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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

þQUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2014

 

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

 

Commission file number 000-30234

 

 

ENERJEX RESOURCES, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   88-0422242
(State or other jurisdiction of incorporation or   (I.R.S. Employer Identification No.)
organization)    
     
4040 Broadway    
Suite 508    
San Antonio, Texas   78209
(Address of principal executive offices)   (Zip Code)

 

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes    þ        No    ¨

 

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

 

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

 

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

Yes    ¨      No     þ

 

The number of shares of Common Stock, $0.001 par value, outstanding on August 13, 2014 was 7,643,114 shares.

 

 
 

  

ENERJEX RESOURCES, INC.

FORM 10-Q

TABLE OF CONTENTS

 

    Page
PART I     FINANCIAL STATEMENTS  
ITEM 1. FINANCIAL STATEMENTS 2
  Condensed Consolidated Balance Sheets at June 30, 2014 (Unaudited) and December 31, 2013 2
  Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013 (Unaudited) 3
  Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013 (Unaudited) 4
  Notes to Condensed Consolidated Financial Statements 5
  FORWARD-LOOKING STATEMENTS

9

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

10

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16
ITEM 4. CONTROLS AND PROCEDURES 16
     
PART II    OTHER INFORMATION  
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4. (REMOVED AND RESERVED) 17
ITEM 5. OTHER INFORMATION 18
ITEM 6. EXHIBITS 18
     
SIGNATURES 20

 

i
 

  

PART 1 – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

EnerJex Resources, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

Unaudited

  

 

   June 30,   December 31, 
   2014   2013 
Assets          
Current assets:          
Cash  $639,227   $1,079,356 
Restricted cash   -    228,840 
Accounts receivable   2,067,418    2,461,746 
Inventory   283,845    238,794 
Marketable securities   1,018,673    1,018,573 
Deposits and prepaid expenses   625,923    373,994 
Total current assets   4,635,086    5,401,303 
           
Non-current assets:          
Fixed assets, net of accumulated depreciation of $1,933,122 and $1,785,401   2,298,309    2,406,591 
Oil and gas properties using full-cost accounting, net of accumulated DD&A   61,572,679    61,349,403 
Other non-current assets   813,143    834,180 
Total non-current assets   64,684,131    64,590,174 
Total assets  $69,319,217   $69,991,477 
           
Liabilities and Stockholders' Equity          
Current liabilities:          
Accounts payable  $2,278,920   $2,424,009 
Accrued liabilities   1,537,922    3,070,461 
Derivative liability   1,721,093    1,011,708 
Total current liabilities   5,537,935    6,506,178 
           
Asset retirement obligation   2,786,906    2,687,801 
Long-term debt   19,029,064    31,547,255 
Derivative liability   635,392    339,642 
Total non-current liabilities   22,451,362    34,574,698 
Total liabilities   27,989,297    41,080,876 
           
Commitments & Contingencies          
Stockholders' Equity:          
10% Series A Cumulative Perpetual Preferred Stock, $0.001 par value, 25,000,000
shares authorized; 751,815 shares issued and outstanding at June 30, 2014
   752    - 
Preferred stock, $0.001 par value, 25,000,000 shares authorized; 4,779,460 shares
issued and outstanding at December 31, 2013
   -    4,780 
Common stock, $0.001 par value, 250,000,000  shares authorized; shares issued and
outstanding 7,643,114  at June 30, 2014 and 7,281,163 at December 31, 2013
   7,643    7,281 
Treasury Stock, 383,333 shares   (2,551,000)   (2,551,000)
Paid-in capital   66,190,136    49,913,535 
Accumulated other comprehensive income   (552,589)   (552,589)
Retained (deficit)   (21,765,022)   (20,462,406)
Total stockholder’s equity   41,329,920    28,910,601 
Total liabilities and stockholders' equity  $69,319,217   $69,991,477 

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

2
 

  

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, 
   2014   2013   2014   2013 
                 
Oil revenues  $3,574,465   $2,196,736   $7,187,044   $4,534,037 
Natural gas revenues   374,931    -    617,329    - 
Total revenues   3,949,396    2,196,736    7,804,373    4,534,037 
                     
Expenses:                    
Direct operating costs   1,511,133    751,957    3,043,040    1,534,029 
Depreciation, depletion and  amortization   832,381    418,561    1,596,139    863,098 
Professional fees   227,213    269,257    452,115    625,479 
Salaries   369,088    185,978    679,436    431,989 
Administrative expense   251,200    174,243    392,229    313,647 
Total expenses   3,191,015    1,799,996    6,162,959    3,768,242 
Income from operations   758,381    396,740    1,641,414    765,795 
                     
Other income (expense):                    
Interest expense   (358,739)   (137,128)   (737,667)   (255,373)
Gain (loss) on derivatives   (1,406,739)   407,759    (1,811,092)   167,818 
Other income   292    49,214    4,174    58,381 
Total other income (expense)   (1,765,186)   319,845    (2,544,585)   (29,174)
Net income (loss)  $(1,006,805)  $716,585   $(903,171)  $736,621 
                     
Net income (loss)   (1,006,805)   716,585    (903,171)   736,621 
Preferred dividends   -    (199,456)   (399,447)   (392,343)
Net income (loss) attributable to common stockholders  $(1,006,805)  $517,129   $(1,302,618)  $344,278 
Net income (loss) per share basic and diluted  $(.14)  $.11   $(.18)  $0.08 
Weighted average shares   7,342,858    4,522,501    7,317,092    4,522,468 

 

  

 

See Notes to Condensed Consolidated Financial Statements.

 

3
 

  

EnerJex Resources, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

   For the Six Months Ended 
   June 30, 
   2014   2013 
Cash flows from operating activities          
Net income (loss)  $(903,171)  $736,621 
Depreciation, depletion and amortization   1,596,139    863,098 
Stock, options and warrants issued for services   359,473    140,496 
Accretion of asset retirement obligation   127,389    56,386 
Settlement of asset retirement obligation   (30,647)   (36,758)
Loss (gain) on derivatives   1,005,135    (590,501)
Loss on sale of fixed assets   -    7,785 
Adjustments to reconcile net income to cash from operating activities:          
Accounts receivable   394,328    233,698 
Inventory   (45,051)   - 
Prepaid expenses   (290,498)   (137,674)
Accounts payable   (145,089)   (900,069)
Accrued liabilities   (1,076,249)   (16,556)
Cash flows from operating activities   991,759    356,526 
           
Cash flows from investing activities          
Purchase of fixed assets   (39,439)   (41,418)
Additions to oil and gas properties   (2,657,269)   (3,035,741)
Proceeds from the sale of assets   987,939    452,118 
Cash flows from investing activities   (1,708,769)   (2,625,041)
           
Cash flows from financing activities          
Payments on long-term debt   (14,018,191)   - 
Payments on notes payable   -    (400,000)
Proceeds from borrowings   1,500,000    2,500,000 
Proceeds from sale of preferred stock   13,400,932    - 
Deferred financing costs   21,037    - 
Dividends paid on preferred stock   (855,737)   (367,650)
Cash flows from financing activities   48,041    1,732,350 
           
Net decrease in cash   (668,969)   (536,165)
Cash – beginning   1,308,196    767,494 
Cash – ending  $639,227   $231,329 
           
Supplemental disclosures:          
Interest paid  $388,335   $117,588 
Income taxes paid  $-   $- 
           
Non-cash transactions:          
Share based payments issued for services  $359,473   $140,496 

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

4
 

  

EnerJex Resources, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

 

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, 2013.

  

Our consolidated financial statements include the accounts of our wholly-owned subsidiaries, EnerJex Kansas, Inc., DD Energy, Inc., Black Sable Energy, LLC, Working Interest, LLC and Black Raven Energy, Inc. (“Black Raven”) for the three month and six month periods ended June 30, 2014 and for the year ended December 31, 2013. On September 27, 2013 we acquired Black Raven. Accordingly, only the financial position, results of operations and cash flows of Black Raven for the quarter ended December 31, 2013 were included in the Company’s consolidated financial statements for the year ended December 31, 2013. All intercompany transactions and accounts have been eliminated in consolidation.

 

Note 2 - Stock Options

 

A summary of stock options is as follows: 

 

   Options   Weighted
Average
Price
 
Outstanding December 31, 2013   231,133   $9.36 
Granted   2,367    10.50 
Cancelled   (1,500)   10.50 
Exercised   -    - 
Outstanding June 30, 2014   232,000   $9.47 

 

 

Note 3 – Fair Value Measurements

 

We hold certain financial assets which are required to be measured at fair value on a recurring basis in accordance with the Statement of Financial Accounting Standard No. 157, "Fair Value Measurements" ("ASC Topic 820-10"). ASC Topic 820-10 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). ASC Topic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability. The three levels of the fair value hierarchy under ASC Topic 820-10 are described below:

 

Level 1. Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access. We believe our debt approximates fair value at June 30, 2014.

 

Level 2. Valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities. We consider the derivative liability to be Level 2. We determine the fair value of the derivative liability utilizing various inputs, including NYMEX price quotations and contract terms.

 

Level 3. Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. We consider our marketable securities to be Level 3

 

5
 

  

Our derivative instruments consist of fixed price commodity swaps and a deferred premium put.

 

   Fair Value Measurement 
   Level 1   Level 2   Level 3 
Crude oil contracts  $-   $(2,356,485)  $- 
Marketable Securities  $-   $-   $1,018,673 

 

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, 2013  $2,687,801 
Liabilities incurred during the period   2,363 
Liabilities settled during the period   (30,647)
Accretion   127,389 
Asset retirement obligations, June 30, 2014  $2,786,906 

 

Note 5 - Derivative Instruments

 

We have entered into certain derivative or physical arrangements with respect to portions of our crude oil production to reduce our sensitivity to volatile commodity prices and/or to meet hedging requirements under our Credit Facility. We believe that these derivative arrangements, although not free of risk, allow us to achieve a more predictable cash flow and to reduce exposure to commodity price fluctuations. However, derivative arrangements limit the benefit of increases in the prices of crude oil. Moreover, our derivative arrangements apply only to a portion of our production.

 

We have an Intercreditor Agreement in place between us, our counterparties, BP Corporation North America, Inc. ("BP") and Cargill Incorporated (“Cargill”) and our agent Texas Capital Bank, N.A., which allows Texas Capital Bank to also act as agent for the counterparties for the purpose of holding and enforcing any liens or security interests resulting from our derivative arrangements. Therefore, we are not required to post additional collateral, including cash.

 

The following derivative contracts were in place at June 30, 2014:

 

   Term  Monthly Volumes  Price/Bbl   Fair Value 
Deferred premium put

  1/16-6/16  9,000 Bbls  $85.00   $(79,830)
Crude oil swap  1/15-12/15  5,800 Bbls  $88.55    (591,774)
Crude oil swap  9/13-12/14  3,000 Bbls  $95.15    (148,830)
Crude oil swap  7/11-12/15  2,750 Bbls  $83.70    (746,888)
Crude oil collar  1/14-12/14  1,900 Bbls  $96.00    (84,569)
Crude oil swap  7/12-12/15  1,400 Bbls  $76.74    (595,524)
Crude oil swap  1/14-12/14  1,380 Bbls  $90.25    (109,070)
              $(2,356,485)

 

Monthly volume is the weighted average throughout the period.

 

The total fair value is shown as a derivative instrument in both the current and non-current liabilities on the balance sheet. 

 

6
 

  

Note 6 - 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 ("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 six months, as selected by the Borrowers. The margins for all loans are based on a pricing grid ranging from 0.00% to 0.75% for the Base Rate Margin and 2.25% to 3.00% for the Floating Rate Margin based on the Company's Borrowing Base Utilization Percentage (as defined in the Amended and Restated Credit Agreement). 

 

On December 15, 2011, we entered into a First Amendment to Amended and Restated Credit Agreement and Second Amended and Restated Promissory Note in the amount of $50,000,000 with the Bank. The Amendment 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 reflects the following changes: (i) the Bank consented to the restructuring transactions related to the dissolution of Rantoul Partners, and (ii) the Bank terminated a Limited Guaranty, as defined in the Credit Agreement, executed by Rantoul Partners in favor of the Bank. 

 

On April 16, 2013, the Bank increased our borrowing base to $19.5 million. 

 

On September 30, 2013, we entered into a Fifth Amendment to the Amended and Restated Credit Agreement.  The Fifth Amendment reflects the following changes:  (i) an expanded principal commitment amount of the Bank to $100,000,000, (ii) an increase in our Borrowing Base to $38,000,000, (iii) the addition of Black Raven Energy, Inc. 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 reflects the following changes: (i) the addition of Iberia Bank as a participant in our credit facility, and (ii) a technical correction to our covenant calculations.

 

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

 

Our current borrowing base is $38 million, of which we had borrowed $19.0 million as of June 30, 2014. We intend to conduct an additional borrowing base review in the second half of 2014, and we expect the increases in our production and the maturity of our producing assets to result in an additional borrowing base increase as part of the additional borrowing base review. For the six month period ended June 30, 2014, and for the year ended December 31, 2013, the interest rate on amounts borrowed under our credit facility was 3.3%. This facility expires on October 3, 2015. 

 

7
 

  

Note 7 Commitments & Contingencies

 

As of June 30, 2014 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, 2014 and 2013 was approximately $106,000 and $52,000 respectively. Future non-cancellable minimum lease payments are approximately $83,000 for the remainder of 2014, $154,000 for 2015, $147,000 for 2016, $145,000 for 2017, $90,000 for 2018 and $77,000 for 2019. 

 

Note 8 Equity Transactions 

 

On January 15, 2014, 7,333 shares were issued to two employees of the Company as compensation. The share price on the issue date was $7.05. From February 5, 2014 through March 17, 2014, 9,595 shares were issued for professional services rendered on behalf of the Company. The share price on all issuance dates for those shares was $7.50.

 

Effective after the close of trading in EnerJex common stock on May 30, 2014, the Company affected a 1-for-15 reverse stock split, by which each share of EnerJex common stock was reclassified, and changed into 1/15th of a fully paid and non-assessable share of common stock. In lieu of fractions of a share, the Company paid to holders of fractions of a share cash equal to $11.25 per share, which was the minimum value designated in the amended and restated certificate of designations affecting the reverse stock split.

 

On June 16, 2014, we adopted the Amended and Restated Certificate of Designation modifying the terms of our then-existing Series A preferred stock. Concurrently with filing of that Amended and Restated Certificate of Designation, the holders of our existing Series A preferred stock exchanged each outstanding share of such existing Series A preferred stock for (i) a number of shares of our common stock into which such Series A preferred stock was then convertible immediately prior to the exchange (318,630 shares in the aggregate), and (ii) a number of shares of Series A preferred stock equal to the quotient determined by dividing (x) that portion of the holder's original Series A preferred stock purchase price that had not yet been paid in dividends, by (y) $23.75.

 

On June 20, 2014, we closed an underwritten initial public offering of 639,157 shares of our Series A preferred stock at a purchase price of $23.75 per share for gross proceeds of $15.2 million. The shares sold to the underwriters included 83,368 shares pursuant to a 45-day option that was exercised by the underwriters in full on June 20, 2014.

 

Note 9 Subsequent Events

 

We have reviewed all material events through the date of this report in accordance with ASC 855-10.

 

On July 31, 2014, the company paid a dividend of approximately $208,900 on our 10% Series A Cumulative Perpetual Preferred Stock to shareholders of record at the close of business on July 15, 2014. The dividend was for the period beginning June 20, 2014 (the date of the issuance of the shares of Preferred Stock) through July 31, 2014.

 

8
 

  

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, 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;
  · 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, 2013.

  

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., DD Energy, 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 31st fiscal year end.

 

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 to of a written request to us at EnerJex Resources, Inc., 4040 Broadway, Suite 508, San Antonio, Texas 78209. 

 

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INDUSTRY AND MARKET DATA

 

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

 

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 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, Colorado, Nebraska 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 are focusing our capital budget on the development of our Colorado and Kansas properties where we have identified hundreds of drilling locations and reactivation or recompletion opportunities that we believe will generate high rates of return with low risk profiles.

 

Recent Developments

 

The following is a brief description of our most significant corporate developments that have occurred since the end of 2013:

 

·In our Adena Field Project, we reactivated and initiated production from 6 new J-Sand oil wells and 1 new J-Sand natural gas well, recompleted and initiated water injection into 4 new secondary recovery J-Sand wells, and recompleted 2 D-sand oil wells in a secondary recovery waterflood pilot that was initiated during 2013. Preliminary production tests in this D-Sand waterflood pilot indicate that secondary recovery operations have increased reservoir pressure, and swab tests indicate the potential for commercial oil production. Initial oil production from this pilot is expected to commence in August 2014.

 

During June and July 2014, we conducted detailed production tests on our J-Sand oil wells in order to measure oil and water volumes. Data collected from these testing operations is being utilized to optimize field operations and future development planning. The testing process resulted in inefficient run times that negatively impacted production volumes during these months. All but two of the active J-Sand oil wells were back on production by the end of July and we expect to complete the testing process in early August 2014. We intend to continue reactivating and recompleting wells in this project throughout the remainder of 2014.

 

·In our Mississippian Project, we initiated a development drilling program in July and have since drilled three successful oil wells that are currently awaiting completion. We intend to continue drilling new wells in this project throughout the remainder of 2014.

 

·In our Niobrara Project, we successfully completed workover operations on eight natural gas wells. In addition we tested two wells located approximately one mile apart in a portion of our Niobrara Project located in Sedgwick County, Colorado. Each well achieved an initial production rate of more than 600 thousand cubic feet of natural gas (Mcf) per day from the Niobrara formation at a depth of approximately 2,900 feet.

 

The Company has filed 17 drilling permits in in this area, where we have identified dozens of high-ranked drilling locations based on 3D seismic analysis. We have completed our assessment of the costs and timing associated with this development, including drilling and completion operations, pipeline construction, and the upgrade of an existing tap which the Company previously acquired that connects to the Trailblazer pipeline. We are aggressively moving forward with our development plans in this new area of the project, where management expects to drill 17 wells during the fourth quarter and initiate production by year-end. 

 

·Effective after the close of trading in EnerJex common stock on May 30, 2014, the Company affected a 1-for-15 reverse stock split, by which each share of EnerJex common stock was reclassified, and changed into 1/15th of a fully paid and non-assessable share of common stock. In lieu of fractions of a share, the Company paid to holders of fractions of a share cash equal to $11.25 per share, which was the minimum value designated in the amended and restated certificate of designations affecting the reverse stock split.

  

·On June 16, 2014, we adopted the Amended and Restated Certificate of Designation modifying the terms of our then-existing Series A preferred stock. Concurrently with filing of that Amended and Restated Certificate of Designation, the holders of our existing Series A preferred stock exchanged each outstanding share of such existing Series A preferred stock for (i) a number of shares of our common stock into which such Series A preferred stock was then convertible immediately prior to the exchange (318,630 shares in the aggregate), and (ii) a number of shares of Series A preferred stock equal to the quotient determined by dividing (x) that portion of the holder's original Series A preferred stock purchase price that had not yet been paid in dividends, by (y) $23.75.

  

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·On June 17, 2014 our common stock and non-dilutive Series A Cumulative Perpetual Preferred Stock began trading on the NYSE MKT under the symbols ENRJ and ENRJPR. The Company’s common stock prior to June 17, 2014 traded on the OTCQB.

 

·On June 20, 2014, we closed an underwritten public offering of 639,157 shares of 10% Series A Cumulative Perpetual Preferred Stock (liquidation preference of $25.00 per share) at a price to the public of $23.75 per share for gross proceeds of $15.2 million. The shares sold to the underwriters included 83,368 shares pursuant to a 45-day option that was exercised by the underwriters in full on June 20, 2014. The Series A Preferred Shares contain the following provisions: (i) Series A Preferred Shareholders shall receive cumulative dividends at the stated rate of 10% per annum of the $25.00 per share liquidation preference; (ii) the Series A Preferred Shares shall not be redeemable by the Company except on or after June 16, 2017 or after a Change of Control of the Company; (iii) the Series A Preferred Shares shall not have any relative, participating, option or other voting rights or powers: and (iv) the Series A Preferred Shares shall not be convertible into our common stock.

 

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 periods ended June 30, 2014 and June 30, 2013.

 

   For the Three Months Ended   For the Six Months Ended 
   June 30,   June 30, 
   2014   2013   2014   2013 
                 
Net Production                    
Oil (Bbl)   37,881    23,857    77,546    50,394 
Natural gas (Mcf)   90,322    -    147,463    - 
                     
Average Sales Prices                    
Oil (Bbl)  $94.36   $92.08   $92.68   $89.97 
Natural gas (Mcf)  $4.15   $-   $4.19   $- 
                     
Average Production Cost (1)                    
Per barrel of oil equivalent (“Boe”)  $44.27   $49.06   $45.43   $47.57 
                     
Average Lifting Costs (2)                    
Per Boe  $28.55   $31.52   $29.80   $30.44 

  

(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, 2014 and 2013 compared.

 

Income:

 

   Three Months Ended   Increase /   Six Months Ended   Increase / 
   June 30,   (Decrease)   June 30,   (Decrease) 
   2014   2013   $   2014   2013   $ 
Oil revenues  $3,574,465   $2,196,736   $1,377,729   $7,187,044   $4,534,037   $2,653,007 
Natural gas revenues   374,931    -    374,931    617,329    -    617,329 
Total  $3,949,396   $2,196,736   $1,752,660   $7,804,373   $4,534,037   $3,270,336 

  

Oil Revenues

 

Oil revenues for the six months ended June 30, 2014 were $7,187,044 compared to revenues of $4,534,037 for the six months ended June 30, 2013. Revenues increased as a result of higher oil production associated with the assets acquired via the Black Raven merger and as a result of slightly higher oil prices.

 

Natural Gas Revenues

 

Natural gas revenues for the six months ended June 30, 2014 were $617,329. Natural gas revenues increased as result of increased natural gas production from assets that were acquired as part of our merger with Black Raven on September 27, 2013.

 

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Expenses:

 

   Three Months Ended   Increase /   Six Months Ended   Increase / 
   June 30,   (Decrease)   June 30,   (Decrease) 
   2014   2013   $   2014   2013   $ 
Production expenses:                              
Direct operating costs  $1,511,133   $751,957   $759,176   $3,043,040   $1,534,029   $1,509,011 
Depreciation, depletion and amortization   832,381    418,561    413,820    1,596,139    863,098    733,041 
Total production expenses   2,343,514    1,170,518    1,172,996    4,639,179    2,397,127    2,242,052 
                               
General expenses:                              
Professional fees   227,213    269,257    (42,044)   452,115    625,479    (173,364)
Salaries   369,088    185,978    183,110    679,436    431,989    247,447 
Administrative expense   251,200    174,243    76,957    392,229    313,647    78,582 
Total general expenses   847,501    629,478    218,023    1,523,780    1,371,115    152,665 
Total production and general expenses   3,191,015    1,799,996    1,391,019    6,162,959    3,768,242    2,394,717 
                               
Income from operations   758,381    396,740    361,641    1,641,414    765,795    875,619 
                               
Other income (expense)                              
Interest expense   (358,739)   (137,128)   (221,611)   (737,667)   (255,373)   (482,294)
Gain (loss) on derivatives   (1,406,739)   407,759    (1,814,498)   (1,811,092)   167,818    (1,978,910)
Other income   292    49,214    (48,922)   4,174    58,381    (54,207)
Total other income (expense)   (1,765,186)   319,845    (2,085,031)   (2,544,585)   (29,174)   (2,515,411)
                               
Net income (loss)  $(1,006,805)  $716,585   $(1,723,390)  $(903,171)  $736,621   $(1,639,792)

 

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, 2014 increased 98% to $3,043,040 from $1,534,029 for the six months ended June 30, 2013. However, direct operating costs per Boe decreased from $30.44 to $29.80. The $1,509,011 increase in direct operating costs is due primarily to new production associated with the assets that we acquired as part of our merger with Black Raven on September 27, 2013. 

 

Depreciation, Depletion and Amortization

 

Depreciation, depletion and amortization for the six months ended June 30, 2014 was $1,596,139 compared to $863,098 for the six months ended June 30, 2013. The increase in depletion expense is due primarily to increased oil and natural gas production during the first six months of 2014 compared to the first six months of 2013. Depletion expense per Boe decreased $1.50 or 8.8% in the first half of 2014 compared to the first half of 2013.

 

Professional Fees

 

Professional fees for the six months ended June 30, 2014 were $452,115 compared to $625,479 for the six months ended June 30, 2013. The decrease in professional fees is due primarily to a reduction in lawsuit related legal fees and a reduction in fees related to outsourced third party engineering and consulting work that we conducted during the first quarter of 2013. Professional fees for the six months ended June 30, 2014 include the following expenses: i) a one-time severance payment of approximately $127,000 paid to a former executive of Black Raven Energy, ii) legal bills totaling approximately $87,000 related to litigation related matters, iii) legal expenses and other transaction related expenses of approximately $61,000 associated with the Series A Preferred Stock offering, the listing of our common stock on the NYSE MKT exchange, and other miscellaneous transaction related expenses, and iv) investor relations related expenses totaling approximately $37,000.

 

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Salaries

 

Salaries for the six months ended June 30, 2014 were $679,436 compared to $431,989 for the six months ended June 30, 2013.  The increase in salaries is due primarily to the addition of employees following our merger with Black Raven.

 

Administrative Expenses

 

Administrative expenses for the six months ended June 30, 2014 were $392,229 compared to $313,647 for the six months ended June 30, 2013. The increase in administrative expenses is due primarily to the addition of employees, office space and the administrative costs associated with our merger with Black Raven on September 27, 2013.

 

Interest Expense

 

Interest expense for the six months ended June 30, 2014 was $737,667 compared to $255,373 for the six months ended June 30, 2013. Interest expense and amortization of deferred financing costs increased as a result of increased borrowings. Proceeds from the Series A Preferred Stock offering were used to reduce outstanding borrowings on our line of credit with Texas Capital Bank in June 2014. Accretion increased due to assets that were acquired as part of our merger with Black Raven on September 27, 2013.

 

Gain (Loss) on Derivatives

 

We incurred a loss of $1,811,092 on our derivative contracts in the first six months of 2014 compared to a gain of $167,818 for the six months ended June 30, 2013. The loss was due primarily to the completion of contracts during the six month period ending June 30, 2014 and an increase in the WTI benchmark oil price. 

 

Net Income (Loss)

 

Net loss for the six months ended June 30, 2014 was $903,171 compared to net income of $736,621for the six months ended June 30, 2013.  The decrease in net income was due primarily to an increase in the unrealized loss on derivatives resulting from the “mark to market” valuation of our derivative contracts at June 30, 2014 as compared to June 30, 2013.

 

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. We believe that our historical means of meeting our capital requirements will provide us with adequate liquidity to fund our operations and capital program in 2014.

 

The following table summarizes total current assets, total current liabilities and working capital.

 

   June 30,
2014
   December 31,
2013
   Increase /
(Decrease)
 
             
Current Assets  $4,635,086   $5,401,303   $(766,217)
                
Current Liabilities  $5,537,935   $6,506,178   $(968,243)
                
Working Capital (deficit)  $(902,849)  $(1,104,875)  $202,026 

 

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 ("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. 

 

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

 

 On December 15, 2011, we entered into a First Amendment to Amended and Restated Credit Agreement and Second Amended and Restated Promissory Note in the amount of $50,000,000 with the Bank, 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 reflects the following changes: (i) the Bank consented to the restructuring transactions related to the dissolution of Rantoul Partners, and (ii) the Bank terminated a Limited Guaranty, as defined in the Credit Agreement, executed by Rantoul Partners in favor of the Bank.

 

On April 16, 2013, the Bank increased our borrowing base to $19.5 million.

 

On September 30, 2013, we entered into a Fifth Amendment to the Amended and Restated Credit Agreement.  The Fifth Amendment reflects the following changes: (i) an expanded principal commitment amount of the Bank to $100,000,000, (ii) an increase in our Borrowing Base to $38,000,000, (iii) the addition of Black Raven Energy, Inc. 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 reflects the following changes: (i) the addition of Iberia Bank as a participant into our credit facility, and (ii) made a technical correction to our covenant calculations.

 

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

 

Our current borrowing base is $38 million, of which we had borrowed $19.0 million as of June 30, 2014. We intend to conduct an additional borrowing base review in the second half of 2014, and we expect the increases in our production and the maturity of our producing assets to result in an additional borrowing base increase as part of the additional borrowing base review. For the six month period ended June 30, 2014, and for the year ended December 31, 2013, the interest rate on amounts borrowed under our credit facility was 3.3%. This facility expires on October 3, 2015.

 

Satisfaction of our cash obligations for the next 12 months

 

We intend to meet our near term cash obligations through financings under our credit facility with Texas Capital Bank and through cash flow generated from operations.

 

Summary of product research and development

 

We do not anticipate performing any significant product research and development under our plan of operation.

 

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.

 

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 Significant changes in the number of employees

 

There have been no significant changes in number of employees since December 31, 2013. We currently have 32 full-time employees, 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. During the quarter ended June 30, 2014 and the year ended December 31, 2013, there were no impairments resulting from the quarterly ceiling tests. 

 

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

 

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 Asset Retirement Obligations

 

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

 

Share-Based Payments

 

The value we assign to the options and warrants that we issue is based on the fair market value as calculated by the Black-Scholes pricing model. To perform a calculation of the value of our options and warrants, we determine an estimate of the volatility of our stock. We need to estimate volatility because there has not been enough trading of our stock to determine an appropriate measure of volatility. We believe our estimate of volatility is reasonable, and we review the assumptions used to determine this whenever we issue 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.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

We are a smaller reporting Company as defined by Rule 12b-2 under the Securities Exchange Act of 1934, and are not required to provide the information required under this item.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Our chief executive officer, Robert G. Watson, Jr., and our Chief Financial Officer, Douglas M. Wright, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Report pursuant to Exchange Act Rule 13-a-15(b). Based on the evaluation, Mr. Watson and Mr. Wright concluded that our disclosure controls and procedures are effective.

 

There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS.

 

We may become involved in various routine legal proceedings incidental to our business. However, to our knowledge as of the date of this transition report, there are no material pending legal proceedings to which we are a party or to which any of our property is subject, except the legal proceedings discussed below.

 

On January 23, 2012, we filed a petition seeking recovery of damages arising from breach of contract, legal malpractice, breach of fiduciary duty and fraud in the Circuit Court of Jackson County, Missouri against attorneys Jeffrey T. Haughey, Robert K. Green, and the law firm Husch Blackwell LLP f/k/a Husch Blackwell Sanders, LLC. The petition in this action, EnerJex Resources, Inc., v. Haughey, et al., alleges, among other things, that the defendants violated their fiduciary duties and defrauded us in connection with our stock offering in 2008. 

 

The petition alleges economic loss of approximately $50 million and demands judgment for unspecified actual and punitive damages together with repayment of $484,473 in legal fees paid by EnerJex. At the time the petition was filed, we estimated our economic loss of approximately $50 million by conducting an analysis that considered a number of factors, including the loss of at least $25 million of gross proceeds we would have received in the failed 2008 stock offering, the loss of the value we could have created had it been able to utilize the proceeds from the stock offering to execute its business plan in the 2008 economic environment, and the loss of market value for our common stock. 

 

A trial to hear a portion of this case in the 16th Circuit Court of Jackson County, Missouri, began on December 2, 2013. In that trial, based on its rulings on written motions, the court disallowed our claims for actual and consequential damages for breach of contract and legal malpractice against the defendants. On December 19, 2013, the Company reached an agreement with the defendants to settle our claims for breach of fiduciary duty and fraud in return for (i) the defendants paying to us the sum of $500,000, which was paid to us in January 2014, and (ii) dismissal of the defendants’ counterclaim of $492,134 and interest on that amount, which was removed from our balance sheet and is not reflected as a liability as of December 31, 2013. Our financial statements reflect the litigation costs that we have incurred to date. 

 

In entering into this settlement, the defendants have not admitted liability on any matter related to the claims in the litigation. In June 2014, we appealed the court’s rulings and requested from the appellate court authorization to pursue our claims for actual and consequential damages with respect to our claims alleging breach of contract and legal malpractice against the defendants. There can be no assurance of the outcome of the appellate process, including whether the appellate court will allow us to seek actual and consequential damages for breach of contract and legal malpractice and breach of fiduciary duty, as well as what amount of damages, if any, we may recover. 

 

Any additional monetary award resulting from a settlement of this litigation that is reached for our benefit in an amount that exceeds our total costs of litigation shall be subject to a contingency fee for the benefit of our attorneys. There can be no assurance of the outcome of this litigation, including whether and in what amount EnerJex may recover damages.

 

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. (REMOVED AND RESERVED).

 

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ITEM 5. OTHER INFORMATION.

 

None.

 

ITEM 6.  EXHIBITS.

 

Exhibit
No.
  Description
2.1   Agreement and Plan of Merger between Millennium Plastics Corporation and Midwest Energy, Inc. effective August 15, 2006 (incorporated by reference to Exhibit 2.3 to the Form 8-K filed on August 16, 2006)
2.2   Agreement and Plan of Merger by and among Registrant, BRE Merger Sub, Inc., Black Raven Energy, Inc. and West Coast Opportunity Fund, LLC dated July 23, 2013 (incorporated herein by reference to Exhibit 10.4 on Form 8-K filed July 29, 2013).
3.1   Amended and Restated Articles of Incorporation, as currently in effect (incorporated by reference to Exhibit 3.1 to the Form 10-Q filed on August 14, 2008)
3.2   Amended and Restated Bylaws, as currently in effect (incorporated by reference to Exhibit 3.3 to the Form SB-2 filed on February 23, 2001)
3.3   Certificate of Amendment of Articles of Incorporation (Previously filed)
4.1   Article VI of Amended and Restated Articles of Incorporation of Millennium Plastics Corporation (incorporated by reference to Exhibit 1.3 to the Form 8-K filed on December 6, 1999)
4.2   Article II and Article VIII, Sections 3 & 6 of Amended and Restated Bylaws of Millennium Plastics Corporation (incorporated by reference to Exhibit 4.1 to the Form SB-2 filed on February 23, 2001)
10.1   Amended and Restated 2002/2003 Stock Option Plan (incorporated by reference to Exhibit 10 to the Form 8-K filed on May 11, 2007
10.2   Form of Officer and Director Indemnification Agreement (incorporated by reference to Exhibit 10.2 to the Form 8-K filed on October 16, 2008)
10.3   Euramerica Letter Agreement Amendment dated September 15, 2008 (incorporated by reference to Exhibit 10.10 to the Form 8-K filed on September 18, 2008)
10.4   Euramerica Letter Agreement Amendment dated October 15, 2008 (incorporated by reference to Exhibit 10.11 to the Form 8-K filed on October 21, 2008)
     
10.5   Amendment 4 to Joint Exploration Agreement effective as of November 6, 2008 between MorMeg, LLC and EnerJex Resources, Inc.  (incorporated by reference to Exhibit 10.15 to the Form 10-K filed July 14, 2009)
10.6   Standby Equity Distribution Agreement with Paladin Capital Management, S.A. dated December 3, 2009 (incorporated by reference to Exhibit 10.52 to the Form S-1 filed on December 9, 2009)
10.7   Amendment 5 to Joint Exploration Agreement effective as of December 31, 2009 between MorMeg LLC and EnerJex Resources, Inc. (incorporated by reference to Exhibit 10.15 to the Form 10-Q filed on February 16, 2010)
10.8   Amendment 6 to Joint Exploration Agreement effective as of March 31, 2010 between MorMeg LLC and EnerJex Resources, Inc. (incorporated by reference to Exhibit 10.24 to the Form 10-K filed on July 15, 2010)
10.9†   Amended and Restated EnerJex Resources, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on October 16, 2008)
     
10.10   Securities Purchase and Asset Acquisition Agreement between EnerJex Resources, Inc. and West Coast Opportunity Fund, LLC; Montecito Venture Partners, LLC; J&J Operating Company, LLC and Frey Living Trust dated December 31, 2010 (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on January 6, 2011).
10.11   Stock Repurchase Agreement between EnerJex Resources, Inc. and Working Interest Holdings, LLC dated December 31, 2010 (incorporated by reference to Exhibit 10.2 to the Form 8-K filed on January 6, 2011).
10.12   Securities Purchase Agreement between EnerJex Resources, Inc. and various Investors dated December 31, 2010 (incorporated by reference to Exhibit 10.3 to the Form 8-K filed on January 6, 2011).
10.13   Joint Development Agreement between EnerJex Resources, Inc. and Haas Petroleum, LLC dated December 31, 2010 (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on January 27, 2011).
10.14   Joint Operating Agreement between EnerJex Resources, Inc. and Haas Petroleum, LLC and MorMeg, LLC dated December 31, 2010 (incorporated by reference to Exhibit 10.2 to the Form 8-K filed on January 27, 2011).
10.15   Letter Agreement with Registrant, James Loeffelbein, John Loeffelbein and J&J Operating dated January 14, 2011 (incorporated by reference to Exhibit 10.1 on Form 8-K filed on January 18, 2011).
10.16   Form of Securities Purchase Agreement among Registrant and Investors dated March 31, 2011 (incorporated by reference to Exhibit 10.1 on Form 8-K filed on April 4, 2011).

 

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10.17   Form of Warrant among Registrant and Investors dated March 31, 2011 (incorporated by reference to Exhibit 10.2 on Form 8-K filed on April 4, 2011).
10.18   Form of Stock Redemption Agreement among Registrant and Working Interest Holdings, LLCs dated March 31, 2011 (incorporated by reference to Exhibit 10.1 on Form 8-K filed on April 4, 2011).
10.19   Amended and Restated Credit Agreement dated October 3, 2011 (incorporated herein by reference to Exhibit 10.1 on Form 8-K filed on October 6, 2011).
10.20   Option and Joint Development Agreement by and among Registrant and MorMeg, LLC dated August 2011 (incorporated herein by reference to Exhibit 10.1 on Form 8-K filed on November 15, 2011).
10.21   Rantoul Partners General Partnership Agreement dated December 14, 2011 (incorporated herein by reference to Exhibit 10.1 on Form 8-K filed on December 14, 2011).
10.22   First Amendment to Amended and Restated Credit Agreement dated December 14, 2011 (incorporated herein by reference to Exhibit 10.2 on Form 8-K filed on December 14, 2011).
10.23   First Amendment to General Partnership Agreement for Rantoul Partners dated March 30, 2012 (incorporated herein by reference to Exhibit 10.1 on Form 8-K filed on April 5, 2012).
10.24   Share Option Agreement by and among the EnerJex and Enutroff dated August 31, 2012 (incorporated herein by reference to Exhibit 10.1 on Form 8-K filed on October 10, 2012).
10.25   Second Amendment to Amended and Restated Credit Agreement dated August 31, 2012 (incorporated herein by reference to Exhibit 10.1 on Form 8-K filed on November 8, 2012).
10.26   Third Amendment to Amended and Restated Credit Agreement dated November 2, 2012 (incorporated herein by reference to Exhibit 10.2 on Form 8-K filed on November 8, 2012).
10.27   Securities and Asset Purchase Agreement by and among Registrant and James Loeffelbein and Enutroff dated November 3, 2012 (incorporated herein by reference to Exhibit 10.1 on Form 8-K filed on January 7, 2013).
10.28†   Second Amendment to General Partnership Agreement of Rantoul Partners dated November 27, 2012 (incorporated herein by reference to Exhibit 10.1 on Form 8-K filed on November 29, 2012).
10.29   Amended and Restated Employment Agreement by and among Registrant and Robert G. Watson, Jr. dated December 31, 2012 (incorporated herein by reference to Exhibit 10.1 on Form 8-K filed on January 4, 2013).
10.30   Partial Assignment of Assets by and among Rantoul Partners and Working Interest, LLC, dated December 31, 2012 (incorporated herein by reference to Exhibit 10.1 on Form 8-K filed on January 30, 2013).
10.31   Fourth Amendment to Amended and Restated Credit Agreement by and among Registrant and Texas Capital Bank dated December 31, 2012 (incorporated herein by reference to Exhibit 10.2 on Form 8-K filed on January 30, 2013).
10.32   First Amendment to Amended & Restated Mortgage Security Agreement, Financing Statement and Assignment of Production by and among Working Interest, LLC and Texas Capital Bank dated December 31, 2012 (incorporated herein by reference to Exhibit 10.3 on Form 8-K filed on January 30, 2013).
10.33   Mortgage, Security Agreement, Financing Statement and Assignment of Production and Revenues by and among Working Interest, LLC and Texas Capital Bank dated December 31, 2012 (incorporated herein by reference to Exhibit 10.4 on Form 8-K filed on January 30, 2013).
10.34   2013 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.1 on Registration Statement on Form S-8 filed on June 12, 2013)
10.35   Fifth Amendment to Amended and Restated Credit Agreement by and among Registrant and Texas Capital Bank, N.A. dated September 30, 2013 (incorporated herein by reference to Exhibit 10.1 on Form 8-K filed October 1, 2013).
10.36  

Sixth Amendment to Amended and Restated Credit Agreement by and among Registrant and Texas Capital Bank, N.A. dated November 19, 2013 (incorporated by reference to Exhibit 10.37 on Form 10-Q filed May 13, 2014).

10.37  

Exchange Agreement between EnerJex Resources, Inc. and holders of Series A preferred stock (incorporated by reference to Exhibit 10.38 on Form S-1/A Amendment No. 2 filed June 3, 2014).

10.38   Seventh Amendment to Amended and Restated Credit Agreement by and among Registrant and Texas Capital Bank, N.A. dated May 22, 2014 (incorporated by reference to Exhibit 10.1 to Form 8-K filed May 27, 2014).
21.1   Subsidiaries
31.1   Certification of Chief Executive and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1   Certification of Chief Executive and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2   Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

† Indicates management contract or compensatory plan or arrangement.

 

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SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

ENERJEX RESOURCES, INC.  
(Registrant)  
   
By:    /s/ Robert G. Watson, Jr.  
  Robert G. Watson, Jr. Chief Executive Officer  
   
Date: August 13, 2014  

 

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