ITEM
1. FINANCIAL STATEMENTS
EnerJex
Resources, Inc. and Subsidiaries
Condensed
Consolidated Balance Sheets
|
|
June 30,
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(Unaudited)
|
|
|
Assets
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
90,874
|
|
|
$
|
128,035
|
|
Restricted cash
|
|
|
—
|
|
|
|
50,000
|
|
Accounts receivable
|
|
|
262,496
|
|
|
|
600,255
|
|
Derivative receivable
|
|
|
—
|
|
|
|
10,570
|
|
Inventory
|
|
|
71,982
|
|
|
|
185,733
|
|
Marketable securities
|
|
|
—
|
|
|
|
210,990
|
|
Deposits and prepaid expenses
|
|
|
268,229
|
|
|
|
493,384
|
|
Total current assets
|
|
|
693,581
|
|
|
|
1,678,967
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
Fixed assets, net of accumulated depreciation of $579,647 and $1,817,711
|
|
|
217,129
|
|
|
|
2,077,055
|
|
Oil and gas properties using full-cost accounting, net of accumulated DD&A of $8,552,720 and $15,189,716
|
|
|
1,456,044
|
|
|
|
3,437,030
|
|
Other non-current assets
|
|
|
—
|
|
|
|
798,809
|
|
Total non-current assets
|
|
|
1,673,174
|
|
|
|
6,312,894
|
|
Total assets
|
|
$
|
2,366,754
|
|
|
$
|
7,991,861
|
|
Liabilities and Stockholders’ Deficit
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
306,358
|
|
|
$
|
294,241
|
|
Accrued liabilities
|
|
|
525,572
|
|
|
|
1,535,165
|
|
Current portion of long term debt
|
|
|
4,605,806
|
|
|
|
17,925,000
|
|
Total current liabilities
|
|
|
5,437,736
|
|
|
|
19,754,406
|
|
|
|
|
|
|
|
|
|
|
Asset retirement obligation
|
|
|
1,574,717
|
|
|
|
3,314,191
|
|
Other long-term liabilities
|
|
|
5,160,364
|
|
|
|
3,401,149
|
|
Total non-current liabilities
|
|
|
6,735,081
|
|
|
|
6,715,340
|
|
Total liabilities
|
|
|
12,172,817
|
|
|
|
26,469,746
|
|
Commitments & Contingencies
|
|
|
|
|
|
|
|
|
Stockholders’ Deficit:
|
|
|
|
|
|
|
|
|
10% Series A cumulative perpetual redeemable preferred stock, $0.001 par value, 25,000,000 shares authorized; 938,248 shares issued and outstanding June 30, 2017 and December 31, 2016
|
|
|
938
|
|
|
|
938
|
|
Series B convertible preferred stock, $0.001 par value, 1,764 shares authorized, and 1,374 and 1,764 issued and outstanding at June 30, 2017 and December 31, 2016, respectively.
|
|
|
1
|
|
|
|
2
|
|
Series C convertible preferred stock, $0.001 par value,
500 shares authorized; 300 and 0 shares, issued and outstanding at June 30, 2017 and December 31,
2016, respectively
|
|
|
1
|
|
|
|
—
|
|
Series C convertible preferred stock issuable
|
|
|
150,000
|
|
|
|
—
|
|
Common stock, $0.001 par value, 250,000,000 shares authorized; shares
issued and outstanding 10,321,397 at June 30, 2017 and 8,423,936 at December 31, 2016, respectively
|
|
|
10,322
|
|
|
|
8,424
|
|
Paid-in capital
|
|
|
69,645,168
|
|
|
|
69,090,613
|
|
Accumulated deficit
|
|
|
(79,612,493
|
)
|
|
|
(87,577,862
|
)
|
Total stockholders’ deficit
|
|
|
(9,806,063
|
)
|
|
|
(18,477,885
|
)
|
Total liabilities and stockholders’ deficit
|
|
$
|
2,366,754
|
|
|
$
|
7,991,861
|
|
See
Notes to Condensed Consolidated Financial Statements (unaudited).
EnerJex
Resources, Inc. and Subsidiaries
Condensed
Consolidated Statements of Operations
(Unaudited)
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil revenues
|
|
$
|
285,691
|
|
|
$
|
593,174
|
|
|
$
|
895,195
|
|
|
$
|
1,127,147
|
|
Natural gas revenues
|
|
|
—
|
|
|
|
2,506
|
|
|
|
19,509
|
|
|
|
24,532
|
|
Total revenues
|
|
|
285,691
|
|
|
|
595,680
|
|
|
|
914,704
|
|
|
|
1,151,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating costs
|
|
|
199,870
|
|
|
|
653,803
|
|
|
|
808,136
|
|
|
|
1,347,665
|
|
Depreciation, depletion and amortization
|
|
|
101,289
|
|
|
|
84,490
|
|
|
|
225,235
|
|
|
|
248,678
|
|
Impairment of oil and gas asset
|
|
|
—
|
|
|
|
2,137,663
|
|
|
|
—
|
|
|
|
6,644,596
|
|
Professional fees
|
|
|
112,275
|
|
|
|
59,308
|
|
|
|
422,538
|
|
|
|
137,117
|
|
Salaries
|
|
|
267,684
|
|
|
|
326,312
|
|
|
|
277,147
|
|
|
|
810,059
|
|
Administrative expense
|
|
|
137,081
|
|
|
|
91,736
|
|
|
|
271,036
|
|
|
|
248,862
|
|
Total expenses
|
|
|
818,199
|
|
|
|
3,353,312
|
|
|
|
2,004,092
|
|
|
|
9,436,977
|
|
Income (loss) from operations
|
|
|
(532,508
|
)
|
|
|
(2,757,632
|
)
|
|
|
(1,089,388
|
)
|
|
|
(8,285,298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(44,654
|
)
|
|
|
(332,456
|
)
|
|
|
(724,494
|
)
|
|
|
(662,219
|
)
|
Gain on loan sale agreement
|
|
|
11,500,124
|
|
|
|
—
|
|
|
|
11,500,124
|
|
|
|
—
|
|
Loss on derivatives
|
|
|
—
|
|
|
|
(1,295,792
|
)
|
|
|
—
|
|
|
|
(2,381,396
|
)
|
Other income
|
|
|
246,833
|
|
|
|
922,942
|
|
|
|
246,846
|
|
|
|
2,174,186
|
|
Total other income (expense)
|
|
|
11,702,303
|
|
|
|
(705,306
|
)
|
|
|
11,022,476
|
|
|
|
(869,429
|
)
|
Net income (loss)
|
|
$
|
11,169,795
|
|
|
$
|
(3,462,938
|
)
|
|
$
|
9,933,088
|
|
|
$
|
(9,154,727
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
11,169,795
|
|
|
|
(3,462,938
|
)
|
|
|
9,933,088
|
|
|
|
(9,154,727
|
)
|
Preferred dividends
|
|
|
(1,088,108
|
)
|
|
|
(684,139
|
)
|
|
|
(1,967,716
|
)
|
|
|
(1,270,543
|
)
|
Net income (loss) attributable to common stockholders
|
|
$
|
10,081,687
|
|
|
$
|
(4,147,077
|
)
|
|
$
|
7,965,371
|
|
|
$
|
(10,425,270
|
)
|
Net income (loss) per share basic
|
|
$
|
1.06
|
|
|
$
|
(.49
|
)
|
|
$
|
.89
|
|
|
$
|
(1.24
|
)
|
Weighted average shares basic
|
|
|
9,485,078
|
|
|
|
8,423,936
|
|
|
|
8,954,507
|
|
|
|
8,423,936
|
|
Net income (Loss) per share diluted
|
|
$
|
.69
|
|
|
$
|
(.49
|
)
|
|
$
|
.55
|
|
|
$
|
(1.24
|
)
|
Weighted average shares diluted
|
|
|
14,556,606
|
|
|
|
8,423,936
|
|
|
|
14,429,924
|
|
|
|
8,423,936
|
|
See
Notes to Condensed Consolidated Financial Statements (unaudited).
EnerJex
Resources, Inc. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
9,933,088
|
|
|
$
|
(9,154,727
|
)
|
Depreciation, depletion and amortization
|
|
|
150,301
|
|
|
|
248,678
|
|
Amortization of deferred financing costs
|
|
|
223,790
|
|
|
|
60,215
|
|
Impairment of oil and gas assets
|
|
|
—
|
|
|
|
6,644,596
|
|
Stock, options and warrants issued for services
|
|
|
47,951
|
|
|
|
151,234
|
|
Accretion of asset retirement obligation
|
|
|
74,934
|
|
|
|
112,740
|
|
Settlement of asset retirement obligation
|
|
|
—
|
|
|
|
(2,768
|
)
|
Loss on derivatives
|
|
|
—
|
|
|
|
2,381,396
|
|
Gain on loan sale agreement, net of cash
|
|
|
(11,500,124
|
)
|
|
|
—
|
|
Adjustments to reconcile net income (loss) to cash used in operating activities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(21,000
|
)
|
|
|
(28,388
|
)
|
Inventory
|
|
|
(15,943
|
)
|
|
|
(58,740
|
)
|
Prepaid expenses
|
|
|
207,897
|
|
|
|
(159,260
|
)
|
Accounts payable
|
|
|
(6,366
|
)
|
|
|
(828,756
|
)
|
Accrued liabilities
|
|
|
372,949
|
|
|
|
(509,501
|
)
|
Cash used in operating activities
|
|
|
(532,526
|
)
|
|
|
(1,143,281
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase of fixed assets
|
|
|
—
|
|
|
|
(76,570
|
)
|
Additions to oil and gas properties
|
|
|
(4,635
|
)
|
|
|
(16,794
|
)
|
Cash used in investing activities
|
|
|
(4,635
|
)
|
|
|
(93,364
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Repayments of long-term debt
|
|
|
—
|
|
|
|
(611,660
|
)
|
Proceeds from sale of preferred stock
|
|
|
450,000
|
|
|
|
—
|
|
Cash provided by (used in) financing activities
|
|
|
450,000
|
|
|
|
(611,660
|
)
|
|
|
|
|
|
|
|
|
|
Net (decrease) in cash
|
|
|
(87,161
|
)
|
|
|
(1,848,305
|
)
|
Cash – beginning
|
|
|
178,035
|
|
|
|
3,101,682
|
|
Cash – ending
|
|
$
|
90,874
|
|
|
$
|
1,253,377
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
—
|
|
|
$
|
448,041
|
|
Income taxes paid
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
Share based payments issued for services
|
|
$
|
47,951
|
|
|
$
|
151,234
|
|
See
Notes to Condensed Consolidated Financial Statements (unaudited).
EnerJex
Resources, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements (unaudited)
Note
1 – Basis of Presentation
The
unaudited condensed consolidated financial statements of EnerJex Resources, Inc. (“
we
”, “
us
”,
“
our
”, “
EnerJex
” and “
Company
”) have been prepared in accordance with
United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q
and reflect all adjustments which, in the opinion of management, are necessary for a fair presentation. All such adjustments are
of a normal recurring nature. The results of operations for the interim period are not necessarily indicative of the results to
be expected for a full year. Certain amounts in the prior year statements have been reclassified to conform to the current year
presentations. The statements should be read in conjunction with the financial statements and footnotes thereto included in our
Annual Report Form 10-K for the fiscal year ended December 31, 2016, filed with the Securities and Exchange Commission on March
31, 2017.
Our
consolidated financial statements include the accounts of our wholly-owned subsidiaries, EnerJex Kansas, Inc., Black Sable Energy,
LLC, Working Interest, LLC and Black Raven Energy, Inc., for the three and six month periods ended June 30, 2017 and for the year
ended December 31, 2016. All intercompany transactions and accounts have been eliminated in consolidation.
Note
2 – Going Concern
The
accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue
as a going concern.
On
October 3, 2011, the Company, entered into an Amended 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 were 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 of the Agreement by three years to October 3, 2018. On August 12, 2015, 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 an 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) suspended certain hedging requirements,
and (iii) amended other items of the Credit Agreement.
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 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, 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. 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 to the Company had purchased from EnerJex’s secured bank lender
all rights to the Company’s secured indebtedness, and that EnerJex had executed a definitive written agreement for the discharge
of the Company’s secured indebtedness with the purchasing investor group. Final closing on this agreement occurred on May
10, 2017.
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 a 150% return
on the Cash Purchase Price within five (5) years of the closing date of the sale, 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 released 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 agreed to forgive our existing secured loan in the approximate principal amount of $17,295,000, and in exchange
entered into a secured promissory note (which we refer to as the “
restated secured note
”) in the original
principal amount of $4,500,000.
|
|
a.
|
conveyed our oil and gas
properties and associated performance and surety bonds in Colorado, Texas, and Nebraska;
|
|
b.
|
conveyed
all of our shares of Oakridge Energy, Inc. (together, the “
conveyed oil and gas assets
”); and
|
|
c.
|
retained
our assets in Kansas and continued as a going concern. The Kansas assets currently provide most of our current operating revenue.
|
The
restated secured note:
|
a.
|
is secured
by a first-priority lien in the Company’s oil and gas producing assets situated in the State of Kansas,
|
|
b.
|
evidences
accrued interest on the $4,500,000 principal balance at a rate of 16% per annum,
|
|
c.
|
bears
interest from and after May 1, 2017, at a rate of 16.0% per annum,
|
|
d.
|
is pre-payable
in full at a discount at any time during the term of the restated secured note upon EnerJex paying $3,300,000 to successor
lender, and
|
|
e.
|
matures
and is due and payable in full on November 1, 2017.
|
We
will have two options to extend the maturity date of the restated secured note by 90 days each (first to January 30, 2018 and
then to April 30, 2018), upon payment of extension fees of $100,000 for each extension.
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 are to be forgiven.
The
closing occurred on May 10, 2017. As part of the closing procedures and net settlement, we issued a promissory note to Pass Creek
Resources LLC in the amount of $105,806. The promissory bears interest at 16% per annum and matured on June 9, 2017. The amount
due was not paid on June 9, 2017, but the holder has not provided the Company a notice of default.
In
connection with the May 10, 2017 closing and in consideration of the satisfaction of $13,425,000 of the amount due under the Credit
Agreement, as amended, the Company and certain of its subsidiaries transferred to PCR Holdings LLC, an affiliate of the successor
lenders under the Credit Agreement, all of the Company’s oil and gas properties and assets located in Colorado, Texas, and
Nebraska, as well as the Company’s shares of Oakridge Energy, Inc.
To
evidence the Company’s remaining $4,500,000 of indebtedness to PWCM Investment Company IC LLC (“
PWCM
”),
RES Investment Group, LLC (“
RES
”), Round Rock Development Partners, LP (“
Round Rock
”), and
Cibolo Holdings, LLC (“
Cibolo Holdings,
” and together with PWCM, RES and Round Rock, “
Successor Lenders
”),
the Company’s subsidiaries (except Kansas Holdings, LLC) entered into a Second Amended and Restated Credit Agreement with
Cortland Capital Market Services LLC, as Administrative Agent, and the other financial institutions and banks parties thereto
(the “
New Credit Agreement
”), and a related Amended and Restated Note (the “
New Note
”),
in the amount of $3.3 million as described above.
Our
subsidiaries’ obligations under the credit agreement and note are non-recourse and are secured by a first-priority lien
in the Company’s and the subsidiaries’ oil properties and assets located in Kansas. The Company was removed as a borrower
under the Credit Agreement, but entered into a Guaranty of Recourse Carveouts, pursuant to which the Company guarantees the Subsidiaries’
payment of certain fees and expenses due under the Credit Agreement, and may be liable for certain conduct, such as fraud, bad
faith, gross negligence, and waste of the Kansas oil properties or assets.
In
addition to the transactions noted above, the Company is currently discussing potential financing transactions in order to fulfill
our current capital requirements, which we believe, if finalized and completed, will ensure the future viability of the Company.
However, due to our current capital structure and the nature of oil and gas interests, i.e., that rates of production generally
decline over time as oil and gas reserves are depleted, if the Company is unable to obtain the necessary financing to finalize
the asset purchase or drill additional wells; coupled with the continued substantial drop in commodity prices over the last twelve
months, the Company believes that its revenues may continue to decline over time. Therefore, the Company could be forced to scale
back our business plan, sell assets to satisfy outstanding debts or take other remedial steps which could even include seeking
bankruptcy protection.
These
conditions raise substantial doubt about the Company’s ability to continue as a going concern for the next twelve months
following the issuance of these financial statements. The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. Accordingly, the financial statements do not include
any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
Note
3 – Stock Options and Warrants
A
summary of stock options and warrants is as follows:
|
|
|
Options
|
|
|
Weighted
Avg.
Exercise
Price
|
|
|
Warrants
|
|
|
Weighted
Avg.
Exercise
Price
|
|
Outstanding December 31, 2016
|
|
|
|
207,664
|
|
|
$
|
9.69
|
|
|
|
1,904,286
|
|
|
$
|
2.75
|
|
Granted
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Cancelled
|
|
|
|
(50,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding June 30, 2017
|
|
|
|
157,664
|
|
|
$
|
9.69
|
|
|
|
1,904,286
|
|
|
$
|
2.75
|
|
Note
4 – Asset Retirement Obligation
Our
asset retirement obligations relate to the liabilities associated with the abandonment of oil and natural 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, December 31, 2016
|
|
|
$
|
3,314,191
|
|
Release of liabilities
|
|
|
|
(1,814,408
|
)
|
Accretion
|
|
|
|
74,934
|
|
Asset retirement obligations, June 30, 2017
|
|
|
$
|
1,574,717
|
|
Note
5 – Long-Term Debt
Senior
Secured Credit Facility
On
October 3, 2011, the Company and DD Energy, Inc., EnerJex Kansas, Inc., Black Sable Energy, LLC and Working Interest, LLC, its
subsidiaries (“
Borrowers
”) entered into an Amended and Restated Credit Agreement with Texas Capital Bank, N.A.
(the “
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 used to refinance Borrowers’
prior outstanding revolving loan facility with the 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 nine 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 reflected the addition of Rantoul Partners as an additional
Borrower and added 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 our borrowing base to $7,000,000, (ii) reduced the minimum interest rate to 3.75%, and (ii) 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 our 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 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 reflected 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, we entered into a Fifth Amendment to the Amended and Restated Credit Agreement. The Fifth Amendment reflected
the following changes: (i) an expanded principal commitment amount of the Bank to $100,000,000, (ii) an increase in our Borrowing
Base to $38,000,000, (iii) the addition of Black Raven Energy, Inc., our wholly-owned subsidiary, to the Credit Agreement as a
borrower party, (iv) the addition of certain collateral and security interests in favor of the Bank, and (v) the reduction of
our 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 reflected
the following changes: (i) the addition of Iberia Bank as a participant in our credit facility (together with the Bank, the “
Banks
”),
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 reflected
the Bank’s consent to our issuance of up to 850,000 shares of our 10% Series A Cumulative Redeemable Perpetual Preferred
Stock.
On
August 15, 2014, we entered into an Eighth Amendment to the Amended and Restated Credit Agreement. The Eighth Amendment reflected
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, 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 our 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 would 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 reflected
the following changes, it: (i) allowed the Company to sell certain oil assets in Kansas, (ii) allowed for approximately $1,300,000
of the proceeds from the sale to be reinvested in Company owned oil and gas projects and (iii) provided that not less than $1,500,000
from the proceeds of the sale would be applied to outstanding loan balances.
On
November 13, 2015, the Company entered into an Eleventh Amendment to the Amended and Restated Credit Agreement. The Eleventh Amendment
reflected the following changes: (i) waived certain provisions of the Credit Agreement, (ii) suspended certain hedging requirements,
and (iii) amended other provisions of the Credit Agreement.
On
April 1, 2016, the Company informed the Banks 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 payment on April 6, 2016
and on April 7, 2016 entered into a Forbearance Agreement whereby the Banks agreed 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 the Banks amended the Forbearance
Agreement to extend the forbearance period to August 31, 2016. On July 29, 2016, the Company and the Banks 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 Banks.
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 a 150% return
on the Cash Purchase Price within five (5) years of the closing date of the sale, 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 released 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 agreed to forgive our existing secured loan in the approximate principal amount of $17,295,000, and in exchange
entered into a secured promissory note (which we refer to as the “
restated secured note
”) in the original
principal amount of $4,500,000.
|
|
a.
|
conveyed our oil and gas
properties and associated performance and surety bonds in Colorado, Texas, and Nebraska;
|
|
b.
|
conveyed
all of our shares of Oakridge Energy, Inc. (together, the “
conveyed oil and gas assets
”); and
|
|
c.
|
retained
our assets in Kansas and continued as a going concern. The Kansas assets currently provide most of our current operating revenue.
|
The
restated secured note:
|
a.
|
is secured
by a first-priority lien in the Company’s oil and gas producing assets situated in the State of Kansas,
|
|
b.
|
evidences
accrued interest on the $4,500,000 principal balance at a rate of 16% per annum,
|
|
c.
|
bears
interest from and after May 1, 2017, at a rate of 16.0% per annum,
|
|
d.
|
is pre-payable
in full at a discount at any time during the term of the restated secured note upon EnerJex paying $3,300,000 to successor
lender, and
|
|
e.
|
matures
and is due and payable in full on November 1, 2017.
|
We
will have two options to extend the maturity date of the restated secured note by 90 days each (first to January 30, 2018 and
then to April 30, 2018), upon payment of extension fees of $100,000 for each extension.
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 are to be forgiven.
The
closing occurred on May 10, 2017. As part of the closing procedures and net settlement, we issued a promissory note to Pass Creek
Resources LLC in the amount of $105,806. The promissory bears interest at 16% per annum and matured on June 9, 2017. The amount
due was not paid on June 9, 2017, but the holder has not provided the Company a notice of default.
In
connection with the May 10, 2017 closing and in consideration of the satisfaction of $13,425,000 of the amount due under the Credit
Agreement, as amended, the Company and certain of its subsidiaries transferred to PCR Holdings LLC, an affiliate of the successor
lenders under the Credit Agreement, all of the Company’s oil and gas properties and assets located in Colorado, Texas, and
Nebraska, as well as the Company’s shares of Oakridge Energy, Inc.
Below is a table showing the reconciliation
of the gain on LSA as set forth on the statement of operations for the three and six months ended June 30, 2017:
Forgiveness of existing secured loan
|
|
$
|
17,295,000
|
|
Forgiveness of accrued interest
|
|
|
1,306,801
|
|
Issuance of secured promissory note
|
|
|
(4,500,000
|
)
|
Transfer of oil and gas properties
|
|
|
(1,902,726
|
)
|
Transfer of gas gathering system
|
|
|
(1,772,588
|
)
|
Transfer of shares of Oakridge Energy, Inc.
|
|
|
(210,990
|
)
|
Transfer of ARO liability
|
|
|
1,283,769
|
|
Transfer of other assets
|
|
|
858
|
|
Gain on LSA
|
|
$
|
11,500,124
|
|
To
evidence the Company’s remaining $4,500,000 of indebtedness to PWCM Investment Company IC LLC (“
PWCM
”),
RES Investment Group, LLC (“
RES
”), Round Rock Development Partners, LP (“
Round Rock
”), and
Cibolo Holdings, LLC (“
Cibolo Holdings,
” and together with PWCM, RES and Round Rock, “
Successor Lenders
”),
the Company’s subsidiaries (except Kansas Holdings, LLC) entered into a Second Amended and Restated Credit Agreement with
Cortland Capital Market Services LLC, as Administrative Agent, and the other financial institutions and banks parties thereto
(the “
New Credit Agreement
”), and a related Amended and Restated Note (the “
New Note
”),
in the amount of $3.3 million as described above.
Our
subsidiaries’ obligations under the credit agreement and note are non-recourse and are secured by a first-priority lien
in the Company’s and the subsidiaries’ oil properties and assets located in Kansas. The Company was removed as a borrower
under the Credit Agreement, but entered into a Guaranty of Recourse Carveouts, pursuant to which the Company guarantees the Subsidiaries’
payment of certain fees and expenses due under the Credit Agreement, and may be liable for certain conduct, such as fraud, bad
faith, gross negligence, and waste of the Kansas oil properties or assets.
As
of June 30, 2017, the principal balance of $105,806 along with accrued interest remained due.
Note
6 – Commitments & Contingencies
As
of June 30, 2017 the Company had an outstanding irrevocable letter of credit in the amount of $50,000 issued in favor of the Texas
Railroad Commission. The letter of credit is required by the Texas Railroad Commission for all companies operating in the state
of Texas with production greater than limits they prescribe.
Rent
expense for the six months ended June 30, 2017 and 2016 was approximately $75,000 and $68,000, respectively. Future non-cancellable
minimum lease payments are approximately $70,000 for the remainder of 2017, $91,000 for 2018, and $77,000 for 2019.
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 June 30, 2017, 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 in connection with this proceeding.
The Company has faith that it will prevail and at June 30, 2017, 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 it has paid all rents owed to C&F Ranch LLC and will
vigorously defend itself in connection with this proceeding. The Company has faith that it will prevail and at June 30, 2017,
no reserve for potential losses arising from this matter has been recorded.
Note
7 – 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 as 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 June 30, 2016, which were based on a West Texas Intermediate oil price
of $42.46 per Bbl and a Henry Hub natural gas price of $2.63 per Mcf (adjusted for basis and quality differentials), respectively.
This test resulted in a pre-tax write-down of $2,137,663 for the quarter ended June 30, 2016 and $6,644,596 for the six month
period ended June 30, 2016. For the six month period ended June 30, 2017, the Company’s present value of future estimate
cash flows discounted at 10%, exceeded the net book value of those assets. Accordingly, the Company did not record an impairment
charge.
Note
8 – Equity Transactions
We accrued dividends of $879,608 and $1,759,215 for the Series A Preferred Stock for the three and six months ended June 30, 2017, respectively. At June 30, 2017, accumulated dividends payable to the Series A Preferred Stock holders totaled $5,160,364.
On
April 27, 2017, the Company entered into an Additional Issuance Agreement with Alpha Capital Anstalt, for the purchase of 300
restricted shares of its newly designated Series C Convertible Preferred Stock in consideration for $300,000, with an option to
purchase an additional 200 shares of Series C Convertible Preferred Stock for an aggregate purchase price of $200,000. As of June
30, 2017, the Company had issued 300 shares of Series C Convertible Preferred Stock for an aggregate purchase price of $300,000.
In addition, during the three months ending June 30, 2017, the Company had received $150,000 from Alpha Capital Anstalt to purchase
an additional 150 shares of Series C Convertible Preferred Stock. As of June 30, 2017, the additional 150 shares of Series C Convertible
Preferred Stock have not been issued and are reflected as Series C Convertible Preferred Stock Issuable on the balance sheet in
the aggregate amount of $150,000.
The
Company recorded a beneficial conversion feature of $208,500 based on the fair value of the common stock and the conversion rate
as of the date of issuance. This amount was recorded as a deemed distribution on the date of issuance.
The
Series C Convertible Preferred Stock (“
Series C Preferred Stock
”) is non-voting (except to the extent required
by law and except for certain consent rights relating to amending the certificate of incorporation or bylaws, and the like), ranks
senior to the common stock with respect to dividends and with respect to distributions upon a deemed dissolution, liquidation
or winding-up of the Company, and ranks junior to the Company’s Series A preferred stock and Series B preferred stock with
respect to dividends and with respect to distributions upon a deemed dissolution, liquidation or winding-up of the Company. Upon
request of the Holders, the Company can seek stockholder approval to remove the Issuance Limitation described therein and to allow
for further adjustments related to anti-dilution protection, only if such stockholder approval is obtained. The Series C Convertible
Preferred Stock has a liquidation preference of $1,000 per share, and is convertible at the option of the holder at a conversion
price equal to $0.30 per share, or a ratio equal to approximately 3,333 shares of common stock for each one (1) share of Series
C Convertible Preferred Stock, subject to customary adjustments. Dividends are payable on the shares of Series C Convertible Preferred
Stock only if and to the extent that dividends are payable on the common stock into which the Series C Convertible Preferred Stock
is convertible. The Series C Convertible 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 for the redemption price of $1,000 per share, as adjustable
as provided in the designation 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 common stock outstanding immediately after giving effect to the issuance of shares
of common stock upon conversion of the Series C Preferred Stock. In addition, the Company may not convert the Series C Preferred
Stock into a number of shares of common stock which, when aggregated with any shares of common stock issued on or after the original
issue date and prior to such conversion date in connection with any conversion of Series C Preferred Stock would exceed 1,683,944
shares of common stock (19.99% of the outstanding shares as of the original issue date), subject to adjustment for forward and
reverse stock splits, recapitalizations and the like. In the event conversion of the Series C Preferred Stock is limited pursuant
to these provisions, each holder shall be entitled to a pro rata portion of the issuable maximum.
Pursuant
to the anti-dilutive provisions of the Securities Purchase Agreement dated as of March 11, 2015, which requires the Company to
issue additional shares of common stock to adjust the purchase price paid by purchasers in the Company’s March 2015 offering,
in the event any shares are sold (or convertible securities are sold), with a price per share less than the purchase price paid
by the March 2015 purchasers subject to the terms of the Securities Purchase Agreement, Alpha Capital Anstalt received 597,461
shares of common stock. In addition, the Series B Convertible Preferred Stock conversion ratio equal to approximately 571 shares
of common stock for each one (1) share of Preferred Stock reset to approximately 3,333 shares of common stock for each one (1)
share of Series B Convertible Preferred Stock, to be consistent with the terms of the Series C Convertible Preferred Stock, pursuant
to the anti-dilution requirements of the Series B Convertible Preferred Stock.
During
the three months ending June 30, 2017, Alpha Capital Anstalt converted 390 shares of Series B Convertible Preferred Stock into
1,300,000 shares of common stock.
Note
9 – Related Party Transaction
Effective
May 1, 2017, the Company entered into an agreement with Camber Energy, Inc., pursuant to which EnerJex will be responsible for
performing certain general and administrative services for Camber for a fee of $150,000 per month. This fee includes payments
to vendors who provide accounting services to Camber. Richard E. Menchaca, a member of the Board of Directors of the Company,
is a co-guarantor of bank debt held by Camber Energy, Inc. and Robert Schleizer, our newly appointed Interim Chief Financial Officer
is also the Interim Chief Financial Officer of Camber Energy, Inc.
Note
10 – Subsequent Events
On
July 14, 2017, the Company entered into a Secured Promissory Note for $100,000 with Alpha Capital Anstalt, which has a maturity
date of November 15, 2017, and accrues interest at a rate of 8% per annum. The amount due under the note is secured by a security
interest, subordinate to certain other security interests of the Company, in substantially all of the Company’s assets.
On
July 28, 2017, the Company received an advance of $50,000 from Alpha Capital Anstalt.
Effective
August 17, 2017, Robert Schleizer was
appointed as Interim Chief Financial Officer and principal accounting/financial officer of the Company. He replaced Douglas M. Wright who resigned to pursue other business opportunities.
We
have reviewed all material events through the date of this report in accordance with ASC 855-10.
FORWARD-LOOKING
STATEMENTS
This
report contains forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties,
many of which are beyond our control. All statements, other than statements of historical fact, contained in this report, including
statements regarding future events, our future financial performance, business strategy and plans and objectives of management
for future operations, are forward-looking statements. We have attempted to identify forward-looking statements by terminology
including “
anticipates,
” “
believes,
” “
can,
” “
continue,
”
“
could,
” “
estimates,
” “
expects,
” “
intends,
” “
may,
”
“
plans,
” “
potential,
” “
predicts,
” or “
should
” or the
negative of these terms or 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. These statements are only predictions and involve
known and unknown risks, uncertainties and other factors, including the risks outlined under “
Risk Factors
”
or elsewhere in this report and our latest Annual Report on Form 10-K, which may cause our or our industry’s actual results,
levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance
or achievements expressed or implied by these forward-looking statements. 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 to differ materially from those contained in any forward-looking statements. The factors impacting these risks
and uncertainties include, but are not limited to:
|
•
|
inability
to attract and obtain additional development capital;
|
|
•
|
inability
to achieve sufficient future sales levels or other operating results;
|
|
•
|
inability
to efficiently manage our operations;
|
|
•
|
effect
of our hedging strategies on our results of operations;
|
|
•
|
potential
default under our secured obligations or material debt agreements;
|
|
•
|
estimated
quantities and quality of oil reserves;
|
|
•
|
our
ability to raise capital in the future;
|
|
•
|
outstanding
debt obligations and our ability to repay such obligations as they come due;
|
|
•
|
ongoing
and potential future litigation, judgments and settlements;
|
|
•
|
declining
local, national and worldwide economic conditions;
|
|
•
|
fluctuations
in the price of oil;
|
|
•
|
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 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;
|
|
•
|
adverse
state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with
respect to existing operations; and
|
|
•
|
changes
in U.S. GAAP or in the legal, regulatory and legislative environments in the markets in which we operate.
|
You
should not place undue reliance on any forward-looking statement, each of which applies only as of the date of this report. Except
as required by law, we undertake no obligation to update or revise publicly any of the forward-looking statements after the date
of this report to conform our statements to actual results or changed expectations. For a detailed description of these and other
factors that could cause actual results to differ materially from those expressed in any forward-looking statement, please see
“
Risk Factors
” in this document and in our Annual Report on Form 10-K for the fiscal year ended December 31,
2016.
You
should read the matters described in “
Risk Factors
” and the other cautionary statements made in this report,
and incorporated by reference herein, as being applicable to all related forward-looking statements wherever they appear in this
report. We cannot assure you that the forward-looking statements in this report will prove to be accurate and therefore prospective
investors are encouraged not to place undue reliance on forward-looking statements.
This
information should be read in conjunction with the interim unaudited financial statements and the notes thereto included in this
Quarterly Report on Form 10-Q, and the audited financial statements and notes thereto and “
Part II
”, “
Item
7, Management’s Discussion and Analysis of Financial Condition and Results of Operations
” contained in our Annual
Report on Form 10-K for the year ended December 31, 2016 (the “
Annual Report
”).
Certain
capitalized terms used below and otherwise defined below, have the meanings given to such terms in the footnotes to our consolidated
financial statements included above under “
Part I - Financial Information”
-
“Item 1. Financial Statements
”.
All
references in this report to “
we,
” “
us,
” “
our,
” “
Company
”
and “
EnerJex
” refer to EnerJex Resources, Inc. and our wholly-owned operating subsidiaries, EnerJex Kansas,
Inc., Black Sable Energy, LLC, Working Interest, LLC, and Black Raven Energy, Inc. unless the context requires otherwise. We report
our financial information on the basis of a December 31 fiscal year end.
In
addition, unless the context otherwise requires and for the purposes of this report only:
•
|
“
Bbl
”
refers to one stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to crude oil or other
liquid hydrocarbons;
|
•
|
“
Boe
”
barrels of oil equivalent, determined using the ratio of one Bbl of crude oil, condensate or natural gas liquids, to six Mcf
of natural gas;
|
•
|
“
Mcf
”
refers to a thousand cubic feet of natural gas;
|
•
|
“
SEC
”
or the “
Commission
” refers to the United States Securities and Exchange Commission; and
|
•
|
“
Securities
Act
” refers to the Securities Act of 1933, as amended.
|
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 at www.sec.gov or on our website at
www.enerjex.com
. You can also obtain copies of
the documents at prescribed rates by writing 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 of a written request to us at EnerJex Resources, Inc., 4040 Broadway,
Suite 425, 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 is based
on our good faith estimates. Although we believe that this information is reliable, we cannot guarantee the accuracy and completeness
of this information, and we have not independently verified any of it.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The
following discussion of our financial condition and results of operations should be read in conjunction with our financial statements
and the related notes to our financial statements included elsewhere in this report. In addition to historical financial information,
the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our
actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements
as a result of many factors, including those discussed under, and incorporated by reference in, ITEM 1A. Risk Factors and elsewhere
in this report.
Overview
Our
principal strategy is to acquire, develop, explore and produce domestic onshore oil properties. Our business activities are currently
focused in Kansas and other opportunities in Oklahoma and Texas.
We
continue to investigate multiple opportunities to both unlock value and accelerate growth in an accretive manner on behalf of
shareholders, including but not limited to mergers, acquisitions, joint ventures, and non-dilutive financings. There can be no
assurance of the results or timing associated with this process.
We
have substantially curtailed capital spending because of the current commodity price environment and the Company’s limited
capital. Once the commodity market and/or capital availability improves, we intend to focus our budget on the development of our
Kansas properties where we have identified certain drilling locations and reactivation or recompletion opportunities that we believe
will generate high rates of return with low risk profiles as well as certain acquisitions.
Plan
of Operations
The
Board of Directors is currently pursuing possible strategic transactions involving opportunities both in and outside the oil and
gas industry that will offer the opportunity for future growth and net cash flow. Those opportunities may involve a business combination
with another business enterprise, the acquisition of one or more groups of assets, an equity or debt financing transaction to
provide capital with which to fund operations and expansion, and other similar transactions. To illustrate the types of transactions
that the Company is investigating, the Company has been investigating the acquisition by purchase or contribution of certain operating
oil and gas assets. In addition, the Company recently was involved in discussions about a possible acquisition by merger of a
privately held company that operates an agricultural drone business and in which an affiliate of the holder of the Company’s
Series B Preferred Stock has an interest. While the discussions about a business combination with that privately held agricultural
drone enterprise have been suspended, those discussions may resume in the future. In addition, the Company expects to continue
to pursue other acquisition and business combination opportunities. No assurance can be given that any one or more of these potential
business combinations or asset acquisition opportunities will be consummated.
Recent
Developments
The
following is a brief description of our most significant corporate developments that have occurred since the end of 2015:
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 will 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.
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
October 26, 2016, the NYSE MKT (the “
NYSE
”) delisted our Series A preferred stock from the NYSE 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 due to our failure 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 subsequently granted an extension and on April 27, 2017, the Company held an annual meeting of shareholders.
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 agreed to forgive our existing secured loan in the approximate principal amount of $17,295,000, and in exchange
entered into a secured promissory note (which we refer to as the “
restated secured note
”) in the original
principal amount of $4,500,000.
|
|
a.
|
conveyed
our oil and gas properties and associated performance and surety bonds in Colorado, Texas, and Nebraska;
|
|
b.
|
conveyed
all of our shares of Oakridge Energy, Inc. (together, the “
conveyed oil and gas assets
”); and
|
|
c.
|
retained
our assets in Kansas and continued as a going concern. The Kansas assets currently provide most of our current operating revenue.
|
The
restated secured note:
|
a.
|
is
secured by a first-priority lien in the Company’s oil and gas producing assets situated in the State of Kansas,
|
|
b.
|
evidences
accrued interest on the $4,500,000 principal balance at a rate of 16% per annum,
|
|
c.
|
bears
interest from and after May 1, 2017, at a rate of 16.0% per annum,
|
|
d.
|
is
pre-payable in full at a discount at any time during the term of the restated secured note upon EnerJex paying $3,300,000
to successor lender, and
|
|
e.
|
matures
and is due and payable in full on November 1, 2017.
|
We
will have two options to extend the maturity date of the restated secured note by 90 days each (first to January 30, 2018 and
then to April 30, 2018), upon payment of extension fees of $100,000 for each extension.
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 are to be forgiven.
The
closing occurred on May 10, 2017. As part of the closing procedures and net settlement, we issued a promissory note to Pass Creek
Resources LLC in the amount of $105,806. The promissory bears interest at 16% per annum and matured on June 9, 2017. The amount
due was not paid on June 9, 2017, but the holder has not provided the Company a notice of default. As of June 30, 2017, the principal
balance of $105,806 along with accrued interest remained due.
In
connection with the May 10, 2017 closing and in consideration of the satisfaction of $13,425,000 of the amount due under the Credit
Agreement, as amended, the Company and certain of its subsidiaries transferred to PCR Holdings LLC, an affiliate of the successor
lenders under the Credit Agreement, all of the Company’s oil and gas properties and assets located in Colorado, Texas, and
Nebraska, as well as the Company’s shares of Oakridge Energy, Inc.
To
evidence the Company’s remaining $4,500,000 of indebtedness to PWCM Investment Company IC LLC (“
PWCM
”),
RES Investment Group, LLC (“
RES
”), Round Rock Development Partners, LP (“
Round Rock
”), and
Cibolo Holdings, LLC (“
Cibolo Holdings,
” and together with PWCM, RES and Round Rock, “
Successor Lenders
”),
the Company’s subsidiaries (except Kansas Holdings, LLC) entered into a Second Amended and Restated Credit Agreement with
Cortland Capital Market Services LLC, as Administrative Agent, and the other financial institutions and banks parties thereto
(the “
New Credit Agreement
”), and a related Amended and Restated Note (the “
New Note
”),
in the amount of $3.3 million as described above.
Our
subsidiaries’ obligations under the credit agreement and note are non-recourse and are secured by a first-priority lien
in the Company’s and the subsidiaries’ oil properties and assets located in Kansas. The Company was removed as a borrower
under the Credit Agreement, but entered into a Guaranty of Recourse Carveouts, pursuant to which the Company guarantees the Subsidiaries’
payment of certain fees and expenses due under the Credit Agreement, and may be liable for certain conduct, such as fraud, bad
faith, gross negligence, and waste of the Kansas oil properties or assets.
Net
Production, Average Sales Price and Average Production and Lifting Costs
The
table below sets forth our net oil production (net of all royalties, overriding royalties and production due to others), the average
sales prices, average production costs and direct lifting costs per unit of production for the three and six month periods ended
June 30, 2017 and 2016.
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (Bbl)
|
|
|
6,501
|
|
|
|
14,219
|
|
|
|
19,633
|
|
|
|
30,911
|
|
Natural gas (Mcf)
|
|
|
—
|
|
|
|
13,661
|
|
|
|
11,649
|
|
|
|
27,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Sales Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (Bbl)
|
|
$
|
43.95
|
|
|
$
|
41.72
|
|
|
$
|
45.42
|
|
|
$
|
36.46
|
|
Natural gas (Mcf)
|
|
$
|
—
|
|
|
$
|
.18
|
|
|
$
|
1.67
|
|
|
$
|
.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Production Cost
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per barrel of oil equivalent (“
Boe
”)
|
|
$
|
46.33
|
|
|
$
|
44.76
|
|
|
$
|
47.73
|
|
|
$
|
44.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Lifting Costs
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Boe
|
|
$
|
30.74
|
|
|
$
|
39.64
|
|
|
$
|
37.33
|
|
|
$
|
37.97
|
|
|
(1)
|
Production
costs include all operating expenses, transportation expenses, depreciation, depletion and amortization, lease operating expenses
and all associated taxes. Impairment of oil properties is not included in production costs.
|
|
(2)
|
Direct
lifting costs do not include impairment expense or depreciation, depletion and amortization.
|
Results
of Operations for the Three and Six Months Ended June 30, 2017 and 2016 compared.
Income
:
|
|
Three Months Ended
|
|
|
Increase /
|
|
|
Six Months Ended
|
|
|
Increase /
|
|
|
|
June 30,
|
|
|
(Decrease)
|
|
|
June 30,
|
|
|
(Decrease)
|
|
|
|
2017
|
|
|
2016
|
|
|
$
|
|
|
2017
|
|
|
2016
|
|
|
$
|
|
Oil revenues
|
|
$
|
285,691
|
|
|
$
|
593,174
|
|
|
$
|
(307,483
|
)
|
|
$
|
895,195
|
|
|
$
|
1,127,147
|
|
|
$
|
(231,952
|
)
|
Natural gas revenues
|
|
|
—
|
|
|
|
2,506
|
|
|
|
(2,506
|
)
|
|
|
19,509
|
|
|
|
24,532
|
|
|
|
(5,023
|
)
|
Total
|
|
$
|
285,691
|
|
|
$
|
595,680
|
|
|
$
|
(309,989
|
)
|
|
$
|
914,704
|
|
|
$
|
1,151,679
|
|
|
$
|
(236,975
|
)
|
Oil
Revenues
Oil
revenues for the six months ended June 30, 2017, were $895,195 compared to revenues of $1,127,147 for the six months ended June
30, 2016 and for the three months ended June 30, 2017, were $285,691 compared to revenues of $593,174 for the same period in 2016.
Of the year-to-date oil revenue decrease of $231,952, approximately $509,000 (offset by the increase in prices as described below)
was due to lower production volumes. Oil production decreased approximately 36% in the first six months of 2017 from 30,911 barrels
produced in the first half of 2016 to 19,633 barrels produced for the first six months ended June 30, 2017. The production decrease
was due primarily to the curtailment of both growth and maintenance capital expenditures, and the conveyance of the Company’s
oil and gas properties in Colorado, Nebraska and Texas in connection with the restructuring of its outstanding senior debt in
May 2017.
This
was offset by an increase in revenues of approximately $277,000 due to higher crude oil prices. Crude oil prices increased
$8.96 or 25% to an average price of $45.42 per barrel for the first six months of 2017 compared to $36.46 per barrel for the
same period in 2016.
Natural
Gas Revenues
Natural
gas revenues for the six months ended June 30, 2017 were $19,509 compared to revenues of $24,532 for the six months ended June
30, 2016 and for the three months ended June 30, 2017 were $0 compared to revenues of $2,506 for the same period in 2016. Of the
year-to-date revenue decrease of $5,023, approximately $27,000 (offset by the increase in prices as described below) was due to
lower production volumes. Production decreased in the first six months of 2017 from 27,515 Mcf for the six months ended June 30,
2016, to 11,649 Mcf for the comparable period of 2017. The production decrease was due primarily to the curtailment of both growth
and maintenance capital expenditures and the conveyance of the Company’s oil and gas properties in Colorado, Nebraska and
Texas in connection with the restructuring of its outstanding senior debt in May 2017. This was offset by an increase in revenues
of approximately $22,000 due to higher natural gas prices. Natural gas prices increased $0.78 or 88% from an average price of
$0.89 per Mcf for the first six months of 2016 to an average price of $1.67 per Mcf for the same period of 2017.
Expenses:
|
|
Three Months Ended
|
|
|
Increase /
|
|
|
Six Months Ended
|
|
|
Increase /
|
|
|
|
June 30,
|
|
|
(Decrease)
|
|
|
June 30,
|
|
|
(Decrease)
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
Production expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating costs
|
|
$
|
199,870
|
|
|
$
|
653,803
|
|
|
$
|
(453,933
|
)
|
|
$
|
808,136
|
|
|
$
|
1,347,665
|
|
|
$
|
(539,529
|
)
|
Depreciation, depletion and amortization
|
|
|
101,829
|
|
|
|
84,490
|
|
|
|
16,799
|
|
|
|
225,235
|
|
|
|
248,678
|
|
|
|
(23,443
|
)
|
Impairment of oil & gas properties
|
|
|
—
|
|
|
|
2,137,663
|
|
|
|
(2,137,663
|
)
|
|
|
—
|
|
|
|
6,644,596
|
|
|
|
(6,644,596
|
)
|
Total production expenses
|
|
|
301,159
|
|
|
|
2,875,956
|
|
|
|
(2,574,797
|
)
|
|
|
1,033,371
|
|
|
|
8,240,939
|
|
|
|
(7,207,568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees
|
|
|
112,275
|
|
|
|
59,308
|
|
|
|
52,967
|
|
|
|
422,538
|
|
|
|
137,117
|
|
|
|
285,421
|
|
Salaries
|
|
|
267,684
|
|
|
|
326,312
|
|
|
|
(58,628
|
)
|
|
|
277,147
|
|
|
|
810,059
|
|
|
|
(532,912
|
)
|
Administrative expense
|
|
|
137,081
|
|
|
|
91,736
|
|
|
|
45,345
|
|
|
|
271,036
|
|
|
|
248,862
|
|
|
|
22,174
|
|
Total general expenses
|
|
|
517,039
|
|
|
|
477,356
|
|
|
|
39,683
|
|
|
|
970,721
|
|
|
|
1,196,038
|
|
|
|
(225,317
|
)
|
Total production and general expenses
|
|
|
818,198
|
|
|
|
3,353,312
|
|
|
|
(2,535,114
|
)
|
|
|
2,004,093
|
|
|
|
9,436,977
|
|
|
|
(7,432,884
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) from operations
|
|
|
(532,508
|
)
|
|
|
(2,757,632
|
)
|
|
|
(2,225,124
|
)
|
|
|
(1,089,388
|
)
|
|
|
(8,285,298
|
)
|
|
|
7,195,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(44,654
|
)
|
|
|
(332,456
|
)
|
|
|
(287,802
|
)
|
|
|
(724,494
|
)
|
|
|
(662,219
|
)
|
|
|
(62,275
|
)
|
Gain on loan sale agreement
|
|
|
11,500,124
|
|
|
|
—
|
|
|
|
(11,500,124
|
)
|
|
|
11,500,124
|
|
|
|
—
|
|
|
|
(11,500,124
|
)
|
Loss on derivatives
|
|
|
—
|
|
|
|
(1,295,792
|
)
|
|
|
(1,295,792
|
)
|
|
|
—
|
|
|
|
(2,381,396
|
)
|
|
|
(2,381,396
|
)
|
Other income
|
|
|
246,833
|
|
|
|
922,942
|
|
|
|
(676,109
|
)
|
|
|
246,846
|
|
|
|
2,174,186
|
|
|
|
(1,927,340
|
)
|
Total other income (expense)
|
|
|
11,702,303
|
|
|
|
(705,306
|
)
|
|
|
12,407,609
|
|
|
|
11,022,476
|
|
|
|
(869,429
|
)
|
|
|
11,891,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
11,169,795
|
|
|
$
|
(3,462,938
|
)
|
|
$
|
14,632,733
|
|
|
$
|
9.933,088
|
|
|
$
|
(9,154,727
|
)
|
|
$
|
19,087,815
|
|
Direct
Operating Costs
Direct
operating costs include direct labor and equipment costs related to pumping, gauging, pulling, well repairs, compression, transportation
costs, and general maintenance requirements in our oil and gas fields. These costs also include certain contract labor costs,
and other non-capitalized expenses. Direct operating costs for the six months ended June 30, 2017 decreased by $539,529, or 40%
to $808,136 from $1,347,665 for the six months ended June 30, 2016 and for the three months ended June 30, 2017 were $199,870
compared to $653,803 for the same period in 2016. Year-to-date direct operating costs per Boe decreased $0.64 or approximately
2% to $37.33 for 2017, compared to $37.97 per boe for the same period of 2016. The decrease was primarily due to the curtailment
of both growth and maintenance capital expenditures, and the conveyance of the Company’s oil and gas properties in Colorado,
Nebraska and Texas.
Depreciation,
Depletion and Amortization
Depreciation,
depletion and amortization for the six months ended June 30, 2017 was $225,235 compared to $248,678 for the six months ended June
30, 2016 and for the three months ended June 30, 2017 was $101,289 compared to $84,490 for the same period in 2016. The year-to-date
decrease in depletion expense of $23,443 or approximately 9% was due to the decrease in our depletable base year-over-year resulting
from the impairment sustained in 2016 and further reduced by lower production volumes. Depletion expense per Boe decreased $3.40
or approximately 49% in the first half of 2017 compared to the first half of 2016 and also as discussed above production decreased
approximately 39% six months over six months due primarily to lower spending on lease operating expenditures and lower investments
in maintenance capital.
Impairment
of Oil and Gas Properties
Under
the full cost method of accounting, capitalized oil and gas property costs less accumulated depletion and net of deferred income
taxes may not exceed an amount equal to the sum of the present value, discounted at 10%, of estimated future net revenues from
proved oil and gas reserves and the cost of unproved properties not subject to amortization (without regard to estimates of fair
value), or estimated fair value, if lower, of unproved properties that are not subject to amortization. Should capitalized costs
exceed this ceiling, an impairment expense is recognized.
For
the three and six months ended June 30, 2017, we were not required to record an impairment expense on our evaluated oil and gas
properties. For the three and six months ended June 30, 2016, we recognized an impairment expense on our evaluated oil and gas
properties of $2,137,663 and $6,644,596, respectively.
Professional
Fees
Professional
fees for the six months ended June 30, 2017 were $422,538 compared to $137,117 for the six months ended June 30, 2016 and $112,275
for the three months ended June 30, 2017 compared to $59,308 for the same period in 2016. The increase in year-to-date professional
fees of $285,421 was due primarily to increased spending in 2017 on consulting, legal, and investor relations services. These
increases were partially offset by decreased third party reserve engineering fees.
Salaries
Salaries
for the six months ended June 30, 2017 were $277,147 compared to $810,059 for the six months ended June 30, 2016 and $267,684
for the three months ended June 30, 2017 compared to $326,312 for the same period in 2016. The decrease in year-to-date salaries
of approximately $532,912 is due primarily to a reduced number of employees.
Administrative
Expenses
Administrative
expenses for the six months ended June 30, 2017 were $271,036 compared to $248,862 for the six months ended June 30, 2016 and
$137,081 for the three months ended June 30, 2017 compared to $91,736 for the same period in 2016. The year-to-date increase of
approximately $22,174 in 2017 compared to 2016, was due primarily to increased general and administrative from a working interest
partner, IT, telecom, software, and meals, travel, and entertainment. The increase was partially offset by higher SEC reporting
costs, taxes and other, training, and dues and subscriptions.
Interest
Expense
Interest
expense for the six months ended June 30, 2017 was $724,494 compared to $662,219 for the six months ended June 30, 2016, an increase
of approximately $62,275 and $44,654 for the three months ended June 30, 2017 compared to $332,456 for the same period in 2016.
Interest expense increased as a result of higher interest rate charges under the forbearance agreement offset by the reduction
of debt under the Loan Sale Agreement (“
LSA
”) (see note 2 to the financial statements for further information).
Gain
on Loan Sale Agreement
For
the three and six months ended June 30, 2017, we recognized a gain of $11,500,124 on the LSA and the restructuring of our debt
completed thereby. For the three and six months ended June 30, 2016, we had no loan sale gains or sale of loans.
Loss
on Derivatives
All
of the Company’s hedge contracts expired in 2016, so we incurred no unrealized gains or losses in the six month ended June
2017. We recorded an unrealized loss of $2,381,396 in the marking to market of our derivative contracts for the first six months
of 2016 and $1,295,792 for the three months ended June 30, 2016.
Other
Income
Other
income decreased by $1,927,340 in 2017 from $2,174,186 for the six months ended June 30, 2016 to $246,846 for the six months ended
June 30, 2017 and decreased by $676,109 for the three months ended June 30, 2017 compared to the same period in 2016. The decrease
was due to the expiration of derivative contracts in 2016, resulting in no realization of gains from their monetization in 2017
offset by income from performing certain general and administrative services for Camber Energy, Inc., for a fee of $150,000 per
month beginning May 2017.
Net
Income (Loss)
The
net income for the six months ended June 30, 2017 was $9,933,088 compared to a net loss of $9,154,727 for the six months ended
June 30, 2016 and net income of $11,169,795 for the three months ended June 30, 2017, compared to net loss of $3,462,938 for the
same period in 2016. The year-to-date increase in the net income was due primarily to the gain from the LSA of $11,500,124 and
the reduction in the impairment of oil and gas properties of $6,644,596.
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 decline in oil
prices and the restructuring of our outstanding debt, it will be more difficult during the remainder of 2017 and into 2018 to
use our historical means of meeting our capital requirements to provide us with adequate liquidity to fund our operations and
capital program.
The
following table summarizes total current assets, total current liabilities and working capital.
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
|
Increase /
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
$
|
693,581
|
|
|
$
|
1,678,967
|
|
|
$
|
(985,386
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
$
|
5,437,736
|
|
|
$
|
19,754,406
|
|
|
$
|
(14,316,670
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working Capital Deficit
|
|
$
|
(4,744,155
|
)
|
|
$
|
(18,075,439
|
)
|
|
$
|
(13,331,284
|
)
|
The
working capital deficit at June 30, 2017 was $4,744,155 compared to $18,075,439 at December 31, 2016. The year-to-date decrease
in the working capital deficit was primarily due to the $13.5 million of debt forgiven as part of the LSA.
We
had $532,526 of cash used in operating activities for the six months ended June 30, 2017, which was mainly due to $11.0 million
of gain on the LSA, offset by the $9.9 million net income for the period.
We
had $4,635 of cash used in investing activities for the six months ended June 30, 2017, which was solely due to the purchase of
oil and gas properties.
We
had $450,000 of cash provided by financing activities for the six months ended June 30, 2017, which was due to proceeds from
the sale of Series C Convertible Preferred Stock ($450,000).
The
unaudited condensed consolidated financial statements included in Part I Financial Information, Item 1 Financial Statements, of
this report have been prepared assuming that the Company will continue as a going concern. There is currently substantial doubt
about the Company’s ability to continue as a going concern as discussed in Note 1 to the unaudited condensed consolidated
financial statements.
The
Company’s Senior Secured Credit Facility is described below. Note 6 to the unaudited condensed consolidated financial statements
includes additional information on certain commitments and contingencies of the Company.
Senior
Secured Credit Facility
On
October 3, 2011, the Company and DD Energy, Inc., EnerJex Kansas, Inc., Black Sable Energy, LLC and Working Interest, LLC, its
subsidiaries (“
Borrowers
”) entered into an Amended and Restated Credit Agreement with Texas Capital Bank, N.A.
(the “
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 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 nine 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, which closed on December 15, 2011. The Amendment reflected the addition
of Rantoul Partners as an additional Borrower and added 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 our 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 our 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 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 reflected 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, we entered into a Fifth Amendment to the Amended and Restated Credit Agreement. The Fifth Amendment reflected
the following changes: (i) an expanded principal commitment amount of the Bank to $100,000,000, (ii) an increase in our Borrowing
Base to $38,000,000, (iii) the addition of Black Raven Energy, Inc., our wholly-owned subsidiary, to the Credit Agreement as a
borrower party, (iv) the addition of certain collateral and security interests in favor of the Bank, and (v) the reduction of
our 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 reflected
the following changes: (i) the addition of Iberia Bank as a participant in our credit facility (together with the Bank, the “
Banks
”),
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 reflected
the Bank’s consent to our issuance of up to 850,000 shares of our 10% Series A Cumulative Perpetual Preferred Stock.
On
August 15, 2014, we entered into an Eighth Amendment to the Amended and Restated Credit Agreement. The Eighth Amendment reflected
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, 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 our 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 would 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 reflected
the following changes, it: (i) allowed the Company to sell certain oil assets in Kansas, (ii) allowed for approximately $1,300,000
of the proceeds from the sale to be reinvested in Company owned oil and gas projects, and (iii) provided that not less than $1,500,000
from the proceed of the sale would be applied to outstanding loan balances.
On
November 13, 2015, the Company entered into an Eleventh Amendment to the Amended and Restated Credit Agreement. The Eleventh Amendment
reflected the following changes: (i) waived certain provisions of the Credit Agreement, (ii) suspend certain hedging requirements,
and (iii) made certain other amendments to the Credit Agreement.
On
April 1, 2016, the Company informed the Banks 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 payment on April 6, 2016
and on April 7, 2016 entered into a Forbearance Agreement whereby the Banks agreed 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 the Banks amended the Forbearance
Agreement to extend the forbearance period to August 31, 2016. On July 29, 2016, the Company and the Banks 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 Banks.
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 a 150% return
on the Cash Purchase Price within five (5) years of the closing date of the sale, 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 released 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 agreed to forgive our existing secured loan in the approximate principal amount of $17,295,000, and in exchange
entered into a secured promissory note (which we refer to as the “
restated secured note
”) in the original
principal amount of $4,500,000.
|
|
a.
|
conveyed
our oil and gas properties and associated performance and surety bonds in Colorado, Texas, and Nebraska;
|
|
b.
|
conveyed
all of our shares of Oakridge Energy, Inc. (together, the “
conveyed oil and gas assets
”); and
|
|
c.
|
retained
our assets in Kansas and continued as a going concern. The Kansas assets currently provide most of our current operating revenue.
|
The
restated secured note:
|
a.
|
is
secured by a first-priority lien in the Company’s oil and gas producing assets situated in the State of Kansas,
|
|
b.
|
evidences
accrued interest on the $4,500,000 principal balance at a rate of 16% per annum,
|
|
c.
|
bears
interest from and after May 1, 2017, at a rate of 16.0% per annum,
|
|
d.
|
is
pre-payable in full at a discount at any time during the term of the restated secured note upon EnerJex paying $3,300,000
to successor lender, and
|
|
e.
|
matures
and is due and payable in full on November 1, 2017.
|
We
will have two options to extend the maturity date of the restated secured note by 90 days each (first to January 30, 2018 and
then to April 30, 2018), upon payment of extension fees of $100,000 for each extension.
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 are to be forgiven.
The
closing occurred on May 10, 2017. As part of the closing procedures and net settlement, we issued a promissory note to Pass Creek
Resources LLC in the amount of $105,806. The promissory bears interest at 16% per annum and matured on June 9, 2017. The amount
due was not paid on June 9, 2017, but the holder has not provided the Company a notice of default.
In
connection with the May 10, 2017 closing and in consideration of the satisfaction of $13,425,000 of the amount due under the Credit
Agreement, as amended, the Company and certain of its subsidiaries transferred to PCR Holdings LLC, an affiliate of the successor
lenders under the Credit Agreement, all of the Company’s oil and gas properties and assets located in Colorado, Texas, and
Nebraska, as well as the Company’s shares of Oakridge Energy, Inc.
To
evidence the Company’s remaining $4,500,000 of indebtedness to PWCM Investment Company IC LLC (“
PWCM
”),
RES Investment Group, LLC (“
RES
”), Round Rock Development Partners, LP (“
Round Rock
”), and
Cibolo Holdings, LLC (“
Cibolo Holdings,
” and together with PWCM, RES and Round Rock, “
Successor Lenders
”),
the Company’s subsidiaries (except Kansas Holdings, LLC) entered into a Second Amended and Restated Credit Agreement with
Cortland Capital Market Services LLC, as Administrative Agent, and the other financial institutions and banks parties thereto
(the “
New Credit Agreement
”), and a related Amended and Restated Note (the “
New Note
”),
in the amount of $3.3 million as described above.
Our
subsidiaries’ obligations under the credit agreement and note are non-recourse and are secured by a first-priority lien
in the Company’s and the subsidiaries’ oil properties and assets located in Kansas. The Company was removed as a borrower
under the Credit Agreement, but entered into a Guaranty of Recourse Carveouts, pursuant to which the Company guarantees the Subsidiaries’
payment of certain fees and expenses due under the Credit Agreement, and may be liable for certain conduct, such as fraud, bad
faith, gross negligence, and waste of the Kansas oil properties or assets.
Recent
Funding and Related Transactions
On
April 10, 2017, we obtained an unsecured loan in the principal amount of $150,000 from an affiliate of the holder of our issued
and outstanding shares of Series B Preferred Stock (the “
lender
”). The loan was converted into 150 shares of
Series Convertible Preferred Stock.
On
April 27, 2017, the Company entered into an Additional Issuance Agreement with Alpha Capital Anstalt, for the purchase of
300 restricted shares of its newly designated Series C Convertible Preferred Stock in consideration for $300,000, of which
$150,000 was payable in cash and $150,000 was payable via a note conversion, with an option to purchase an additional 200
shares of Series C Convertible Preferred Stock for an aggregate purchase price of $200,000. As of June 30, 2017, the Company
had issued 300 shares of Series C Convertible Preferred Stock for an aggregate purchase price of $300,000. In addition,
during the three months ending June 30, 2017, the Company had received $150,000 from Alpha Capital Anstalt to purchase
an additional 150 shares of Series C Convertible Preferred Stock. As of June 30, 2017, the additional 150 shares of Series C
Convertible Preferred Stock have not been issued and are reflected as Series C Convertible Preferred Stock Issuable on the
balance sheet in the aggregate amount of $150,000. The shares have also not been issued as of the date of this
filing.
The
Series C Preferred Stock is non-voting (except to the extent required by law and except for certain consent rights relating to
amending the certificate of incorporation or bylaws, and the like), ranks senior to the common stock with respect to dividends
and with respect to distributions upon a deemed dissolution, liquidation or winding-up of the Company, and ranks junior to the
Company’s Series A preferred stock and Series B preferred stock with respect to dividends and with respect to distributions
upon a deemed dissolution, liquidation or winding-up of the Company. Upon request of the Holders, the Company can seek stockholder
approval to remove the Issuance Limitation described therein and to allow for further adjustments related to anti-dilution protection,
only if such stockholder approval is obtained. The Series C Convertible Preferred Stock has a liquidation preference of $1,000
per share, and is convertible at the option of the holder at a conversion price equal to $0.30 per share, or a ratio equal to
approximately 3,333 shares of common stock for each one (1) share of Series C Convertible Preferred Stock, subject to customary
adjustments. Dividends are payable on the shares of Series C Convertible Preferred Stock only if and to the extent that dividends
are payable on the common stock into which the Series C Convertible Preferred Stock is convertible. The Series C Convertible 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 for the redemption price of $1,000 per share, as adjustable as provided in the designation 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 common stock outstanding immediately after giving effect to the issuance of shares
of common stock upon conversion of the Series C Preferred Stock. In addition, the Company may not convert the Series C Preferred
Stock into a number of shares of common stock which, when aggregated with any shares of common stock issued on or after the original
issue date and prior to such conversion date in connection with any conversion of Series C Preferred Stock would exceed 1,683,944
shares of common stock (19.99% of the outstanding shares as of the original issue date), subject to adjustment for forward and
reverse stock splits, recapitalizations and the like. In the event conversion of the Series C preferred is limited pursuant to
these provisions, each holder shall be entitled to pro rata portion of the issuable maximum.
Pursuant
to the anti-dilutive provisions of the Securities Purchase Agreement dated as of March 11, 2015, which requires the Company to
issue additional shares of common stock to adjust the purchase price paid by purchasers in the Company’s March 2015 offering,
in the event any shares are sold (or convertible securities are sold), with a price per share less than the purchase price paid
by the March 2015 purchasers subject to the terms of the Securities Purchase Agreement, Alpha Capital Anstalt received 597,461
shares of common stock. In addition, the Series B Convertible Preferred Stock conversion ratio equal to approximately 571 shares
of common stock for each one (1) share of Preferred Stock reset to approximately 3,333 shares of common stock for each one (1)
share of Series B Convertible Preferred Stock, to be consistent with the terms of the Series C Convertible Preferred Stock, pursuant
to the anti-dilution requirements of the Series B Convertible Preferred Stock.
During
the three months ending June 30, 2017, Alpha Capital Anstalt converted 390 shares of Series B Convertible Preferred Stock into
1,300,000 shares of common stock.
Effective
May 1, 2017, the Company entered into an agreement with Camber Energy, Inc., pursuant to which EnerJex will be responsible for
performing certain general and administrative services for Camber for a fee of $150,000 per month. Richard E. Menchaca, a member
of the Board of Directors of the Company, is a co-guarantor of bank debt held by Camber Energy, Inc. and Robert Schleizer, our
newly appointed Interim Chief Financial Officer is also the Interim Chief Financial Officer of Camber Energy, Inc.
On
July 14, 2017, the Company entered into a Secured Promissory Note for $100,000 with Alpha Capital Anstalt, which has a maturity
date of November 15, 2017, and accrues interest at a rate of 8% per annum. The amount due under the note is secured by a security
interest, subordinate to certain other security interests of the Company, in substantially all of the Company’s assets.
On
July 28, 2017, the Company received an advance of $50,000 from Alpha Capital Anstalt.
Summary
of product research and development
We
do not anticipate performing any significant product research and development under our plan of operations.
Expected
purchase or sale of any significant equipment
We
anticipate that we will purchase the necessary production and field service equipment required to produce oil during our normal
course of operations over the next twelve months.
Significant
changes in the number of employees
At
June 30, 2017, we had one full-time employee, including field personnel. As production and drilling activities increase or decrease,
we may have 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
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.
Critical
Accounting Policies and Estimates
Our
critical accounting estimates include the value of our oil and gas properties, asset retirement obligations, and share-based payments.
Oil
and Gas Properties
We
follow the full-cost method of 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 using the units of production (UOP) method. Currently we only have operations 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.
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 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 conditions plus (b) the cost of properties not being amortized
plus (c) the lower of cost or estimated fair value of unproven properties included in the costs being amortized less (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 unweighted 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 three and six months ended June 30, 2017, we were not required to record an impairment expense on our evaluated oil and
gas properties. For the six months ended June 30, 2016, we incurred a $6,644,596 impairment charge and for the six months ended
June 30, 2015 our impairment charge was $27,822,989.
Asset
Retirement Obligations
The
asset retirement obligation relates to the plugging 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 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.
Effects
of Inflation and Pricing
The
oil industry is very cyclical and the demand for goods and services of oil field companies, suppliers and others associated with
the industry puts extreme pressure on the economic stability and pricing structure within the industry. Material changes in prices
impact revenue stream, estimates 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 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 prices for oil remains volatile.