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 nine month periods ended September 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.
Merger Agreement
On October 19, 2017, EnerJex entered into an Agreement
and Plan of Merger (the “
Merger Agreement
”) with AgEagle Aerial Systems, Inc., a Nevada corporation (“
AgEagle
”),
which designs, develops, produces, and distributes technologically advanced small unmanned aerial vehicles (UAV or drones) that
are supplied to the agriculture industry, and AgEagle Merger Sub, Inc., a Nevada corporation and wholly-owned subsidiary of the
Company (“
Merger Sub
”). Pursuant to the terms and subject to the conditions set forth in the Merger Agreement,
Merger Sub will be merged with and into AgEagle, Merger Sub will cease to exist and AgEagle will survive as a wholly-owned subsidiary
of the Company (the “
Merger
”). The respective boards of directors of EnerJex and AgEagle have approved the Merger
Agreement and the transactions contemplated thereby.
At the effective time of the Merger (the “
Effective
Time
”), the shares of AgEagle capital stock will be automatically converted into the right to receive equal to 85% of
the then issued and outstanding capital stock of the Company on a fully diluted basis. In addition, at the Effective Time all outstanding
options and warrants to purchase shares of AgEagle common stock will be assumed by the Company and converted into options and warrants
to purchase shares of Company common stock. No fractional shares of Company common stock will be issued in the Merger but will
be rounded to the nearest whole share. Following the consummation of the Merger, former stockholders of AgEagle with respect to
the Merger are expected to own 85% of the Company’s outstanding common stock (inclusive of the AgEagle assumed stock options
and warrants), and current common and Series A Preferred stockholders of the Company are expected to own 15% of the Company, excluding
shares of common stock that may be issued in connection with the conversion of the Company’s Series B Preferred Stock and
Series C Preferred Stock, and not including any additional shares which may be issued in connection with the Company’s closing
obligation to provide up to $4 million in new working capital and the elimination of all liabilities currently on the Company’s
balance sheet.
In connection with the Merger, the Company will
also file a proxy statement seeking stockholder approval to: (a) amend the terms of its Series A Preferred Stock (as discussed
below); (b) approve the issuance of the Company’s shares in connection with the Merger to the AgEagle shareholders and new
investors, in excess of 19.9% of the Company’s total issued and outstanding shares of common stock; (c) approve the issuance
of shares to current Company management and directors in lieu of deferred salary and fees, a majority of which will be held in
escrow to secure the Company’s indemnity obligations under the Merger Agreement; and (d) change the name of the Company to
“
AgEagle Aerial Resources, Inc.
”
The Merger Agreement provides that, immediately
following the Effective Time, the existing board of directors and officers of the Company will resign and new directors and officers
will be appointed by AgEagle.
The Company intends to dispose of its principal
assets, consisting primarily of its Kansas oil and gas properties, concurrently with the closing of the Merger. In the event the
Merger is not consummated, the Company does not have a present intention to dispose of the above described assets.
The completion of the Merger is subject to various
customary conditions, including, among other things: (a) the approval of the stockholders of the Company and AgEagle; (b) the accuracy
of the representations and warranties made by each of the Company and AgEagle and the compliance by each of the Company and AgEagle
with their respective obligations under the Merger Agreement; (c) approval of the stockholders of the Company for the issuance
of its common stock and any other securities (x) to the AgEagle stockholders in connection with the Merger and (y) in connection
with the financing transactions contemplated by the Merger Agreement; (d) approval for the listing of shares of the Company’s
common stock to be issued in the Merger and other related transactions on the NYSE American; and (e) that all of the Company’s
assets as disclosed shall have been sold, transferred or otherwise disposed of and the corresponding debt and liabilities shall
have been extinguished. The Company’s existing cash resources are insufficient to satisfy all of its outstanding liabilities.
Accordingly, in order to satisfy the condition and consummate the Merger, the Company will be required to raise additional funding
prior to the closing of the Merger, the failure of which could result in the Company’s failure to consummate the Merger Agreement.
The Merger Agreement contains customary representations,
warranties and covenants, including covenants obligating each of the Company and AgEagle to continue to conduct its respective
business in the ordinary course, to provide reasonable access to each other’s information and to use reasonable best efforts
to cooperate and coordinate to make any filings or submissions that are required to be made under any applicable laws or requested
to be made by any government authority in connection with the Merger. The Merger Agreement also contains a customary “
no
solicitation
” provision pursuant to which, prior to the earlier of January 31, 2018, or the completion or termination
of the Merger, neither the Company nor AgEagle may solicit or engage in discussions with any third party regarding another acquisition
proposal unless, in the Company’s case, it has received an unsolicited, bona fide written proposal that the recipient’s
board of directors determines is or would reasonably be expected to result in a superior proposal. The Company has paid AgEagle
a $50,000 non-refundable fee at the signing of the Merger Agreement. The Merger Agreement contains certain termination rights in
favor of each of the Company and AgEagle.
In addition, the Merger Agreement contains provisions
for indemnification in the event of any damages suffered by either party as a result of breaches of representations and warranties
contained therein. The aggregate maximum indemnification obligation of any indemnifying party for damages with respect to breaches
of representations and warranties set forth in the Merger Agreement shall not exceed, in the aggregate, $350,000, other than fraud,
intentional misrepresentation or willful breach. An indemnifying party shall satisfy its indemnification obligations with shares
of Company common stock equal to the aggregate amount of losses of the indemnified party, calculated based upon the greater of
(i) the value of the Company common stock as of the closing of the Merger; and (ii) the average closing price of the Company common
stock on the NYSE American for the five trading days immediately prior to the date such a claim is made. The Company has agreed
to deposit an aggregate of 1,215,278 shares of common stock to be issued to current officers and directors of the Company in lieu
of deferred salary and fees into escrow to secure its indemnification obligations, the issuance of such shares requiring the approval
of the Company’s common stockholders.
In connection with, and as a condition to the closing
of the Merger, the Company is seeking the consent of the holder of its Series A Preferred Stock (“
Series A Preferred Stock
”)
to amend the terms thereof to: (i) allow the Company to pay all accrued but unpaid dividends up to September 30, 2017 in additional
shares of Series A Preferred Stock based on the value of the liquidation preference thereof, (ii) eliminate the right of the Series
A Preferred Stock holders to receive any dividends accruing after September 30, 2017, and (iii) convert each share of Series A
Preferred Stock into 10 shares of Company common stock. An affirmative vote of 66.7% of all shares of Series A Preferred Stock
voting as a class as of the record date of the proxy statement is required to amend the terms of the Certificate of Designation
to provide for these changes, as required under the Merger Agreement.
As of September 30, 2017, the Series A Preferred
Stock had accrued a total of $6,039,972 in accrued but unpaid dividends, which would result in an additional 241,599 shares of
Series A Preferred Stock being issued by the Company to satisfy these accrued dividends.
The Merger Agreement provides either party the right
to terminate the Merger if it has not been consummated by January 31, 2018, provided that if all of the conditions to closing shall
have been satisfied or shall be capable of being satisfied at such time, the required closing date may be extended until March
31, 2018.
Financing Transactions
On October 3, 2011, the Company entered into an
Amended and Restated Credit Agreement with Texas Capital Bank, and other financial institutions and banks that may become a party
to the Credit Agreement from time to time (“
TCB
” or “
Bank
”). 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 certain 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 Sellers 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 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 its 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 its 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.
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 September 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
|
|
|
|
93,498
|
|
Asset retirement obligations, September 30, 2017
|
|
|
$
|
1,593,281
|
|
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 the 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 and the other
Sellers entered into and completed the transactions contemplated by the LSA, described in greater detail in “Part I”
– “Item 1 Financial Statements” of this report above under “
Note 2 – Going Concern
”
– “
Financing Transactions
”.
Below is a table showing the reconciliation of the
gain on LSA as set forth on the statement of operations for the nine months ended September 30, 2017:
Forgiveness of existing secured loan
|
|
$
|
17,925,000
|
|
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
|
|
|
1,814,407
|
|
Transfer of other assets
|
|
|
(1,159,780
|
)
|
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 under “Note
2 – Going Concern” – “Financing Transactions”.
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 September 30, 2017, the principal balance
of $105,806 along with accrued interest remained due under the promissory note with Pass Creek Resources LLC.
Note 6 – Commitments & Contingencies
As of September 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 nine months ended September
30, 2017 and 2016 was approximately $75,000 and $104,000, respectively. Future non-cancellable minimum lease payments are approximately
$35,000 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 September 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 September
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 September 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 September 30, 2017, 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. For the nine-month period
ended September 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. This test resulted in a pre-tax write-down
of $7,444,597 for the nine-month period ended September 30, 2016.
Note 8 – Equity Transactions
We accrued dividends of $879,608 and $2,638,823
for our Series A Preferred Stock for the three and nine months ended September 30, 2017, respectively. At September 30, 2017, accumulated
dividends payable to the Series A Preferred Stock holders totaled $6,039,972.
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 September 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 nine months ending September 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 September 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 for the nine months ended September 30, 2017.
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 nine months ending September 30, 2017,
Alpha Capital Anstalt converted 390 shares of Series B Convertible Preferred Stock into 1,300,000 shares of common stock.
See also the description of the Alpha Capital Anstalt warrant exercises which occurred subsequent to September
30, 2017, as described in “
Note 10 – Subsequent Events
”.
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 Chief Financial Officer and a Director of
Camber Energy, Inc.
Note 10 – Subsequent Events
See the subsequent events in “
Note 2 –
Going Concern
”.
On October 23, 2017, Alpha Capital Anstalt exercised warrants to purchase 1,000,000 shares of our common
stock for an aggregate exercise price of $300,000 (or $0.30 per share), pursuant to the terms of such warrants, and was issued
1,000,000 shares of common stock.
On November 6, 2017, Alpha Capital Anstalt
exercised warrants to purchase 771,428 shares of our common stock for an aggregate exercise price of $231,429 (or $0.30 per share),
pursuant to the terms of such warrants, and was issued 771,428 shares of common stock.
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, our latest Annual Report on Form 10-K,
filed with the SEC on March 31, 2017 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, filed with the
SEC on August 21, 2017, 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:
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inability to complete and/or risks associated with recently disclosed and pending business combination transactions;
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inability to attract and obtain additional development capital;
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inability to achieve sufficient future sales levels or other operating results;
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inability to efficiently manage our operations;
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effect of our hedging strategies on our results of operations;
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defaults under our secured obligations or material debt agreements;
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estimated quantities and quality of oil reserves;
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our ability to raise capital in the future;
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outstanding debt obligations and our ability to repay such obligations as they come due;
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ongoing and potential future litigation, judgments and settlements;
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declining local, national and worldwide economic conditions;
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fluctuations in the price of oil;
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continued weather conditions that impact our abilities to efficiently manage our drilling and development activities;
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the inability of management to effectively implement our strategies and business plans;
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approval of certain parts of our operations by state regulators;
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inability to hire or retain sufficient qualified operating field personnel;
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increases in interest rates or our cost of borrowing;
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deterioration in general or regional economic conditions;
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adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations;
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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;
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inability to acquire mineral leases at a favorable economic value that will allow us to expand our development efforts;
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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
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changes in U.S. GAAP or in the legal, regulatory and legislative environments in the markets in which we operate.
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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, filed with the SEC on March 31, 2017
and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, filed with the SEC on August 21, 2017.
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:
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“
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;
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“
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;
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“
Mcf
” refers to a thousand cubic feet of natural gas;
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“
SEC
” or the “
Commission
” refers to the United States Securities and Exchange Commission; and
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“
Securities Act
” refers to the Securities Act of 1933, as amended.
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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.