidates or business and investments opportunities; the ability to reduce our operating costs; general economic conditions and our expected liquidity in future periods. These forward-looking statements are based on our current expectations and could besignificantly affected by inflation.

Company Overview

On March 26, 2018, EnerJex Resources, Inc. (“EnerJex”), a Nevada company, consummated the uncertaintiestransactions contemplated by the Agreement and risk factors described throughout this filingPlan of Merger (the “Merger Agreement”), dated October 19, 2017, pursuant to which AgEagle Merger Sub, Inc., a Nevada corporation and particularly ina wholly-owned subsidiary of EnerJex, merged with and into AgEagle Aerial Systems Inc., a privately held company organized under the “Risk Factors” set forth in Part I, Item 1Alaws of this Annual Reportthe state of Nevada (“AgEagle Sub”), with AgEagle Sub surviving as a wholly-owned subsidiary of EnerJex (the “Merger”). In connection with the Merger, EnerJex changed its name to AgEagle Aerial Systems Inc. (the “Company, “we,” “our,” or “us”) and AgEagle Sub changed its name to “AgEagle Aerial, Inc.” Our Common Stock will continue to trade on Form 10-K.the NYSE American under its new symbol “UAVS” commencing on March 27, 2018. As a result of the Merger, through AgEagle Sub, we are now engaged in the business of designing, developing, producing, distributing and supporting technologically-advanced small unmanned aerial vehicles (UAVs or drones) that we supply to the precision agriculture industry. Additionally, we recently announced a new service offering using our actual results may differ materially from those anticipated in these forward-looking statements.leased UAVs and associated data processing services for the sustainable agriculture industry.

 

Overview We are headquartered in Neodesha, Kansas, and are a manufacturer of unmanned aerial vehicles focused on providing actionable data to the precision agriculture industry. We design, produce, distribute and support technologically-advanced small unmanned aerial vehicles (UAVs or drones) that we offer for sale commercially to the precision agriculture industry. Additionally, we recently announced a new service offering using our UAVs and associated data processing services for the sustainable agriculture industry and aerial imaging processing services.

 Historically, AgEagle derived the majority of its revenue from the sale of its AgEagle Classic and RAPID systems. However, as a result of the development of our new product, the RX-60 and RX-48, we will no longer manufacture and distribute our previous two systems. We believe that the UAV industry is currently in the early stages of development and has significant growth potential. Additionally, we believe that some of the innovative potential products in our research and development pipeline will emerge and gain traction as new growth platforms in the future, creating market opportunities.

We deliver advanced solutions utilizing our proprietary technologies and trade secrets that help farmers, agronomists and other precision agricultural professionals operate more effectively and efficiently. Our UAVs were initially specifically designed to help farmers increase profits by pinpointing areas where nutrients or chemicals need to be applied, as opposed to traditional widespread land application processes, thus decreasing input costs, reducing the amount of chemicals applied and potentially increasing yields. Our products are designed for busy agriculture professionals who do not have the time to process images on their computers, which some of our competitors require.

In addition to UAV sales, in late 2018, we introduced a new drone-leasing program, alleviating farmers and agribusinesses from significant upfront costs associated with purchasing a drone, while also relieving them from ongoing drone maintenance and support requirements. Additionally, the new program provides the option of engaging a trained AgEagle pilot to operate the drone and manage the entire image collection process, creating a truly turnkey aerial imagery capture solution for our customers.

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Our principal strategybusiness is seasonal in nature and, as a result, our revenue and expenses and associated revenue trends fluctuate from quarter to develop, acquire, explorequarter. For example, we anticipate that the second and produce domestic onshore oilthird quarter of each year will generally represent our strongest quarter in terms of customer contracts. Conversely, during the winter months and gas properties. Our businessthe end of year holidays, when the growing season is not on-going, we generally anticipate lower customer contracts. In addition, our net revenue is impacted by our marketing strategies, including the timing and amount of paid advertising and promotional activity. We also anticipate that our net revenue will be impacted by the timing and success of our ongoing product expansion. 

Research and development activities are currently focusedintegral to our business and we follow a disciplined approach to investing our resources to create new technologies and solutions. With the welcoming of our new CEO, Mr. Barrett Mooney, in Kansas, Colorado, Nebraska,2018, we continue to invest in our future success. Under his leadership, we intend to expand our software offerings and Texas.

Results of Operations

The following table presents selected information regarding our operating results from continuing operations.

  Year Ended  Year Ended    
  December 31,  December 31,    
  2016  2015  Difference 
Oil & gas revenues(1)            
Crude oil revenues $2,390,024  $4,525,089  $(2,135,065)
Average price per Bbl  40.75   44.24   (3.49)
Natural gas revenues  71,703   353,633   (281,930)
Average price per Mcf  1.51   1.88   (.37)
Expenses:            
Lease operating expenses(2)  2,661,258   4,501,940   (1,840,682)
Depreciation, depletion and amortization(3)  254,329   1,108,039   (853,710)
Impairment of oil and gas properties  8,032,670   48,930,087   (40,897,417)
Total production expenses  10,948,257   54,540,066   (43,591,809)
Professional fees(4)  310,471   680,860   (370,389)
Salaries(5)  1,642,593   1,927,552   (284,959)
Depreciation - other fixed assets  159,638   203,407   (43,769)
Administrative expenses(6)  539,571   636,459   (96,888)
Total expenses $13,600,530  $57,988,344  $(44,387,814)

(1) 2016 crude oil revenues decreased $2.1 million or 47% to 2.4 million from $4.5 millionleverage his experience in fiscal 2015.  This decrease was due to the continued decline in crude oil prices. Realized oil prices dropped $3.49 or 8% during 2016 from an average of $44.24 per bbl in 2015 to an average of $40.75 per bbl in 2016. Declining prices accounted for approximately $200,000 of the $2.1 million drop in crude oil revenues. A decrease in production volumes in 2016 accounted for $1.9 million of the $2.1 million decrease in revenues. Volumes decreased by approximately 43,600 bbls or 43% to 58,653 bbls in 2016 compared to production of 102,289 bbls in 2015.  2016 natural gas revenues decreased approximately $282,000 or 80% to $71,700 from $353,600 million in 2015. The decrease was due to lower natural gas prices in 2016. Natural gas prices decreased $.37 per mcf or 20% from an average price of $1.88 in 2015 to an average price of $1.51 in 2016. This drop in prices accounted for $69,100 of the overall $282,000 decrease in revenues. A decrease in production volumes accounted for the remaining $213,000 decrease in revenues. Natural gas volumes decreased approximately 140,900 mcf or 75% in 2016 from 188,400 mcf in 2015 to 47,600 mcf in 2016.

(2) 2016 lease operating expenses decreased $1.8 million or 41% to $2.7 million from $4.5 million in 2015. However, lease operating expenses per boe increased 19% or $6.30 to $39.97 in 2016 from $33.67 per boe in 2015.  

(3) The depletion expense decrease is due primarily to the impairment of oil and gas properties necessitated by the SEC quarterly ceiling tests. The Company reviews the carrying value of oil and gas properties accounted for by use of the full cost rules of accounting. This method dictates that the net book value of oil and gas properties, less deferred income taxes, may not exceed a calculated “ceiling.” Any excess of the net book value of proved oil and gas properties, less related deferred income taxes, over the ceiling is charged to expense and reflected in the statement of operations. For the year ended December 31, 2015 impairments of $16,401,376, $11,421,613, $9,720,983 and $11,386,115 were record in the first, second, third and fourth quarters respectively. For the year ended December 31, 2016 impairments of $4,506,933, $2,137,663, $800,000 and $588,073were record in the first, second, third and fourth quarters respectively. Because of these write downs depletion expense per boe decreased 54% or $4.47 per boe from $8.29 per boe in 2015 to $3.82 per boe in 2016. As a result, 2016 depletion expense decreased approximately $854,000 to approximately $254,000 from $1,108,039 in 2015.

(4) Professional fees decreased 54% or approximately $370,000 thousand from approximately $681,000 in 2015 to approximately $310,500 in 2016. Investor relation expenditures decreased approximately $110,000 and Consulting fees including tax, third party engineering and audit decreased by approximately $308,000. These decreases were partially offset by increases in legal fees of approximately $48,000.

(5) Salaries decreased 15% or approximately $300,000. The decrease was due primarily to decreased head counts.

(6) Administrative expenses decreased approximately $97,000 or 15%. The decrease was due primarily to decreased spending on SEC matters, travel, training and office supplies of $122,000, $21,000, $30,000 and $18,000 respectively. These decreases were partially offset by an increase spending for ITbuilding scalable digital solutions promoting sustainability and software and reduced recovers of overhead costs from a joint interest partner of $34,000 and $60,000 respectively.


Reserves

  Year Ended  Year Ended 
  December 31,  December 31, 
Proved Reserves 2016  2015 
Total proved PV10 (present value) of reserves $3,437,030  $8,769,970 
Total proved reserves (BOE) $1,587,690  $2,574,860 
Average Price (per bbl) $37.36  $50.28 
Average Price (per mcf) $1.65  $2.58 

Of the 1.6 million BOE of total proved reserves, approximately 12.2% are classified as proved developed producing, approximately 42.3% are classified as proved developed non-producing, and approximately 45.5% are classified as proved undeveloped.

The following table presents summary information regarding our estimated net proved reserves as of December 31, 2016. All calculations of estimated net proved reserves have been made in accordance with the rules and regulations of the SEC, and, except as otherwise indicated, give no effect to federal or state income taxes. The estimates of net proved reserves are based on the reserve reports prepared by Cobb & Associates Inc., our independent petroleum consultants. For additional information regarding our reserves, please see Note 13 to our audited financial statements for the fiscal year ended December 31, 2016.

Summary of Proved Oil and Gas Reserves

December 31, 2016

  Gross  Net 
     Natural
Gas
     Oil     Natural
Gas
     Oil    
Proved Reserves Crude Oil  Liquids  Natural Gas  Equivalents  Crude Oil  Liquids  Natural Gas  Equivalents  PV 10(2) 
Category BBL’s  BBL’s  MCF’s  BOE’s  BBL’s  BBL’s  MCF’s  BOE’s(1)  (before tax) 
Proved, Developed  488,580   56,320   4,827,420   1,349,470   372,140   44,780   2,686,800   864,720   2,120,330 
Proved, Undeveloped  196,860   -   4,176,000   892,860   152,610   -   3,422,170   722,970   1,316,700 
Total Proved  685,440   56,320   9,003,420   2,242,330   524,750   44,780   6,108,970   1,587,690   3,437,030 

In 2016 the Company invested approximately $17,100 in its oil and gas properties. These reduced expenditures were in response to extremely low commodity prices. The Company has approximately $1.7 million of current asset on hand and important infrastructure in Colorado completed which will facilitate the exploitation and development of proved undeveloped reserves over the next five years. At year end the Company’s review of proved undeveloped reserves revealed challenges but the Company maintains its belief that reserves will be developed within five years of their initial recording as a proved undeveloped reserve. In addition it believes it has the financial wherewithal to develop all it’s proved undeveloped reserves within the five year time frames required; utilizing its balance sheet, to borrow funds as needed and it has the ability to joint venture any of its assets.

(1)The following table shows our reconciliation of our PV10 to our standardized measure of discounted future net cash flows (the most direct comparable measure calculated and presented in accordance with GAAP). PV10 is our estimate of the present value of future net revenues from estimated proved oil and gas reserves after deducting estimated production and ad valorem taxes, future capital costs and operating expenses, but before deducting any estimates of future income taxes. The estimated future net revenues are discounted at an annual rate of 10% to determine their “present value.” We believe PV10 to be an important measure for evaluating the relative significance of our oil and gas properties and that the presentation of the non-GAAP financial measure of PV10 provides useful information to investors because it is widely used by professional analysts and sophisticated investors in evaluating oil and gas companies. Because there are many unique factors that can impact an individual company when estimating the amount of future income taxes to be paid, we believe the use of a pre-tax measure is valuable for evaluating our company. We believe that most other companies in the oil and gas industry calculate PV10 on the same basis. PV10 should not be considered as an alternative to the standardized measure of discounted future net cash flows as computed under GAAP.


  As of December 31,  As of December 31, 
  2016  2015 
PV10 (before tax) $3,437,030  $8,769,970 
Future income taxes, net of 10% discount $-  $- 
Standardized measure of discounted future net cash flows $3,437,030  $8,769,970 

Liquidity and Capital Resources

Liquidity is a measure of a company’s ability to meet potential cash requirements. We have historically met our capital requirements through debt financing, revenues from operations, asset sales and the issuance of equity securities. Due to the dramatic deterioration of oil prices, the resulting decline in our reserves as reflected in our reserve report which caused a corresponding reduction in our borrowing base, and the recent issuances of equity securities from our “shelf” registration, it will be more difficult in 2016 to use our historical means of meeting our capital requirements to provide us with adequate liquidity to fund our operations and capital programs. Accordingly, the Company has chosen to preserve liquidity by not devoting capital to its oil and gas properties, while minimizing expenditures for operating, general and administrative expenses. With positive working capital, we will be positioned to capitalize on increases in commodity pricing when such changes occur.

The following table summarizes total current assets, total current liabilities and working capital at year ended December 31, 2016 compared to the year ended December 31, 2015.

  Year Ended  Year Ended    
  December 31, 2016  December 31, 2015  Difference 
Current Assets $1,678,967  $7,213,213  $(5,534,246)
Current Liabilities $19,754,407  $4,260,559  $(15,493,848)
Working Capital (deficit) $(18,075,440) $2,952,654  $(21,028,094)

Senior Secured Credit Facility

On October 3, 2011, the Company, DD Energy, Inc., EnerJex Kansas, Inc., Black Sable Energy, LLC and Working Interest, LLC (“Borrowers”) entered into an Amended and Restated Credit Agreement with Texas Capital Bank, N.A. (“Bank”) and other financial institutions and banks that may become a party to the Credit Agreement from time to time. The facilities provided under the Amended and Restated Credit Agreement were to be used to refinance Borrowers prior outstanding revolving loan facility with Bank, dated July 3, 2008, and for working capital and general corporate purposes.

At our option, loans under the facility will bear stated interest based on the Base Rate plus Base Rate Margin, or Floating Rate plus Floating Rate Margin (as those terms are defined in the Credit Agreement). The Base Rate will be, for any day, a fluctuating rate per annum equal to the higher of (a) the Federal Funds Rate plus 0.50% and (b) the Bank’s prime rate. The Floating Rate shall mean, at Borrower’s option, a per annum interest rate equal to (i) the Eurodollar Rate plus Eurodollar Margin, or (ii) the Base Rate plus Base Rate Margin (as those terms are defined in the Amended and Restated Credit Agreement). Eurodollar borrowings may be for one, two, three, or six months, as selected by the Borrowers. The margins for all loans are based on a pricing grid ranging from 0.00% to 0.75% for the Base Rate Margin and 2.25% to 3.00% for the Floating Rate Margin based on the Company’s Borrowing Base Utilization Percentage (as defined in the Amended and Restated Credit Agreement).

On December 15, 2011, we entered into a First Amendment to Amended and Restated Credit Agreement and Second Amended and Restated Promissory Note in the amount of $50,000,000 with the Bank. The Amendment reflects the addition of Rantoul Partners, as an additional Borrower and adds as additional security for the loans the assets held by Rantoul Partners.


On August 31, 2012, we entered into a Second Amendment to Amended and Restated Credit Agreement with the Bank. The Second Amendment: (i) increased the borrowing base to $7,000,000, (ii) reduced the minimum interest rate to 3.75% and (iii) added additional new leases as collateral for the loan.

On November 2, 2012, we entered into a Third Amendment to Amended and Restated Credit Agreement with the Bank. The Third Amendment (i) increased the borrowing base to $12,150,000 and (ii) clarified certain continuing covenants and provided a limited waiver of compliance with one of the covenants so clarified for the fiscal quarter ended December 31, 2011.

On January 24, 2013, we entered into a Fourth Amendment to Amended and Restated Credit Agreement, which was made effective as of December 31, 2012 with the Bank. The Fourth Amendment reflects the following changes: (i) the Bank consented to the restructuring transactions related to the dissolution of Rantoul Partners, and (ii) the Bank terminated a Limited Guaranty, as defined in the Credit Agreement, executed by Rantoul Partners in favor of the Bank.

On April 16, 2013, the Bank increased our borrowing base to $19,500,000.

On September 30, 2013, we entered into a Fifth Amendment to the Amended and Restated Credit Agreement. The Fifth Amendment reflects the following changes: (i) expanded principal commitment amount of the Bank to $100,000,000; (ii) increased the Borrowing Base to $38,000,000; (iii) added Black Raven Energy, Inc. to the Credit Agreement as borrower parties; (iv) added certain collateral and security interests in favor of the Bank; and (v) reduced the Company’s current interest rate to 3.30%.

On November 19, 2013, we entered into a Sixth Amendment to the Amended and Restated Credit Agreement. The Sixth Amendment reflects the following changes: (i) the addition of Iberia Bank as a participant in our credit facility, and (ii) a technical correction to our covenant calculations.

On May 22, 2014, we entered into a Seventh Amendment to the Amended and Restated Credit Agreement. The Seventh Amendment reflects the Bank’s consent to our issuance of up to 850,000 shares of our 10% Series A Cumulative Redeemable Perpetual Preferred Stock.analytics. 

 

On August 15, 2014,28, 2018, we entered into an Eighth Amendmentclosed the transactions contemplated by the Asset Purchase Agreement (the “Purchase Agreement”) dated July 25, 2018 with AgEagle Aerial, Inc., a wholly-owned subsidiary of the Company, Agribotix, LLC, a Colorado limited liability company (“Agribotix” or the “Seller”), and the other parties named therein. Pursuant to the Amended and Restated Credit Agreement. The Eighth Amendment reflects the following changes: (i) the borrowing base was increased from $38 million to $40 million, and (ii) the maturity of the facility was extended by three years to October 3, 2018.

On April 29, 2015,Purchase Agreement, we entered into a Ninth Amendment to the Amended and Restated Credit Agreement. In the Ninth Amendment, the Banks (i) re-determined the Borrowing Base based upon the recent Reserve Report dated January 1, 2015, (ii) imposed affirmative obligations on the Company to use a portion of proceeds received with regard to future sales of securities or certain assets to repay the loan, (iii) consented to non-compliance by the Company with certain terms of the Credit Agreement, (iv) waived certain provisions of the Credit Agreement, and (v) agreed to certain other amendments to the Credit Agreement.

On May 1, 2015, the Borrowers and the Banks entered into a Letter Agreement to clarify that up to $1,000,000 in proceeds from any potential future securities offering will be unencumbered by the Banks’ Liens as described in the Credit Agreement through November 1, 2015, and that, until November 1, 2015, such proceeds shall not be subject to certain provisions in the Credit Agreement prohibiting the Company from declaring and paying dividends that may be due and payable to holders of securities issued in such potential offerings or issued prior to the Letter Agreement.

On August 12, 2015, we entered into a Tenth Amendment to the Amended and Restated Credit Agreement. The Tenth Amendment reflects the following changes: (i) allow the Company to sell certain oil assets in Kansas, (ii) allow for approximately $1,300,000 of the proceeds from the sale to be reinvested in Company owned oil and gas projects and (iii) apply not less than $1,500,000 from the proceed of the sale to outstanding loan balances.

On November 13, 2015, the Company entered into a Eleventh Amendment to the Amended and Restated Credit Agreement. The Eleventh Amendment reflects the following changes: (i) waived certain provisions of the Credit Agreement, (ii) suspend certain hedging requirements, and (iii) to make certain other amendments to the Credit Agreement.

Our current borrowing base is $17,925,000, of which we had borrowed $17,925,000 as of December 31, 2016. The interest rate on amounts borrowed under our credit facility during 2016 was approximately 8.7% and for the year ended December 31, 2015, the interest rate on amounts borrowed was approximately 4.3%. This facility expires on October 3, 2018. 


On April 1, 2016, the Company informed the Bank that it would cease making the mandatory monthly borrowing base reduction payments and did not make the required April 1, 2016 payment. The Company made its mandatory quarterly interest payments on April 6, 2016, and May 2, 2016. On April 7, 2016 the Company entered into a Forbearance Agreement whereby the Bank agreed to not exercise remedies and rights afforded it under the Amended and Restated Credit Agreement for thirty days. The thirty day period was to be used by the Company to pursue strategic alternatives.

On April 28, 2016 the Bank informed the Company that it would extend the above Forbearance Agreement period to May 31, 2016 upon effecting a principal reduction of $125,000. In addition, the Company will receive an automatic extension to September 15, 2016 upon meeting certain terms and conditions specified by the Bank. On May 31, 2016, the Company and the Bank amended the Forbearance Agreement to extend the forbearance period to August 31, 2016. On July 29, 2016, the Company and the Bank amended the Forbearance Agreement to extend the forbearance period to October 1, 2016. 

On October 1, 2016, the Company and the Bank could not reach an agreement to extend the Third Amendment to the Forbearance Agreement. Following this outcome, the Company decided to discontinue payment of interest on its outstanding loan obligations with the Bank. The Company continued to evaluate plans to restructure, amend or refinance existing debt through private options.

On February 10, 2017, the Company, the Bank and IberiaBank (collectively, "Sellers"), and PWCM Investment Company IC LLC, and certain financial institutions (collectively, "Buyers") entered into a Loan Sale Agreement ("LSA"), pursuant to which Seller sold to Buyers, and Buyers purchased from Sellers,acquired all of Sellers' right, title and interest in and to all assets owned by the Agribotix utilized in their business of providing integrated agricultural drone solutions and drone-enabled software technologies and services for precision agriculture, except for certain excluded assets as set forth in the Purchase Agreement. At closing, we also assumed certain commitments under various third-party contracts pursuant to the Credit Agreement and Loan Documents, in exchange for (i) a cash payment of $5,000,000 (the "Cash Purchase Price"), (ii) a Synthetic Equity Interest equal to 10%terms of the Proceeds, after Buyer's realization of 150% return on the Cash Purchase Price within five (5) years of the Closing Date, with payment being distributed 65.78947368% to TCB and 34.21052632% to IberiaBank, and (iii) at any time prior to February 10, 2022, Buyer may acquire the interest in clause (ii) above.

In connection with the LSA, we release Sellers and its successors as holders of the rights under the Credit Agreement and Loan Documents, including Buyers, from any and all claims under the Credit Agreement and Loan Documents.

Also on February 10, 2017, the Company and its subsidiaries, and PWCM Investment Company IC LLC, a Delaware limited liability company and other buyers (collectively, the "successor lender"), entered into a binding letter agreement dated February 10, 2017, which was subsequently amended on March 30, 2017 (as amended, the “letter agreement”) pursuant to which:

1.the successor lender would agree to forgive our existing secured loan in the approximate principal amount of $17,295,000, and in exchange enter into a secured promissory note (which we refer to as the "restated secured note") in the original principal amount of $4,500,000.

2.we would:

a.convey our oil and gas properties and associated performance and surety bonds in Colorado, Texas, and Nebraska, and

b.all of our shares of Oakridge Energy, Inc. (together, the "conveyed oil and gas assets"); and

c.retain our assets in Kansas and continue as a going concern. The Kansas assets currently provide most of our current operating revenue.

The restated secured note shall:

a.be secured by a first-priority lien in the Company’s oil and gas producing assets situated in the State of Kansas,

b.evidence accrued interest on the $4,500,000 principal balance at a rate of 16% per annum,

c.bear interest from and after May 1, 2017, at a rate of 16.0% per annum,

d.be pre-payable in full at a discount at any time during the term of the restated secured note upon EnerJex's paying $3,300,000 to successor lender, and

e.mature and be due and payable in full on November 1, 2017.

We will have 2 options to extend the maturity date of the restated secured note by 90 days each upon payment of an extension fee of $100,000, which shall be applied against the principal balance of the note.

So long as we repay the $3,300,000 in indebtedness on or prior to the maturity date, as extended, all other amounts payable under the restated secured note shall be forgiven.

The Closing is expected to occur on or before May 1, 2017 (the February 10, 2017 letter agreement provided for a Closing on or before April 30, 2017. This was amended to May 1, 2017 in the amendment).


Satisfaction of our cash obligations for the next 12 months

We will not be able to meet our cash obligations for the next 12 months unless the proposed loan forgiveness transaction with our successor lender under out secured credit facility discussed above closes

If the loan forgiveness transaction with the successor lender does not close, our indebtedness under our secured credit facility will remain outstanding and in default, and the secured lender will likely foreclose on all of our assets and we will not be able to continue as a going concern. We will also need to raise additional funds to continue operations and to meet our near term cash obligations after the transaction. We may raise additional funds assets sales and cash flow generated from operations.

Due to the declines in oil prices, the resulting decline in our reserves caused a corresponding reduction to our borrowing base, our continued default of our obligations under the secured credit facility, our issuances of equity securities from our “shelf” registration, our issuance of Series B preferred equity with an anti-dilution protection, and, if the loan restructuring transaction is closed, the reduced size of our business (as discussed above we will only retain the Kansas assets) it will be more difficult in 2017 to use our historical means to meet our cash obligations in the next twelve months.

Summary of product research and development that we will perform for the term of our planAgreement. 

 

We do not anticipate performing any significantbelieve that purchasing Agribotix’s primary product researchFarmLens™, a subscription cloud analytics service that processes data, primarily collected with a drone such as ours, and development undermakes such data usable by farmers and agronomists it will benefit us and our plan of operation.shareholders by developing important vertically integrated products and services.FarmLens is currently sold by us as a subscription and offered either standalone or in a bundle with major drone platforms manufactured by leading drone providers like AgEagle, DJI, and senseFly. 

 

Expected purchase or sale of any significant equipment

We anticipate that we will purchaseTheFarmLensplatform extends our reach as a business by partnering with and directly integrating into offerings by leading agricultural companies like John Deere’s Operations Center and The Climate Corporation’s FieldView. To date, Agribotix has processed agricultural imagery for over 50 different crop types from over 50 countries around the necessary production and field service equipment required to produce oil and gas during our normal course of operations over the next 12 months.

Significant changes in the number of employees

We currently have 10 full-time employees, two temporary employees and one part-time employee including field personnel. As production and drilling activities increase or decrease, we will adjust our technical, operational and administrative personnel as appropriate. We use and will continue to use independent consultants and contractors to perform various professional services, particularly in the area of land services, reservoir engineering, geology, drilling, water hauling, pipeline construction, well design, well-site monitoring and surveillance, permitting and environmental assessment. We believe that this use of third-party service providers may enhance our ability to contain operating and general expenses, and capital costs.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.world.

 

Critical Accounting Policies and Estimates

 

Our accounting policiesmanagement’s discussion and estimates that are critical to our business operations and understanding of our results of operations include those relating to our oil and gas properties, asset retirement obligations and the value of share-based payments. This is not a comprehensive list of all of the accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP, with no need for our judgment in the application. There are also areas in which our judgment in selecting any available alternative would not produce a materially different result. However, certain of our accounting policies are particularly important to the portrayalanalysis of our financial positioncondition and results of operations and we may use significant judgment in the application; as a result, they are subject to an inherent degree of uncertainty. In applying those policies, we use our judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Our most critical estimates include those related to revenue recognition, inventories and reserves for excess and obsolescence, accounting for stock-based awards, and income taxes. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience observationand on various other factors that we believe are reasonable under the circumstances, the results of trends inwhich form the industry,basis for making judgments about the carrying value of assets and information availableliabilities that are not readily apparent from other outside sources, as appropriate. For asources. Our actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting estimates affect our more detailed discussion on the application of thesesignificant judgments and other accounting policies,estimates used in preparing our consolidated financial statements. Please see Note 1, Summary of Significant Accounting Policies,2 to our consolidated financial statements, which are included in Item 8 “Financial Statements and Supplementary Data” of this report.

Oil and Gas Properties

We followAnnual Report, for our Summary of Significant Accounting Policies. There have been no material changes made to the full-cost method ofcritical accounting under which all costs associated with property acquisition, exploration and development activities are capitalized. We also capitalize internal costs that can be directly identified with our acquisition, exploration and development activities and do not include costs related to production, general corporate overhead or similar activities.


Proved properties are amortized usingestimates during the units of production method (UOP). Currently we only have operationsperiods presented in the Unites States of America. The UOP calculation multiplies the percentage of estimated proved reserves produced each quarter by the cost of these reserves. The amortization base in the UOP calculation includes the sum of proved property, net of accumulated depreciation, depletion and amortization (DD&A), estimated future development costs (future costs to access and develop proved reserves) and asset retirement costs, less related salvage value.

The cost of unproved properties are excluded from the amortization calculation until it is determined whether or not proved reserves can be assigned to such properties or until development projects are placed into service. Geological and geophysical costs not associated with specific properties are recorded as proved property immediately. Unproved properties are reviewed for impairment quarterly.consolidated financial statements

 

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Revenue Recognition

 Revenue is recognized when earned. Our revenue recognition policies are in compliance with Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) Topic 606, Revenue from Contracts with Customers, and the Securities and Exchange Commission Staff Accounting Bulletin No. 101 and 104. This updated guidance supersedes the current revenue recognition guidance, including industry-specific guidance. The updated guidance introduces a five-step model to achieve its core principal of the entity recognizing revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This standard provides a single set of guidelines for revenue recognition to be used across all industries and requires additional disclosures. It is effective for annual and interim reporting periods beginning after December 15, 2017.

Topic 606 requires revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services and recognize revenue under the new standard as costs are incurred. Under previous U.S. generally accepted accounting principles (GAAP), revenue was generally recognized when deliveries were made, performance milestones were attained, or as costs were incurred. The new standard accelerates the timing of when the revenue is recognized, however, it does not change the total amount of revenue recognized on these contracts. The new standard does not affect revenue recognition for purposes of the Company’s sales as each of the Company’s revenue transactions represent a single performance obligation that is satisfied at a point time or monthly subscription fees which are recognized ratably over the subscription period, as defined in the new ASU. Accordingly, the Company recognizes revenue for small UAS product contracts with customers at the point in time when the transfer of control passes to the customer, which is generally when title and risk of loss transfer. The Company adopted the updated guidance effective January 1, 2018 using the full costretrospective method, however the new standard did not have a material impact on our consolidated financial position and consolidated results of accounting,operations, as it did not change the net book valuemanner or timing of oil and gas properties, less deferred income taxes,recognizing revenue on a majority of our revenue transactions. 

Goodwill

We review the recoverability of goodwill whenever events or changes in circumstances indicate that the carrying amount of such assets may not exceed a calculated “ceiling.”be recoverable or o on an annual basis. The ceiling limitation is (a) the present value of future net revenues computed by applying current prices of oil & gas reserves (with consideration of price changes only to the extent provided by contractual arrangements) to estimated future production of proved oil & gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves computed using a discount factor of 10 percent and assuming continuation of existing economic conditionsplus (b) the cost of properties not being amortizedplus (c) the lower of cost or estimated fair value of unproven properties included in the costs being amortizedless (d) income tax effects related to differences between book and tax basis of properties. Future cash outflows associated with settling accrued retirement obligations are excluded from the calculation. Estimated future cash flows are calculated using end-of-period costsbased upon, among other things assumptions about expected future operating performance, and an unweighted arithmetic average of commodity prices in effect onmay differ from actual cash flows. If the first day of eachsum of the previous 12 months held flat forprojected undiscounted cash flows (excluding interest) is less than the lifecarrying value of the production, except where prices are defined by contractual arrangements.assets, the assets will be written down to the estimated fair value in the period in which the determination is made. As of December 31, 2018, there have been no events or changes in circumstances that indicate that it is more likely than not that a goodwill impairment has occurred since assessment date of August 2018.

 

Any excessIntangible Assets – Acquired in Business Combinations

We perform valuations of the net book value of proved oilassets acquired and gas properties, less related deferred income taxes, over the ceiling is charged to expense and reflected as additional DD&A in the statement of operations. The ceiling calculation is performed quarterly. For the year ended December 31, 2016 impairments of $4,506,933, $2,137,663, $800,000 and $588,073 were recorded for the first, second, third quarters and fourth quarters respectively. For the year ended December 31, 2015 impairments of $16,401,376, $11,421,613, $9,720,983 and $11,386,115 were record in the first, second, third and fourth quarters respectively.

Proceeds from the sale or disposition of oil and gas properties areliabilities assumed on each acquisition accounted for as a reductionbusiness combination and allocate the purchase price of each acquired business to capitalizedour respective net tangible and intangible assets. Acquired intangible assets include: customer relationships and trade names. We use valuation techniques to value these intangibles assets, with the primary technique being a discounted cash flow analysis. A discounted cash flow analysis requires us to make various assumptions and estimates including projected revenue, gross margins, operating costs, unless a significant portion (greater than 25%) of our reserve quantitiesgrowth rates, useful lives and discount rates Intangible assets are sold,amortized over their estimated useful lives using the straight-line method which approximates the pattern in which case a gain or loss is recognized in income. In 2015 the Company sold its Cherokee project assets located in Kansas for net proceeds of $2,867,305. At the time of the sale the reserve quantities made up approximately 6.7% of total reserve quantities. Accordingly, the net proceeds reduced the carrying value of our oil and gas properties.economic benefits are consumed.

 

Asset Retirement ObligationsShare-Based Compensation Awards

The asset retirement obligation relates to the plug and abandonment costs when our wells are no longer useful. We determine the value of the liability by obtaining quotes for this service and estimate the increase we will face in the future. We then discount the future value based on an intrinsic interest rate that is appropriate for us. If costs rise more than what we have expected there could be additional charges in the future however we monitor the costs of the abandoned wells and we will adjust this liability if necessary.

Share-Based Payments

The value we assign to the options and warrants that we issue is based on the fair market value as calculated by the Black-Scholes pricing model. To perform a calculation of the value of our options, and warrants, we determine an estimate of the volatility of our stock. We need to estimate volatility because there has not been enough trading of our stock to determine an appropriate measure of volatility. We believe our estimate of volatility is reasonable, and we review the assumptions used to determine this whenever we issue a new equity instruments. If we have a material error in our estimate of the volatility of our stock, our expenses could be understated or overstated. All share-based awards are expensed on a straight-line basis over the vesting period of the options.

 

Recent Issued Accounting Standards

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Income Taxes

We are required to estimate our income taxes, which includes estimating our current income taxes as well as measuring the temporary differences resulting from different treatment of items for tax and accounting purposes. We currently have significant deferred assets, which are subject to periodic recoverability assessments. Realizing our deferred tax assets principally depends on our achieving projected future taxable income. We may change our judgments regarding future profitability due to future market conditions and other factors, which may result in recording a valuation allowance against those deferred tax assets.

 

See Note 1, SummaryWe followed the guidance in SEC Staff Accounting Bulletin 118 (“SAB 118”), which provides additional clarification regarding the application of Significant Accounting Policies - Recent Issued Accounting Standards,ASC Topic 740 in situations where we do not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) for the reporting period in which the Act was enacted. SAB 118 provides for a measurement period beginning in the reporting period that includes the Act’s enactment date and ending when the Company has obtained, prepared, and analyzed the information needed in order to complete the accounting requirements but in no circumstances should the measurement period extend beyond one year from the enactment date.

Results of Operations

Year Ended December 31, 2018 as Compared to Year Ended December 31, 2017

During the year ended December 31, 2018, we recorded revenues of $107,813 compared to revenues of $116,035 for the same period in 2017, a 7% decrease. The decrease was due to a shift in the drone industry from do-it-yourself, early adopter farmers to a more services-oriented model whereby independent agronomists provided prescriptions for the application of chemicals based on data they collect through aerial imagery and drones. The Company is in the process of addressing this change in the market through strategic acquisitions and the launch of a service-oriented model toward sustainable markets as result of the recent infusion of operating capital and significant reduction of debt.

During the year ended December 31, 2018, cost of sales totaled $61,680, a $31,679 or 34% decrease as compared to $93,359 in the year ended December 31, 2017. We had a gross profit of $46,133 or 43% during the year ended December 31, 2018 compared to $22,677 or 20% for the comparable period in 2017, resulting in an increase in our profit margins for the year. There were two main contributors to the decrease in our cost of sales resulting in the increase in our gross margins: 1) we focused on selling our UAVS products without cellular connectivity resulting in a much lower cost of manufacturing of our drones and instead utilized theFarmLens platform for purposes of processing the imagery versus the selling our drones with cellular connectivity and 2) we did not record any additional amounts to our consolidated financial statements includedobsolescence reserve as we did not believe it to be necessary once we conducted our year-end inventory observation procedures. We also had some subscription-based sales for the quarter of 2018 that although a small amount of revenue resulted in this report.much higher profit margins to our business.

 

EffectsWe recorded total operating expenses of Inflation$2,106,732 during 2018, a 206% increase as compared to operating expenses of $689,539 in the same period of 2017. Our operating expense are comprised of general and Pricingadministrative costs, professional fee and selling costs. General and administrative expenses totaled $1,333,371 in 2018 compared to $247,837 in 2017, an increase of 438%, due to more insurance, financial filing fees and investor relations in connection with on-going expenses related to us being publically traded. We also had additional general and administrative costs related to an increase in salary expense for new and existing employees along with stock compensation costs for employees and directors due to the issuance of options. Lastly as part of our acquisition of Agribotix we recorded amortization expense related to the intangibles acquired and new software costs incurred to support the business. Professional fees totaling $696,222 in 2018 were expenses incurred for legal and accounting, compared to $410,698 in 2017 which related to increased legal, audit, accounting and tax services associated with the in connection with the reverse merger completed on March 26, 2018 and the acquisition of Agribotix and the on-going expenses related to being publically traded. Selling expenses of $77,139 in 2018 compared to $31,004 in 2017 representing an increase of 171% due to more travel expenses and website investment made to market our new business model.

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Other income for the year ended December 31, 2018 was $13,333 and $12,458 for the year ended 2017, representing a 7% increase due the reversal of dealer termination costs accrued from prior periods as a result of all liabilities having been fully satisfied during the period.

Interest expense for the year ended December 31, 2018 was $32,417 as compared to $142,810 in the prior year. The decrease was due to the conversion of all debt, except for a promissory note assumed as a result of the EnerJex merger and the amortization of debt discounts and warrant expense in 2017 totaling $34,082 that were not recorded in 2018.

Our net loss was $2,079,683 in 2018. This represents a $1,282,468 increase from our net loss of $797,215 in 2017, Overall the increase in net loss is due to more costs and less sales for the period as we begin our new initiatives in the sustainable agriculture market. 

Cash Flows

December 31, 2018 compared to December 31, 2017

Cash on hand was $2,601,730 at December 31, 2018, an increase of $2,566,441 compared to the $35,289 on hand at December 31, 2017. Cash used in operations for 2018 was $1,778,138 compared to $328,878 of cash used by operations for 2017. The increase was driven mainly by new expenses due to us becoming a publicly traded company which included insurance expense related to the current and previous directors and officers of Enerjex of $107,645 that was prepaid in full and additional payables related to the increase in operating costs associated with the SEC filing requirements, legal costs for both our SEC requirements and the acquisition of Agribotix along additional salary expense for new and existing employees that were incurred due to the expansion of our business model. We also recorded non-cash expenses of $400,600 for stock issued in exchange for services and $110,593 of stock compensation expense.

Cash used by investing activities during 2018 was $1,560,219 mainly for the payments related to the acquisition of Agribotix,a significant amount of accounts payable assumed by us in the amount of $891,474 due to the Merger,offset by $256,255 cash acquired in connection with the Merger compared to cash used by investing activities during 2017 of $87,775 for payments related to the acquisition of Agribotix and purchases of equipment for manufacturing of our drones.

Cash provided by financing activities during 2018 was $5,904,799 as a result of $4,000,000 net of $20,000 in fees invested in the company in exchange for common and preferred shares at the time of the Merger and another $2,000,000 net of $30,000 in fees. Cash was also used to repurchase shares from a shareholder for $210,642 and make payments of $84,559 on the promissory note assumed from Enerjex offset by additional cash that was received in connection with issuance of the Series C Preferred Stock of $250,000 subsequent to the Merger.

Liquidity and Capital Resources

As of December 31, 2018, we had working capital of $2,531,264 and a loss from operations of $2,060,599 for the period then ended. While there can be no guarantees, we believe cash on hand, in connection with cash from operations will be sufficient to fund operations for the next year of operations. In addition, we intend to pursue other opportunities of financing with outside investors.

On November 21, 2017, Alpha Capital Anstalt (“Alpha”) signed a binding commitment letter EnerJex to provide prior to or at the closing of the Merger a minimum of $4 million in new equity capital (the “Private Placement”). The Private Placement was consummated on March 26, 2018. In connection with the Private Placement, Alpha purchased an additional 4,000 shares of Series C Preferred Stock at a purchase price of $1,000 per share for total aggregate consideration of $4 million. The Series C Preferred Stock is convertible into 2,612,245 shares of our Common Stock. In addition, as consideration for their funding commitment, Alpha received a fee equal to 408,552 shares of our Common Stock.

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Each share of Series C Preferred Stock is convertible into a number of shares of our Common Stock equal to the quotient determined by dividing (x) the stated value of $1,000 per share, by (y) a conversion price of $1.53. Until the volume weighted average price of our Common Stock on NYSE exceeds $107.50 with average trading volume of 200,000 shares per day for ten consecutive trading days, the conversion price of our Series C Preferred Stock is subject to full-ratchet, anti-dilution price protection. Under that provision, if, while that full-ratchet, anti-dilution price protection is in effect, we issue shares of our Common Stock at a price per share (the “Dilutive Price”) that is less than the conversion price, then the conversion price of our Series C Preferred Stock is automatically reduced to be equal to the Dilutive Price. The effect of that reduction is that, upon the issuance of shares of Common Stock at a Dilutive Price, the Series C Preferred Stock would be convertible into a greater number of shares of our Common Stock.

On December 27, 2018, AgEagle Aerial Systems Inc. (the “Company”) entered into Securities Purchase Agreement (the “Agreement”) with an institutional investor (the “Purchaser”). Pursuant to the terms of the Agreement, the Board of Directors of the Company (the “Board”) designated a new series of preferred stock, the Series D Preferred Stock, which is non-convertible and provides for an 8% annual dividend and is subject to optional redemption by the Company (the “Preferred Stock”). The Company issued 2,000 shares of Preferred Stock and a warrant (the “Warrant”) to purchase 3,703,703 shares of the Company’s Common Stock, par value $0.001 per share (the “Common Stock”), for $2,000,000 in gross proceeds. The shares of Common Stock underling the Warrant are referred to as the “Warrant Shares”. The Company also entered into a registration rights agreement (the “Registration Rights Agreement”) granting registration rights to the Purchaser with respect to the Warrant Shares.

 

The oilAgreement provides that upon a subsequent financing or financings with net proceeds of at least $500,000, the Company must exercise its optional redemption of the Preferred Stock (as more fully described below in Item 5.03) and gas industryapply any and all net proceeds from such financing(s) to the redemption in full of the Preferred Stock.

The Warrant is very cyclicalexercisable for a period of five years through December 26, 2023, at an exercise price equal to $0.54 per share, and is subject to customary adjustments for stock splits dividend, rights offerings, pro rata distributions and fundamental transactions. In addition, in the demandevent the Company undertakes a subsequent equity financing or financings at an effective price per share that is less than $0.54, the exercise price of the Warrant shall be reduced to the lower price.

The Warrant provides that the Warrant holder shall have a “Beneficial Ownership Limitation” equal to 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. The Warrant holder, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation, as provided for goodsin the Warrant.

Pursuant to the terms of the Registration Rights Agreement, the Company shall file an initial registration statement registering the Warrant Shares no later than the 20thcalendar day following the required filing date of the Company’s Annual Report on Form 10-K for the year ending December 31, 2018 (the “Filing Date”) and, services of oil and gas field companies, suppliers and others associatedwith respect to any additional registration statements, the earliest practical date on which the Company is permitted by SEC Guidance to file such additional registration statement related to such registrable securities. The Company shall have the registration statement declared effective with the industry puts extreme pressureSecurities and Exchange Commission (the “Commission”) no later than the 90th calendar day following the Filing Date or, in the event of a “full review” by the Commission, the 120th calendar day following the Filing Date. There are no penalties for failure to file or be declared effective by the dates set forth above.

The Series C and D Preferred Stock was issued pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder, in reliance on the economic stability and pricing structure within the industry. Material changesrecipient’s status as an “accredited investor” as defined in prices impact revenue stream, estimatesRule 501(a) of future reserves, borrowing base calculations of bank loans and value of properties in purchase and sale transactions. Material changes in prices can impact the value of oil and gas companies and their ability to raise capital, borrow money and retain personnel. We anticipate business costs and the demand for services related to production and exploration will fluctuate while the commodity price for oil and gas remains volatile.Regulation D.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.The Series C Preferred Stock was issued pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder, in reliance on the recipient’s status as an “accredited investor” as defined in Rule 501(a) of Regulation D.

 

Management ResponsibilityOff-Balance Sheet Arrangements

At December 31, 2018, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. Since our inception, except for Financial Informationstandard operating leases, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities. We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

Contractual Obligations

 

We have no material contractual obligations.

Inflation

Our opinion is that inflation has not had, and is not expected to have, a material effect on our operations.

Climate Change

Our opinion is that neither climate change, nor governmental regulations related to climate change, have had, or are responsibleexpected to have, any material effect on our operations.

New Accounting Pronouncements

There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This Item is not required for the preparation, integrity and fair presentation of oura Smaller Reporting Company.

ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our financial statements andare contained in pages F-1 through F-29, which appear at the other information that appears inend of this Annual Report on Form 10-K. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States and include estimates based on our best judgment.

 

We maintain a comprehensive system of internal controls and procedures designed to provide reasonable assurance, at an appropriate cost-benefit relationship, that our financial information is accurate and reliable, our assets are safeguarded and our transactions are executed in accordance with established procedures.

RBSM LLP, an independent registered public accounting firm, is retained to audit our consolidated financial statements. Its accompanying report is based on audits conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States).

Our consolidated financial statements and notes thereto, and other information required by this Item 8 are included in this report beginning on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.


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ITEM 9A. CONTROLS AND PROCEDURES.

ITEM 9A.CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Control Procedures

 

Our InterimThe Company’s Chief Executive Officer Louis G. Shott., and ourthe Company’s Chief Financial Officer Douglas M. Wright, evaluated the effectiveness of ourthe Company’s disclosure controls and procedures (as definedas of December 31, 2018 and had concluded that the Company’s disclosure controls and procedures are effective. The termdisclosure controls and proceduresmeans controls and other procedures that are designed to ensure that information required to be disclosed by the Company in Rule 13a-15(e)the reports that it files or submits under the Securities Exchange Act of 1934, as amended) as ofamended, is recorded, processed, summarized and reported, within the end oftime periods specified in the period covered by this Report pursuant to Exchange Act Rule 13a-15(b). Based on the evaluation, Mr. WatsonSEC’s rules and Mr. Wright concluded that our disclosureforms. Disclosure controls and procedures are effective.

include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Management’s Report on Internal Control over Financial Reporting

 

OurThe Company’s management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. TheseAct. The Company’s internal controls arecontrol over financial reporting is designed to provide reasonable assurance thatregarding the reportedreliability of financial information is presented fairly, that disclosures are adequatereporting and that the judgments inherent in the preparation of financial statements are reasonable. There arein accordance with Generally Accepted Accounting Principles (“GAAP”).

Because of its inherent limitations, in the effectiveness of anya system of internal control includingover financial reporting can provide only reasonable assurance of such reliability and may not prevent or detect misstatements. Also, projection of any evaluation of effectiveness to future periods is subject to the possibilityrisk that controls may become inadequate because of human error and overridingchanges in conditions, or that the degree of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance,compliance with respect to reporting financial information.the policies or procedures may deteriorate.

 

Management has conducted, with the participation of our Chief Executive Officer and our Chief Financial Officer, an evaluationassessment of the effectiveness of our internal control over financial reporting as of December 31, 2018. Management’s assessment of internal control over financial reporting used the criteria set forth in SEC Release 33-8810 based on the framework and criteria established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Commission (“COSO”) inInternal Control over Financial Reporting — Guidance for Smaller Public Companies.Based on this evaluation, managementManagement concluded that our system of internal control over financial reporting was effective as of December 31, 2016.2018, based on these criteria.

This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. As a smaller reporting company, our management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only the management’s report.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting, that occurredas defined in Rules 13a-15(t) and 15d-15(f) under the Exchange Act, during our most recent fiscalthe fourth quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B.OTHER INFORMATION

ITEM 9B. OTHER INFORMATION.

None.

 

On October 3, 2011, we entered into

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PART III

ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following table and biographical summaries set forth information, including principal occupation and business experience about our directors and executive officers:

NameAgeOther positions with the Company; other directorships held in last five yearsHas served as a Company director since
Bret Chilcott57Chairman of the Board, President and SecretaryApril 2014
Barrett Mooney34Chief Executive Officer
Nicole Fernandez-McGovern46Chief Financial Officer
Grant Begley(1)(2)(3)65DirectorJune 2016
Louisa Ingargiola(1)(2)(3)51DirectorNovember 2018
Thomas Gardner(1)(2)(3)43DirectorJune 2016
Corbett Kull50DirectorJuly 2018

(1)Member of the audit committee.
(2)Member of the compensation committee.
(3)Member of the nominating and corporate governance committee.

Bret Chilcott. Mr. Chilcott has served as a member of the Board of Directors of the Company and as President since the inception of the Company in April 2014 and had served as Chief Executive Officer from February 2016 to July 18, 2018. As of July 18, 2018, Mr. Chilcott stepped down as Chief Executive Officer and currently serves as President, Secretary and Chairman of the Board of the Directors. The path to the Company started when Mr. Chilcott established his advanced composite manufacturing company, Solutions by Chilcott, LLC, whose manufacturing processes led the way to the initial fixed wing design of the Company. Previously, Mr. Chilcott spent over 12 years with Cobalt Boats in Neodesha, Kansas, where he held a variety of positions from Director of Product Development and Engineering to Director of Sales and Marketing. In those positions, he was responsible for developing strategic product plans for the company as well as the management of regional sales managers. Prior to Cobalt Boats, Mr. Chilcott also spent a number of years working at the Cessna Aircraft Company and Snap-on Tools. It was at Snap-on Tools, acting as a national accounts manager, that Mr. Chilcott first established his blueprint for a dealer network, a model which he carried over successfully to the Company when the Company began selling its product. Mr. Chilcott graduated from Kansas Community College in 1982 with a degree in Sales and Marketing. The Company believes that Mr. Chilcott’s background and experience in composite parts manufacturing provides him with a broad familiarity of the range of issues confronting the Company in the market, which makes him a qualified member of our board.

Barrett Mooney. Mr. Mooney was appointed as Chief Executive Officer on July 18, 2018. Mr. Mooney brings an Amendedextensive track record of growing agriculture and Restated Credit Agreementsustainability businesses. From May 1, 2017 to July 18, 2018, he served as Group Product Lead for The Climate Corporation, a subsidiary of Monsanto (recently acquired by Bayer), where he led the satellite imagery team, managed a team focused on using artificial intelligence to enhance crop yield production an introduced a new organizational structure to improve sales efficiency. Prior to The Climate Corporation, from July 1, 2012 to May 1, 2017, Mr. Mooney co-founded and was CEO and president of HydroBio, a software company that used satellite-driven image analytics to conserve water and maximize crop yields. In May 2017, he sold HydroBio to The Climate Corporation. Mr. Mooney holds a Doctor of Philosophy in Agricultural and Biological Engineering from the University of Florida. He is also a member of the American Society of Agricultural and Biological Engineers.

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Nicole Fernandez-McGovern, CPA.In August 2016, Ms. Fernandez-McGovern was named AgEagle’s Chief Financial Officer, charged with Texas Capital Bank,overseeing the Company’s global financial operations to include managing financial planning, general tax and accounting activities, capital formation, SEC reporting and other key financial institutionsduties. Prior to joining AgEagle, she served as Chief Executive Officer and banks (“Bank”) that may becomeChief Financial Officer of Trunity Holdings, Inc., a partypublicly traded education technology company. While at Trunity, Ms. Fernandez-McGovern led the successful restructuring of the Company by acquiring a new compounding pharmacy business and finalizing the spin-out of the legacy education business into a newly formed private company. From 2011 through 2013, she was President of RCM Financial Consulting, a specialized consulting firm focused on providing interim accounting and financial services to small and medium sized businesses. For the preceding ten years, Ms. Fernandez-McGovern was a financial manager at Elizabeth Arden where she was involved with all aspects of the Nasdaq-listed company’s SEC and financial reporting processes. She launched her professional career at KPMG, LLP in its audit and assurance practice, where she managed various large -scale engagements for both public and privately held companies. Ms. Fernandez-McGovern earned a Master of Business Administration degree with concentration in Accounting and International Business and a Bachelor of Business Administration degree with concentration in Accounting, both from the University of Miami. In addition to being fluent in Spanish, she is also a Certified Public Accountant in the State of Florida and serves on the boards of the South Florida Chapter of Financial Executives International and Pembroke Pines Charter Schools.

Grant Begley. Mr. Begley has served as a member of the Board of Directors of the Company since June 2016. Since July 2011, Mr. Begley has served as President of Concepts to Capabilities Consulting LLC, which advises global executive clients on competitive positioning and performance in aerospace. From August 2010 to September 2011, Mr. Begley was Corporate Senior Vice President for Alion Science and Technology. Prior to Alion, Mr. Begley served as Pentagon Senior Advisor to the Credit AgreementOffice of the Under Secretary of Defense, for Unmanned Systems, advising on critical issues and leading development of DoD’s 2011 Unmanned Systems Roadmap. Mr. Begley’s career includes defense industry leadership positions for the development of advanced capabilities with Raytheon and Lockheed Martin where he initiated and led cross-corporation unmanned systems and robotics successes. Mr. Begley served in the United States Navy for 26 years, where his duties included operational assignments flying fighter aircraft, designated Top Gun, followed by acquisition assignments for the development and management of next generation manned and unmanned aircraft systems, weapon systems and joint executive acquisition assignments. Mr. Begley holds Master’s degrees in Aerospace and Aeronautic Engineering from timethe Naval Post-Graduate School and a Bachelor’s degree in General Engineering from the U.S. Naval Academy. The Company believes that Mr. Begley’s 20 plus years of experience as a UAV industry expert, focused on UAV technologies, regulations and commercial applications, will be an invaluable resource to time.the Board of Directors.

Louisa Ingargiola. Ms. Ingargiola has served as a member of the Board of Directors of the Company since November 27, 2018. In 1990, Ms. Ingargiola joined Boston Capital Partners as an Investment Advisor in their Limited Partnership Division. In this capacity, she worked with investors and partners to report investment results, file tax forms, and recommend investments. In 1992, Ms. Ingargiola joined MetLife Insurance Company as a Budget and Expense Manager. In this capacity she managed a $30 million annual budget. Her responsibilities included budget implementation, expense and variance analysis and financial reporting. From 2007 through 2016, Ms. Ingargiola served as the Chief Financial Officer at MagneGas Corporation (NASDAQ: MNGA) and continues to serve as a director. Ms. Ingargiola currently serves as Chief Financial Officer of Avalon-Globocare (NASDAQ:AVCO) and as the Audit Committee Chair of FTE Networks, Inc. (NYSE:FTNW) and Electra Meccanica (NASDAQ:SOLO) where she has helped manage over $200 Million in equity and debt financing. Ms. Ingargiola also serves as a Director of The facilities provided underJBF Foundation Worldwide, a 501(c)(3) non-profit. Ms. Ingargiola graduated in 1989 from Boston University with a Bachelor’s degree in Business Administration and a concentration in Finance. In 1996, she received her MBA in Health Administration from the AmendedUniversity of South Florida.

Thomas Gardner. Mr. Gardner has served as a member of the Board of Directors since June 2016 and Restated Credit Agreementhe and his firmhas been engaged as a consultant to the Company. Since May 2010, Mr. Gardner has served as COO and Director at NeuEon, Inc., a technology advisory consulting firm, where he oversees operations and provides strategic technology and business guidance to select clients. Mr. Gardner has extensive experience in the areas of business and technology leadership across many industries, including financial services, manufacturing, telecommunications and consumer goods. Within these sectors, Mr. Gardner has specific expertise in the areas of process improvement, digitization and standardization, mergers and acquisitions, system implementations, enterprise resource planning and work-force optimization. Mr. Gardner holds a dual Bachelor of Science in Accounting and Management from Bryant University. The Company believes that Mr. Gardner’s experience as a data analytics expert, along with his strategic technology and business expertise, brings a unique perspective to the Board of Directors.

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Corbett Kull. Mr. Kull has served as a member of the Board of Directors of the Company since July 2018. Since December 8, 2014, Mr. Kull has served as senior director of marketing for The Climate Corporation, a subsidiary of Monsanto (now Bayer), which provides software, hardware and insurance products to farmers worldwide. Prior to his role at The Climate Corporation, in 2013. Kull co-founded 640 Labs, an agribusiness that leveraged the power of analytics, mobile technologies and cloud computing to help farmers capture and store in-field data. In December 2014, he sold 640 Labs to The Climate Corporation. Kull received his Master in Business Administration, with an emphasis in Marketing, from the Illinois Institute of Technology. He earned a Bachelor’s of Science in Electrical Engineering from Rose-Hulman Institute of Technology. The Company believes that Mr. Kull’s business expertise regarding analytics, mobile technologies and cloud computing qualify Mr. Kull as a valuable member of the Board of Directors.

Board of Directors’ Term of Office

Directors are elected at our annual meeting of shareholders and serve for one year until the next annual meeting of shareholders or until their successors are elected and qualified.

Family Relationships

There are no family relationships among the officers and directors, nor are there any arrangements or understanding between any of the Directors or Officers of our Company or any other person pursuant to which any Officer or Director was or is to be used to refinance a prior outstanding revolving loan facility with TCB dated July 3, 2008,selected as an officer or director.

Involvement in Certain Legal Proceedings

During the last ten years, none of our officers, directors, promoters or control persons have been involved in any legal proceedings as described in Item 401(f) of Regulation S-K.

Board Meetings; Committee Meetings; and for working capital and general corporate purposes. On August 15, 2014 we entered into an Eighth Amendment to the Amended and Restated Credit Agreement. Among other things the Eighth Amendment extended the maturity of the Agreement by three years to October 3, 2018. On August 12, 2015, we entered into a Tenth Amendment to the Amended and Restated Credit Agreement. Among other things the Tenth Amendment established the requirement of monthly borrowing base reductions commencing September 1, 2015 and continuing on the first of each month thereafter.Annual Meeting Attendance

 

In 2018, the Board of Directors held five meetings and acted by unanimous written consent on various matters. We encourage each director to attend our annual meeting of shareholders in person or by telephone conference call. All but one of the board members attended the 2018 Annual Meeting of Shareholders.

Committees of the Board of Directors

Our Board of Directors has standing audit, compensation, and nominating committees, comprised solely of independent directors. Each committee has a charter, which is available at the Company’s website, www.ageagle.com. Each committee member is independent under NYSE American committee independence requirements applicable to the committee on which such member serves.

Audit Committee

The Audit Committee, which is established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, is responsible for assisting the Board of Directors in its oversight of the integrity of the Company’s financial statements, the qualifications and independence of the Company’s independent auditors, and the Company’s internal financial and accounting controls. The Audit Committee has direct responsibility for the appointment, compensation, retention (including termination) and oversight of the Company’s independent auditors, and the Company’s independent auditors report directly to the Audit Committee. During 2018, the Audit Committee had a total of three meetings.

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The Post-Merger Company’s current members of the Audit Committee are Louisa Ingargiola, Chair, Grant Begley, and Thomas Gardner. During the fiscal year ended December 31, 2017, Mr. Scott Burell was the Chair of the Audit Committee and resigned from the Board of Directors of the Company on November 21, 2018. Ms. Louisa Ingargiola was appointed on November 27, 2018 as a director of the Board of Directors of the Company and as the Chair of the Audit Committee to replace Mr. Burell. Each member of the Audit Committee qualifies as an independent director under the corporate governance standards of the NYSE American and the independence requirements of Rule 10A-3 of the Exchange Act. The Board of Directors has determined that Louisa Ingargiola qualifies as an “audit committee financial expert” as such term is currently defined in Item 407(d)(5) of Regulation S-K and meets the financial sophistication requirements of the NYSE American.

Compensation Committee

The Compensation Committee approves the compensation objectives for the Company, approves the compensation of the chief executive officer and approves or recommends to the Board of Directors for approval the compensation of other executives. The Compensation Committee reviews all compensation components, including base salary, bonus, benefits and other perquisites.

The Post-Merger Company’s current members of the Compensation Committee are Grant Begley, Chairman, Louisa Ingargiola, and Thomas Gardner. Mr. Scott Burell was a member of the Compensation Committee and resigned from the Board of Directors of the Company on November 21, 2018. Ms. Louisa Ingargiola was appointed on November 27, 2018 as a director of the Board of Directors of the Company and as a member of the Compensation Committee to replace Mr. Burell’s role. During 2018, the Compensation Committee had a total of two meetings.

The members of the compensation committee are Messrs. Begley and Gardner and Ms. Ingargiola. Mr. Begley serves as chair of the compensation committee. Each member of the compensation committee is a non-employee director within the meaning of Rule 16b-3 of the rules promulgated under the Exchange Act, each is an outside director as defined by Section 162(m) of the United States Internal Revenue Code of 1986, as amended, or the Code, and each is an independent director as defined by the NYSE American. The compensation committee has adopted a written charter that satisfies the applicable standards of the SEC and the NYSE American, which is available on our website.

Nominating and Corporate Governance Committee

The nominating and corporate governance committee is responsible for making recommendations to our board of directors regarding candidates for directorships and the structure and composition of our board and the board committees. In addition, the nominating and corporate governance committee will be responsible for developing and recommending to our board corporate governance guidelines applicable to the company and advising our board on corporate governance matters. During 2018, the Nominating and Corporate Governance Committee had no meetings and acted by unanimous written consent on one occasion.

The Post-Merger Company’s current members of the Nominating and Corporate Governance Committee are Thomas Gardner, Chairman, Louisa Ingargiola, and Grant Begley. Mr. Scott Burell was a member of the Nominating and Corporate Governance Committee and resigned from the Board of Directors of the Company on November 21, 2018. Ms. Louisa Ingargiola was appointed on November 27, 2018 as a director of the Board of Directors of the Company and as a member of the Nominating and Corporate Governance Committee to replace Mr. Burell. Each member of the nominating and corporate governance committee will be an independent director as defined by the NYSE American. The nominating and corporate governance committee has adopted a written charter that satisfies the applicable standards of the NYSE American, which is available on our website

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The Nominating and Corporate Governance Committee will consider director candidates recommended by security holders. Potential nominees to the Board of Directors are required to have such experience in business or financial matters as would make such nominee an asset to the Board of Directors and may, under certain circumstances, be required to be “independent”, as such term is defined under Section 121(a) of the listing standards of NYSE American and applicable SEC regulations. Security holders wishing to submit the name of a person as a potential nominee to the Board of Directors must send the name, address, and a brief (no more than 500 words) biographical description of such potential nominee to the Nominating and Corporate Governance Committee at the following address: Nominating and Corporate Governance Committee of the Board of Directors, c/o AgEagle Aerial Systems Inc., 117 S. 4th Street, Neodesha, Kansas 66757. Potential director nominees will be evaluated by personal interview, such interview to be conducted by one or more members of the Nominating and Corporate Governance Committee, and/or any other method the Nominating and Corporate Governance Committee deems appropriate, which may, but need not, include a questionnaire. The Nominating and Corporate Governance Committee may solicit or receive information concerning potential nominees from any source it deems appropriate. The Nominating and Corporate Governance Committee need not engage in an evaluation process unless (i) there is a vacancy on the Board of Directors, (ii) a director is not standing for re-election, or (iii) the Nominating and Corporate Governance Committee does not intend to recommend the nomination of a sitting director for re-election. A potential director nominee recommended by a security holder will not be evaluated differently from any other potential nominee. Although it has not done so in the past, the Nominating and Corporate Governance Committee may retain search firms to assist in identifying suitable director candidates.

The Board does not have a formal policy on Board candidate qualifications. The Board may consider those factors it deems appropriate in evaluating director nominees made either by the Board or stockholders, including judgment, skill, strength of character, experience with businesses and organizations comparable in size or scope to the Company, experience and skill relative to other Board members, and specialized knowledge or experience. Depending upon the current needs of the Board, certain factors may be weighed more or less heavily. In considering candidates for the Board, the directors evaluate the entirety of each candidate’s credentials and do not have any specific minimum qualifications that must be met. The directors will consider candidates from any reasonable source, including current Board members, stockholders, professional search firms or other persons. The directors will not evaluate candidates differently based on who has made the recommendation.

Changes in Nominating Process

In 2018, there were no material changes to the procedures by which security holders may recommend nominees to our Board of Directors.

Compliance with Section 16(A) of the Exchange Act

Section 16(a) of the Exchange Act requires the Company’s directors, officers and stockholders who beneficially own more than 10% of any class of equity securities of the Company registered pursuant to Section 12 of the Exchange Act, collectively referred to herein as the “Reporting Persons,” to file initial statements of beneficial ownership of securities and statements of changes in beneficial ownership of securities with respect to the Company’s equity securities with the SEC. All Reporting Persons are required by SEC regulation to furnish us with copies of all reports that such Reporting Persons file with the SEC pursuant to Section 16(a). Based solely on our review of the copies of such reports and upon written representations of the Reporting Persons received by us, we believe that all Section 16(a) filing requirements applicable to such Reporting Persons have been timely met.

Code of Ethics

The Company has adopted a Code of Ethics for adherence by its Chief Executive Officer and Chief Financial Officer to ensure honest and ethical conduct; full, fair and proper disclosure of financial information in the Company’s periodic reports filed pursuant to the Securities Exchange Act of 1934; and compliance with applicable laws, rules, and regulations. Any person may obtain a copy of our Code of Ethics, without charge, by mailing a request to the Company at the address appearing on the front page of this Annual Report on Form 10-K or by viewing it on our website found at www.ageagle.com.

ITEM 11.EXECUTIVE COMPENSATION

In connection with the Merger, all of the EnerJex executive officers and directors resigned from their positions with EnerJex, and the officers and directors of AgEagle Sub were appointed to serve as officers and directors of the Company post-merger. EnerJex’s named executive officers for the fiscal years ended December 31, 2017 and 2016 are no longer current executive officers of AgEagle. As a result, and for ease of reference we have included a separate executive compensation section to reflect the prior years’ compensation for the EnerJex executive officers and directors.

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Executive Compensation – AgEagle (Post-Merger)

The following table sets forth compensation information for services rendered by certain of our executive officers in all capacities during the last two completed fiscal years. The following information includes the dollar value of base salaries and certain other compensation, if any, whether paid or deferred.

Summary Compensation Table

Name and Principal Position Year Salary Bonus Equity   Awards(4) All Other Compensation Total
Bret Chilcott (1)  2018  $120,539  $  $  $  $120,539 
   2017  $31,200  $  $  $  $31,200 
Barrett Mooney (2)  2018  $95,615  $  $54,995  $  $150,610 
   2017  $  $  $  $  $ 
Nicole Fernandez-McGovern (3)  2018  $207,500  $  $27,759  $  $235,259 
   2017  $20,000  $  $6,339  $  $26,339 

(1)Bret Chilcott served as Chief Executive Officer and President of the Company until July 18, 2018, after which he stepped down as Chief Executive Officer and now serves as President.
(2)Barrett Mooney was appointed as Chief Executive Officer of the Company effective July 18, 2018.
(3)Nicole Fernandez-McGovern was appointed as Chief Financial Officer of the Company effective April 6, 2016. Amounts for 2018 include deferred compensation payments from 2017.
(4)The aggregate grant date fair value of the options awarded to each executive officer is computed in accordance with FASB ASC Topic 718 and excludes the effect of forfeiture assumptions. Also, these awards generally vest over a one period from the date of grant. The assumptions used to calculate the fair value of stock option awards are Black-Scholes option valuation model.

Employment Agreements

Bret Chilcott

Mr. Chilcott has served as a member of the Board of Directors of the Company and as President since the inception of the Company in 2010 and had served as Chief Executive Officer from February 2016 to July 18, 2018. As of July 18, 2018, Mr. Chilcott stepped down as Chief Executive Officer and currently serves as President, Secretary and Chairman of the Board of the Directors. Mr. Chilcott has no formal agreement with the Company but did hold the position of Chief Executive of the Company for an annual salary of $175,000. Upon his resignation as Chief Executive Officer of the Company his salary was reduced to $140,000, annually.

Barrett Mooney

Pursuant to an employment offer letter dated July 9, 2018, Mr. Mooney will receive as compensation for his services as Chief Executive Officer a base salary of $220,000 per year, which shall be subject to annual performance review by the Compensation Committee of the Board and may be revised by the Board, in its sole discretion. Mr. Mooney received an initial grant of 75,000 shares of restricted Common Stock of the Company which is fully vested. Mr. Mooney shall also be eligible to receive an award of 75,000 shares of restricted Common Stock of the Company which shall fully vest as of January 1, 2019 if, and only if, the stock price of the Company reaches $3.55 per share and the closing price per share is at or above such price at the end of the day on January 1, 2019. In addition, Mr. Mooney is eligible to receive an award of 20,000 nonqualified stock options under the Company’s 2017 Omnibus Equity Incentive Plan (the “Equity Plan”) upon securing one sustainability pilot program on or before October 31, 2018, and an additional award of 30,000 nonqualified stock options under the Equity Plan upon securing a second sustainability pilot program on or before January 31, 2019. Both awards shall provide for immediate vesting and exercisability at an exercise price equal to the fair market value of the Company’s shares of Common Stock underlying the options as of the date of grant. Mr. Mooney will also be eligible receive an award of up to 55,000 nonqualified stock options under the Equity Plan based upon the results of his annual performance review in the first quarter of 2019.

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Effective December 18, 2018, an amendment was signed for the original employment offer letter dated July 9, 2018 hereby providing an amendment to provide that in lieu of the issuance of 75,000 shares of restricted Common Stock of the Company (the “Shares”), the Company shall award to Executive 125,000 Nonqualified Stock Options (the “Stock Options”) under the Company’s 2017 Omnibus Equity Incentive Plan (the “Equity Plan”). The Stock Options shall be subject to the terms of the Equity Plan and standard option award agreement which shall have a term of 10 years and provide for vesting over a one-year period and exercisability at an exercise price equal to the fair market value of the Company’s Common Stock as of the date of the grant. The award of 75,000 shares were returned to the company and immediately cancelled.

Nicole Fernandez-McGovern

Based on her agreement commencing with the date of appointment as CFO in August 2016, Ms. Fernandez-McGovern earned a salary of $66,000 per year, payable in monthly installments of $5,500 for 2017. In 2018, her monthly installment payment increased to $8,000 and effective upon the closing of the Merger, Ms. Fernandez-McGovern’s salary increased to $150,000. As part of her compensation upon the closing of the Merger, Ms. Fernandez-McGovern also received 10-year stock options to purchase 265,033 shares of Common Stock at an exercise price of $0.06 per share, of which half of the options vested upon issuance and the remainder will vest equally over two years. Additionally, on a quarterly basis, Ms. Fernandez-McGovern will be awarded 12,500 shares of stock options to purchase Common Stock at an exercise price per share equal to the market price of our Common Stock at the time of issuance during the term of her employment.

Effective January 1, 2019, Ms. Fernandez-McGovern signed a new employment agreement with the Company, whereby her annual base salary increased to $180,000 and a ten-year grant of 50,000 stock options to purchase shares of Common Stock at an exercise price of $0.54 was awarded. In addition, Ms. Fernandez-McGovern will continue to receive quarterly grants of 12,000 stock options to purchase Common Stock at an exercise price equal to the market price of our Common Stock at the time of issue during the term of her employment. All of the awards will vest equally over two years.

We have no other formal employment agreements with our executive officers, nor any compensatory plans or arrangements resulting from the resignation, retirement or any other termination of our named executive officers, from a change-in-control, or from a change in any executive officer’s responsibilities following a change-in-control. However, it is possible we will enter into formal employment agreements with our executive officers in the future.

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Outstanding Equity Awards at 2018 and 2017 Year-Ends

The following table lists the outstanding equity incentive awards held by the EnerJex Pre-Merger Named Executive Officers as of the fiscal year ended December 31, 2018 and 2017.

Option Awards
Name and Principal Position Fiscal Year Granted Number of Securities Underlying Unexercised Options Exercisable (#) Number of Securities Underlying Unexercised Options Un-Exercisable (#) Number of Securities Underlying Unexercised Unearned Options (#) Option Exercise Price ($) Option Expiration Date
Barrett Mooney  2018   4,452   120,548     $0.62   12/17/2028 
Chief Executive Officer  2017           $    
Nicole Fernandez-McGovern  2018   3,125   9,375     $1.82   6/29/2023 
Chief Financial Officer  2018   1,563   10,938     $1.64   9/29/2023 
   2017   215,340   49,693     $0.06   10/02/2027 
Bret Chilcott  2018           $    
President  2017           $    

Potential Payments upon Termination or Change in Control

We do not have any contract, agreement, plan or arrangement that provides for any payment to any of our Named Executive Officers at, following, or in connection with a termination of the employment of such Named Executive Officer, a change in control of the Company or a change in such Named Executive Officer’s responsibilities.

DIRECTOR COMPENSATION – AGEAGLE (POST-MERGER)

Pursuant to their respective offer letters, Messers Grant Begley, Thomas Gardner and Scott Burell are entitled to receive for their service on the Board: (1) an initial grant of five-year options to purchase 77,356 shares of Common Stock as accrued for time served as a Board member at an exercise price of $0.06 per share that vested half upon issuance and the remainder is vesting equally over two years; and (2) additional five-year options to purchase 16,500 shares of Common Stock issuable per calendar quarter of service at an exercise price per share equal to the market price of our Common Stock at the time of issuance that will vest equally over two years.

Pursuant to his offer letter Mr. Corbett Kull is entitled to receive for his service on the board: (1) an initial grant of five-year options to purchase 41,250 shares of Common Stock upon appointment, which was at an exercise price of $1.77 (equal to the market price of our Common Stock on the date of grant) that will vest in equal installments every calendar quarter over a one year period; and (2) five-year options to purchase 16,500 shares of Common Stock per calendar quarter of service at an exercise price per share equal to the market price of our Common Stock at the time of issuance that will vest in equal installments every calendar quarter for the two-year period after date the grant.

Effective November 21, 2018, Mr. Scott Burell resigned from the Board of Directors of the Company and his positions as a member of the Compensation and Nominating and Corporate Governance Committee and Chairman of the Audit Committee. As a result of his resignation, Mr. Burell did not receive any options for the last quarter of 2018 as options are awarded upon completion of the term. To replace Mr. Burell, Ms. Louisa Ingargiola was appointed on November 27, 2018 as a director of the Board of Directors of the Company, a member of the Compensation and Nominating and Corporate Governance Committee and Chairman of the Audit Committee.

Pursuant to her offer letter, Ms. Louisa Ingargiola is entitled to receive for her service on the board: (1) an initial grant of five-year options to purchase 41,250 shares of Common Stock upon appointment, which was at an exercise price of $0.77 (equal to the market price of our Common Stock on the date of grant) that will vest in equal installments every calendar quarter over a one year period; and (2) five-year options to purchase 16,500 shares of Common Stock per calendar quarter of service at an exercise price per share equal to the market price of our Common Stock at the time of issuance that will vest in equal installments every calendar quarter for the two year period after date the grant.

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Option Exercises for Fiscal 2018 and 2017

Mr. Scott Burell exercised 60,724 options on December 4, 2018 at an exercise price of $0.06 of which 55,801 shares were delivered due to the Company’s withholding obligation relating to the exercise of these options.

EXECUTIVE COMPENSATION – ENERJEX (PRE-MERGER)

The following table sets forth summary compensation information for the fiscal year ended December 31, 2018 and the year ended December 31, 2017, for our former chief executive officer, former chief financial officer and other former highly compensated executive officers. We did not have any other executive officers as of the end of 2018 or 2017, whose total compensation exceeded $100,000. We refer to these persons as the EnerJex Pre-Merger Named Executive Officers elsewhere in this report.

Name and Principal Position Year Salary Bonus Stock Awards Option Awards All Other Compensation Total
Louis G. Schott, Former Interim  2018  $  $  $  $  $  $ 
Chief Executive Officer and Secretary (1)  2017  $75,000  $  $  $  $  $75,000 
Robert Schleizer, Former Chief  2018  $  $  $  $  $  $ 
Financial Officer (4)  2017  $75,000  $  $  $  $  $75,000 
Robert G. Watson, Jr., Former  2018  $  $  $  $  $  $ 
President, Chief Executive Officer (2)  2017  $15,000  $  $  $  $  $15,000 
Douglas M. Wright, Former Chief  2018  $  $  $  $  $  $ 
Financial Officer (3)  2017  $96,000  $  $  $  $  $96,000 
David L. Kunovic, Former Executive  2018  $  $  $  $  $  $ 
Vice President, Exploration (5)  2017  $108,865  $  $  $  $  $108,865 
Kent A. Roach, Former Executive  2018  $  $  $  $  $  $ 
Vice President, Engineering (5)  2017  $108,865  $  $  $  $  $108,865 

(1)Mr. Schott joined the Company as Interim CEO on February 10, 2017 and resigned in connection with the Merger.
(2)Mr. Watson resigned as a director and officer of the Company on February 10, 2017.
(3)Mr. Wright resigned on February 10, 2017.
(4)Mr. Schleizer joined the Company as Chief Financial Officer on August 17, 2017 and resigned in connection with the Merger.
(5)Resigned in connection with the Merger.

Employment Agreements

Louis G. Schott. — Former Interim Chief Executive Officer

On February 10, 2017, the Company TCP and IberiaBank (collectively, "Sellers"), and PWCM Investment Company IC LLC, and certain financial institutions (collectively, "Buyers") entered into a Loan Sale Agreement ("LSA"), pursuant to which Seller sold to Buyers, and Buyers purchased from Sellers, all of Sellers' right, title and interest in, to and under the Credit Agreement and Loan Documents, in exchange for (i) a cash payment of $5,000,000 (the "Cash Purchase Price"), (ii) a Synthetic Equity Interest equal to 10%an employment agreement with Louis G. Schott, as interim chief executive officer of the Proceeds, after Buyer's realizationCompany. The employment agreement provides an annual base salary of 150% return on the Cash Purchase Price within five (5) years of the Closing Date, with payment being distributed 65.78947368% to TCB and 34.21052632% to IberiaBank, and (iii) at any time prior to February 10, 2022, Buyer may acquire the interest$225,000. Mr. Schott resigned from his position as interim chief executive officer in clause (ii) above. In connection with the LSA, we release SellersMerger and its successorshis employment agreement was terminated.

Option Exercises for Fiscal 2018 and 2017

There were no options exercised by the EnerJex Pre-Merger Named Executive Officers in fiscal years 2018 and 2017, as holdersall pre-merger options issued by EnerJex were cancelled upon the date of the rights under the Credit Agreement and Loan Documents, including Buyers, from any and all claims under the Credit Agreement and Loan Documents.Merger.

 

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Grants of Plan-Based Awards in Fiscal Year 2018 and 2017

We granted to Mr. Wright an option expiring on July 31, 2017, to purchase 50,000 shares of our Common Stock at a cash exercise price equal to $10.50. One third of the options vest on the first anniversary of the date of grant, and the remaining options vest in twenty-four (24) equal tranches each month for the next two (2) year period. Mr. Wright’s employment with the company ended effective February 10,17, 2017, and therefore pursuant to the 2013 Plan he must exercise the options within three (3) months of employment termination (May 17, 2017) or forfeit them. The options were not exercised

Outstanding Equity Awards at 2017 Fiscal Year-End

The following table lists the outstanding equity incentive awards held by the EnerJex Pre-Merger Named Executive Officers as of the fiscal year ended December 31, 2017.

  Option Awards
  Fiscal Year Granted Number of Securities Underlying Unexercised Options Exercisable (#) Number of Securities Underlying Unexercised Options Un-Exercisable (#) Number of Securities Underlying Unexercised Unearned Options (#) Option Exercise Price ($) Option Expiration Date
David L. Kunovic  2013   50,000        $10.50  12/31/23
Kent A. Roach  2014   39,743   10,417     $10.50  12/31/19

DIRECTOR COMPENSATION – ENERJEX (Pre-Merger)

For the fiscal year ended December 31, 2017, the Company and its subsidiaries, and PWCM Investment Company IC LLC, a Delaware limited liability company and other buyers (collectively, the "successor lender"), entered into a binding letter agreement dated February 10, 2017, which was subsequently amended on March 30, 2017 (as amended, the “letter agreement”) pursuant to whichEnerJex Pre-Merger non-employee directors received no compensation.

 

ITEM 12.1.the successor lender would agree to forgive our existing secured loan in the approximate principal amount of $17,295,000, and in exchange enter into a secured promissory note (which we refer to as the "restated secured note") in the original principal amount of $4,500,000.

2.we would:

a.convey our oil and gas properties in Colorado, Texas, and Nebraska, and

b.all of our shares of Oakridge Energy, Inc. (together, the "conveyed oil and gas assets"); and

c.retain our assets in Kansas and continue as a going concern. The Kansas assets currently provide most of our current operating revenue.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The restated secured note shall:following table sets forth certain information regarding the beneficial ownership of our Common Stock as of March 27, 2019 by:

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a.be secured by a first-priority lien in the Company’s oil and gas producing assets situated in the Stateeach person, or group of Kansas,

b.evidence accrued interest on the $4,500,000 principal balance at a rateaffiliated persons, known to us to own beneficially more than 5% of 16% per annum,

c.bear interest from and after May 1, 2017, at a rate of 16.0% per annum,

d.be pre-payable in full at a discount at any time during the term of the restated secured note upon EnerJex's paying $3,300,000 to successor lender, and

e.mature and be due and payable in full on November 1, 2017.

We will have 2 options to extend the maturity date of the restated secured note by 90 days each upon payment of an extension fee of $100,000, which shall be applied against the principal balance of the note.

So long as we repay the $3,300,000 in indebtedness on or prior to the maturity date, as extended, all other amounts payable under the restated secured note shall be forgiven.

Borrower shall retain all of its existing oil and gas properties located in Kansas, including equipment and tangible personal property related to those oil and gas properties. The Kansas-based assets that the Company will retain generate a majority of the Company’s revenue and cash flow from operations. These assets shall secure the remaining $3,300,000 due in 6 months, nine months or a year.

The Closing is expected to occur on or before May 1, 2017.


If we are unable to complete the proposed loan forgiveness transaction with our successor lender, we may need to seek relief under the U.S. Bankruptcy Code. This relief may include: (i) seeking bankruptcy court approval for the sale or sales of some, most or substantially all of our assets pursuant to section 363(b) of the U.S. Bankruptcy Code and a subsequent liquidation of the remaining assets in the bankruptcy case; (ii) pursuing a plan of reorganization (where votes for the plan may be solicited from certain classes of creditors prior to a bankruptcy filing) that we would seek to confirm (or “cram down”) despite any classes of creditors who reject or are deemed to have rejected such plan; or (iii) seeking another form of bankruptcy relief, all of which involve uncertainties, potential delays and litigation risks.

Under certain circumstances, it is also possible that our creditors may file an involuntary petition for bankruptcy against us.

All these factors raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Information in response to this item is incorporated by reference from the registrant’s definitive proxy statement for its 2017 Annual Stockholder Meeting of Stockholders filed 120 days after December 31, 2016.

ITEM 11. EXECUTIVE COMPENSATION.

Information in response to this item is incorporated by reference from the registrant’s definitive proxy statement for its 2017 Annual Stockholder Meeting of Stockholders filed 120 days after December 31, 2016.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Information in response to this item is incorporated by reference from the registrant’s definitive proxy statement for its 2017 Annual Stockholder Meeting of Stockholders filed 120 days after December 31, 2016.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Information in response to this item is incorporated by reference from the registrant’s definitive proxy statement for its 2017 Annual Stockholder Meeting of Stockholders filed 120 days after December 31, 2016.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Information in response to this item is incorporated by reference from the registrant’s definitive proxy statement for its 2017 Annual Stockholder Meeting of Stockholders filed 120 days after December 31, 2016.


PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

The following information required under this item is filed as part of this report:

1. Financial Statements

Page
Management Responsibility for Financial Information44
Management’s Report on Internal Control Over Financial Reporting45
Index to Financial StatementsF-1
Report of Independent Registered Public Accounting FirmsF-2
Consolidated Balance SheetsF-4
Consolidated Statements of OperationsF-5
Consolidated Statements of Stockholders EquityF-6
Consolidated Statements of Cash FlowsF-7

2. Financial Statement Schedules

None.

3. Exhibit Index

Exhibit
No.
Descriptionour Common Stock;
   
2.1each of our current directors;
 Agreement and Plan of Merger between Millennium Plastics Corporation and Midwest Energy, Inc. filed on August 16, 2006. (incorporated by reference to Exhibit 2.3 to Form 8-K filed on August 16,2006)
2.2each of our named executive officers; and
 Agreement and Plan of Merger by and among Registrant, BRE Merger Sub, Inc., Black Raven Energy, Inc. and West Coast Opportunity Fund, LLC dated July 23, 2013 (incorporated herein by reference to Exhibit 10.4 on Form 8-K filed July 29, 2013).
3.1all of our current directors and executive officers as a group.

The information in the following table has been presented in accordance with the rules of the SEC. Under such rules, beneficial ownership of a class of capital stock includes any shares of such class as to which a person, directly or indirectly, has or shares voting power or investment power and also any shares as to which a person has the right to acquire such voting or investment power within 60 days through the exercise of any stock option, warrant or other right. If two or more persons share voting power or investment power with respect to specific securities, each such person is deemed to be the beneficial owner of such securities. Except as we otherwise indicate below and under applicable community property laws, we believe that the beneficial owners of the Common Stock listed below, based on information they have furnished to us, have sole voting and investment power with respect to the shares shown. Except as otherwise indicated, each stockholder named in the table is assumed to have sole voting and investment power with respect to the number of shares listed opposite the stockholder’s name.

Name and Address of Beneficial Owner(1) Number of Shares(2) Percent of Class
Bret Chilcott  5,800,321   46.22%
Chairman of the Board, President and Nominee Director        
Barrett Mooney  4,452   0.04%
Chief Executive Officer(3)        
Nicole Fernandez-McGovern  220,027   1.75%
Chief Financial Officer(3)        
Grant Begley  75,227   0.60%
Nominee Director(3)        
Thomas Gardner  142,519   1.14%
Nominee Director(3)        
Louisa Ingargiola  1,921   0.02%
Director(3)        
Corbett Kull  20,969   0.17%
Nominee Director(3)        
All Directors and Executive Officers as a Group (seven persons)  6,265,436   49.94%
GreenBlock Capital, LLC  846,569   6.75%
420 Royal Palm Way        
Palm Beach, Florida 33480(4)        
Alpha Capital Anstalt  1,253,684   9.99%
Pradafant 7, Furstentums 9490        
Vaduz, Liechtenstein(5)        

(1)Unless otherwise indicated, such individual’s address is c/o AgEagle Aerial Systems, Inc., 117 South 4thStreet, Neodesha, Kansas 66757.

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(2)The persons named in this table have sole voting and investment power with respect to all shares of Common Stock reflected as beneficially owned by them. A person is deemed to be the beneficial owner of securities that can be acquired by such person within sixty (60) days from December 31, 2018 and the total outstanding shares used to calculate each beneficial owner’s percentage includes such shares, although such shares are not taken into account in the calculations of the total number of shares or percentage of outstanding shares. Beneficial ownership as reported does not include shares subject to option or conversion that are not exercisable within 60 days of December 31, 2018.
 
(3)All shares reflected are those shares of Common Stock which underlie options issued and fully vested, as of December 31, 2018.
(4)Excludes options to purchase 207,055 shares of Common Stock which are subject to vesting and ownership limitation provisions. Mr. Chris Spencer, a Partner of GreenBlock Capital, LLC, has sole investment and voting power with respect to the shares. The address for GreenBlock Capital, LLC is 420 Royal Palm Way, Palm Beach, Florida 33480. Information regarding this beneficial owner is furnished in reliance upon its Schedule 13G, dated March 26, 2018.
(5)As of December 31, 2018, Alpha owned 315,422 shares of Common Stock and owned 4,662 shares of Series C Preferred Stock, which are currently convertible into 8,633,333 shares of Common Stock, and 2,000 Series D Preferred Shares and 3,703,703 warrants to purchase shares of Common Stock at an exercise price of $0.54. The table includes only 1,253,684 shares of Common Stock that Alpha is deemed to beneficially own because under the terms of the Series C Certificate of Designation, the holder thereof may not own in excess of 9.99% of the Company’s voting (i.e., Common) stock at any given time.

Equity Compensation Plans

Company 2017 Omnibus Equity Incentive Plan

The 2017 Omnibus Equity Plan is a comprehensive incentive compensation plan under which the Company can grant equity-based and other incentive awards to officers, employees and directors of, and consultants and advisers to, the Company The purpose of the Plan is to help the Company attract, motivate and retain such persons and thereby enhance shareholder value. The Plan provides for the grant of awards which are incentive stock options (“ISOs”), non-qualified stock options (“NQSOs”), unrestricted shares , restricted shares, restricted stock units, performance stock, performance units, SARs, tandem stock appreciation rights, distribution equivalent rights, or any combination of the foregoing, to key management employees, non-employee directors, and non-employee consultants of the Company or any of its subsidiaries (each a “participant”) (however, solely Company employees or employees of the Company’s subsidiaries are eligible for incentive stock option awards). The Company has reserved a total of 2,000,000 shares of Common Stock for issuance as or under awards to be made under the Plan.

Types of Stock Awards

The Plan provides for the grant of incentive stock options and non-qualified stock options. Stock options may be granted to employees, including officers, non-employee directors and consultants of the Company or its affiliates, except that incentive stock options may be granted only to employees.

Share Reserve

The aggregate number of shares of Common Stock that have been reserved for issuance under the Plan is 2,000,000. As of December 31, 2018, there are 1,287,103 shares underlying options granted under the Plan and 712,897 shares of Common Stock available for future issuance under the Plan. If a stock option award expires, terminates, is canceled or is forfeited for any reason, the number of shares subject to the stock option award will again be available for issuance. In addition, if stock awards are settled in cash, the share reserve will be reduced by the number of shares of Common Stock with a value equal to the amount of the cash distributions as of the time that such amount was determined and if stock options are exercised using net exercise, the share reserve will be reduced by the gross number of shares of Common Stock subject to the exercised portion of the option. We also have 207,055 shares underlying options that have been granted outside of the Plan.

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Administration

Our board of directors or a duly authorized committee thereof, has the authority to administer the Plan. Subject to the terms of the Plan, our board of directors or the authorized committee, referred to herein as the committee, determines recipients, dates of grant, the numbers and types of stock awards to be granted and the terms and conditions of the stock option awards, including the period of exercisability and vesting schedule applicable to a stock option award. Subject to the limitations set forth below, the committee will also determine the exercise price and the types of consideration to be paid for the award. The committee has the authority to modify outstanding awards under the Plan. The committee has the authority to adopt, alter and repeal administrative rules, guidelines and practices governing the Plan and to perform all other acts, including delegating administrative responsibilities, as it deems advisable to construe and interpret the terms and provisions of the Plan and any stock option award granted under the Plan. Decisions and interpretations or other actions by the committee are in the discretion of the committee and are final binding and conclusive on the company and all participants in the Plan.

Stock Options

Incentive stock options and non-qualified stock options are granted pursuant to stock option award agreements adopted by the committee. The committee determines the exercise price for a stock option, within the terms and conditions of the Plan, provided that the exercise price shall not be less than (i) in the case of a grant of any NQSO or an ISO to a key employee who at the time of the grant does not own stock representing more than ten percent (10%) of the total combined voting power of all classes of our stock or of any subsidiary, one hundred percent (100%) of the fair market value of a share of Common Stock as determined on the date the stock option award is granted; (ii) in the case of a grant of an ISO to a key employee who, at the time of grant, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of our stock or of any subsidiary, one hundred ten percent (110%) of the fair market value of a share of Common Stock, as determined on the date the stock option award is granted. The fair market value of the Common Stock for purposes of determining the exercise price shall be determined by the Committee in accordance with any reasonable method of valuation consistent with applicable requirements of Federal tax law, including, as applicable, the provisions of Code Section 422(c)(8) and 409A as applicable. Stock options granted under the Plan will become exercisable at the rate specified by the committee and may be exercisable for restricted stock, if determined by the committee.

The committee determines the term of stock options granted under the Plan, up to a maximum of ten years. The option holder’s stock option agreement shall provide the rights, if any, that such holder has to exercise the stock option at such time that such holder’s service relationship with us, or any of our affiliates, ceases for any reason, including disability, death, with or without cause, or voluntary resignation. All unvested stock option awards are forfeited if the participant’s employment or service is terminated for any reason, unless our compensation committee determines otherwise.

Acceptable consideration for the purchase of Common Stock issued upon the exercise of a stock option will be determined by the committee and may include (i) check, bank draft or money order, or wire transfer, (ii) if the Company’s Common Stock is publicly traded, a broker-assisted cashless exercise, or (iii) such other methods as may be approved by the committee, including without limitation, the tender of shares of our Common Stock previously owned by the option holder or a net exercise of the option.

Unless the committee provides otherwise, options generally are not transferable except by will, the laws of descent and distribution. The committee may provide that a non-qualified stock option may be transferred to a family member, as such term is defined under the applicable securities laws.

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Tax Limitations on Incentive Stock Options

The aggregate fair market value, determined at the time of grant, of our Common Stock with respect to incentive stock options that are exercisable for the first time by an option holder during any calendar year may not exceed $100,000. Options or portions thereof that exceed such limit will generally be treated as non-qualified stock options. No incentive stock option may be granted to any person who, at the time of the grant, owns or is deemed to own stock possessing more than 10% of our total combined voting power or that of any of our affiliates unless (i) the option exercise price is at least 110% of the fair market value of the stock subject to the option on the date of grant, and (ii) the term of the incentive stock option does not exceed five years from the date of grant.

Adjustments for Changes in Capital Structure and other Special Transactions

In the event of a stock dividend, stock split, or recapitalization, or a corporate reorganization in which we are a surviving corporation (and our shareholders prior to such transaction continue to own at least 50% of our capital stock after such transaction), including without limitation a merger, consolidation, split-up or spin-off, or a liquidation, or distribution of securities or assets other than cash dividends, the number or kinds of shares subject to the Plan or to any stock option award previously granted, and the exercise price, shall be adjusted proportionately by the committee to reflect such event.

In the event of a merger, consolidation, or other form of reorganization with or into another corporation (other than a merger, consolidation, or other form of reorganization in which we are the surviving corporation and our shareholders prior to such transaction continue to own at least 50% of the capital stock after such transaction), a sale or transfer of all or substantially all of the assets of the Company or a tender or exchange offer made by any corporation, person or entity (other than an offer made by us), all stock options held by any option holder shall be fully vested and exercisable by the option holder.

Furthermore, the committee, either before or after the merger, consolidation or other form of reorganization, may take such action as it determines in its sole discretion with respect to the number or kinds of shares subject to the Plan or any option under the Plan.

Amendment, Suspension or Termination

The committee may at any time amend, suspend, or terminate any and all parts of the Plan, any stock option award granted under the Plan, or both in such respects as the committee shall deem necessary or desirable, except that no such action may be taken which would impair the rights of any option holder with respect to any stock option award previously granted under the Plan without the option holder’s consent.

Description of Securities

Our authorized capital stock consists of 275,000,000 shares, of which 250,000,000 shares are designated as Common Stock par value $.001 per share, and 25,000,000 shares are designated as preferred stock, par value $.001 per share of which (i) no shares have been designated as Series A Preferred Stock, (ii) 1,764 shares have been designated as Series B Preferred Stock, (ii) 10,000 shares have been designated as Series C Preferred Stock and (iii) 2,000 shares have been designated as Series D Preferred Stock. As of December 31, 2018, we had 12,549,394 shares of Common Stock, no shares of Series A Preferred Stock, 0 shares of Series B Preferred Stock, 4,662 shares of Series C Preferred Stock and 2,000 shares of Series D Preferred Stock outstanding.

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ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

AgEagle is a party to a consulting agreement dated as of March 1, 2015 with GreenBlock Capital, LLC, or GreenBlock, which beneficially owns approximately 8.33% of our Common Stock. Under the terms of the agreement, the Company agreed to issue 368,099 (post-split) shares of the Company’s Common Stock on May 1, 2015, an additional 368,099 (post-split) shares of Common Stock on January 15, 2016 and 207,055 (post-split) stock options exercisable for five years from the issuance date at an exercise price per share of $0.06 pursuant to the consulting agreement. As of December 31, 2015, no shares had been issued to the consultant. The Company recognized $1,250,000 of consulting expense during 2015 and 2016 related to the value of the shares earned, which was based on the estimated fair value of the stock as of December 31, 2015, based on the terms of a transaction which ultimately closed in February 2016, as there was no dis-incentive for non-performance. No additional expense was recorded for the nine months September 30, 2017 for the Common Stock granted in connection with the strategic consulting agreement executed in March 2015. During 2015, AgEagle recorded $69,528 of non-cash compensation expense related to the vested stock options granted to GreenBlock. The consulting agreement terminated by mutual agreement of the parties on August 31, 2016. During 2016, AgEagle recognized $138,802 related to the stock options. During the nine months ended September 30, 2017, the Company recognized $6,397 of additional consulting expense related to the issuance of the Common Stock for the stock options as a result of the modification of the exercise price of the options from $2.60 per share to $0.10 per share.

On (i) December 15, 2016, the Company issued a promissory note with an aggregate principal amount of $30,000 to GreenBlock Capital, a related party, (ii) January 24, 2017, AgEagle issued a 2nd promissory note with an aggregate principal amount of $30,000 to GreenBlock, and (iii) June 14, 2017, a 3rd promissory note with an aggregate principal amount of $16,050 was issued to GreenBlock (the “Related Party Notes A”). The Related Party Notes A accrue interest at an annual rate of 2% and matured on November 6, 2017. On or about August 1, 2017, GreenBlock entered into extension and modification agreements with AgEagle whereby they agreed to extend the maturity date of the Related Party Notes A to February 28, 2018, and in exchange a conversion feature was added whereby the debt can be converted into AgEagle Common Stock at $2.00 per share, and amended the interest rate on the note retroactively to accrue at a rate of 8% annually.

Between the dates of March 15 and July 12, 2017, AgEagle issued seven new promissory notes totaling an aggregate amount of $55,000 to Bret Chilcott, who is our Chairman of the Board and President, and at the time was also our CEO. The promissory notes (the “Related Party Notes B”) accrue interest at an annual rate of 2% and matured on November 6, 2017. On or about August 1, 2017, Mr. Chilcott entered into extension and modification agreements with AgEagle whereby they agreed to extend the maturity date of the Related Party Notes B to February 28, 2018, and in exchange a conversion feature was added whereby the debt can be converted into AgEagle Common Stock at $2.00 per share, and amended the interest rate on the note retroactively to accrue at a rate of 8% annually.

Director Independence

The Board of Directors has reviewed the independence of our directors based on the listing standards of the NYSE American. Based on this review, the Board of Directors determined that each of Messrs. Begley, Gardner and Kull and Ms. Ingargiola are independent within the meaning of the NYSE American. In making this determination, our Board of Directors considered the relationships that each of these non-employee directors has with us and all other facts and circumstances our board of directors deemed relevant in determining their independence. As required under applicable NYSE American rules, we anticipate that our independent directors will meet in regularly scheduled executive sessions at which only independent directors are present.

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ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees

Our independent auditor, D. Brooks and Associates CPA’s billed an aggregate of $32,078 for the year ended December 31, 2018 audit and the quarterly reviews for the year ended December 31, 2018. D. Brooks and Associates CPA’s billed $26,076 for the December 31, 2017 audit, quarterly reviews for the year ended December 31, 2017 and audit related fees. In addition, $17,515 and $1,400 was billed for tax services in 2018 and 2017, respectively. Audit Fees and Audit Related Fees consist of fees billed for professional services rendered for auditing our Financial Statements, reviews of interim Financial Statements included in quarterly reports, services performed in connection with other filings with the Securities & Exchange Commission and related comfort letters and other services that are normally provided by our independent auditors in connection with statutory and regulatory filings or engagements. Tax Fees consists of fees billed for professional services for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and local tax compliance and consultation in connection with various transactions and acquisitions. All Other Fees consists of fees billed for professional services associated with the consent by auditors related to the audited financial statements of EnerJex and Agribotix and not paid to D.Brooks and Associates CPA’s.

  2018 2017
Audit Fees $32,078  $26,076 
Audit-Related Fees  1,000   1,064 
Tax Fees  17,515   1,400 
All Other Fees  21,000    
Total $71,593  $28,540 

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PART IV

ITEM 15.EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES

Exhibit No.Description
3.1Amended and Restated Articles of Incorporation, as currently in effect (incorporated by reference to Exhibit 3.1 to the Form 10-Q filed on August 14, 2008)

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3.2 Amended and Restated Bylaws, as currently in effect (incorporated by reference to Appendix C to Schedule 14A filed on June 6, 2013)
3.3Certificate of Amendment of Articles of Incorporation as filed with the Nevada Secretary of State on May 29, 2014 (incorporated herein by reference as Exhibit 3.1 on Current Report Form 8-K filed on May 29, 2014)
3.4 
3.3Certificate of Amendment of Articles of Incorporation (incorporated by reference as Exhibit 3.1 on Current Report Form 8-K filed on May 29, 2014)
3.5 Amended and Restated Certificate of Designation for Series A Preferred Stock (incorporated by reference to Exhibit 4.6 to the Form S-1/A filed on June 3, 2014)
3.63.4 Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock (incorporated herein by reference as Exhibit 4.1 on Current Report Form 8-K filed on March 11, 2015)
4.1 Specimen common stock certificate
3.5Certificate of Designation of Series C Preferred Stock filed with the Nevada Secretary of State on April 27, 2017 (incorporated herein by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on April 28, 2018)
3.6Amendment to Certificate of Designation of Series C Preferred Stock (incorporated by reference to Exhibit 4.33.3 to the Form S-1/A filed on May 27, 2008)
4.2Specimen Series A Preferred Stock Certificate (incorporated by reference to Exhibit 4.4 to the Form S-1/A filed on June 3, 2014)
4.3Specimen Series B Convertible Preferred Stock Certificate (incorporated herein by reference as Exhibit 4.2 on Current Report Form 8-K filed on March 11, 2015)29, 2018)
4.4 
3.7Certificate of Designation for Series A Preferred Stock (incorporated by reference to Exhibit 4.1 to the Form 8-K filed on January 6, 2011).
4.5 Form of Warrant to Purchase Common Stock (incorporated herein by reference as Exhibit 4.3 on Current Report Form 8-K filed on March 11, 2015)
4.63.8 FormAmended and Restated Certificate of Placement Agent Warrant (incorporated herein by reference as Exhibit 4.4 on Current Report Form 8-K filed on March 11, 2015)
10.1FormDesignation of OfficerPreferences, Rights and Director Indemnification AgreementLimitations of the 10% Series A Redeemable Perpetual Preferred Stock (incorporated by reference to Exhibit 10.23.1 to the Form 8-K filed on October 16, 2008)March 29, 2018)
10.2 
3.9Certificate of Amendment 4 to Joint Exploration Agreement effective asAmended and Restated Certificate of November 6, 2008 between MorMeg, LLCDesignation of Preferences, Rights and EnerJex Resources, Inc.Limitations of the 10% Series A Redeemable Perpetual Preferred Stock (incorporated by reference to Exhibit 10.15 to the Form 10-K filed July 14, 2009)
10.3Amendment 5 to Joint Exploration Agreement effective as of December 31, 2009 between MorMeg LLC and EnerJex Resources, Inc. (incorporated by reference to Exhibit 10.15 to the Form 10-Q filed on February 16, 2010)
10.4Amendment 6 to Joint Exploration Agreement effective as of March 31, 2010 between MorMeg LLC and EnerJex Resources, Inc. (incorporated by reference to Exhibit 10.24 to the Form 10-K filed on July 15, 2010)
10.5Amended and Restated EnerJex Resources, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.13.2 to the Form 8-K filed on October 16, 2008)March 29, 2018)
10.6 Joint Development Agreement between
3.10Certificate of Amendment to the Articles of Incorporation of EnerJex Resources, Inc. and Haas Petroleum, LLC dated December 31, 2010to change the company’s name (incorporated by reference to Exhibit 10.13.4 to the Form 8-K filed on January 27, 2011).March 29, 2018)
10.7 Joint Operating Agreement between
3.11Certificate of Amendment to the Articles of Incorporation of EnerJex Resources, Inc. and Haas Petroleum, LLC and MorMeg, LLC dated December 31, 2010to effect a 1-for-25 reverse stock split (incorporated by reference to Exhibit 10.23.5 to the Form 8-K filed on January 27, 2011).March 29, 2018)
10.8 
3.12Articles of Merger, dated March 26, 2018, by and between AgEagle Aerial Systems, Inc. and AgEagle Merger Sub, Inc.(incorporated by reference from Exhibit 3.6 on Form 8-K filed on March 29, 2018)
3.13Amended and Restated CreditBylaws, as currently in effect (incorporated by reference to Appendix C to Schedule 14A filed on May 22, 2013)
3.14Certificate of Designation of Series D 8% Preferred Stock filed with the Nevada Secretary of State on December 26, 2018 (incorporated herein by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on December 28, 2018)
4.1Form of 8% Convertible Debenture due November 6, 2016 (Incorporated by reference to the Registration Statement on Form S-1 (Reg. No. 333-226324) originally filed on July 24, 2018)

46 

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4.2Form of 8% Convertible Debenture due June 30, 2017 (Incorporated by reference to the Registration Statement on Form S-1 (Reg. No. 333-226324) originally filed on July 24, 2018)
4.3Common Stock Purchase Warrant, dated as of December 27, 2018 issued to Alpha Capital Anstalt (incorporated herein by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on December 28, 2018)
10.2Incubator Lease Agreement, dated October 3, 2011August 28, 2015, between the City of Neodosha, Kansas and the Registrant (Incorporated by reference to the Registration Statement on Form S-1 (Reg. No. 333-226324) originally filed on July 24, 2018)
10.32017 Equity Incentive Plan of the Registrant (Incorporated by reference to the Registration Statement on Form S-1 (Reg. No. 333-226324) originally filed on July 24, 2018)
10.5Agreement, dated May 13, 2016, between the Registrant and Botlink, LLC (Incorporated by reference to the Registration Statement on Form S-1 (Reg. No. 333-226324) originally filed on July 24, 2018 )
10.7Offer Letter, dated July 9, 2017, between the Registrant and Barrett Mooney (incorporated herein by reference to Exhibit 10.1 on Form 8-K filed on October 6, 2011).July 19, 2018)
10.9 Option and Joint Development Agreement by and among Registrant and MorMeg, LLC
10.8Form of Deed in Lieu of Foreclosure, dated August 2011March 26, 2018 (incorporated herein by reference to Exhibit 10.1 on Form 8-K filed on November 15, 2011).March 29, 2018)
10.10 First Amendment
10.9Form of Release and Covenant Not to Amended and Restated Credit AgreementSue, dated December 14, 2011March 26, 2018 (incorporated herein by reference to Exhibit 10.2 on Form 8-K filed on December 14, 2011).March 29, 2018)
10.11 Second Amendment
10.10Form of Promissory Note between EnerJex Resources, Inc. and Pass Creek Resources, LLC dated March 26, 2018 (incorporated by reference to AmendedExhibit 10.3 on Form 8-K filed on March 29, 2018)
10.11Form of Additional Issuance and Restated CreditExchange Agreement, dated August 31, 2012March 26, 2018, by and among EnerJex Resources, Inc. and the investor named therein, relating to the purchase of shares of Series C Preferred Stock (incorporated hereinby reference to Exhibit 10.4 on Form 8-K filed on March 29, 2018)
10.12Voting Agreement, dated as of October 19, 2017, by and among EnerJex Resources, Inc. and a principal stockholder of AgEagle (incorporated by reference to Exhibit 10.1 on Form 8-K filed October 20, 2017)
10.13Form of Exchange Agreement dated November 20, 2017 between the Registrant and Agribotix LLC (Incorporated by reference to the Registration Statement on Form S-1 (Reg. No. 333-226324) originally filed on July 24, 2018)
10.14Form of Agribotix Distribution and Resale Agreement dated November 20, 2017 (Incorporated by reference to the Registration Statement on Form S-1 (Reg. No. 333-226324) originally filed on July 24, 2018)

47 

Table of Contents

10.15Form of AgEagle Dealer Agreement (Incorporated by reference to the Registration Statement on Form S-1 (Reg. No. 333-226324) originally filed on July 24, 2018
10.16ASSET PURCHASE AGREEMENT, dated as of July 25, 2018, into by and among the (i) Registrant, (ii) EAGLE AERIAL SYSTEMS, INC., a Nevada corporation and wholly-owned subsidiary of Registrant, (iii) AGRIBOTIX, LLC, a Colorado limited liability company, (iv) the individuals listed on the signature page thereof, and (v) Paul Hoff, in his capacity as the representative of the Seller Investor. (Incorporated by reference to Exhibit 10.1 on Form 8-K filed on November 8, 2012)July 31, 2018).
10.12 Third Amendment to Amended and Restated Credit
10.17Securities Purchase Agreement, dated November 2, 2012December 27, 2018, by and between the Registrant and Alpha Capital Anstalt (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on December 28, 2018)
10.18Registration Rights Agreements, dated December 27, 2018, by and between the Registrant and Alpha Capital Anstalt (incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on November 8, 2012).December 28, 2018)
10.13 Amended
10.19*Offer Letter for Nicole Fernandez-McGovern dated January 1, 2019
10.20*AgEagle Employee Confidentiality and Restated EmploymentProprietary Rights Agreement between AgEagle Aerial Systems Inc and Nicole Fernandez-McGovern dated January 1, 2019
10.21*Colorado Commercial Lease Agreement by and amongbetween Advanced Radar Company and Agribotix LLC, dated June 1, 2018
10.22*AgEagle Building Lease Extension Letter dated August, 17, 2018
14.1Code of Ethics of the Registrant and Robert G. Watson, Jr. dated December 31, 2012 (incorporated hereinApplicable To Directors, Officers And Employees (Incorporated by reference to Exhibit 10.1 on Form 8-K filed on January 4, 2013).
10.14Fourth Amendment to Amended and Restated Credit Agreement by and among Registrant and Texas Capital Bank dated December 31, 2012 (incorporated herein by reference to Exhibit 10.2 on Form 8-K filed on January 30, 2013).
10.15First Amendment to Amended & Restated Mortgage Security Agreement, Financing Statement and Assignment of Production by and among Working Interest, LLC and Texas Capital Bank dated December 31, 2012 (incorporated herein by reference to Exhibit 10.3 on Form 8-K filed on January 30, 2013).
10.16Mortgage, Security Agreement, Financing Statement and Assignment of Production and Revenues by and among Working Interest, LLC and Texas Capital Bank dated December 31, 2012 (incorporated herein by reference to Exhibit 10.4 on Form 8-K filed on January 30, 2013).
10.172013 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.1 onthe Registration Statement on Form S-8S-1 (Reg. No. 333-226324) originally filed on June 12, 2013)July 24, 2018)
10.18 Fifth Amendment to Amended and Restated Credit Agreement by and among Registrant and Texas Capital Bank, N.A. dated September 30, 2013 (incorporated herein by reference to Exhibit 10.1 on Form 8-K filed October 1, 2013).
10.1921.1* Sixth Amendment to Amended and Restated Credit Agreement by and among Registrant and Texas Capital Bank, N.A. dated November 19, 2013 (incorporated by reference to Exhibit 10.37 on Form 10-Q filed May 13, 2014).List of Subsidiaries
10.20 Exchange Agreement between EnerJex Resources, Inc. and holders
31.1*Rule 13(a)-14(a)/15(d)-14(a) Certification of Series A preferred stock (incorporated by reference to Exhibit 10.38 on Form S-1/A Amendment No. 2 filed June 3, 2014).principal executive officer

 48 

10.2131.2* Seventh Amendment to Amended and Restated Credit Agreement by and among Registrant and Texas Capital Bank, N.A. dated May 22, 2014 (incorporated by reference to Exhibit 10.1 to Form 8-K filed May 27, 2014).Rule 13(a)-14(a)/15(d)-14(a) Certification of principal financial officer
10.22 Form of Securities Purchase Agreement dated as of March 11, 2015 (incorporated herein by reference as Exhibit 10.1 on Current Report Form 8-K filed on March 11, 2015)
10.2332.1* Eighth Amendment to Amended and Restated Credit Agreement by and among Registrant and Texas Capital Bank, N.A. dated August 13, 2014 (incorporated by reference as Exhibit 10.23 on Form 10-K filed March 31, 2015).Section 1350 Certification of principal executive officer
10.24 Ninth Amendment to Amended and Restated Credit Agreement by and among Registrant and Texas Capital Bank, N.A. dated April 29, 2015 (incorporated by reference to Exhibit 10.1 to Form 8-K filed May 5, 2015).
10.2532.2* Purchase Agreement bySection 1350 Certification of principal financial officer and among Registrant and Northland Securities, Inc. dated May 8, 2015 (incorporated by reference as Exhibit 1.1 of Form 8-K filed May 8, 2015.)principal accounting officer
10.26 Tenth Amendment to the Amended and Restated Credit Agreement by and among Registrant and Texas Capital Bank, N.A. dated September 8, 2015 (incorporated by reference to Exhibit 10.26 of Form 10-Q filed November 16, 2015).
10.27Eleventh Amendment to Amended and Restated Credit Agreement by and among Registrant and Texas Capital Bank, N.A. dated November 16, 2015 (incorporated by reference to Exhibit 10.1 to Form 8-K filed November 16, 2015).
10.28

Forbearance Agreement dated April 4, 2016 (incorporated by reference to Exhibit 10.1 to Form 8-K filed June 3, 2016).

10.29

Third Amendment to Forbearance Agreement dated July 29, 2016 (incorporated by reference to Exhibit 10.1 to Form 8-K filed on August 1, 2016.

10.30Letter Agreement dated February 10, 2017, by and among Texas Capital Bank, N.A., Iberia Bank, PWCM Investment Company IC LLC, EnerJex Resources, Inc., EnerJex Kansas, Inc., Black Sable Energy, LLC, Black Raven Energy, Inc. and Adena, LLC (incorporated by reference to Exhibit 10.1 on Form 8-K filed February 14, 2017).
10.31

Loan Sale Agreement dated February 10, 2017, by and among Texas Capital Bank, N.A., Iberia Bank, PWCM Investment Company IC LLC, EnerJex Resources, Inc., EnerJex Kansas, Inc., Black Sable Energy, LLC, Black Raven Energy, Inc., and Adena, LLC (incorporated by reference to Exhibit 10.2 on Form 8-K filed February 14, 2017).

10.32

Consulting Agreement dated February 10, 2017, by and between Registrant and Douglas Wright (incorporated by reference to Exhibit 10.3 on Form 8-K filed February 14, 2017).

10.33

Employment Agreement dated February 10, 2017, by and between Registrant and Louis G. Schott (incorporated by reference to Exhibit 10.4 on Form 8-K filed February 14, 2017).

10.34

Separation and General Release Agreement dated February 10, 2017, by and between Registrant and Robert G. Watson, Jr.*

21.1Subsidiaries*
23.1Consent of Cobb & Associates, Inc.*
23.2Cobb & Associates Letter Report dated March 15, 2017*
23.3Cobb & Associates Letter Report dated February 29, 2016*
24.1Power of Attorney (included with signatures).*
31.1Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.1Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2Certificate of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101.INS XBRL Instance Document*INSTANCE DOCUMENT
101.SCH XBRL Taxonomy Extension Schema Document*TAXONOMY EXTENSION SCHEMA
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document*TAXONOMY EXTENSION CALCULATION LINKBASE
101.DEF XBRL Taxonomy Extension Definition Linkbase Document*TAXONOMY EXTENSION DEFINITION LINKBASE
101.LAB XBRL Taxonomy Extension Label Linkbase Document*TAXONOMY EXTENSION LABEL LINKBASE
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document*TAXONOMY EXTENSION PRESENTATION LINKBASE

 

* Filed herewith.herewith

 

49

48 

Table of Contents 

 

SIGNATURES

 

Pursuant to the requirements ofIn accordance with Section 13 or 15(d) of the Securities Exchange Act, of 1934, the registrant has duly caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

ENERJEX RESOURCES,AGEAGLE AERIAL SYSTEMS INC.
   
Dated : March 28, 2019By:/s/ Louis G. SchottBarrett Mooney
 

Louis G. Schott

Interim

Barrett Mooney
Chief Executive Officer

   
Date:Dated : March 31, 201728, 2019

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

NameBy:TitleDate/s/ Nicole Fernandez-McGovern
 
/s/ Louis G. SchottInterim Chief Executive Officer,March 31, 2017

Louis G. Schott

(Principal Executive Officer), SecretaryNicole Fernandez-McGovern
 
/s/ Douglas M. WrightChief Financial OfficerMarch 31, 2017
Douglas M. Wright
/s/ Ryan A. LoweDirectorMarch 31, 2017
Ryan A. Lowe
/s/ Lance W. HelfertDirectorMarch 31, 2017
Lance Helfert
/s/ James G. MillerDirectorMarch 31, 2017
James G. Miller
/s/ Richard E. MenchacaDirectorMarch 31, 2017
Richard E. Menchaca

 

50


Index to Financial StatementsINDEX TO FINANCIAL STATEMENTS

 

ContentsPage No.
Index to Financial StatementsF-1
  
Report of Independent Registered Public Accounting FirmF-2
  
Consolidated Balance Sheets at December 31, 20162018 and December 31, 20152017F-3
  
Consolidated Statements of Operations for the YearYears Ended December 31, 20162018 and December 31, 20152017F-4
  
Consolidated Statement of Stockholders’ Equity (Deficit) Equity for the YearYears Ended December 31, 20162018 and December 31, 20152017F-5
  
Consolidated StatementStatements of Cash Flows for the YearYears Ended December 31, 20162018 and December 31, 20152017F-6
  
Notes to the Consolidated Financial StatementsF-7

 

F-1

F-1

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Report of Independent Registered Public Accounting Firm

To Thethe Board of Directors and
Stockholders of

EnerJex Resources AgEagle Aerial Systems, Inc.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of EnerJex ResourcesAgEagle Aerial Systems, Inc. (“The Company”)(the Company) as of December 31, 20162018 and 2015,2017, and the related consolidated statements of operations, stockholders’ deficiency,equity (deficit), and cash flows for the years ended December 31, 20162018 and 2015. 2017, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of AgEagle Aerial Systems, Inc. as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years ended December 31, 2018 and 2017, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe Company’s consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatements.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included considerationAs part of our audits, we are required to obtain an understanding of internal control over financial reporting, as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’sCompany’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion,

D. Brooks and Associates CPA’s, P.A

We have served as the financial statements referred to above present fairly, in all material respects, the financial position of EnerJex Resources Inc., as of December 31, 2016 and 2015 and the results of its operations, and its cash flows for the years ended December 31, 2016 and 2015 in conformity with accounting principles generally accepted in the United States of America.Company’s auditor since 2015.

Palm Beach Gardens, Florida

March 28, 2019

 

The accompanying consolidated financial statements have been prepared assuming that the Company is a going concern. As discussed in Note 2 of the financial statements, the Company plans a significant restructuring which if successful will forgive substantially all of its outstanding debt obligations. Closing of this transaction is scheduled on or before April 30, 2017. Management’s plans as to this matters are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

D. Brooks and Associates CPA’s, P.A. 4440 PGA Blvd., Suite 104, Palm Beach Gardens, FL 33410 – (561) 429-6225

 

 

RBSM, LLP

New York, New York

March 31, 2017

Las Vegas, NV   Kansas City, MO   Houston, TX   New York, NY   Washington DC

Mumbai, India   Athens, Greece   San Francisco, CA   Beijing, China

Member ANTEA INTERNATIONAL with offices worldwide

F-2

F-2

 

AGEAGLE AERIAL SYSTEMS, INC.

EnerJex Resources, Inc. and SubsidiariesCONSOLIDATED BALANCE SHEETS

Consolidated Balance Sheets

 

  December 31, 
  2016  2015 
��      
Assets        
Current Assets:        
Cash unrestricted $128,035  $3,101,682 
Restricted cash  50,000   - 
Accounts receivable  600,255   977,488 
Derivative receivable  10,570   2,531,401 
Inventory  185,733   144,327 
Marketable securities  210,990   210,990 
Deposits and prepaid expenses  493,384   247,325 
Total current assets  1,678,967   7,213,213 
         
Non-current assets:        
Fixed assets, net of accumulated depreciation of $1,817,711 and $1,658,073  2,077,055   1,995,010 
Oil & gas properties using full cost accounting, net of accumulated DD&A of $15,189,716 and $14,935,386  3,437,030   11,706,939 
Other non-current assets  798,809   919,239 
Total non-current assets  6,312,894   14,621,188 
Total assets $7,991,861  $21,834,401 
         
Liabilities and Stockholders’ (Deficit) Equity        
         
Current liabilities:        
Accounts payable $294,241  $1,142,842 
Accrued liabilities  1,535,165   1,131,057 
Current portion of long term debt  17,925,000   1,986,660 
Total current liabilities  19,754,406   4,260,559 
         
Non-Current Liabilities:        
Asset retirement obligation  3,314,191   3,091,478 
Long-term debt  -   16,625,000 
Other long-term liabilities  3,401,149   390,937 
Total non-current liabilities  6,715,340   20,107,415 
Total liabilities  26,469,746   24,367,974 
         
Commitments and Contingencies        
         
Stockholders’ (Deficit) Equity:        
10% Series A Cumulative Redeemable Perpetual Preferred Stock, $.001 par value, 25,000,000 shares authorized; shares issued and outstanding 938,248 at December 31, 2016 and December 31, 2015  938   938 
Series B Convertible Preferred stock, $.001 par value, 1,764 shares authorized, issued and outstanding at December 31, 2016 and December 31, 2015  2   2 
Common stock, $0.001 par value, 250,000,000 shares authorized; shares issued and outstanding 8,423,936 at December 31, 2016 and December 31, 2015  8,424   8,424 
Paid in capital  69,090,613   68,848,944 
Accumulated deficit  (87,577,862)  (71,391,881)
Total stockholders’ (deficit)  (18,477,885)  (2,533,573 
Total liabilities and stockholders’ (deficit) equity $7,991,861  $21,834,401 
  As of December 31,
ASSETS 2018 2017
CURRENT ASSETS:        
 Cash $2,601,730  $35,289 
 Accounts receivable  93   255 
 Inventories  149,482   158,632 
 Prepaid and other current assets  80,370   3,384 
 Total current assets  2,831,675   197,560 
         
 Property and equipment, net  28,374   38,703 
 Investment in unconsolidated investee     75,000 
 Intangible assets, net  677,118    
 Goodwill  3,270,984    
 Total assets $6,808,151   311,263 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)        
 Accounts payable $197,827  $426,154 
 Accrued expenses  41,841   59,354 
 Accrued interest  1,333   185,335 
 Contract liability  4,892    
 Payroll liabilities  13,521   5,521 
 Convertible notes payable     1,160,005 
 Promissory note  40,998    
 Promissory notes - related party     131,050 
 Total current liabilities  300,412   1,967,419 
 Total liabilities  300,412   1,967,419 
         
COMMITMENTS AND CONTINGENCIES (SEE NOTE 11)        
         
STOCKHOLDERS’ EQUITY (DEFICIT):        
Preferred stock, $0.001 par value, 25,000,000 shares authorized:        
Preferred stock, Series B, $0.001 par value, 0 shares authorized, 0 shares issued and outstanding at December 31, 2018      
Preferred stock, Series C Convertible, $0.001 par value, 10,000 shares authorized, 4,662 shares issued and outstanding at December 31, 2018  5    
Preferred stock, Series D Convertible, $0.001 par value, 2,000 shares authorized, 2,000 shares issued and outstanding at December 31, 2018  2    
Common Stock, $0.001 par value, 250,000,000 shares authorized, 12,549,394 shares issued and outstanding at December 31, 2018  12,549    
Common Stock, $0.0001 par value, 100,000,000 shares authorized, 4,200,000 shares issued and outstanding at December 31, 2017     420 
Additional paid-in capital  12,171,274   1,939,832 
Accumulated deficit  (5,676,091)  (3,596,408)
Total stockholders’ equity (deficit) $6,507,739  $(1,656,156)
Total liabilities and stockholders’ equity (deficit) $6,808,151  $311,263 

 

See Accompanying Notes to Consolidated Financial Statements.

 

F-3

F-3

 

AGEAGLE AERIAL SYSTEMS, INC.

EnerJex Resources, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF OPERATIONS

Consolidated Statements of Operations

 

  Year Ended December 31, 
  2016  2015 
       
Crude oil revenues $2,390,024  $4,525,089 
Natural gas revenues  71,703   353,633 
Total revenues  2,461,727   4,878,722 
         
Expenses:        
Direct operating costs  2,661,258   4,501,940 
Depreciation, depletion and amortization  413,967   1,311,446 
Impairment of oil and gas assets  8,032,670   48,930,087 
Professional fees  310,471   680,860 
Salaries  1,642,593   1,927,552 
Administrative expense  539,571   636,459 
Total expenses  13,600,530   57,988,344 
Loss from operations  (11,138,803)  (53,109,622)
         
Other income (expense):        
Interest expense  (1,911,906)  (1,293,407)
Gain (loss) on mark to market of derivative contracts  (2,531,401)  (2,194,679 
Other income (loss)  2,406,340   4,675,854 
Total other income (expense)  (2,036,967)  1,187,768 
(Loss) income before provision for income taxes  (13,175,770)  (51,921,854)
Provision for income taxes  -   - 
         
Net (loss) $(13,175,770) $(51,921,854)
         
Net (loss) $(13,175,770) $(51,921,854 
Preferred dividends  (3,010,211)  (1,798,274)
Net (loss) attributable to common stockholders $(16,185,981) $(53,720,128)
Net (loss) per common share basic and diluted  (1.92)  (6.50)
Weighted Average Shares  8,423,936   8,265,716 
  For the Year Ended December 31,
  2018 2017
 Revenues $107,813  $116,035 
 Cost of sales  61,680   93,359 
 Gross Profit  46,133   22,676 
         
 Operating Expenses:        
 Selling expenses  77,139   31,004 
 General and administrative  1,333,371   247,837 
 Professional fees  696,222   410,698 
 Total Operating Expenses  2,106,732   689,539 
 Loss from Operations  (2,060,599)  (666,863)
         
Other Income (Expenses):        
Other income  13,333   12,458 
Interest expense  (32,417)  (142,810)
Total Other Expenses, Net  (19,084)  (130,352)
Loss Before Income Taxes  (2,079,683)  (797,215)
Provision for income taxes      
Net Loss $(2,079,683) $(797,215)
         
Net Loss Per Share - Basic and Diluted $(0.25) $(0.19)
         
Weighted Average Number of Shares Outstanding During the Period -- Basic and Diluted  8,175,639   4,200,000 

 

See Accompanying Notes to Consolidated Financial Statements.

 

F-4

F-4

 

AGEAGLE AERIAL SYSTEMS, INC.

EnerJex Resources, Inc. and SubsidiariesCONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE YEAR ENDED DECEMBER 31, 2018

  Par $ .0001 Preferred Stock Series A Shares Preferred Stock Series A Amount Par $ .0001 Preferred Stock Series B Shares Preferred Stock Series B Amount Par $ .0001 Preferred Stock Series C Shares Preferred Stock Series C Amount Par $ .0001 Preferred Stock Series D Shares Preferred Stock Series D Amount Par $ .0001 Common Shares Common Stock Amount Additional Paid-In Capital Accumulated Deficit Total
Stockholders’ Deficit
Balance as of December 31, 2016 37,530  $  71  $     $     $  336,957  $420  $1,902,161  $(2,799,193) $(896,612)
Pre-merger issuances of shares  42,470      (56)     12            94,756             
Pre-merger conversion of shares                          220,083             
Issuance of employee and director stock options                                6,397      6,397 
Warrants issued with convertible promissory note                                9,082      9,082 
Share compensation period costs                                22,192      22,192 
Net loss                                   (797,215)  (797,215)
Balance as of December 31, 2017  80,000      14      12            651,796   420   1,939,832   (3,596,408)  (1,656,156)
Pre-merger issuances and conversions of shares  (80,000)     (6)     (12)           3,548,204             
Sale of Series C preferred stock              250                  250,000      250,000 
Founder stock returned to company                          (75,000)  (75)  75       
Shares repurchased from shareholder                          (139,567)  (140)  (210,503)     (210,643)
Conversion of Series B and C preferred stock        (8)     (2,467)  (2)        1,616,470   1,616   (1,614)      
Exercise of options                          55,801   56   (56)      
Issuance of Common Stock for consulting services                          185,000   185   400,415      400,600 
AgEagle debt conversion into Common Stock                          787,891   788   1,503,015      1,503,803 
AgEagle shareholder Common Stock conversion to EnerJex common shares              2,056   2         2,757,063   6,537   (6,539)      
Acquisition of Agribotix                          1,275,000   1,275   2,998,725      3,000,000 
Issuance of common and preferred stock for EnerJex shareholders upon merger              197            1,886,736   1,887   (762,662)     (760,775)
Issuance of Series C Common Stock in connection with merger, net of $20K in fees              4,626   5               3,979,995      3,980,000 
Issuance of Series D preferred stock and warrants for cash                    2,000   2         1,969,998      1,970,000 
Share compensation period costs                                110,593      110,593 
Net loss                                   (2,079,683)  (2,079,683)
Balance as of December 31, 2018    $     $  4,662  $5  2,000  $2  12,549,394  $12,549  $12,171,274  $(5,676,091) $6,507,739 

Note: Amounts have been adjusted to reflect 25 to 1 stock split upon merger

See Accompanying Notes to Consolidated Statement of Changes in Stockholders’ Equity (Deficit).

 

                              
                    Accumulated         
  10% Series A  Series B        Other        Total 
  Preferred Stock  Preferred Stock  Common Stock  Comprehensive  Paid In  Retained  Stockholders’ 
  Shares  Amount  Shares  Amount  Shares  Amount  Income  Capital  Deficit  

(Deficit)

 
Balance, January 1, 2015  751,815   752           7,643,114   7,643   (552,589)  63,825,998   (17,280,817)  46,000,987 
Dividend received from Oakridge Energy                          552,589           552,589 
Stock issued for services  3,000   3           17,500   18       23,979       24,000 
Stock based compensation                              396,124       396,124 
Sale of commons stock                  763,322   763       824,643       825,506 
Sale of series A preferred stock  185,433   1,832                       2,014,410       2,014,595 
Sale if series B preferred stock          1,764   2               1,763,790       1,763,792 
Preferred stock dividends                                  (2,189,210)  (2,189,210)
Net loss for the year                                  (51,921,854)  (51,921,854)
Balance, December 31, 2015  938,248   938   1,764   2   8,423,936   8,424   -   68,848,944   (71,391,881)  (2,533,573)
Stock based compensation                              241,669       241,669 
Preferred stock dividends                                  (3,010,211)  (3,010,211)
Net loss for the year                                  (13,175,770)  (13,175,770)
Balance, December 31, 2016  938,248  $938   1,764  $2   8,423,936  $8,424  $-  $69,090,613  $(87,757,862) $(18,477,885)

F-5

AGEAGLE AERIAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

  For the Year Ended December 31,
  2018 2017
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss $(2,079,683) $(797,215)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation and amortization  65,362   18,453 
Issuance of employee and director stock options     6,397 
Stock-based compensation  110,593   22,192 
Shares issued for professional services  400,600    
Warrants issued with convertible promissory note     9,082 
Accretion for debt discounts, warrants and issuance costs     25,000 
         
Changes in assets and liabilities:        
Accounts receivable  163   18,631 
Inventories  12,836   (1,228)
Prepaid expenses and other assets  (76,986)  (10,228)
Deferred Revenue  (1,927)   
Accounts payable  (228,327)  349,729 
Accrued liabilities  (17,513)  (67,709)
Accrued interest  28,744   106,315 
Accrued payroll liabilities  8,000   (8,297)
Net cash used in operating activities  (1,778,138)  (328,878)
         
CASH FLOW FROM INVESTING ACTIVITIES:        
Purchases of fixed assets     (12,775)
Cash received in reverse merger  256,255    
Payments of liabilities assumed in reverse merger  (891,474)    
Acquisition of Agribotix  (925,000)  (75,000)
Net cash used in investing activities  (1,560,219)  (87,775)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Proceeds from the issuance of convertible   notes payable     335,005 
Proceeds from the issuance of promissory note – related party     101,050 
Payments of the principle on note payable  (84,559)   
Shares repurchased from shareholder  (210,643)   
Proceeds from the issuance of Common Stock and Series C convertible preferred stock in connection with merger, net of $20,000 in fees  3,980,000    
Proceeds from the sale of Series C convertible preferred stock  250,000    
Proceeds from the issuance of Common Stock   Series D  1,970,000    
Net cash provided by financing activities  5,904,798   436,055 
         
Net increase in cash  2,566,441   19,402 
Cash at beginning of period  35,289   15,887 
Cash at end of period $2,601,730  $35,289 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Interest cash paid $39,313  $ 
Income taxes paid $  $ 
         
NON-CASH INVESTING AND FINANCING ACTIVITIES:        
Assets acquired (liabilities assumed) in reverse merger:        
Cash $256,255  $ 
Accounts payable  (891,474)   
Promissory note  (125,556)   
Net liabilities assumed $(760,775) $ 
Conversion of debt into Common Stock $1,503,801  $ 
Conversion of Series B and C preferred stock into Common Stock $613  $ 
Acquisition of Agribotix:        
Issuance of Common Stock as consideration $3,000,000  $ 
Cash paid in the prior year  75,000    
Deferred revenue  6,819    
Inventory  (3,685)   
Fixed assets  (7,650)   
Intangible assets  (724,500)   
Goodwill  (3,270,984)   
Cash paid for acquisition $(925,000) $ 

 

See Accompanying Notes to Consolidated Financial Statements.

 

F-6

F-5

 

EnerJex Resources, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

  Year Ended December 31, 
  2016  2015 
Cash flows from operating activities        
Net (loss) $(13,175,770) $(51,921,854)
Depreciation, depletion and amortization  413,967   1,311,446 
Impairment of oil and gas assets  8,032,670   48,930,087 
Stock, options and warrants issued for services  241,669   420,103 
Accretion of asset retirement obligation  225,480   257,712 
Settlement of asset retirement obligations  (2,767)  (2,244)
(Gain) loss on derivatives  2,520,831   2,190,350 
Loss on sale of fixed assets  -   13,661 
Adjustments to reconcile net (loss) (used in) operating activities:        

Changes in current assets and liabilities

        
Accounts receivable  377,233   301,021 
Inventory  (41,406)  103,891 
Deposits and prepaid expenses  (246,059)  77,014 
Accounts payable  (848,601)  (1,899,993)
Accrued liabilities  404,108   70,131 
Cash flows used in operating activities  (2,098,645)  (148,675)
         
Cash flows from investing activities        
Purchase of fixed assets  (241,683)  (7,876)
Oil and gas properties additions  (17,089)  (251,821)
Sale of oil and gas properties  -   2,867,305 
Proceeds from sale of fixed assets  -   33,142 
Increase in restricted cash  (50,000)    
Dividend received from Oakridge Energy  -   1,360,172 
Cash flows (used in) investing activities  (308,772)  4,000,922 
         
Cash flows from financing activities        
Proceeds from sale of stock  -   4,603,812 
Repayments of long-term debt  (686,660)  (4,935,595)
Borrowings on long-term debt  -   500,000 
Preferred stock dividends paid  -   (1,798,274)
Deferred financing costs  120,430   73,968 
Cash flows (used in) financing activities  (566,230)  (1,556,089)
(Decrease) increase in cash and cash equivalents  (2,973,647)  2,296,158 
Cash and cash equivalents, beginning  3,101,682   805,524 
Cash and cash equivalents, end $128,035  $3,101,682 
         
Supplemental disclosures:        
Interest paid $922,072  $840,513 
Income taxes paid $-  $- 
Non-cash investing and financing activities:        
Share-based payments issued for services $241,669  $420,103 
Preferred dividends payable $3,010,211  $390,936 

See Notes to Consolidated Financial Statements.

F-6

AGEAGLE AERIAL SYSTEMS INC.

EnerJex Resources, Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

Notes to Consolidated Financial Statements

 

Note 1 -– Description of Business

AgEagle Aerial Systems, Inc. (“AgEagle” or “the Company”) was created to pioneer, innovate and advance aerial imaging data collection and analytics technologies capable of addressing the impending food and environmental sustainability crises that threaten the planet. The Company’s daily efforts are focused on delivering the metrics, tools and strategies necessary to define and implement intelligent sustainability and precision farming solutions that solve important problems confronting the agricultural industry. Since its founding in 2010, the Company has remained intent on becoming a trusted partner to major food manufacturers and precision growers seeking to adopt and support productive agricultural approaches to better farming practices which limit impact on natural resources, reduce reliance on inputs and materially increase crop yields and profits.

 The Company designs, produces, distributes and supports technologically-advanced small unmanned aerial vehicles (UAVs or drones) that AgEagle offers for sale commercially to the precision agriculture industry. In addition to UAV sales, in late 2018, the Company introduced a new drone-leasing program, alleviating farmers and agribusinesses from significant upfront costs associated with purchasing a drone, while also relieving them from ongoing drone maintenance and support requirements. Additionally, the new program provides the option of engaging a trained AgEagle pilot to operate the drone and manage the entire image collection process, creating a truly turnkey aerial imagery capture solution for its customers.

Additionally, the Company recently announced a new service offering using its leased UAVs and associated data processing services for the sustainable agriculture industry.AgEagle is the nation’s first drone-based aerial imagery company to utilize leading-edge data capture technology and customized analytics solutions to help promote and proactively support corporate and farming sustainability initiatives.

On August 28, 2018, AgEagle acquired all right, title and interest in and to all assets owned by Agribotix, LLC to be utilized in their business of providing integrated agricultural drone solutions and drone-enabled software technologies and services for precision agriculture. AgEagle’s management believes that purchasing Agribotix’s primary product,FarmLens™, will benefit the Company and its shareholders by developing important vertically integrated products and services.FarmLens is a subscription cloud analytics service that processes data, primarily collected with a drone such as ours, and makes such data actionable by farmers and agronomists.FarmLens is currently sold by the Company as a subscription service and offered either standalone or in a bundle with drone platforms manufactured by leading drone providers like AgEagle, DJI and senseFly.

The Company is headquartered in Neodesha, Kansas. Its website address is http://www.ageagle.com.

Corporate History; Recent Business Combinations

On March 26, 2018 (the “Merger Date”), the Company consummated the transactions contemplated by that certain Agreement and Plan of Merger (the “Merger Agreement”), dated October 19, 2017, pursuant to which AgEagle Merger Sub, Inc., a Nevada corporation and the Company’s wholly-owned subsidiary, merged with and into AgEagle Aerial Systems Inc., a privately held company organized under the laws of the state of Nevada (“AgEagle Sub”), with AgEagle Sub surviving as its wholly-owned subsidiary (the “Merger”). In connection with the Merger, the Company changed its name to AgEagle Aerial Systems Inc. and AgEagle Sub changed its name to “AgEagle Aerial, Inc.” The Company’s Common Stock continues to trade on the NYSE American under its new symbol “UAVS” since March 27, 2018.

Prior to the merger, the Company was formerly known as Millennium Plastics Corporation and was incorporated in the State of Nevada on March 31, 1999. In August 2006, the Company acquired Midwest Energy, Inc., a Nevada corporation pursuant to a reverse merger. After such merger, Midwest Energy became a wholly-owned subsidiary, and as a result of such merger, the former Midwest Energy stockholders controlled approximately 98% of our outstanding shares of Common Stock. The Company changed its name to EnerJex Resources, Inc., (“EnerJex”) in connection with this merger, and in November 2007, it changed the name of Midwest Energy (one of our wholly-owned subsidiaries) to EnerJex Kansas, Inc. (“EnerJex Kansas”). All of its operations conducted prior to this merger were through EnerJex Kansas, Inc., Black Sable Energy, LLC, a Texas limited liability company (“Black Sable”) and Black Raven Energy, Inc. a Nevada corporation (“Black Raven”). The Company’s leasehold interests were held in our wholly-owned subsidiaries Black Sable, Working Interest, LLC, EnerJex Kansas and Black Raven.

F-7

AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

Note 1 – Description of Business-Continued

On August 28, 2018, the Company closed the transactions contemplated by the previously announced Asset Purchase Agreement (the “Purchase Agreement”) dated July 25, 2018 with AgEagle Aerial, Inc., a wholly-owned subsidiary of the Company, Agribotix, LLC, a Colorado limited liability company (sometimes also referred to herein as” Agribotix” or the “Seller”), and the other parties named therein. Pursuant to the Purchase Agreement, the Company acquired all right, title and interest in and to all assets owned by the Seller utilized in the Seller’s business of providing integrated agricultural drone solutions and drone-enabled software technologies and services for precision agriculture, except for certain excluded assets as set forth in the Purchase Agreement. At closing, the Company also assumed certain liabilities under various third-party contracts pursuant to the terms of the Purchase Agreement.

Note 2 – Summary of Significant Accounting Policies

 

Basis of Presentation

Our and Consolidation - These financial consolidated financial statements are presented in United States dollars and have been prepared in accordance with accounting principles generally accepted in the United States. Our operationsThe Company’s consolidated financial statements are considered to fall withinprepared using the accrual method of accounting. The Company has elected a single industry segment, which are the acquisition, development, exploitation and production of crude oil and natural gas properties in the United States.  OurDecember 31 fiscal year end.

The consolidated financial statements include our wholly owned subsidiaries.

the accounts of AgEagle Aerial Systems Inc. and its wholly-owned subsidiaries AgEagle Aerial, Inc., EnerJex Kansas, Inc., Black Sable Energy, LLC, Black Raven Energy, Inc. All significant intercompany balances and transactions have been eliminated uponin consolidation.  Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. 

Nature of Business

We are an independent energy company engaged in the business of producing and selling crude oil and natural gas. The crude oil and natural gas is obtained primarily by the acquisition and subsequent exploration and development of mineral leases.  Development and exploration may include drilling new exploratory or development wells on these leases. These operations are conducted primarily in Kansas, Colorado, Nebraska and Texas.

Use of Estimates in the Preparation of Financial Statements

 

The summary of significant accounting policies presented below is designed to assist in understanding the Company’s consolidated financial statements. Such consolidated financial statements and accompanying notes are the representations of the Company’s management, who are responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America (“US GAAP”) in all material respects, and have been consistently applied in preparing the accompanying consolidated financial statements.

Use of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted accounting principlesin the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenuesrevenue and expenses during the reporting period. Significant estimates included in the consolidated financial statements are: (1) oil and gas revenues and reserves; (2) depreciation, depletion and amortization; (3) valuation allowances associated with income taxes (4) accrued assets and liabilities; (5) stock-based compensation; (6) asset retirement obligations, (7) valuation of derivative instruments and (8) impairment of oil and gas assets.  Although management believes these estimates are reasonable, changes in facts and circumstances or discovery of new information may result in revised estimates.  Actual results could differ from those estimates. Significant estimates include the allowance for bad debt, warranty and dealer termination costs, obsolete inventory, valuation of stock issued for services and stock options, valuation of intangible assets and the valuation of deferred tax assets.

 

Trade Accounts ReceivableFair Value of Financial Instruments - Unless otherwise disclosed, the fair value of the Company’s financial instruments, including cash, accounts receivable, convertible debt, promissory notes, accounts payable and accrued expenses, approximates their recorded values due to their short-term maturities.

 

Cash and Cash Equivalents - Cash and cash equivalents includes any highly liquid investments with an original maturity of three months or less.

Receivables and Credit Policy -Trade accounts receivablereceivables due from customers are recordeduncollateralized customer obligations due under normal trade terms requiring payment within 30 days from the invoice date. Terms with our distributor allow for payment terms of 45 days from the invoice date. Trade receivables are stated at the invoiced amount and dobilled to the customer. The Company generally does not bear any interest.  We regularly reviewcharge interest on overdue customer account balances. Payments of trade receivables are allocated to insure that the amounts will be collected and establishspecific invoices identified on the customer’s remittance advice or, adjustif unspecified, are applied to the earliest unpaid invoices.

The Company estimates an allowance for uncollectible amountsdoubtful accounts based upon an evaluation of the current status of receivables, historical experience, and other factors as necessary usingnecessary. It is reasonably possible that the specific identification method.  Account balances are charged off againstCompany’s estimate of the allowance after all meansfor doubtful accounts will change. The Company determined that no allowance was necessary as of collection have been exhaustedDecember 31, 2018 and the potential for recovery is considered remote.December 31, 2017.

 

Inventory

F-8

AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

  

Note 2 – Summary of Significant Accounting Policies-Continued

Inventories - Inventories, which consist of raw materials, finished goods and work-in-process, are comprised of crude oil held in storage and materials and supplies used in field operations. Crude oil inventories are valuedstated at the lower of cost or market,net realizable value, with cost being determined by the average-cost method, which approximates the first-in, first-out method. Cost components include direct materials and direct labor, as well as in-bound freight. At each balance sheet date, the Company evaluates its ending inventories for excess quantities and obsolescence. This evaluation primarily includes an analysis of forecasted demand in relation to the inventory on hand, among consideration of other factors. The physical condition (e.g., age and quality) of the inventories is also considered in establishing its valuation. Based upon the evaluation, provisions are made to reduce excess or obsolete inventories to their estimated net realizable values. Once established, write-downs are considered permanent adjustments to the cost basis of the respective inventories. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from the amounts that the Company may ultimately realize upon the disposition of inventories if future economic conditions, customer inventory levels, product discontinuances, sales return levels or competitive conditions differ from the Company’s estimates and expectations. As of December 31, 2018 and 2017, the Company had recorded a first-in, first outprovision for obsolescence of $10,369 and $15,369, respectively.

Goodwill - We review the recoverability of goodwill whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable or o on an annual basis. Material and suppliesThe estimated future cash flows are valued at lower of cost or market, based upon, specificamong other things assumptions about expected future operating performance, and may differ from actual cash flows. If the sum of the projected undiscounted cash flows (excluding interest) is less than the carrying value of the assets, the assets will be written down to the estimated fair value in the period in which the determination is made. As of December 31, 2018, there have been no events or changes in circumstances that indicate that it is more likely than not that a goodwill impairment has occurred since assessment date of August 2018.

Intangible Assets – Acquired in Business Combinations-We perform valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination and allocate the purchase price of each acquired business to our respective net tangible and intangible assets. Acquired intangible assets include: customer relationships and trade names. We use valuation techniques to value these intangibles assets, with the primary technique being a discounted cash flow analysis. A discounted cash flow analysis requires us to make various assumptions and estimates including projected revenue, gross margins, operating costs, growth rates, useful lives and discount rates Intangible assets are amortized over their estimated useful lives using the straight-line method which approximates the pattern in which the economic benefits are consumed.

Business Combinations - The Company recognizes, with certain exceptions, 100% of the fair value of assets acquired, liabilities assumed, and non-controlling interests when the acquisition constitutes a change in control of the acquired entity. Shares issued in consideration for a business combination, contingent consideration arrangements and pre-acquisition loss and gain contingencies are all measured and recorded at their acquisition-date fair value. Subsequent changes to fair value of contingent consideration arrangements are generally reflected in earnings. Any in-process research and development assets acquired are capitalized as of the acquisition date. Acquisition-related transaction costs are expensed as incurred. The operating results of entities acquired are included in the accompanying consolidated statements of operations from the date of acquisition.

Revenue Recognition and Concentration-The Company generally recognizes revenue on sales to customers, dealer and distributors upon satisfaction of our performance obligations when the goods are shipped. The Company generally ships FOB Shipping Point terms. Shipping documents are used to verify delivery and customer acceptance. The Company assesses whether the sales price is fixed or determinable based on the payment terms associated with the transaction and quantity of drones being purchased. The Company assesses collectability based on the creditworthiness of the customer as determined by evaluations and the customer’s payment history. Additionally, customers are required to place a deposit on each UAV ordered.

F-9

AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

Note 2 – Summary of Significant Accounting Policies-Continued

As a result of the Agribotix acquisition, the Company now has an additional product line which is the sale of subscription services for use of theFarmLens™ platform to process aerial imaging. These subscription fees are recognized ratably over each monthly membership period.

The Company has executed one significant non-exclusive worldwide distributor agreement in 2016 and amended this agreement to make it non-exclusive by allowing the Company the right to sell its products directly into the marketplace. Only the non-exclusive worldwide distributor has the right of return within twelve months of purchase up to a certain percentage of the annual sales volume less a restocking fee. As of December 31, 2018, no sales of the Company are subject to this right of return clause per the distributor agreement.

Sales concentration information for customers comprising more than 10% of the Company’s total net sales such customers is summarized below:

  Percent of total sales for year ended December 31,
Customers 2018 2017
Customer A  18.0%   * 
Customer B  10.4%   * 
Customer C   *   20.9%

The table below reflects our revenue for the periods indicated by product mix.

  For the Year Ended December 31,
Type 2018 2017
Product Sales $93,219  $116,035 
Subscription Sales  14,594    
Total $107,813  $116,035 

Vendor Concentration-As of December 31, 2018, there was one significant vendors that the Company relies upon to perform stitching itsFarmLensplatform. This vendor provided services to the Company which can be replaced by alternative vendors should the need arise.

Shipping Costs - Shipping costs for the year ended December 31, 2018 totaled $ 5,239, and $5,648 for the year ended December 31, 2017. All shipping costs billed directly to the customer are directly offset to shipping costs resulting in a net expense to the Company which is included in cost orof goods sold in shipments of operations.

Advertising Costs – Advertising costs are expensed as incurred. Advertising costs amounted to $1,454 for the year ended December 31, 2018, and $11,775 for the year ended December 31, 2017.

Earnings Per Share - Basic loss per share is computed by using adividing net loss by the weighted average cost.number of common shares outstanding for the year. Diluted loss per share is computed by dividing net loss by the weighted average number of common shares outstanding plus Common Stock equivalents (if dilutive) related to warrants, options and convertible instruments.

 

Share-Based Payments

F-10

AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

 

Note 2 – Summary of Significant Accounting Policies-Continued

Potentially Dilutive Securities - The Company has excluded all common equivalent shares outstanding for warrants, options and convertible instruments to purchase Common Stock from the calculation of diluted net loss per share because all such securities are antidilutive for the periods presented. For the year ended December 31, 2018, the Company had 3,703,703 warrants and 1,287,103 options to purchase Common Stock, 4,662 shares of Series C Preferred Stock which may be converted into 8,633,333 shares of Common Stock. For the year ended December 31, 2017, the Company had 828,200 warrants and 1,134,800 options to purchase Common Stock, and 1,095,864 potential convertible shares which may be issued resulting from the provisions of convertible notes.

Income Taxes - The Company accounts for income taxes in accordance with FASB ASC Topic 740, Accounting for Income Taxes. This topic requires an asset and liability approach for accounting for income taxes. The Company evaluates its tax positions that have been taken or are expected to be taken on income tax returns to determine if an accrual is necessary for uncertain tax positions. The Company will recognize future accrued interest and penalties related to unrecognized tax benefits in income tax expense if incurred. All income tax returns not filed more than three years ago are subject to federal and state tax examinations by tax authorities.

Share-Based Compensation Awards - The value we assign to the options and warrants that we issue is based on the fair market value as calculated by the Black-Scholes pricing model. To perform a calculation of the value of our options, and warrants, we determine an estimate of the volatility of our stock. We need to estimate volatility because there has not been enough trading of our stock to determine an appropriate measure of volatility. We believe our estimate of volatility is reasonable, and we review the assumptions used to determine this whenever we issue a new equity instruments. If we have a material error in our estimate of the volatility of our stock, our expenses could be understated or overstated. All share-based awards are expensed on a straight-line basis over the vesting period of the options.

 

Recently Issued Accounting Standards - In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). This updated guidance supersedes the current revenue recognition guidance, including industry-specific guidance. The updated guidance introduces a five-step model to achieve its core principal of the entity recognizing revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This standard provides a single set of guidelines for revenue recognition to be used across all industries and requires additional disclosures. It is effective for annual and interim reporting periods beginning after December 15, 2017.

Topic 606 requires revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services and recognize revenue under the new standard as costs are incurred. Under previous U.S. generally accepted accounting principles (GAAP), revenue was generally recognized when deliveries were made, performance milestones were attained, or as costs were incurred. The new standard accelerates the timing of when the revenue is recognized, however, it does not change the total amount of revenue recognized on these contracts. The new standard does not affect revenue recognition for purposes of the Company’s sales as each of the Company’s revenue transactions represent a single performance obligation that is satisfied at a point time or monthly subscription fees which are recognized ratably over the subscription period, as defined in the new ASU. Accordingly, the Company recognizes revenue for small UAVS product contracts with customers at the point in time when the transfer of control passes to the customer, which is generally when title and risk of loss transfer. The Company adopted the updated guidance effective January 1, 2018 using the full retrospective method, however the new standard did not have a material impact on the Company’s consolidated financial position and consolidated results of operations, as it did not change the manner or timing of recognizing revenue on a majority of its revenue transactions.

F-11

F-7

 

Income TaxesAGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

 

Income taxes are accounted for underNote 2 – Summary of Significant Accounting Policies-Continued

In January 2016, the FASB issued ASU 2016-01, Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation and disclosure of financial statements. This guidance will be effective in the first quarter of fiscal year 2019 and early adoption is not permitted. The Company is currently evaluating which transition method it will adopt and the expected impact of the updated guidance, but does not believe the adoption of the updated guidance will have a significant impact on its consolidated financial statements.

In February 2016, FASB issued Account Standards Update 2016-02 – Leases (Topic 842) intended to improve financial reporting of leasing transaction whereby lessees will need to recognize a right-of-use asset and a lease liability method. Deferred taxfor virtually all of their leases. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than twelve months. Consistent with current Generally Accepted Accounting Principles (GAAP), the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP—which requires only capital leases to be recognized on the balance sheet—the new ASU will require both types of leases to be recognized on the balance sheet. The Company is currently evaluating the impact of the updated guidance.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The new guidance is intended to reduce diversity in practice in how transactions are recognized when items of income and expense are recognizedclassified in the financial statements in differentstatement of cash flows. This ASU is effective for fiscal years, and for interim periods than when recognized inwithin those fiscal years, beginning after December 15, 2017. The adoption of this standard did not have a material impact on the applicable tax return. Deferred tax assets arise when expenses are recognized in the financial statements before the tax returns or when income items are recognized in the tax return prior to theCompany’s consolidated financial statements. Deferred tax

In January 2017, the FASB issued ASU 2017-01, Business Combinations—Clarifying the definition of a business (Topic 805). This ASU clarifies the definition of a business with the objective of providing a more robust framework to evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets also ariseor businesses. The Company’s adoption of ASU No. 2017-01 effective May 1, 2018 did not have a material impact on the consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718). This ASU reduces the diversity in practice and cost and complexity when operating losses or tax credits are availableapplying the guidance in Topic 718 to offset tax payments due in future years. Deferred tax liabilities arise when income items are recognized in the financial statements before the tax returns or when expenses are recognized in the tax return prior to the financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date when the change in the tax rate was enacted.terms or conditions of a share-based payment award. The Company’s adoption of ASU No. 2017-09 effective May 1, 2018 did not have a material impact on its consolidated financial statements.

 

We routinely assessOther recent accounting pronouncements issued by FASB did not or are not believed by management to have a material impact on the reliability of our deferred tax assets.  If we conclude that it is more likely than not that some portionCompany’s present or allfuture financial statements.

F-12

AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

Note 3 — Inventories

Inventories consist of the deferred tax assets will not be realized under accounting standards, the tax asset is reduced by a valuation allowance.  In addition we routinely assess uncertain tax positions,following at:

  December 31,
  2018 2017
Raw materials $109,826  $106,569 
Work-in process  30,088   34,850 
Finished goods  19,937   32,582 
Gross inventory  159,851   174,001 
Less obsolete reserve  (10,369)  (15,369)
Total $149,482  $158,632 

Note 4 — Property and accrue for tax positions that are not more-likely-than-not to be sustained upon examination by taxing authorities.Equipment

 

Uncertain Tax PositionsProperty and equipment consist of the following at:

 

We follow guidance in Topic 740 of the Codification for its accounting for uncertain tax positions. Topic 740 prescribes guidance for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. To recognize a tax position, we determine whether it is more-likely-than-not that the tax position will be sustained upon examination, including resolution of any related appeals or litigation, based solely on the technical merits of the position. A tax position that meets the more-likely-than-not threshold is measured to determine the amount of benefit to be recognized in the financial statements. The amount of tax benefit recognized with respect to any tax position is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement.

  December 31,
  2018 2017
Property and equipment $116,313  $108,664 
Less accumulated depreciation  (87,939)  (69,961)
  $28,374  $38,703 

 

We have no liabilityDepreciation expense for unrecognized tax benefits recorded as of December 31, 2016 and 2015. Accordingly, there is no amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate and there is no amount of interest or penalties currently recognized in the consolidated statement of operations or consolidated balance sheet as of December 31, 2016. In addition, we do not believe that there are any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months. We recognize related interest and penalties as a component of income tax expense.

Tax years open for audit by federal tax authorities as of December 31, 2016 are the years ended December 31, 2013, 20142018 and 2015. Tax years ending prior to 2013 are open for audit to the extent that net operating losses generated in those years are being carried forward or utilized in an open year.2017 was $17,980 and $18,453 respectively.

 

Fair Value Measurements

Accounting guidance establishes a single authoritative definition of fair value based upon the assumptions market participants would use when pricing an asset or liability and creates a fair value hierarchy that prioritizes the information used to develop those assumptions.  Additional disclosures are required, including disclosures of fair value measurements by level within the fair value hierarchy.  We incorporate a credit risk assumption into the measurement of certain assets and liabilities.

Cash and Cash Equivalents

We consider all highly liquid investment instruments purchased with original maturities of three months or less to be cash equivalents for purposes of the consolidated statements of cash flows and other statements. We maintain cash on deposit, which, can exceeds federally insured limits. We have not experienced any losses on such accounts and believe we are not exposed to any significant credit risk on cash and equivalents.

Revenue Recognition

Oil and gas revenues are recognized net of royalties when production is sold to a purchaser at a fixed or determinable price, when delivery has occurred and title has transferred, and if collection of the revenue is probable. Cash received relating to future revenues is deferred and recognized when all revenue recognition criteria are met.

FixedNote 5 — Intangible Assets

 

Property and equipmentIntangible assets are recorded at cost.

At December 31, 2016, Fixed Assets consisted of vehicles $355,886, furniturecost and equipment of $795,563, building and leasehold improvements of $23,069 and gathering and compression systems of $2,720,247, as well as accumulated depreciation of vehicles of $336,083, accumulated depreciation of furniture and fixtures of $532,190, accumulated depreciation of building and leasehold improvements of $17,515 and accumulated depreciation of gathering and compression systems of $931,923.

At December 31, 2015, Fixed Assets consisted of vehicles of $354,887, furniture and equipment of $552,288, building and leasehold improvements of $23,069 and gathering and compression systems of $2,722,839 as well as accumulated depreciation of vehicles $328,659, accumulated depreciation of furniture and fixtures of $478,578, accumulated depreciation of building and leasehold improvements of $13,342 and accumulated depreciation of gathering and compression systems of $837,494. 

Depreciation is determined by the use of the straight-line method of accounting using the estimated livesconsist of the assets (3-15 years).  Expendituresacquired for maintenance and repairs are charged to expense.

F-8

Debt issue costs

Debt issuance costs incurred are capitalized and subsequently amortized over the termacquisition of the related debt utilizingAgribotix. Amortization is computed using the straight-line method of amortization over the estimated life of the debt.asset. The Company will annually assess intangible and other long-lived assets for impairment. Intangible assets were comprised of the following at December 31, 2018:

  Estimated
Life
 Gross Cost Accumulated Amortization Net Book Value
Carrying value as of December 31, 2017   $  $  $ 
Intellectual Property/Technology  5 Years  433,400   (28,893)  404,507 
Customer Base  20 Years  72,000   (1,200)  70,800 
Tradenames and Trademarks  5 Years  58,200   (3,880)  54,320 
Non-compete Agreement  4 Years  160,900   (13,409)  147,491 
Carrying value as of December 31, 2018   $724,500  $(47,382) $677,118 

Amortization expense for the years ended December 31, 2018 and 2017 was $47,382 and $0, respectively.

 

Oil & Gas Properties and Long-Lived Assets

F-13

AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

 

We followNote 6 —Investment in Unconsolidated Investee

In November 2017, AgEagle Sub entered into a multi-agreement arrangement with Agribotix, headquartered in Boulder, Colorado, an agricultural information processing company providing actionable data to the full costagriculture industry. Pursuant to the Exchange Agreement whereby AgEagle Sub exchanged 200,000 shares of the Company’s Common Stock it received in the Merger (equal to an aggregate value of $1,000,000) for 20% of the equity membership interests of Agribotix.

Prior to August 28, 2018, the Company accounted for its initial investment in Agribotix using the equity method of accounting under whichaccounting. The ownership interest was accounted for as if Agribotix was a consolidated subsidiary and all costs associatedidentifiable assets, including goodwill and identifiable intangibles, were recorded at fair value and amortized, with property acquisition, explorationthis amortization recorded in “memo” and development activities are capitalized. We also capitalize internal costs that can be directly identified with our acquisition, exploration and development activities and do not include costs related to production, general corporate overhead or similar activities.

Proved properties are amortized using the units of production method (UOP). Currently we only have operationsincluded in the United StatesCompany’s portion of America.earnings of Agribotix. The UOP calculation multipliesCompany acquired all the percentageassets of estimated proved reserves produced each quarter byAgribotix on August 28, 2018. As of the costdate of these reserves. The amortization base inacquisition, the UOP calculation includesCompany adjusted the sum of proved property, net of accumulated depreciation, depletion and amortization (DD&A), estimated future development costs (future costs to access and develop proved reserves) and asset retirement costs, less related salvage value. 

The cost of unproved properties are excluded fromdifference between the amortization calculation until it is determined whether or not proved reserves can be assigned to such properties or until development projects are placed into service. Geological and geophysical costs not associated with specific properties are recorded as proved property immediately. Unproved properties are reviewed for impairment quarterly.

Impairment of long-lived assets is recorded when indications of impairment are present. Impairment is indicated when the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying value.  The carrying value of the assets is then reducedCompany’s investment to their estimated fair value, thatwhich is measured based on an estimatereflected in the purchase consideration recorded upon the acquisition of future discounted cash flows.Agribotix. See Note 7. unaudited summary financial information for Agribotix for the five months ended August 28, 2018 is as follows:

STATEMENT OF OPERATIONS  
Revenues $129,171 
Cost of sales  100,366 
Gross profit  28,805 
Operating expenses  418,333 
Operating loss  (389,528)
Other expense  (3,845)
Net loss  (393,373)
Amortization of “memo” intangible assets  (88,755)
Total adjusted net loss  (482,128)
Adjustment to fair value of ownership interest $(482,128)
Ownership interest  20%
Share of adjusted net income   

Note 7 – Acquisition

 

UnderOn August 28, 2018, pursuant to the full-cost-methodPurchase Agreement, the Company acquired, all right, title and interest in and to all assets owned by the Seller utilized in the Seller’s business of accounting,providing integrated agricultural drone solutions and drone-enabled software technologies and services for precision agriculture, except for certain excluded assets as set forth in the net bookPurchase Agreement (the “Purchased Assets”). At closing, the Company assumed certain liabilities under various third-party contracts pursuant to the terms of the Purchase Agreement.

The consideration for the Purchased Assets made at closing included the following: (a) a cash payment of $150,000 (of which $110,000 was previously paid), (b) 200,000 shares of Common Stock of the Company at a value of oil$5.00 per share (all of which shares were issued to the Seller pursuant to an exchange agreement between the Company and gas properties, less deferred income taxes, may not exceedthe Seller dated as of November 20, 2017), (c) an amount payable at closing equal to the sum of: (i) 500,000 shares of Common Stock at a calculated “ceiling.” The ceiling limitation is (a) the present value of future net revenues computed by applying current prices of oil & gas reserves (with consideration of price changes only$2.00 per share (the “Closing Shares”); and (ii) $450,000 in cash. In addition, the Seller paid on the 90th day following the closing equal to the extentsum of: (i) the number of shares of Common Stock that is calculated by dividing $2,000,000 by the $2.00 share and (ii) $400,000 in cash.

F-14

AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

Note 7 – Acquisition-Continued

If revenue of the business for the one-year period ending on the first anniversary of the closing date is at least $1,000,000, plus the Capital Investment Multiplier (as defined below), then the Seller shall earn the number of shares of Common Stock that is calculated by dividing $250,000 by the Average Price (calculated as if the 20–trading day period to which reference is made above ends on such first anniversary), provided that in no event shall the Average Price be less than $2.00. “Capital Investment Multiplier” means 1.5 times the amount of capital invested by contractual arrangements)the Company or its affiliates in the Seller to estimated future productionsupport and advance the business, inclusive of proved oil & gas reservesloans or other investments provided to Seller prior to the closing, less $250,000.

The Purchase Agreement contains customary representations, warranties and covenants, including provisions for indemnification in the event of any damages suffered by either party as a result of, among other things, breaches of representations and warranties contained therein. An aggregate amount equal $75,000 in cash, 50% of the number of Closing Shares and 25% of the number of Post-Closing Shares were deposited in an escrow account with a third-party escrow agent to secure the indemnification obligations of the Seller pursuant to the terms of the Purchase Agreement.

In accordance with ASC 805, “Business Combinations”, the Company accounted for the acquisition of Agribotix using the acquisition method of accounting. The purchase price was allocated to specific identifiable tangible and intangible assets at their respective fair values at the date of acquisition.

The following table summarizes the latest balance sheet presented, less estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves computed using a discount factor of 10 percent and assuming continuation of existing economic conditionsplus (b) the cost of properties not being amortizedplus (c) the lower of cost or estimatedtotal fair value of unproven propertiesthe consideration transferred as well as the fair values of the assets acquired and liabilities assumed.

Common Stock consideration $3,000,000 
Cash paid  1,000,000 
 Total purchase consideration  4,000,000 
Inventory  (3,685)
Property and equipment  (7,650)
Intangibles assets  (724,500)
Deferred revenue  6,819 
 Goodwill $3,270,984 

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the expected revenue and benefits of the combined company. Goodwill recognized as a result of the acquisition is not deductible for tax purposes. See Note 5 for additional information about other intangible assets. The recognized goodwill related to Agribotix is directly attributable to synergies expected to arise after the acquisition.

As noted above, control was obtained on August 28, 2018, the closing date of the transactions contemplated by the Purchase Agreement, at which time the Company took over the operations of Agribotix and personnel.

The accompanying consolidated financial statement includes the activity of Agribotix for the period after the acquisition commencing August 29, 2018 and ending December 31, 2018.

F-15

AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

Note 7 – Acquisition-Continued

The following unaudited proforma financial information gives effect to the Company’s acquisition of Agribotix as if the acquisition had occurred on January 1, 2018 and had been included in the costs being amortizedless (d) income tax effects related to differences between book and tax basisCompany’s consolidated statement of properties. Future cash outflows associated with settling accrued retirement obligations are excluded from the calculation. Estimated future cash flows are calculated using end-of-period costs and an un-weighted arithmetic average of commodity prices in effect on the first day of each of the previous 12 months held flatoperations for the life of the production, except where prices are defined by contractual arrangements.

Any excess of the net book value of proved oil and gas properties, less related deferred income taxes, over the ceiling is charged to expense and reflected as additional DD&A in the statement of operations. The ceiling calculation is performed quarterly. For the yearyears ended December 31, 2015 impairment charges of $48,930,087 were record. For the year ended December 31, 2016 impairment charges of $8,032,670 were recorded.2018 and 2017:

  For the years ended December 31,
  2018 2017
Revenue $314,486  $357,727 
Net Income $(2,702,928) $(1,460,046)

Note 8 – Debt

 

Proceeds from the sale or disposition of oil and gas properties are accounted for as a reduction to capitalized costs unless a significant portion (greater than 25%) of our reserve quantities are sold, in which case a gain or loss is recognized in income. InConvertible Notes Payable

On May 6, 2015, the Company sold its Cherokee project assets located in Eastern Kansas for net proceedsclosed a private placement pursuant to a subscription agreement whereby two institutional investors (the “2015 Holders”) purchased convertible notes having an aggregate principal amount of $2,867,305. At the time$500,000, convertible into Common Stock of the saleCompany at $2.00 per share and maturing on November 6, 2016. Interest on the reserve quantities made up approximately 6.7%notes accrued at a rate of total reserve quantities. Accordingly,8% annually and was payable quarterly. It was determined that there were no aggregate beneficial conversion features. On or about March 4, 2016, the net proceeds reducedCompany and the carrying value2015 Holders entered into extension and modification agreements whereby the 2015 Holders agreed to extend the maturity date of our oilthe notes to November 6, 2016, and gas properties.

Asset Retirement Obligations

The asset retirement obligation relatespermanently waive all rights and remedies, of whatever nature, with respect to the plugvarious defaults that occurred under this subscription agreement and abandonment costs when our wells are no longer useful. We determinenotes, including, without limitation, (I) the value ofCompany’s failure to become a public SEC reporting company on or before September 30, 2015, (ii) the liability by obtaining quotes for this serviceCompany’s failure to pay interest on the notes, and estimate the increase we will face(iii) modifying and waiving certain participation rights in the future. We then discount the future value based on an intrinsic interest rate that is appropriate for us. If costs rise more than what we have expected there could be additional charges in the future, however, we monitor the costs of the abandoned wells and we will adjust this liability if necessary.

Major Purchasers

financings. For the years ended December 31, 2016,2018 and 2015 we sold our produced crude oil to ARM Energy Management, LLC, Coffeyville Resources Inc.,2017, the Company recorded$9,111 and Sunoco Logistics Inc. on a month-to-month basis$40,000 of interest expense, respectively. As of the Merger Date, the principal amount of the promissory note of $500,000 and we sold our produced natural gas to United Energy Trading and Western Operating Company.its accrued interest of $114,556 were converted at $1.25 per share into 814,381 shares of Common Stock.

 

Marketable Securities Available for SaleOn September 6, 2016, the Company closed a private placement pursuant to a subscription agreement whereby an existing institutional investor (the “2016 Holder”) purchased a convertible note having a principal amount of $300,000, convertible into shares of Common Stock of the Company at $3.00 per share and maturing on September 30, 2017. Interest on the note accrues at a rate of 8% annually and is payable quarterly. It was determined that there were no aggregate beneficial conversion features. For the years ended December 31,2018 and2017,the Company recorded interest expense of$5,467 and$24,000, respectively. As of the Merger Date, the principal amount of the promissory note of $300,000 and its accrued interest of $42,933 were converted at $1.25 per share into 454,440 shares of Common Stock.

 

TheOn February 3, 2017, the Company classifies its marketable equity securities as available-for-saleclosed a private placement pursuant whereby a bridge loan (the “2017 Note A”) agreement was executed with an accredited investor (the “2017 Holder Note A”) to purchase a convertible promissory note with an aggregate principal amount of $175,000, an original issue discount of $25,000, convertible into shares of Common Stock of the Company at $2.50 per share and they are carried at fair market value, with the unrealized gainsmaturing 90 days following issuance, or May 4, 2017. After payment of a finder’s fee and losses included in accumulated other comprehensive income and reported in stockholders’ equity. The difference between historical cost and market totaled $552,589 for the year ended December 31, 2014. For the year ended December 31, 2015expenses, the Company received a dividendnet proceeds of $1,360,172. This receipt of cash was first applied$101,250. In addition, the Company also issued to the other comprehensive loss reported2017 Holder Note A warrant to purchase 200,000 shares of the Company’s Common Stock at an exercise price per share of $2.50. To the extent the entire unpaid principal balance of the note is not paid in stockholders’ equityfull on the maturity date, (i) interest on the unpaid principal balance will accrue from the maturity date at the rate of 18% per annum, and thenwill continue until the date the note is paid in full, and (ii) the Company will issue to the carrying value2017 Holder Note A an additional warrant to purchase 100,000 shares of Common Stock for each ninety (90) calendar day period that the unpaid principal balance of the security reportednote and any accrued interest is not paid in current assets. This resulted in a new carrying valuefull by such date. Upon conversion as of $210,990 for this security. TheMerger Date, the Company expects future distributions and estimates thathad issued an additional 300,000 warrants to purchase shares resulting from the sum of future distributions to be in excessdefault of the remaining book value.loan.

 

F-16

F-9

 

Net Income Per Common ShareAGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

 

Basic net income per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the impact of common shares issuable upon exercise of stock options and warrants and conversion of convertible debt that are not deemed to be anti-dilutive. The dilutive effect of the outstanding stock options and warrants is computed using the treasury stock method.Note 8 – Debt-Continued

 

For the year ended December 31, 2016 and 2015, diluted net loss per share did not include the effect of 298,664 shares of common stock issuable upon the exercise of outstanding stock options as their effect would be anti-dilutive.

Reclassifications

Certain reclassifications have been made to prior periods to conform to current presentations.

Recent Accounting Pronouncements Applicable to the Company

The Company does not believe there are any recently issued, but not yet effective; accounting standards that would have a significant impact on the Company’s financial position or results of operations.

Note 2 - Going Concern

The accompanying consolidated financial statements have been prepared assuming that2018, the Company will continue as a going concern, which contemplates the realizationrecorded $7,077 of assets and liquidation of liabilities in the normal course of business. The Company had an accumulated deficit at December 31, 2016 of $87,577,862. Also, net loss was $13,175,770 and cash used in operations was $2,098,645 forinterest expense. For the year ended December 31, 2016.  The ability2017,the Company recorded interest expense of $ 28,566 and the $25,000 of original issue discount. For the year ended December 31, 2018, the Company recorded $7,077 of interest expense. As of the date of the merger on March 26, 2018, the principal amount of the promissory note of $175,000 and its accrued interest of $35,642 were converted at $2.50 per share into 139,567 shares of Common Stock.

On July 2017, the Company closed a private placement pursuant to a subscription agreement whereby an existing institutional investor (the “2017 Note B”) purchased a convertible note having a principal amount of $100,005, convertible into Common Stock of the Company to continue asat $2.00 per share and maturing on February 28, 2018. Interest on the note accrues at a going concern is dependentrate of 8% annually payable upon its ability to successfully accomplishmaturity. It was determined that there were no aggregate beneficial conversion features. For the plans described below to restructure, amend or refinance debtyears ended December 31,2018 and secure financing and attain profitable operations. The accompanying consolidated financial statements do not include any adjustments that might be necessary if2017, the Company is unable to continue as a going concern.

On October 3, 2011, the Company, entered into an Amendedrecorded$1,822 and Restated Credit Agreement with Texas Capital Bank, and other financial institutions and banks (“TCB” or “Bank”) that may become a party to the Credit Agreement from time to time. The facilities provided under the Amended and Restated Credit Agreement was to be used to refinance a prior outstanding revolving loan facility with TCB dated July 3, 2008, and for working capital and general corporate purposes. On August 15, 2014 the Company entered into an Eighth Amendment to the Amended and Restated Credit Agreement. Among other things the Eighth Amendment extended the maturity$3,778 of interest expense, respectively. As of the Agreement by three years to October 3, 2018. On August 12, 2015,Merger Date, the Company entered into a Tenth Amendment to the Amended and Restated Credit Agreement. Among other things the Tenth Amendment established the requirement of monthly borrowing base reductions commencing September 1, 2015 and continuing on the first of each month thereafter. On November 13, 2015, the Company entered into a Eleventh Amendment to the Amended and Restated Credit Agreement. The Eleventh Amendment reflects the following changes: (i) waived certain provisionsprincipal amount of the Credit Agreement, (ii) suspend certain hedging requirements,promissory note of $100,005 and (iii) to make certain other amendments to the Credit Agreement.its accrued interest of $5,600 were converted at $1.25 per share into 139,943 shares of Common Stock.

 

On April September 2017, the Company closed a private placement pursuant to a subscription agreement whereby an existing institutional investor (the “2017 Note C”) purchased a convertible note having a principal amount of $35,000, convertible into shares of Common Stock of the Company at $2.00 per share and maturing on February 28, 2018. Interest on the note accrues at a rate of 8% annually payable upon maturity. It was determined that there were no aggregate beneficial conversion features. For the years ended December 31,2018 and2017, the Company recorded$638 and$731 of interest expense, respectively. As of the Merger Date, the principal amount of the promissory note of $35,000 and the accrued interest of $1,369 were converted at $1.25 per share into 48,194 shares of Common Stock.

On October 2017, the Company closed a private placement pursuant to a subscription agreement whereby an existing institutional investor purchased a convertible note having a principal amount of $50,000, (the “2017 Note D”) convertible into shares of Common Stock of the Company at $2.00 per share and maturing on February 28, 2018. Interest on the note accrues at a rate of 8% annually payable upon maturity. It was determined that there were no aggregate beneficial conversion features. For the years ended December 31,2018 and2017, the Company recorded$911 and$811 of interest expense, respectively.Asof the Merger Date, the principal of $50,000 and the accrued interest of $1,722 were converted at $1.25 per share into 68,540 shares of Common Stock.

Promissory Notes

On December 15, 2016, the Company informedissued a promissory note with an aggregate principal amount of $30,000 to a shareholder of the Bank that it would cease makingCompany. On January 24, 2017, the mandatory monthly borrowing base reduction paymentsCompany issued a second promissory note with an aggregate principal amount of $30,000 to the same related party. On September 14, 2017, the Company issued a third promissory note with an aggregate principal amount of $16,050 to the same shareholder. All three promissory notes (the “Related Party Notes A”) accrue interest at an annual rate of 2% and did not make the required Aprilmatured on November 6, 2017. On or about August 1, 2016 payment. The Company made its mandatory quarterly interest payment on April 6, 2016 and on April 7, 2016 entered into a Forbearance Agreement whereby the Bank agreed to not exercise remedies and rights afforded it under the Amended and Restated Credit Agreement for thirty days. On May 31, 2016,2017, the Company and the Bank amended to the Forbearance Agreement to extend the forbearance period to August 31, 2016. On July 29, 2016, the Company and the Bankshareholder promissory note A holder entered into a Third Forbearance Agreement which extended the forbearance period to October 1, 2016. Upon the expiration of the Third Forbearance agreement, the Company did not enter into a fourth Forbearance Agreement. Also, at that time the Company discontinued payment of interest on its outstanding loan obligations with the Bank.

Throughout 2016, the Company evaluated plans to restructure, amend or refinance existing debt through private options. On February 14, 2017 the Company announced that a group of investors unrelated the Company has purchased from EnerJex’s secured bank lender all rights to the Company's secured indebtedness,extension and that EnerJex has executed with the purchasing investor group a definitive written agreement for the discharge of the Company's secured indebtedness.

On February 10, 2017, the Company, TCB and IberiaBank (collectively, "Sellers"), and PWCM Investment Company IC LLC, and certain financial institutions (collectively, "Buyers") entered into a Loan Sale Agreement ("LSA"), pursuant to which Seller sold to Buyers, and Buyers purchased from Sellers, all of Sellers' right, title and interest in, to and under the Credit Agreement and Loan Documents, in exchange for (i) a cash payment of $5,000,000 (the "Cash Purchase Price"), (ii) a Synthetic Equity Interest equal to 10% of the Proceeds, after Buyer's realization of 150% return on the Cash Purchase Price within five (5)  years of the Closing Date, with payment being distributed 65.78947368% to TCB and 34.21052632% to IberiaBank, and (iii) at any time prior to February 10, 2022, Buyer may acquire the interest in clause (ii) above. In connection with the LSA, the Company release Sellers and its successors as holders of the rights under the Credit Agreement and Loan Documents, including Buyers, from any and all claims under the Credit Agreement and Loan Documents.

Also on February 10, 2017, the Company and its subsidiaries, and successor lender entered into a binding letter agreement dated February 10, 2017, which was subsequently amended on March 30, 2017 (as amended, the “letter agreement”) pursuant to which:

1.the successor lender would agree to forgive our existing secured loan in the approximate principal amount of $17,295,000, and in exchange enter into a secured promissory note (which we refer to as the "restated secured note") in the original principal amount of $4,500,000.

2.we would:

a.convey our oil and gas properties and associated performance and surety bonds in Colorado, Texas, and Nebraska, and

b.all of our shares of Oakridge Energy, Inc. (together, the "conveyed oil and gas assets"); and

c.retain our assets in Kansas and continue as a going concern. The Kansas assets currently provide most of our current operating revenue.

The restated secured note shall:

a.be secured by a first-priority lien in the Company’s oil and gas producing assets situated in the State of Kansas,

b.evidence accrued interest on the $4,500,000 principal balance at a rate of 16% per annum,

c.bear interest from and after May 1, 2017, at a rate of 16.0% per annum,

d.be pre-payable in full at a discount at any time during the term of the restated secured note upon EnerJex's paying $3,300,000 to successor lender, and

e.mature and be due and payable in full on November 1, 2017.

We will have 2 optionsmodification agreements whereby they agreed to extend the maturity date of the restated securedRelated Party Notes A to February 28, 2018, added a conversion feature whereby the debt can be converted into shares of Common Stock of the Company at $2.00 per share and amended the interest rate on the note by 90 days each upon paymentretroactively to accrue at a rate of an extension fee8% annually. It was determined that there were no aggregate beneficial conversion features. For the years ended December 31, 2018 and 2017, the Company recorded$1,386 and$5,420 of $100,000, which shall be applied againstinterest expense, respectively. As of the Merger Date, the principal balanceof $76,050 and the accrued interest of $7,239 were converted at $1.25 per share into 110,371 shares of Common Stock.

F-17

AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

Note 8 – Debt-Continued

On March 5, 2017, the Company issued a promissory note with an aggregate principal amount of $10,000 to an executive of the note.

So long as we repayCompany. On May 15, 2017, the $3,300,000 in indebtednessCompany issued a second promissory note with an aggregate principal amount of $10,000 to the same executive of the Company. On September 15, 2017, the Company issued a 3rd promissory note with an aggregate principal amount of $32,000 to the same executive of the Company. On July 25, 2017, the Company issued a 3rd promissory note with an aggregate principal amount of $3,000 to the same executive of the Company with the amended terms agreed to on August 1, 2017 per the modification agreement. The promissory notes (the “Related Party Notes B”) accrue interest at an annual rate of 2% and mature on November 6, 2017. On or priorabout August 1, 2017, the Company and the executive of the Company promissory note B holder entered into extension and modification agreements whereby they agreed to extend the maturity date as extended, all other amounts payable underof the restated securedRelated Party Notes B to February 28, 2018, added a conversion feature whereby the debt can be converted into shares of Common Stock of the Company at $2.00 per share and amended the interest rate on the note shall be forgiven.

The Closing is expectedretroactively to occur on or before May 1, 2017 (the February 10, 2017 letter agreement provided foraccrue at a Closing on or before April 30, 2017. Thisrate of 8% annually. It was amended to May 1, 2017 indetermined that there were no aggregate beneficial conversion features. For the amendment). See footnote number 13 of these financial statements for additional information.

F-10

Note 3 - Equity Transactions

Stock transactions in fiscal yearyears ended December 31, 20162018 and 2017 the Company recorded $1,002 and $2,684 of interest expense, respectively. As of the Merger Date, the principal of $55,000 and the accrued interest of $3,686 were converted at $1.25 per share into 77,769 shares of Common Stock.

 

As of the Merger Date, all the AgEagle shares of Common Stock issued in connection with conversion of debt noted above were subsequently converted into EnerJex shares and then split at a rate of 25 to 1 resulting in a conversion rate of 1.6564 per AgEagle share into a total of 787,891 shares of EnerJex Common Stock and 1,631 shares of Series C Preferred Stock.

There were no equity transactions

As part of the liabilities assumed from the EnerJex Merger, the Company recorded a promissory note for a principal amount of $125,556 and accrued interest of $4,171 payable over twelve months and maturing on March 27, 2019. The total amount outstanding as of December 31, 2018 was $40,998, resulting in payments of $88,729 made in 2018. The Company recorded interest of $3,670 for the year ended December 31, 2016.2018.

 

Stock transactions in fiscal year ended December 31, 2015Note 9 – Equity

 

On March 13, 2015, the Company issued inCapital Stock Issuances

As a registered offering 763,322 registered shares of its common stock together with 1,242.17099 shares of its newly designated Series B Convertible Preferred Stock (the “Preferred Stock”) convertible into 709,812 shares of common stock. We also issued in an unregistered offering, 521.62076 shares of Preferred Stock convertible into 298,069 shares of common stock, and warrants to purchase 1,771,428 shares of its common stock. The shareholder’s ability to convert a portionresult of the Preferred Stock and to exerciseMerger all the warrant are restricted: (i) prior to the Company obtaining approvalholders of the offering by its shareholders, which we expect to obtain before May 31, 2015, and (ii) pursuant to customary “blocker” provisions restricting the investor’s ownership to 9.99% of our outstanding common stock.

The Preferred Stock has a liquidation preference of $1,000 per share, and will be convertible at the option of the shareholder at a conversion ratio equal to approximately 571 shares of common stock for each one (1) share of Preferred Stock, subject to customary adjustments and anti-dilution price protection. Dividends are payable on the shares of Preferred Stock only if and to the extent that dividends are payable on the common stock into which the Preferred Stock is convertible. The Preferred Stock has no maturity date and can be redeemed by the Company beginning twelve months after the closing of the offering or upon a change of control. Each warrant will be exercisable for one share of common stock, for a period of five years beginning nine months after March 13, 2015, at a cash exercise price of $2.75 per share, and may be exercised on a cashless basis after that nine-month period if no effective registration statement covers the warrant shares by that time.

On May 13, 2015, the Company sold 183,433 shares of itsCompany’s 10% Series A Cumulative Redeemable Perpetual Preferred Stock (the “Series A Preferred Stock”) had their shares automatically converted into 902,186 shares of the Company’s Common Stock. The Company’s Series B Convertible Preferred Stock of 8.25 shares (the “Series B Preferred Stock”) remained outstanding and were convertible into 5,388 shares of the Company’s Common Stock. The Company’s Series C Convertible Preferred Stock (the “Series C Preferred Stock”) included 2,879 of remaining shares after the conversion and retirement of all the Company’s promissory notes due. These shares are convertible into 1,471,425 shares of the Company’s Common Stock. Furthermore, an additional 4,000 shares of Series C Preferred Stock were issued and are convertible into 3,020,797 shares of the Company’s Common Stock, as they were issued to the current holder of Series C Preferred Stock in connection with a $4 million financing of Series C Preferred Stock (the “Financing”).

On May 11, 2018, we issued an additional 250 shares of our Series C Preferred Stock, convertible into 163,265 shares of our Common Stock and received a cash payment of $250,000 for the issuance of the Series C Preferred Stock. The Series C Preferred Stock includes a beneficial ownership limitation preventing conversion of shares of Series C Preferred Stock into more than 9.99% of the number of shares of our Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon conversion of the Series C Preferred Stock.

F-18

AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

Note 9 – Equity-Continued

On April 16, 2018, Alpha Capital Anstalt converted 8.25 shares of Series B Preferred Stock, representing the last of the outstanding Series B shares, into 5,388 shares of Common Stock at $12.50a conversion price of $1.53.

During the year ended December 31 2018, Alpha Capital Anstalt converted 2,467 shares of Series C Preferred Stock into 1,611,082 shares of Common Stock at a conversion price of $1.53.

In connection with an investor relations agreement, dated April 4, 2018, the Company issued 60,000 shares of its Common Stock to the investor relations firm, and its designees, and agreed to register such shares on its next registration statement (the “Registration Rights”). On July 24, 2018, in connection with the filing of the Company’s registration statement on form S-1, a waiver of the Registration Rights was obtained from the investor relations firm in exchange for 125,000 additional shares, which were issued by the Company and approved by the Board. The Company recognized a total of $400,415 of investor relations expense at a fair value of $2.12 and $2.26 per share within general and administrative costs related to these issuances.

On August 28, 2018 and ninety-days thereafter, pursuant to the Purchase Agreement for gross proceedsAgribotix the Company issued 1,275,000 shares at a $2.00 share price.

 On December 4 ,2018, our former board director Mr. Scott Burell exercised 60,724 options at an exercise price of approximately $2.3 million.$0.06 resulting in the issuance of 55,801 shares as due to the Company’s withholding obligation relating to the exercise of these options some shares were held back.

On December 27, 2018, AgEagle Aerial Systems Inc. (the “Company”) entered into Securities Purchase Agreement (the “Agreement”) with an institutional investor (the “Purchaser”). Pursuant to the terms of the Agreement, the Board of Directors of the Company (the “Board”) designated a new series of preferred stock, the Series D Preferred Stock, which is non-convertible and provides for an 8% annual dividend and is subject to optional redemption by the Company (the “Preferred Stock”). The Company intendsissued 2,000 shares of Preferred Stock and a warrant (the “Warrant”) to usepurchase 3,703,703 shares of the Company’s Common Stock, par value $0.001 per share (the “Common Stock”), for $2,000,000 in gross proceeds. The shares of Common Stock underling the Warrant are referred to as the “Warrant Shares”. The Company also entered into a registration rights agreement (the “Registration Rights Agreement”) granting registration rights to the Purchaser with respect to the Warrant Shares.

The Agreement provides that upon a subsequent financing or financings with net proceeds of this offering for general corporate purposes, including capital expenditures, working capital, preferred stock dividends,at least $500,000, the Company must exercise its optional redemption of the Preferred Stock (as more fully described below in Item 5.03) and repaymentapply any and all net proceeds from such financing(s) to the redemption in full of outstanding borrowings under its senior credit facility.the Preferred Stock.

Warrants Issued

 

The offering was made pursuantWarrants of 3,703,703 are exercisable for a period of five years through December 26, 2023, at an exercise price equal to $0.54 per share, and is subject to customary adjustments for stock splits dividend, rights offerings, pro rata distributions and fundamental transactions. In addition, in the event the Company undertakes a subsequent equity financing or financings at an effective price per share that is less than $0.54, the exercise price of the Warrant shall be reduced to the lower price.

The Warrant provides that the Warrant holder shall have a “Beneficial Ownership Limitation” equal to 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. The Warrant holder, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation, as provided for in the Warrant.

F-19

AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

Note 9 – Equity-Continued

Pursuant to the terms of the Registration Rights Agreement, the Company shall file an initial registration statement registering the Warrant Shares no later than the 20thcalendar day following the required filing date of the Company’s Annual Report on Form S-3 (File No. 333-199030) previously filed10-K for the year ending December 31, 2018 (the “Filing Date”) and, with respect to any additional registration statements, the earliest practical date on which the Company is permitted by SEC Guidance to file such additional registration statement related to such registrable securities. The Company shall have the registration statement declared effective with the Securities and Exchange Commission (the “Commission”) no later than the 90th calendar day following the Filing Date or, in the event of a “full review” by the Commission, the 120th calendar day following the Filing Date. There are no penalties for failure to file or be declared effective by the U.S. Securities and Exchange Commission (SEC). dates set forth above.

 

F-11

Option transactions

Officers (including officers who are members of the Board of Directors), directors, employees and consultants are eligible to receive options under our stock option plans.  We administer the stock option plans and we determine those persons to whom options will be granted, the number of options to be granted, the provisions applicable to each grant and the time periods during which the options may be exercised.  No options may be granted more than ten years after the date of the adoption of the stock option plans.

Each option granted under the stock option plans will be exercisable for a term of not more than ten years after the date of grant.  Certain other restrictions will apply in connection with the plans when some awards may be exercised.  In the event of a change of control (as defined in the stock option plans), the vesting date on which all options outstanding under the stock option plans may first be exercised will be accelerated.  Generally, all options terminate 90 days after a change of control. 

Options Issued

Stock Incentive Plan

 

The Board of Directors approvedof the EnerJex Resources, Inc. Stock Option Plan on August 1, 2002 (the “2002-2003 Stock Option Plan”). Originally, the total number of options that could be granted under the 2002-2003 Stock Option Plan was not to exceed 26,666 shares. In September 2007 our stockholdersCompany has unanimously approved a proposal to amendadopt and restateapprove the 2002-2003EnerJex 2017 Omnibus Equity Incentive Plan (the “Plan”). The Board of Directors recommended that this proposal be presented to the EnerJex shareholders for approval. The Plan became effective on March 26, 2018, the date of the Merger, and is a comprehensive incentive compensation plan under which the Company can grant equity-based and other incentive awards to officers, employees and directors of, and consultants and advisers to, the Company. The purpose of the Plan is to help the Company attract, motivate and retain such persons and thereby enhance shareholder value.

The Company has reserved a total of 2,000,000 shares of Common Stock Optionfor issuance as or under awards to be made under the Plan. To the extent that an award lapses, expires, is canceled, is terminated unexercised or ceases to be exercisable for any reason, or the rights of its holder terminate, any shares subject to such award shall again be available for the grant of a new award. The Plan shall continue in effect, unless sooner terminated, until the tenth (10th) anniversary of the date on which it is adopted by the Board of Directors (except as to increaseawards outstanding on that date). The Board of Directors in its discretion may terminate the Plan at any time with respect to any shares for which awards have not theretofore been granted; provided, however, that the Plan’s termination shall not materially and adversely impair the rights of a holder, without the consent of the holder, with respect to any award previously granted. The number of shares issuablefor which awards which are options or SARs may be granted to 66,666.  On October 14, 2008 our stockholders approved a proposalparticipant under the Plan during any calendar year is limited to amend and restate the 2002-2003 Stock Option Plan to (i) rename it the EnerJex Resources, Inc. Stock Incentive Plan (the “Stock Incentive Plan”)500,000. For purposes of qualifying awards as “performance-based” compensation under Code Section 162(m), (ii) increase the maximum numberamount of shares of our common stockcash compensation that may be issuedpaid to any person under the Stock Incentive Plan to 83,333, and (iii) add restricted stock as an eligible award that canin any single calendar year shall be granted under the Stock Incentive Plan.$500,000.

 

On December 31, 2010 we granted 60,0002018, the Company issued options that vest ratably over a 48 month periodto purchase 534,598 shares of Common Stock to directors and are exercisableemployees of the Company at $6.00the fair value exercise price ranging from $0.51 to $4.33 per share expiring on March 30, 2023 to an Officer ofDecember 17, 2028. The Company determined the company. The term of the options is 5 years. The fairfair-market value of the options as calculated usingto be $449,491. In connection with the Black-Scholes model was $307,751.  The amountissuance of these options, the Company recognized as$102,698 stock compensation expense for the year ended December 31, 2015 and 2016 was zero. 

2018.

 

2013 Stock Incentive Plan

The Board and stockholders approved the adoption of the 2013 Stock Incentive Plan (“Plan”). The Plan reserves 333,300On October 4, 2017, AgEagle Sub issued options to purchase 927,774 shares of our common stock forCommon Stock to employees and directors, that were approved by the grantingboard at an exercise price of $0.06 per share. These options andwere assumed by the Company in the Merger. In connection with the issuance of restricted shares to our employees, officers, directors, and consultants. The Plan increases reserved shares annually based on plan provisions.

  In 2016 no options were granted to any employees or directors.

In 2015, we granted 67,332these options to employees and directors.  Fifty percentdirectors for the year ended December 31, 2018, the Company recorded $7,895 of stock compensation expense and $22,192 for the year ended December 31, 2017.

F-20

AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

Note 9 – Equity-Continued

On March 1, 2015, AgEagle Sub entered into a strategic consulting agreement with a related party and granted 207,055 stock options exercisable over five years from the grant date at an exercise price per share of $2.60. On October 4, 2017, AgEagle Sub held a board meeting to approve the modification of the existing 207,055 options to purchase Common Stock from an exercise price of $2.60 to $0.06 per share. These options were assumed by the Company in the Merger. In connection with these options, vest onethe Company recognized no stock compensation expense for the year after the date of the grant.  The remaining options vest ratably each month over a two year period.   ended December 31, 2018 as they were all fully vested.

The fair value of options granted during the year ended December 31, 2018 were determined using the Black-Scholes option valuation model. The expected term of options granted is based on the simplified method in accordance with Securities and Exchange Commission Staff Accounting Bulletin 107 and represents the period of time that options granted are expected to be outstanding. The Company makes assumptions with respect to expected stock price volatility based on the average historical volatility of peers with similar attributes. In addition, the Company determines the risk-free rate by selecting the U.S. Treasury with maturities similar to the expected terms of grants, quoted on an investment basis in effect at the time of grant for that business day.

The significant weighted average assumptions relating to the valuation of the Company’s stock options granted during the year ended December 31, 2018 were as follows: 

  December 31,
2017
 March 31,
2018
 June 30,
2018
 September 30,
2018
 December 31,
2018
Dividend Yield  0%  0%  0%  0%  0%
Expected life  3.04 to 6.25 Years   3.5 Years   3.5 Years   3.5 Years   3.5-6.5 Years 
Expected volatility  74.80 to 80.41%   77.03%  78.66%  76.04%  80.5%
Risk-free interest rate  1.89 to 2.33%   2.81%  2.68%  3.01%  2.59%

For options granted in 2018, the fair value of the Company’s stock was obtained per the close of market as of December 31, 2018. The future expected stock-based compensation expense expected to be recognized in future years is $288,401, through December 31, 2020.

Intrinsic value is measured using the fair market value at the date of exercise (for shares exercised) or at December 31, 2018 (for outstanding options), less the grant calculatedapplicable exercise price.

A summary of the options activity for the year ended December 31, 2018, are as follows:

  Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate
Intrinsic Value
Outstanding at January 1, 2018  1,134,830  $0.06   8.5 Years  $ 
Granted  534,598   1.35   5.94 Years  $ 
Exercised/Cancelled  (175,270)  0.60   - Years  $ 
Outstanding at December 31, 2018  1,494,158  $0.46   6.93 Years  $ 
Exercisable at December 31, 2018  782,147  $0.22   7.07 Years  $ 

F-21

AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

Note 9 – Equity-Continued

For options granted or modified in 2017, the fair value of the Company’s stock used in estimating the fair value of the stock options was estimated using a discounted cash flow method and recent sales of its Common Stock.

 Intrinsic value is measured using the Black-Scholes model was $295,932 usingfair market value at the following weighted average assumptions:date of exercise (for shares exercised) or at December 31, 2017 (for outstanding options), less the applicable exercise price.

A summary of the options activity for the year ended December 31, 2017 are as follows:

  For the Year Ended December 31, 2017
  Shares* Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value
Outstanding at beginning of year  207,055  $0.06   4.0 years  $ 
Granted  927,775  $0.06   10.0 years  $ 
Outstanding at end of year  1,134,830  $0.06   8.5 years  $ 
Exercisable at end of year  521,873  $0.06   7.9 years  $ 

*- Amounts have been converted to reflect a stock split and conversion rate of 1.656 that occurred upon the EnerJex merger.

As of the Merger Date, all outstanding AgEagle shares of Common Stock and newly issued in connection with conversion of debt were subsequently converted into EnerJex shares and then split at a rate of 25 to 1 resulting in a conversion rate of 1.6564 per AgEagle share. The financial statements give a retrospective effect to the reverse stock split.

Note 10 – Warrants to Purchase Common Stock

As of December 31, 2018, the Company had outstanding, in connection with the issuance of debentures in the prior year, warrants to purchase 828,221 shares of the Company’s Common Stock at an exercise price of $9.85$1.51. All warrants outstanding as of December 31, 2018 are scheduled to expire between February 2, 2024 and October 31, 2024.

On December 27, 2018, the Company issued 2,000 shares of Preferred Stock and a warrant (the “Warrant”) to purchase 3,703,703 shares of the Company’s Common Stock, par value $0.001 per share; commonshare (the “Common Stock”), for $2,000,000 in gross proceeds. The shares of Common Stock underling the Warrant are referred to as the “Warrant Shares”. The Company also entered into a registration rights agreement (the “Registration Rights Agreement”) granting registration rights to the Purchaser with respect to the Warrant Shares.

The Warrant is exercisable for a period of five years through December 26, 2023, at an exercise price equal to $0.54 per share, and is subject to customary adjustments for stock splits dividend, rights offerings, pro rata distributions and fundamental transactions. In addition, in the event the Company undertakes a subsequent equity financing or financings at an effective price per share that is less than $0.54, the exercise price of ranging from $.30the Warrant shall be reduced to $2.00 per share; volatility ranging from 70%the lower price.

The Warrant provides that the Warrant holder shall have a “Beneficial Ownership Limitation” equal to 72%; term9.99% of three years; dividend yieldthe number of 0%; interest rateshares of 1.41%. the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. The Warrant holder, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation, as provided for in the Warrant.

F-22

AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

 

Note 10 – Warrants to Purchase Common Stock-Continued

We expensed $241,669

A summary of activity related to warrants for the year ended December 31, 2018 follows:

  Shares Weighted Average Exercise Price ($) Weighted Average Remaining Contractual Term
Outstanding at December 31, 2017  828,221  $1.51   5.34 
Granted  3,703,703  $0.54   4.99 
Outstanding at December 31, 2018  4,531,924  $0.72   5.05 
Exercisable at December 31, 2018  4,531,924  $0.72   5.05 

*- Amounts have been converted to reflect a stock split and $420,103conversion rate of 1.656 that occurred upon the EnerJex merger.

A summary of activity related to warrants for the year ended December 31, 2017 follows:

  Shares* Weighted Average Exercise Price ($) Weighted Average Remaining Contractual Term
Outstanding at December 31, 2016    $    
Granted  828,221  $1.51   6.60 
Outstanding at December 31, 2017  828,221  $1.51   6.40 
Exercisable at December 31, 2017  828,221  $1.51   6.40 

*- Amounts have been converted to reflect a stock split and conversion rate of 1.656 that occurred upon the EnerJex merger.

Note 11 – Commitments and Contingencies

Operating Leases

The Company leases office space in Neodesha, Kansas for $500 a month. On August 22, 2018, the Company executed an amendment to the lease to renew the term of the lease for an additional one year terminating on September 30, 2019 with no option to renew unless approved by the city commission of Neodesha.

As a result of the Agribotix acquisition, the Company assumed a lease for offices in Boulder, Colorado for $2,000 a month. The lease ends on May 31, 2019 and has an option to terminate at any time with a 30-day prior notice period.

Rent expense was $13,600 and $3,900 for the years ended December 31, 20162018 and December2017, respectively.

Merger Agreement

On March 26, 2018, EnerJex Resources, Inc. (“EnerJex”), a Nevada company, consummated the transactions contemplated by that certain Agreement and Plan of Merger, dated October 19, 2017, pursuant to which AgEagle Merger Sub, Inc., a Nevada corporation and a wholly-owned subsidiary of EnerJex, merged with and into AgEagle Aerial Systems Inc., a privately held company organized under the laws of the state of Nevada (“AgEagle Sub”), with AgEagle Sub surviving as a wholly-owned subsidiary of EnerJex (the “Merger”). In connection with the Merger, EnerJex changed its name to AgEagle Aerial Systems Inc. (the “Company”) and AgEagle Sub changed its name to “Eagle Aerial Systems, Inc.” The Company’s Common Stock will continue to trade on the NYSE American under its new symbol “UAVS” commencing on March 27, 2018. As a result of the Merger, through AgEagle Sub, the Company is now engaged in the business of designing, developing, producing, distributing and supporting technologically-advanced small unmanned aerial vehicles (UAVs or drones) that it supplies to the precision agriculture industry.

F-23

AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 respectively for options granted.2018 AND 2017

Note 11 – Commitments and Contingencies-Continued

 

F-12

A summaryEach share of Common Stock issued and outstanding and underlying options and warrants of AgEagle Sub outstanding immediately prior to the Merger was exchanged for 1.66 shares of Company Common Stock (the “Exchange Ratio”). As a result, at the effective time of the Merger (the “Effective Time”), 5,439,526 shares of AgEagle Sub’s capital stock, representing all currently outstanding shares of Common Stock and all other debt or equity securities convertible into Common Stock (except options isand warrants as follows:

     Weighted Ave.     Weighted Ave. 
  Options  Exercise Price  Warrants  Exercise Price 
                 
Outstanding January 1, 2015  231,332  $9.33      $ 
Granted  67,332   9.85   1,904,286   2.75 
Cancelled  (10,333)  (10.50)        
Exercised  -   -   -   - 
Outstanding December 31, 2015  288,331  $10.17   1,904,286  $2.75 
Granted  -   -   -   - 
Cancelled  (80,667)  (7.15)  -   - 
Exercised          -   - 
Outstanding December 31, 2016  207,664  $9.69   1,904,286  $2.75 

The numberdescribed below) were automatically converted into 7,944,941 shares of Company Common Stock. In addition, at the Effective Time, 685,100 outstanding options thatand 500,000 warrants to purchase shares of AgEagle Sub Common Stock were vested at December 31, 2016 was 195,172. The numberassumed by EnerJex and converted into 1,134,830 options and 828,221 warrants to purchase shares of options that were not vested at December 31, 2016 was 12,493.

Common Stock of the Company.

 

Note 4 - Asset Retirement Obligation

Our asset retirement obligations relate to the abandonmentAll holders of oil and gas wells. The amounts recognized are based on numerous estimates and assumptions, including future retirement costs, inflation rates and credit adjusted risk-free interest rates. The following shows the changes in asset retirement obligations:

Asset retirement obligations, January 1, 2015 $2,906,093 
Liabilities incurred during the period  - 
Release of liabilities associated with the sale of oil properties  (70,083)
Liabilities settled during the year  (2,244)
Accretion  257,712 
Asset retirement obligations, December 31, 2015 $3,091,478 
Liabilities incurred during the period  - 
Liabilities settled during the year  (2,767)
Accretion  225,480 
Asset retirement obligations, December 31, 2016 $3,314,191 

F-13

Note 5 - Long-Term Debt

Senior Secured Credit Facility

On October 3, 2011, the Company, DD Energy, Inc., EnerJex Kansas, Inc., Black Sable Energy, LLC and Working Interest, LLC (“Borrowers”) entered into an Amended and Restated Credit Agreement with Texas Capital Bank, and other financial institutions and banks that may become a party to the Credit Agreement from time to time. The facilities provided under the Amended and Restated Credit Agreement are to be used to refinance Borrowers prior outstanding revolving loan facility with Bank, dated July 3, 2008, and for working capital and general corporate purposes.

At our option, loans under the facility bear stated interest based on the Base Rate plus Base Rate Margin, or Floating Rate plus Floating Rate Margin (as those terms are defined in the Credit Agreement). The Base Rate will be, for any day, a fluctuating rate per annum equal to the higher of (a) the Federal Funds Rate plus 0.50% and (b) the Bank’s prime rate. The Floating Rate shall mean, at Borrower’s option, a per annum interest rate equal to (i) the Eurodollar Rate plus Eurodollar Margin, or (ii) the Base Rate plus Base Rate Margin (as those terms are defined in the Amended and Restated Credit Agreement). Eurodollar borrowings may be for one, two, three, or six months, as selected by the Borrowers. The margins for all loans are based on a pricing grid ranging from 0.00% to 0.75% for the Base Rate Margin and 2.25% to 3.00% for the Floating Rate Margin based on the Company’s Borrowing Base Utilization Percentage (as defined in the Amended and Restated Credit Agreement).

We entered into a First Amendment to Amended and Restated Credit Agreement and Second Amended and Restated Promissory Note in the amount of $50,000,000 with Texas Capital Bank, which closed on December 15, 2011. The Amendment reflects the addition of Rantoul Partners, as an additional Borrower and adds as additional security for the loans the assets held by Rantoul Partners.

On August 31, 2012, we entered into a Second Amendment to Amended and Restated Credit Agreement with Texas Capital Bank. The Second Amendment: (i) increased the borrowing base to $7,000,000 (ii) reduced the minimum interest rate to 3.75% and (iii) added additional new leases as collateral for the loan.

On November 2, 2012, we entered into a Third Amendment to Amended and Restated Credit Agreement with Texas Capital Bank. The Third Amendment (i) increased the borrowing base to $12,150,000 and (ii) clarified certain continuing covenants and provided a limited waiver of compliance with one of the covenants so clarified for the fiscal quarter ended December 31, 2011.

On January 24, 2013, we entered into a Fourth Amendment to Amended and Restated Credit Agreement, which was made effective as of December 31, 2012 with Texas Capital Bank.  The Fourth Amendment reflects the following changes: (i) the Bank consented to the restructuring transactions related to the dissolution of Rantoul Partners, and (ii) the Bank terminated a Limited Guaranty, as defined in the Credit Agreement, executed by Rantoul Partners in favor of the Bank

On April 16, 2013, the Bank increased our borrowing base to $19.5 million.

On September 30, 2013, the Company entered into a Fifth Amendment to the Amended and Restated Credit Agreement.   The Fifth Amendment reflects the following changes:  (i) an expanded principal commitment amount of the Bank to $100,000,000; (ii) increased the Borrowing Base to $38,000,000; (iii) added Black Raven Energy, Inc. to the Credit Agreement as borrower parties; (iv) added certain collateral and security interests in favor of the Bank; and (v) reduced the Company’s current interest rate to 3.30%.

On November 19, 2013, we entered into a Sixth Amendment to the Amended and Restated Credit Agreement. The Sixth Amendment reflects the following changes: (i) the addition of Iberia Bank as a participant in our credit facility, and (ii) a technical correction to our covenant calculations.

On May 22, 2014, we entered into a Seventh Amendment to the Amended and Restated Credit Agreement. The Seventh Amendment reflects the Bank’s consent to our issuance of up to 850,000 shares of ourEnerJex’s 10% Series A Cumulative Redeemable Perpetual Preferred Stock (the “Series A Preferred Stock”) had their shares automatically converted into 896,640 shares of the Company’s Common Stock. EnerJex’s Series B Convertible Preferred Stock (the “Series B Preferred Stock”) remains outstanding, and 1,624 shares of Series C Convertible Preferred Stock (the “Series C Preferred Stock”) are now convertible into 1,060,432 shares of Company Common Stock. Furthermore, an additional 5,051 shares of Series C Preferred Stock, convertible into 3,298,348 shares of Company Common Stock, were issued to the current holder of Series C Preferred Stock in connection with a $4 million financing of Series C Preferred Stock (the “Financing”) and the conversion and retirement of $425,000 in prior EnerJex promissory notes due and owing to such holder.

As of the Effective Time, the former shareholders of AgEagle Sub owned approximately 67% of the Company’s Common Stock (inclusive of the AgEagle Sub assumed stock options and warrants), the former EnerJex holders of Common Stock, the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock, which were outstanding immediately prior to the Financing, collectively own 12.7% of the Company’s Common Stock on a fully-diluted basis.

In connection with the Merger, AgEagle waived the requirement for EnerJex to have paid and satisfied in full all outstanding indebtedness of EnerJex such that there would be no continuing liabilities of EnerJex subsequent to the closing of the Merger (“Liability Condition”). In consideration for AgEagle waiving the Liability Condition, the 1,215,278 shares of Common Stock to be held in escrow (valued at $350,000) owned by certain former principal stockholders, officers and directors of EnerJex to secure losses, if any, that may be suffered by the AgEagle indemnified parties pursuant to the indemnification obligations under the Merger Agreement, were never issued and such former principal stockholders, officers and directors are not entitled to receive such shares. However, such former principal stockholders, officers and directors received, in the aggregate, deferred salaries and fees valued at approximately $297,500. In lieu of payment of the deferred salaries and fees in cash, such amounts have been converted into an aggregate of 1,032,986 shares of Company Common Stock.

Prior to the Merger, EnerJex operated as an oil exploration and production company engaged in the acquisition, development, exploration and production of oil in Eastern Kansas. In connection with the Merger, EnerJex disposed of its principal assets, consisting primarily of its Kansas oil and gas properties.

F-24

AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

Note 11 – Commitments and Contingencies-Continued

Employment and Board Agreements

 

On August 15, 2014 we entered intoJuly 10, 2018, the Company appointed Corbett Kull as an Eighth Amendmentindependent director to serve on the Company’s Board of Directors (the “Board”). Mr. Kull’s appointment fills a vacancy on the Board.

As compensation for his services as an independent director, Mr. Kull received an initial grant of 41,250 stock options at an exercise price of $1.77 per share (the “Initial Grant”). The Initial Grant is exercisable for a period of five years and vests in equal quarterly installments over a one-year period from the date of grant. In addition, Mr. Kull will receive a quarterly grant of 16,500 with an exercise price at the current market price of the Company’s Common Stock at the time of issuance (the “Quarterly Options”). The Quarterly Options are exercisable for a period of five years from the date of grant and vest in equal quarterly installments over a period of two years from the date of grant.

Effective November 21, 2018, Mr. Scott Burell resigned from the Board of Directors of the Company and his positions as a member of the Compensation and Nominating and Corporate Governance Committee and Chairman of the Audit Committee. As a result of his resignation, Mr. Burell did not receive any options for the last quarter of 2018 as options are awarded upon completion of the term. To replace Mr. Burell, Ms. Louisa Ingargiola was appointed on November 27, 2018 as a director of the Board of Directors of the Company, a member of the Compensation and Nominating and Corporate Governance Committee and Chairman of the Audit Committee.

Pursuant to his offer letter Mr. Louisa Ingargiola is entitled to receive for his service on the board: (1) an initial grant of five-year options to purchase 41,250 shares of Common Stock upon appointment, which was at an exercise price of $0.77 (equal to the Amendedmarket price of our Common Stock on the date of grant) that will vest in equal installments every calendar quarter over a one year period; and Restated Credit Agreement. The Eighth Amendment reflects(2) five-year options to purchase 16,500 shares of Common Stock per calendar quarter of service at an exercise price per share equal to the following changes: (i)market price of our Common Stock at the borrowing base was increased from $38 million to $40 million, and (ii)time of issuance that will vest in equal installments every calendar quarter for the maturitytwo year period after date the grant.

Effective as of July 18, 2018, Mr. Barrett Mooney joined the Company as Chief Executive Officer. Mr. Bret Chilcott, founder of the facility was extended by three years to October 3, 2018.Company, stepped down as Chief Executive Officer, but will remain with the Company as President and Chairman of the Board.

 

On April 29, 2015, we entered intoPursuant to an employment offer letter dated July 9, 2018, Mr. Mooney will receive as compensation for his services as Chief Executive Officer a Ninth Amendmentbase salary of $220,000 per year, which shall be subject to annual performance review by the Compensation Committee of the Board and may be revised by the Board, in its sole discretion. Mr. Mooney received an initial grant of 75,000 shares of restricted Common Stock of the Company which is fully vested. Mr. Mooney was also eligible to receive an award of 75,000 shares of restricted Common Stock of the Company which fully vested as of January 1, 2019 if, and only if, the stock price of the Company reached $3.55 per share and the closing price per share was at or above such price at the end of the day on January 1, 2019.

In addition, Mr. Mooney is eligible to receive an award of 20,000 non-qualified stock options under the Company’s 2017 Omnibus Equity Incentive Plan (the “Equity Plan”) upon securing one sustainability pilot program on or before October 31, 2018, and an additional award of 30,000 non-qualified stock options under the Equity Plan upon securing a second sustainability pilot program on or before January 31, 2019. Both awards shall provide for immediate vesting and exercisability at an exercise price equal to the Amended and Restated Credit Agreement. Infair market value of the Ninth Amendment,Company’s shares of Common Stock underlying the Banks (i) re-determinedoptions as of the Borrowing Basedate of grant. Mr. Mooney will also be eligible to receive an award of up to 55,000 non-qualified stock options under the Equity Plan based upon the recent Reserve Reportresults of his annual performance review in the first quarter of 2019.

F-25

AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

Note 11 – Commitments and Contingencies-Continued

Effective December 18, 2018, an amendment was signed for the original employment offer letter dated January 1, 2015, (ii) imposed affirmative obligations onJuly 9, 2018 hereby providing an amendment to provide that in lieu of the issuance of 75,000 shares of restricted Common Stock of the Company to use a portion of proceeds received with regard to future sales of securities or certain assets to repay the loan, (iii) consented to non-compliance by(the “Shares”), the Company with certainshall award to Executive 125,000 Nonqualified Stock Options (the “Stock Options”) under the Company’s 2017 Omnibus Equity Incentive Plan (the “Equity Plan”). The Stock Options shall be subject to the terms of the Credit Agreement, (iv) waived certain provisionsEquity Plan and standard option award agreement which shall have a term of 10 years and provide for vesting over a one-year period and exercisability at an exercise price equal to the fair market value of the Credit Agreement, and (v) agreed to certain other amendmentsCompany’s Common Stock as of the date of the grant. The award of 75,000 shares were returned to the Credit Agreement.company and immediately cancelled.

 

F-14

On May 1, 2015, the Borrowers and the Banks entered into a Letter Agreement to clarify that up to $1,000,000 in proceeds from any potential future securities offering will be unencumbered by the Banks’ Liens as described in the Credit Agreement through November 1, 2015, and that, until November 1, 2015, such proceeds shall not be subject to certain provisions in the Credit Agreement prohibiting the Company from declaring and paying dividends that may be due and payable to holders of securities issued in such potential offerings or issued prior to the Letter Agreement.Note 12 — Related Party Transactions

 

On August 12, 2015, we entered into a Tenth Amendment to the Amended and Restated Credit Agreement. The Tenth Amendmentfollowing reflects the following changes: (i) allowrelated party transactions during the Company to sell certain oil assets in Kansas, (ii) allow for approximately $1,300,000 of the proceeds from the sale to be reinvested in Company owned oilyears ended December 31, 2018 and gas projects and (iii) apply not less than $1,500,000 from the proceed of the sale to outstanding loan balances.2017.

 

Consulting Agreement

On November 13,March 1, 2015, the Company entered into a Eleventh Amendmentstrategic consulting agreement to assist it with raising capital and strategic positioning in an effort to increase its valuation. Under the terms of the agreement, the Company agreed to issue 125,000 shares of the Companys Common Stock on May 1, 2015, an additional 125,000 shares of Common Stock on January 15, 2016 and 125,000 stock options exercisable for five years from the issuance date. As of December 31, 2015, no shares were issued to the Amendedconsultant. The Company recognized $1,250,000 of consulting expense during 2015 and Restated Credit Agreement. The Eleventh Amendment reflects2016 related to the following changes: (i) waived certain provisionsvalue of the Credit Agreement, (ii) suspend certain hedging requirements, and (iii) to make certain other amendments toshares earned, which was based on the Credit Agreement.

On April 1,estimated fair value of the stock as of December 31, 2015, based on the terms of a transaction which ultimately closed on February 22, 2016 by issuing 500,000 shares of its Common Stock, as there was no dis-incentive for non-performance. During 2016, the Company informedrecognized $555,556 of consulting expense related to the Bank that it would cease makingissuance of the mandatory monthly borrowing base reduction paymentsCommon Stock and did not make$138,802 related to the required April 1, 2016 payment. stock options. No additional expense was recorded for the year-ended December 31, 2017 for the common shares granted in connection with the strategic consulting agreement executed in March 2015. During the 2017, the Company recognized $6,397 of additional consulting expense related to the issuance of the Common Stock for the stock options as a result of the modification of the exercise price of the options from $2.60 per share to $0.10 per share.

Promissory Notes

The Company made its mandatory quarterlyissued promissory notes for an aggregate amount of $76,050 (the “Related Party Notes A”) that accrued interest payment on April 6, 2016at an annual rate of 8% and on April 7, 2016 enteredwere set to mature as of the date of the Merger. For the years ended December 31, 2018 and 2017, the Company recorded$1,386 and$5,420 of interest expense, respectively. As of the Merger Date, the principal of $76,050 and the accrued interest of $7,239 were converted at $1.25 per share into 110,371 shares of the Company’s Common Stock.

The Company issued promissory notes for an aggregate amount of $55,000 (the “Related Party Notes B”) that accrued interest at an annual rate of 8% and were set to mature as of the date of the Merger. It was determined that there were no aggregate beneficial conversion features. For the years ended December 31, 2018 and 2017 the Company recorded $1,002 and $2,684 of interest expense, respectively. As of the Merger Date, the principal of $55,000 and the accrued interest of $3,686 were converted at $1.25 per share into 77,769 shares of the Company’s Common Stock.

F-26

AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

Note 12 — Related Party Transactions-Continued

Transactions with Officers

The Company’s Chief Financial Officer, Nicole Fernandez-McGovern, is one of the principals of Premier Financial Filings, a Forbearance Agreement whereby the Bank agreedfull-service financial printer. Premier Financial Filings provided contracted financial services to not exercise remedies and rights afforded it under the Amended and Restated Credit Agreement for thirty days. On May 31, 2016, the Company and their related expenses have been included within general and administrative expenses. For the Bank amended the Forbearance Agreementyear ended December 31, 2018, Premier Financial Filings provided services to extend the forbearance period to August 31, 2016. On July 29, 2016, the Company resulting in fees of $13,302, and an accounts payable of $1,915 as of December 31, 2018.

Note 13 – Income Taxes

Prior to April 15, 2015, AgEagle Aerial Systems Inc. was treated as a disregarded entity for income tax purposes. Income taxes, if any, were the Bank entered into a Third Forbearance Agreement which extended the forbearance period to October 1, 2016. Upon the expirationresponsibility of the Third Forbearance agreement,sole member. In April 2015, the Company did not enter intowas converted to a fourth Forbearance Agreement. Also, at that time the Company discontinued payment of interest on its outstanding loan obligations with the Bank.

On February 10, 2017, Borrowers, TCB and IberiaBank (collectively, "Sellers"), and PWCM Investment Company IC LLC, and certain financial institutions (collectively, "Buyers") entered into that certain Loan Sale Agreement ("LSA"), pursuant to which Seller sold to Buyers, and Buyers purchased from Sellers, all of Sellers' right, title and interest in, to and under the Credit Agreement and Loan Documents, in exchange for (i) a cash payment of $5,000,000 (the "Cash Purchase Price"), (ii) a Synthetic Equity Interest equal to 10% of the Proceeds, after Buyer's realization of 150% return on the Cash Purchase Price within five (5) years of the Closing Date, with payment being distributed 65.78947368% to TCB and 34.21052632% to IberiaBank, and (iii) at any time prior to the five (5) years of February 10, 2017, Buyer may acquire the interest in clause (ii) above. In connection with the LSA, Borrowers release Sellers and its successors as holders of the rights under the Credit Agreement and Loan Documents, including Buyers, from any and all claims under the Credit Agreement and Loan Documents.

On February 10, 2017, the Company, TCB and IberiaBank (collectively, "Sellers"), and PWCM Investment Company IC LLC, and certain financial institutions (collectively, "Buyers") entered into a Loan Sale Agreement ("LSA"), pursuant to which Seller sold to Buyers, and Buyers purchased from Sellers, all of Sellers' right, title and interest in, to and under the Credit Agreement and Loan Documents, in exchange for (i) a cash payment of $5,000,000 (the "Cash Purchase Price"), (ii) a Synthetic Equity Interest equal to 10% of the Proceeds, after Buyer's realization of 150% return on the Cash Purchase Price within five (5)  years of the Closing Date, with payment being distributed 65.78947368% to TCB and 34.21052632% to IberiaBank, and (iii) at any time prior to February 10, 2022, Buyer may acquire the interest in clause (ii) above. In connection with the LSA, the Company release Sellers and its successors as holders of the rights under the Credit Agreement and Loan Documents, including Buyers, from any and all claims under the Credit Agreement and Loan Documents.

Also on February 10, 2017, the Company and its subsidiaries, and successor lender entered into a binding letter agreement dated February 10, 2017, which was subsequently amended on March 30, 2017 (as amended, the “letter agreement”) pursuant to which:

1.the successor lender would agree to forgive our existing secured loan in the approximate principal amount of $17,295,000, and in exchange enter into a secured promissory note (which we refer to as the "restated secured note") in the original principal amount of $4,500,000.

2.we would:

a.convey our oil and gas properties and associated performance and surety bonds in Colorado, Texas, and Nebraska, and

b.all of our shares of Oakridge Energy, Inc. (together, the "conveyed oil and gas assets"); and

c.retain our assets in Kansas and continue as a going concern. The Kansas assets currently provide most of our current operating revenue.

The restated secured note shall:

a.be secured by a first-priority lien in the Company’s oil and gas producing assets situated in the State of Kansas,

b.evidence accrued interest on the $4,500,000 principal balance at a rate of 16% per annum,

c.bear interest from and after May 1, 2017, at a rate of 16.0% per annum,

d.be pre-payable in full at a discount at any time during the term of the restated secured note upon EnerJex's paying $3,300,000 to successor lender, and

e.mature and be due and payable in full on November 1, 2017.

We will have 2 options to extend the maturity date of the restated secured note by 90 days each upon payment of an extension fee of $100,000, which shall be applied against the principal balance of the note.

So long as we repay the $3,300,000 in indebtedness on or prior to the maturity date, as extended, all other amounts payable under the restated secured note shall be forgiven.corporation.

 

The ClosingCompany accounts for income taxes in accordance with FASB ASC Topic 740, Accounting for Income Taxes which requires the Company to provide a net deferred tax asset or liability equal to the expected future tax benefit or expense of temporary reporting differences between book and tax accounting and any available operating loss or tax credit carryforwards. At December 31, 2018 and 2017, the total of all deferred tax assets was $1,400,620 and $899,073 respectively. The amount of and ultimate realization of the benefits from the deferred tax assets for income tax purposes is expected to occur on or before May 1, 2017 (the February 10, 2017 letter agreement provided fordependent, in part, upon the tax laws in effect, the Company’s future earnings, and other future events, the effects of which cannot be determined. Because of the uncertainty surrounding the realization of the deferred tax assets the Company has established a Closing on or before April 30, 2017. This was amended to May 1, 2017 in the amendment).

F-15

Note 6 - Commitmentsvaluation allowance of $1,400,620 and Contingencies

Rent expense$899,073 for the years ended December 31, 2016 and 2015 was approximately $148,000 and $149,000 respectively. Future non-cancellable minimum lease payments are approximately, $145,000 for 2017, $91,000 for 2018 and $77,000 for 2019.

As of December 31, 2016, the Company has an outstanding irrevocable letter of credit2017, respectively. The change in the amount of $50,000 issued in favor of the Texas Railroad Commission. This letter of credit is required by the Commission by all companies operating in the state in accordance with limits prescribed by the Texas Railroad Commission.

We, as a lessee and operator of oil and gas properties, are subject to various federal, state and local laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability on the lessee under an oil and gas lease for the cost of pollution clean-up resulting from operations and subject to the lessee to liability for pollution damages. In some instances, the Company may be directed to suspend or cease operations in the affected area.  As of December 31, 2016, we have no reserve for environmental remediation and are not aware of any environmental claims.

On September 23, 2016 the Company, American Standard Energy Corporation, Baylor Operating LLC, Bernard Given and Loeb & Loeb LLP were sued by Geronimo Holdings Corporation and Randal Capps in the 143rd Judicial District Court located in Pecos, Texas. The suit among other things, seeks damages for an alleged unlawful sale of properties in Crockett County Texas and for alleged unpaid royalties. The Company believes the suit is without merit and will vigorously defend itself. The Company has faith that it will prevail and at December 31, 2016 no reserve for potential losses arising from this matter has been recorded. Additionally under its agreement with Baylor Operating LLC, Baylor has agreed to indemnify and defend the Company against all lawsuits and claims including this one.

On April 26, 2016 C&F Ranch, LLC sued the Company in Allen County Kansas for alleged breach of contract related to the rental of certain lands located on the C&F Ranch. The Company believes that has paid all rents owe to C&F Ranch LLC and will vigorously defend itself. The Company has faith that it will prevail and at December 31, 2016 no reserve for potential losses arising from this matter has been recorded.

Note 7 - Income Taxes

There was no current or deferred income tax expense (benefit)valuation allowance for the years ended December 31, 20162018 and 2017 was $501,548 and $192,125 respectively.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act decreases the U.S. corporate federal income tax rate from a maximum of 35% to a flat 21% effective January 1, 2018. The impact of the re-measurement on the Corporation’s net deferred tax asset, as of December 31, 2015.

The following table sets forth a reconciliation of the provision for income taxes to the statutory federal rate:

  Year Ended December 31, 
  2016  2015 
Statutory tax rate  35.00%  35.00%
State tax rate, net of federal tax  1.78%  1.90%
Other permanent items  0.00%  0.00%
Change in valuation allowance  (36.78)%  (36.90)%
Effective tax rate  (0.00%  0.00%

Significant components of the2017, was an approximately $99,539 decrease in deferred tax assets, with a corresponding decrease in the Company’s valuation allowance, and liabilitiesno impact on income tax expense. The Act also includes a number of other provisions including, among others, the elimination of net operating loss carrybacks and limitations on the use of future losses, the repeal of the Alternative Minimum Tax regime and the repeal of the domestic production activities deduction. These provisions are as follows:not expected to have a material effect on the Corporation.

 

  Year Ended December 31, 
  2016  2015 
Non-current deferred tax asset:        
Oil and gas costs and long-lived assets $11,500,697  $14,513,571 
Derivative instruments  -   934,340 
Net operating loss carry-forward  35,815,113   29,532,954 
Valuation allowance  (47,315,809)  (44,980,865)
Net deferred tax asset (liability) $-  $- 

Given the significant complexity of the Act and anticipated additional implementation guidance from the Internal Revenue Service, further implications of the Act may be identified in future periods.

 

At December 31, 2016, we have2018, the Company had a net operating loss carry forward of approximately $88$2 million expiring in 2021-20372035-2037. Approximately a $100,000 of net operating loss carry forward with no expiration. Management has determined that is subject to certain limitations on an annual basis. Aa 100% valuation allowance has beenbe established against net operating losses where it is more likely than not that such losses will expire or will not be available before they are utilized.

 

The Company incurred a change of control as defined byacquired EnerJex, Inc. in 2018 and changed the Internal Revenue Code. Accordingly, the rules will limit the utilization of the Company’s net operating losses.name from EnerJex, Inc. to AgEagle Aerial Systems Inc. The limitation is determined by multiplying the value of the stock immediately before the ownership change by the applicable long-term exempt rate. It is estimated that approximately $40.9 million offederal net operating losses may be subjectcarried forward by EnerJex, Inc. prior to an annual limitation. Any unused annualthe acquisition are not available to the Company. This limitation may be carried overis due to later years. The amountthe IRC 382 limitation requirement that the business that generated the net operating losses continue for a minimum of the limitation may under certain circumstances be increased by the built-in gains in assets held by the Company at the time of the change that are recognized in the five-year periodtwo years after the change.acquisition.

 

F-27

F-16

 

AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

 

Note 8 - Fair Value Measurements

We hold certain financial assets which are required to be measured at fair value on a recurring basis in accordance with the Statement of Financial Accounting Standard No. 157,“Fair Value Measurements” (“ASC Topic 820-10”).   ASC Topic 820-10 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  ASC Topic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability. The three levels of the fair value hierarchy under ASC Topic 820-10 are described below:

Level 1. Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access.  We believe receivables, payables and our debt approximate fair value at December 31, 2016.

Level 2. Valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.  We consider the derivative liability to be Level 2.  We determine the fair value of the derivative liability utilizing various inputs, including NYMEX price quotations and contract terms.

Level 3. Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. We consider the marketable securities to be a Level 3. Our derivative instruments consist of fixed price commodity swaps.  

  Fair Value Measurement 
  Level 1  Level 2  Level 3 
Marketable securities $-  $-  $210,990 

Note 9 - Derivative Instruments

We enter into derivative or physical arrangements with respect to portions of our crude oil production to reduce our sensitivity to volatile commodity prices and/or to meet hedging requirements under our Credit Facility.  We believe that these derivative arrangements, although not free of risk, allowed us to achieve a more predictable cash flow and to reduce exposure to commodity price fluctuations.  However, derivative arrangements limit the benefit of increases in the prices of crude oil.  Moreover, our derivative arrangements applied only to a portion of our production.

We had an Inter-creditor Agreement in place between the Company; our counterparties, BP Corporation North America, Inc. and Cargill Incorporated and our agent, Texas Capital Bank, N.A., which allows Texas Capital Bank to also act as agent for the counterparties for the purpose of holding and enforcing any liens or security interests resulting from our derivative arrangements.  Therefore, we were not required to post additional collateral, including cash.

At December 31, 2016 all derivative contracts had expired. 

For years ended December 31, 2016 and 2015, the fair value of the Company’s derivative contracts were reflected in current assets on the balance sheet.  We recorded a loss related to the mark to market our derivative contracts for the year ended December 31, 2016 and 2015 of $2,531,401 and $2,194,679 respectively. 

F-17

Note 10 - Net13 – Income Per Common ShareTaxes-Continued

 

The Company reports earnings per share in accordance with ASC Topic 260-10,“Earnings per Share.” Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.

Note 11 - Impairment of Oil and Gas Properties

Pursuant to full cost accounting rules, the Company must perform a ceiling test each quarter on its proved oil and natural gas assets within each separate cost center. All of the Company’s costs are included in one cost center because all of the Company’s operations are located in the United States. The Company’s ceiling test was calculated using trailing twelve-month, unweighted-average first-day-of-the-month prices for oil and natural gas as of December 31, 2016, which were based on a West Texas Intermediate oil price of $42.75 per Bbl and a Henry Hub natural gas price of $2.49 per MMBtu (adjusted for basis and quality differentials), respectively. The trailing twelve-month, unweighted-average first-day-of-the-month prices for oil and natural gas as of September 30, 2016, was based on a West Texas Intermediate oil price of $41.97 per Bbl and a Henry Hub natural gas price of $2.39 per MMBtu (adjusted for basis and quality differentials), respectively. The twelve-month, unweighted-average first-day-of-the –month price as of June 30, 2016 was $42.46 per Bbl and $2.63per MMBtu The twelve-month, unweighted-average first-day-of-the –month price as of March 31, 2016 was $45.16 per Bbl and $2.40 per MMBtu (adjusted for basis and quality differentials), respectively. Utilizing these prices, the calculated ceiling amount was less than the net capitalized cost of oil and natural gas properties as of December 31, 2016, and as a result, a pre-tax write-down of $588,073 was recorded. Utilizing these prices, the calculated ceiling amount was less than the net capitalized cost of oil and natural gas properties as of September 30, 2016, and as a result, a pre-tax write-down of approximately $800,000 was recorded. At June 30, 2016 the calculated ceiling amount was less than net capitalized cost of oil and natural gas properties resulted in a pre-tax write-down of $2.1 million. At March 31, 2016 the calculated ceiling amount was less than net capitalized cost of oil and natural gas properties resulted in a pre-tax write-down of $4.5 million. For the year ended December 31, 2015 and 2016 the Company recorded and impairment charges of $48,930,087 and $8,032,670 respectively. Additional material write-downs of the Company’s oil and gas properties could occur in subsequent quarters in the event that oil and natural gas prices remain at current depressed levels, or if the Company experiences significant downward adjustments to its estimated proved reserves.

Note 12 - Other Income

The following table depicts the components of other income tax benefit for the years ended December 31, 20162018 and 2017 consist of the following:

  2018 2017
Deferred tax benefit:        
Federal $(435,942) $(166,991)
State  (65,606)  (25,134)
Increase in valuation allowance $(501,548) $(192,125)

A reconciliation of income tax expense at the federal statutory rate to income tax expense at the Company’s effective rate for the years ended December 31 2015:is as follows:

 

  Year ended
December 31,
2016
  Year ended
December 31,
2015
 
       
Realized gain (loss) clearing of derivative contracts $2,382,184  $4,662,012 
Loss on sale of fixed assets  -   (13,661)
Miscellaneous income  24,124   27,105 
Interest income  32   398 
Other Income $2,406,340  $4,675,854 
  2018 2017
  Amount Rate Amount Rate
Computed tax at the expected statutory rate $(436,733)  21.00% $(271,053)  34.00%
State and local income taxes, net of federal  (65,606)  3.16   (20,998)  2.64 
Other non-deductible expenses  743   (0.04)  387   (0.05)
Change due to impact of tax rates     (0.00)  99,502   (12.49)
Provision to return true up  48   (0.00)  37   (0.00)
Change in valuation allowance  501,548   (24.12)  192,125   (24.10)
Income tax benefit $   0.00% $   0.00%

The temporary differences, tax credits and carryforwards that gave rise to the following deferred tax assets at December 31 is as follows:

 

Deferred tax assets: 2018 2017
Deferred revenue $1,182  $ 
Property and equipment  6,221   5,209 
Interest  5,826   38,629 
Goodwill amortization  (17,876)   
Intangibles tax amortization  7,488    
Stock options for consulting services employees and directors  32,083   5,363 
Stock options for consulting services-related party  51,878   51,878 
Common Stock for consulting services-related party  302,000   302,000 
Warrant expense  2,194   2,194 
Net operating loss carryforward  1,021,276   493,751 
Total Deferred tax assets  1,400,620   899,024 
Valuation allowance  (1,400,620)  (899,024)
Net Deferred tax assets $  $ 

 

F-28

F-18

 

AGEAGLE AERIAL SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

Note 13 -14- Subsequent Events

 

Loan Sale AgreementPreferred C Share Conversions

During the month of January 2019, Alpha Capital Anstalt converted 270 shares of Series C Preferred Stock into 433,369 shares of Common Stock at a conversion price of $0.54.

During the month of February 2019, Alpha Capital Anstalt converted 216 shares of Series C Preferred Stock into 400,000 shares of Common Stock at a conversion price of $0.54.

 

On February 10, 2017,During the Company, TCB and Iberia Bank (collectively, the "Bank"), and PWCM Investment Company IC LLC, and certain financial institutions (collectively, the "successor lender") enteredmonth of March 2019, Alpha Capital Anstalt converted 540 shares of Series C Preferred Stock into 1,000,000 shares of Common Stock at a loan sale agreement pursuant to which theBank sold to successor lender the Bank’s right, title and interest in, to and under the Credit Agreement and Loan Documents, in exchange for (i) a cash paymentconversion price of $5,000,000 (the "Cash Purchase Price"), (ii) a synthetic equity interest equal to 10% of the proceeds, after successor lender’s realization of 150% return on the Cash Purchase Price within 5 years of the Closing Date, with payment being distributed 65.78947368% to TCB and 34.21052632% to IberiaBank, and (iii) at any time prior to February 10, 2022,, Successor Lender may acquire the synthetic interest in clause (ii) above. In connection with the LSA, we release Sellers and its successors as holders of the rights under the Credit Agreement and Loan Documents, including successor lender, from any and all claims under the Credit Agreement and Loan Documents.$0.54.

 

Also on February 10, 2017, the Company and its subsidiaries, and successor lender entered into a binding letter agreement dated February 10, 2017, which was subsequently amended on March 30, 2017 (as amended, the “letter agreement”) pursuant to which:

1.the successor lender would agree to forgive our existing secured loan in the approximate principal amount of $17,295,000, and in exchange enter into a secured promissory note (which we refer to as the "restated secured note") in the original principal amount of $4,500,000.

2.we would:

a.convey our oil and gas properties in Colorado, Texas, and Nebraska, and

b.all of our shares of Oakridge Energy, Inc. (together, the "conveyed oil and gas assets"); and

c.retain our assets in Kansas and continue as a going concern. The Kansas assets currently provide most of our current operating revenue.

The restated secured note shall:

a.be secured by a first-priority lien in the Company’s oil and gas producing assets situated in the State of Kansas,

b.evidence accrued interest on the $4,500,000 principal balance at a rate of 16% per annum,

c.bear interest from and after May 1, 2017, at a rate of 16.0% per annum,

d.be pre-payable in full at a discount at any time during the term of the restated secured note upon EnerJex's paying $3,300,000 to successor lender, and

e.mature and be due and payable in full on November 1, 2017.

We will have 2 options to extend the maturity date of the restated secured note by 90 days each upon payment of an extension fee of $100,000, which shall be applied against the principal balance of the note.

So long as we repay the $3,300,000 in indebtedness on or prior to the maturity date, as extended, all other amounts payable under the restated secured note shall be forgiven.

The Closing is to occur on or before May 1, 2017.

Management Changes

On February 10, 2017, EnerJex Resources, Inc. and Mr. Robert G. Watson, Jr. CEO entered into a SeparationNew Employment Agreement and Mr. Watson resigned from the Company. Among other things, Mr. Watson agreed to provide consulting services as needed but otherwise has been unemployed since his resignation. On December 7, 2016, prior to his resignation, Mr. Watson recused himself from all Board of Director meetings and has not participated in any Board meetings or discussions since that date. Additionally, on February 10, 2017, Mr. Douglas M. Wright thewith Chief Financial Officer of the Company, resigned from EnerJex Resources, Inc. Since that date Mr. Wright has not been an officer of the Company. Subsequent to his resignation, he entered into an

Effective January 1, 2019, Ms. Fernandez-McGovern signed a new employment agreement with the Company, whereby her annual base salary increased to provide, among other things, consulting services for$180,000 and a ten-year grant of 50,000 stock options to purchase shares of Common Stock at an exercise price of $0.54 were granted. In addition, Ms. Fernandez-McGovern will continue to receive quarterly awards of 12,000 stock options to purchase Common Stock at an exercise price equal to the preparationmarket price of our Common Stock at the time of issue during the term of her employment. All of the Company’s 2016 10-K. The Consulting Services Agreement may be terminated by either party with 30 days written notification.awards will vest equally over two years.

 

F-29

F-19

 

Note 14 - Supplemental Oil and Gas Reserve Information (Unaudited)

Results of operations from oil and gas producing activities

The following table shows the results of operations from the Company’s oil and gas producing activities.  Results of operations from these activities are determined using historical revenues, production costs and depreciation and depletion. The results of operations from the Company’s oil and gas producing activities below exclude non-oil and gas revenues, general and administrative expenses, interest income and interest expense. Income tax expense was determined by applying the statutory rates to pretax operating results.

  Year Ended  Year Ended 
  December 31,  December 31, 
  2016  2015 
Production revenues $2,461,727  $4,878,722 
Production costs  (2,661,258)  (4,501,940)
Depletion and depreciation  (254,329)  (1,108,039)
Income tax  158,851   255,940 
Results of operations for producing activities $(295,009) $(475,317)

Capitalized costs

The following table summarizes the Company’s capitalized costs of oil and gas properties.

  Year Ended  Year Ended 
  December 31,  December 31, 
  2016  2015 
Properties subject to amortization $18,626,746  $26,642,325 
Accumulated depletion  (15,189,716)  (14,935,386)
Net capitalized costs $3,437,030  $11,706,939 

Cost incurred in property acquisition, exploration and development activities

  Year Ended  Year Ended 
  December 31,  December 31, 
  2016  2015 
Acquisition of properties $14,399  $85,895 
Exploration costs  -   - 
Development costs  2,690   165,926 
Net capitalized costs $17,089  $251,821 

F-20

Estimated quantities of proved reserves

Our ownership interests in estimated quantities of proved oil and gas reserves and changes in net proved reserves all of which are located in the United States are summarized below.  Proved reserves are estimated quantities of oil and gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those that are expected to be recovered through existing wells with existing equipment and operating methods. Reserves are stated in barrels of oil equivalent. Geological and engineering estimates by Cobb & Associates, Inc. of proved oil and gas reserves at one point in time are highly interpretive, inherently imprecise and subject to ongoing revisions that may be substantial in amount. Although every reasonable effort is made to ensure that the reserve estimates are accurate, by their nature reserve estimates are generally less precise than other estimates presented in connection with financial statement disclosures.

   December 31, 2016      December 31, 2015   
Proved Reserves Total Proved
Developed
  Proved
Undeveloped
  Total
Proved
  Total Proved
Developed
  Proved
Undeveloped
  Total
Proved
 
                   
Beginning                        
Crude Oil BBL’s  1,287,028   202,884   1,489,912   2,214,038   740,700   2,954,738 
Natural Gas Liquids BBL’s  47,345   -   47,345   89,250   -   89,250 
Natural Gas MCF’s  3,195,895   3,029,514   6,225,409   4,469,845   3,667,314   8,137,159 
Oil Equivalents BOE’s  1,867,041   707,819   2,574,860   3,048,261   1,351,919   4,400,180 
                         
Revisions of previous estimates                        
Crude Oil BBL’s  (898,880)  -   (898,880)  (629,480)  (522,070)  (1,151,550)
Natural Gas Liquids BBL’s  (3,670)  -   (3,670)  (35,860)  -   (35,860)
Natural Gas MCF’s  (108,849)  100   (108,849)  (1,085,542)  (637,800)  (1,723,342)
Oil Equivalents BOE’s  (920,691)  100   (920,592)  (846,264)  (628,370)  (1,474,634)
                         
Sales of minerals in place                        
Crude Oil BBL’s  -   -   -   (201,286)  (15,746)  (217,032)
                         
Production                        
Crude Oil BBL’s  (58,123)  -   (58,123)  (96,244)  -   (96,244)
Natural Gas Liquids BBL’s  (528)  -   (528)  (6,045)  -   (6,045)
Natural Gas MCF’s  (47,554)  -   (47,554)  (188,408)  -   (188,408)
Oil Equivalents BOE’s  (66,578)  -   (66,578)  (133,690)  -   (133,690)
                         
Ending                        
Crude Oil BBL’s  330,025   202,884   532,909   1,287,028   202,884   1,489,912 
Natural Gas Liquids BBL’s  43,237   -   43,237   47,345   -   47,345 
Natural Gas MCF’s  3,039,673   3,029,614   6,069,287   3,195,895   3,029,514   6,225,409 
Oil Equivalents BOE’s  879,874   707,820   1,587,690   1,867,041   707,819   2,574,860 

Proved developed reserves at December 31, 2015 consisted of approximately 71% oil and 29% natural gas and totaled 1,851.9 MBOEs. Proved developed reserves for December 31, 2016 consisted of approximately 42% oil and 58% natural gas and totaled 879.8 MBOEs. Proved undeveloped reserves for December 31, 2015 were 707.8 MBOEs. Proved undeveloped reserves at December 31, 2016 were 707.8 MBOEs.

The Company annually reviews its proved undeveloped reserves to ensure an appropriate plan for development exists. The Company books proved undeveloped reserves only if it plans to convert these reserves to proved developed producing reserves within five years from the date they were first booked. At December 31, 2016 proved undeveloped reserves were approximately 707.8 MBOE’s. The Company plans to develop all the remaining location that comprise the 707.8 MBOE of proved undeveloped reserves within five years. However, the decision to deploy capital and the timing of those expenditures is contingent on many different factors. The Company estimates capital expenditures of approximately $4.3 million will be sufficient to develop these reserves. The development plans assume a continued improvement in commodity pricing and general market conditions within the oil and gas industry.

F-21

The calculation of proved undeveloped reserves requires the Company to make predictions regarding future acquisitions and discoveries and the impact they may have on the Company’s overall development plan of properties it currently owns. The development plan is revised to reflect changes in the oil and gas industry, including changing markets and prices, and new investment opportunities, and such revisions will result in changes to our proved undeveloped reserves. Consequently, the exact timing of capital expenditures will be heavily dependent upon the Company’s interpretation of market opportunities which are deeply influenced by projections of future commodity prices. Each year we will review our five year development plan to maximize the value of our investment in oil and gas assets and in turn maximize shareholder value. At December 31, 2016 we believe the following best characterizes our development plan.

  Estimated Conversion of
Proved Undeveloped Reserves
 
  CAPEX ($MM)  MBOE’s 
2017  -   - 
2018  2,194.2   50.4 
2019  1,664.0   126.2 
2020  182.0   232.9 
2021  288.0   298.3 

For the year ended December 31, 2016 proved reserves decreased 987.1 MBOEs of which production accounted for 66.6 MBOEs or 6.7% of the decrease. The remaining decrease of 920.6 MBOEs, was due primarily to decreases in commodity prices. Crude oil prices decreased $3.49 or 8% and natural gas prices declined 20% or $.37. Diminished commodity pricing triggered negative revisions of 898.9 MBOEs of crude oil classified as proved developed producing. Natural gas liquids decreased pricing resulted in decreases of 3.6 MBOEs to the proved developed producing category. Reduced natural gas prices also reduced amounts classified as proved developed producing by 108.6 MMCF’s. In 2016 there were no material transfers from the proved undeveloped category of 6 reserves to the proved developed category

For the year ended December 31, 2015 proved reserves decreased 1,825.3 MBOEs of which production accounted for 133.7 MBOEs or 7.3% of the decrease. The remaining decrease of 1,691.6 MBOEs, was due primarily to decreases in commodity prices. Crude oil prices decreased $40.00 or 46.1% and natural gas prices declined 42.2% or $1.37. Diminished commodity pricing triggered negative revisions of 586.6 MBOEs of crude oil classified as proved developed producing, negative revisions of 42.9 MBOEs of crude oil classified as proved developed non-producing and negative revisions of 522.1 of MBOEs of crude oil classified as proved undeveloped reserves. Natural gas liquids decreased pricing resulted in decreases of 65.6 MBOEs to the proved developed producing category. Reduced natural gas prices also reduced amounts classified as proved developed producing by 1,347.9 MMCF’s as well as natural gas reserves classified as proved undeveloped by 637.8 MCF. These decreases were partially offset by increases to natural gas liquid reserves classified as proved developed non-producing of 29.7 MBOE and 262.4 MMCF of natural gas reserves classified as proved developed non-producing. In 2015 there were no material transfers from the proved undeveloped category of reserves to the proved developed category.

In 2016 the Company invested approximately $17,100 in its oil and gas properties. These reduced expenditures were in response to extremely low commodity prices. The Company has approximately $1.7 million of current asset on hand and important infrastructure in Colorado completed which will facilitate the exploitation and development of proved undeveloped reserves over the next five years. At year end the Company’s review of proved undeveloped reserves revealed challenges but the Company maintains its belief that reserves will be developed within five years of their initial recording as a proved undeveloped reserve. In addition it believes it has the financial wherewithal to develop all it’s proved undeveloped reserves within the five year time frames required; utilizing its balance sheet, to borrow funds as needed. Additionally, the Company believes it has the ability to joint venture any of its assets.

F-22

Standardized measure of discounted future net cash flows

The standardized measure of discounted future net cash flows from our proved reserves for the periods presented in the financial statements is summarized below.

  Year Ended  Year Ended 
  December 31,  December 31, 
  2016  2015 
Future production revenue $30,085,550  $74,087,130 
Future production costs  (15,278,990)  (46,015,320)
Future development costs  (4,703,230)  (5,901,660)
Future cash flows before income tax  10,103,330   22,170,150 
Future income taxes  -   - 
Future net cash flows  10,103,330   22,170,150 
10% annual discount for estimating of future cash flows  (6,666,300)  (13,400,180)
Standardized measure of discounted net cash flows $3,437,030  $8,769,970 

Changes in standardized measure of discounted future net cash flows

The following is a summary of a standardized measure of discounted net future cash flows related to the Company’s proved oil and gas reserves. The information presented is based on a calculation of estimated proved reserves using discounted cash flows based on the 12-month average price for oil and gas calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month prior period. The additions to estimated proved reserves from new discoveries and extensions could vary significantly from year to year. Additionally, the impact of changes to reflect current prices and costs of reserves proved in prior years could also be significant.

  Year Ended  Year Ended 
  December 31,  December 31, 
  2016  2015 
Balance beginning of year $8,769,970  $62,703,851 
Sales, net of production costs  199,531   (491,055)
Net change in pricing and production costs  (2,012,883)  (51,184,718)
Net change in future estimated development costs  (1,198,430)  7,834,840 
Purchase of minerals in place  -   - 
Extensions and discoveries  -   - 
Sale of minerals in place  -   (2,746,550)
Revisions  (4,538,106)  (8,448,569)
Accretion of discount  2,217,015   16,770,190 
Change in income tax      (15,668,019)
Balance end of year $3,437,030  $8,769,970 

F-23