NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION
The
accompanying consolidated financial statements of PEDEVCO CORP.
(“PEDEVCO” or the “Company”), have been
prepared in accordance with generally accepted accounting
principles in the United States of America (“GAAP”) and
the rules of the Securities and Exchange Commission
(“SEC”) and should be read in conjunction with the
audited financial statements and notes thereto contained in
PEDEVCO’s latest Annual Report filed with the SEC on Form
10-K. In the opinion of management, all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of
the financial position and the results of operations for the
interim periods presented have been reflected herein. The results
of operations for interim periods are not necessarily indicative of
the results to be expected for the full year. Notes to the
financial statements that would substantially duplicate disclosures
contained in the audited financial statements for the most recent
fiscal year, as reported in the Annual Report on Form 10-K for the
year ended December 31, 2017, filed with the SEC on March 29, 2018,
have been omitted.
The
Company’s consolidated financial statements include the
accounts of the Company, its wholly-owned subsidiaries and
subsidiaries in which the Company has a controlling financial
interest. All significant inter-company accounts and transactions
have been eliminated in consolidation.
The Company's
future financial condition and liquidity will be impacted by, among
other factors, the success of our exploration and appraisal
drilling program, the number of commercially viable oil and natural
gas discoveries made and the quantities of oil and natural gas
discovered, the speed with which we can bring such discoveries to
production, and the actual cost of exploration, appraisal and
development of our prospects.
Subject to the
availability of the additional funding, which is not currently in
place but is being currently being negotiated with SK Energy LLC,
the Company's current senior lender, which is owned and controlled
by Dr. Simon Kukes, its Chief Executive Officer and director, the
Company plans to make capital expenditures, excluding capitalized
interest and general and administrative expense, of up to
approximately $8.37 million during the period from January 1, 2018
to December 31, 2018 (none of which has been expended to date) in
order to achieve its plans (with an additional 6.4 net wells to be
drilled and completed in 2019 for a combined total 2018-2019
drilling capital budget of $34.85 million).
The Company expects that it will have sufficient
cash available to meet its needs over the twelve months following
the issuance of these financial statements, which cash the Company
anticipates being available from (i) its projected cash flow from
operations, (ii) its existing cash on hand, (iii) the issuance of
its common shares through National Securities Corporation under our
current “at the market offering” (of which $1.359
million remains available for issuance, subject to limitation under
the SEC’s “Baby Shelf Rules”) and other potential
equity funding opportunities, and (iv) potential loans (which may
be convertible) made available by its senior lender, SK Energy LLC,
which is owned and controlled by Dr. Simon Kukes, the Company's
Chief Executive Officer and director, which funds may not be
available on favorable terms, if at all.
In addition, the Company may seek additional
funding through asset sales, farm-out arrangements, lines of
credit, or public or private debt or equity financings to fund
additional 2018-2019 capital expenditures and/or repay or refinance
a portion or all of our outstanding
debt.
Management has concluded that the previously reported substantial
doubt as to the Company’s ability to continue as a going
concern has been alleviated by management's plans as described
above.
NOTE 2 – DESCRIPTION OF BUSINESS
PEDEVCO’s
primary business plan is engaging in the acquisition, exploration,
development and production of oil and natural gas shale plays in
the United States, with a secondary focus on conventional oil and
natural gas plays. The Company’s principal operating
properties are located in the Wattenberg, Wattenberg Extension, and
Niobrara formation in the Denver-Julesburg Basin (the “D-J
Basin” and the “D-J Basin Asset”) in Weld County,
Colorado, all of which properties are owned by the Company through
its wholly-owned subsidiary, Red Hawk Petroleum, LLC (“Red
Hawk”).
The
Company plans to focus on the development of shale oil and gas
assets held by the Company in its D-J Basin Asset,
and opportunistically seek additional
acreage proximate to the Company’s currently held core
acreage, as well as other attractive onshore oil and gas assets
elsewhere in the U.S., that Company management believes can be
acquired at attractive prices, developed using its operating
expertise, and be accretive to shareholder
value.
The
Company plans to seek additional shale oil and gas and conventional
oil and gas asset acquisition opportunities in the U.S. utilizing
its strategic relationships and technologies that may provide the
Company a competitive advantage in accessing and exploring such
assets. Some or all of these assets may be acquired by existing
subsidiaries or other entities that may be formed at a future
date.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation and Principles of Consolidation.
The consolidated financial statements herein have been prepared in
accordance with GAAP and include the accounts of the Company and
those of its wholly and partially-owned subsidiaries as follows:
(i) Blast AFJ, Inc., a Delaware corporation; (ii) Pacific Energy
Development Corp. (“PEDCO”), a Nevada corporation;
(iii) Pacific Energy & Rare Earth Limited, a Hong Kong company
(dissolved on August 11, 2017); (iv) Blackhawk Energy Limited, a
British Virgin Islands company (which is currently in the process
of being dissolved); (v) Red Hawk Petroleum, LLC, a Nevada limited
liability company; and (vi) White Hawk
Energy, LLC, a Delaware limited liability company, formed on
January 4, 2016 in connection with the contemplated reorganization
transaction with GOM Holdings, LLC (“GOM”), which
reorganization transaction has since been terminated (dissolved in
March 2018). All significant intercompany accounts and transactions
have been eliminated.
Use of Estimates in Financial Statement
Preparation.
The preparation of financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, as well as certain financial
statement disclosures. While management believes that the estimates
and assumptions used in the preparation of the financial statements
are appropriate, actual results could differ from these estimates.
Significant estimates generally include those with respect to the
amount of recoverable oil and gas reserves, the fair value of
financial instruments, oil and gas depletion, asset retirement
obligations, and stock-based compensation.
Cash and Cash Equivalents.
The Company considers all
highly liquid investments with original maturities of three months
or less to be cash equivalents. As of June 30, 2018, and December
31, 2017, cash equivalents consisted of money market funds and cash
on deposit.
Concentrations of Credit Risk.
Financial instruments
which potentially subject the Company to concentrations of credit
risk include cash deposits placed with financial institutions. The
Company maintains its cash in bank accounts which, at times, may
exceed federally insured limits as guaranteed by the Federal
Deposit Insurance Corporation (“FDIC”). At June 30,
2018, approximately $151,000 of the Company’s cash balances
were uninsured. The Company has not experienced any losses on such
accounts.
Sales
to one customer comprised 66% of the Company’s total oil
and gas revenues for the six months ended June 30, 2018. Sales to
one customer comprised 56% of the Company’s total oil and gas
revenues for the six months ended June 30, 2017. The Company
believes that, in the event that its primary customers are unable
or unwilling to continue to purchase the Company’s
production, there are a substantial number of alternative buyers
for its production at comparable prices.
Accounts Receivable.
Accounts receivable typically
consist of oil and gas receivables. The Company has classified
these as short-term assets in the balance sheet because the Company
expects repayment or recovery within the next 12 months. The
Company evaluates these accounts receivable for collectability
considering the results of operations of these related entities
and, when necessary, records allowances for expected unrecoverable
amounts. To date, no allowances have been recorded. Included in
accounts receivable - oil and gas is $20,000 related to receivables
from joint interest owners.
Bad Debt Expense.
The Company’s ability to collect
outstanding receivables is critical to its operating performance
and cash flows. Accounts receivable are stated at an amount
management expects to collect from outstanding balances. The
Company extends credit in the normal course of business. The
Company regularly reviews outstanding receivables and when the
Company determines that a party may not be able to make required
payments, a charge to bad debt expense in the period of
determination is made. Though the Company’s bad debts have
not historically been significant, the Company could experience
increased bad debt expense should a financial downturn
occur.
Equipment.
Equipment is stated at cost less accumulated
depreciation and amortization. Maintenance and repairs are charged
to expense as incurred. Renewals and betterments which extend the
life or improve existing equipment are capitalized. Upon
disposition or retirement of equipment, the cost and related
accumulated depreciation are removed and any resulting gain or loss
is reflected in operations. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets,
which are 3 to 10 years.
Oil and Gas Properties, Successful Efforts Method.
The
successful efforts method of accounting is used for oil and gas
exploration and production activities. Under this method, all costs
for development wells, support equipment and facilities, and proved
mineral interests in oil and gas properties are capitalized.
Geological and geophysical costs are expensed when incurred. Costs
of exploratory wells are capitalized as exploration and evaluation
assets pending determination of whether the wells find proved oil
and gas reserves. Proved oil and gas reserves are the estimated
quantities of crude oil and natural gas which geological and
engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing
economic and operating conditions, (i.e., prices and costs as of
the date the estimate is made). Prices include consideration of
changes in existing prices provided only by contractual
arrangements, but not on escalations based upon future
conditions.
Exploratory
wells in areas not requiring major capital expenditures are
evaluated for economic viability within one year of completion of
drilling. The related well costs are expensed as dry holes if it is
determined that such economic viability is not attained. Otherwise,
the related well costs are reclassified to oil and gas properties
and subject to impairment review. For exploratory wells that are
found to have economically viable reserves in areas where major
capital expenditure will be required before production can
commence, the related well costs remain capitalized only if
additional drilling is under way or firmly planned. Otherwise the
related well costs are expensed as dry holes.
Exploration
and evaluation expenditures incurred subsequent to the acquisition
of an exploration asset in a business combination are accounted for
in accordance with the policy outlined above.
Depreciation,
depletion and amortization of capitalized oil and gas properties is
calculated on a field by field basis using the unit of production
method. Lease acquisition costs are amortized over the total
estimated proved developed and undeveloped reserves and all other
capitalized costs are amortized over proved developed
reserves.
Impairment of Long-Lived Assets.
The Company reviews
the carrying value of its long-lived assets annually or whenever
events or changes in circumstances indicate that the historical
cost-carrying value of an asset may no longer be appropriate. The
Company assesses recoverability of the carrying value of the asset
by estimating the future net undiscounted cash flows expected to
result from the asset, including eventual disposition. If the
future net undiscounted cash flows are less than the carrying value
of the asset, an impairment loss is recorded equal to the
difference between the asset’s carrying value and estimated
fair value.
Asset Retirement Obligations.
If a reasonable estimate
of the fair value of an obligation to perform site reclamation,
dismantle facilities or plug and abandon wells can be made, the
Company will record a liability (an asset retirement obligation or
“ARO”) on its consolidated balance sheet and capitalize
the present value of the asset retirement cost in oil and gas
properties in the period in which the retirement obligation is
incurred. In general, the amount of an ARO and the costs
capitalized will be equal to the estimated future cost to satisfy
the abandonment obligation assuming the normal operation of the
asset, using current prices that are escalated by an assumed
inflation factor up to the estimated settlement date, which is then
discounted back to the date that the abandonment obligation was
incurred using an assumed cost of funds for the Company. After
recording these amounts, the ARO will be accreted to its future
estimated value using the same assumed cost of funds and the
capitalized costs are depreciated on a unit-of-production basis
over the estimated proved developed reserves. Both the accretion
and the depreciation will be included in depreciation, depletion
and amortization expense on our consolidated statements of
operations.
The
following table describes changes in our asset retirement
obligations during the six months ended June 30, 2018 and 2017 (in
thousands):
|
|
|
Asset retirement
obligations at January 1
|
$
477
|
$
246
|
Accretion
expense
|
32
|
33
|
Obligations
incurred for acquisition
|
-
|
-
|
Changes in
estimates
|
(7
)
|
(1
)
|
Asset retirement
obligations at June 30
|
$
502
|
$
278
|
Revenue Recognition.
ASU 2014-09,
“Revenue from Contracts with Customers
(Topic 606)”
, supersedes the revenue recognition
requirements and industry-specific guidance under
Revenue Recognition (Topic 605)
. Topic
606 requires an entity to recognize revenue when it transfers
promised goods or services to customers in an amount that reflects
the consideration the entity expects to be entitled to in exchange
for those goods or services. The Company adopted Topic 606 on
January 1, 2018, using the modified retrospective method applied to
contracts that were not completed as of January 1, 2018. Under the
modified retrospective method, prior period financial positions and
results will not be adjusted. The cumulative effect adjustment
recognized in the opening balances included no significant changes
as a result of this adoption. While the Company does not expect
2018 net earnings to be materially impacted by revenue recognition
timing changes, Topic 606 requires certain changes to the
presentation of revenues and related expenses beginning January 1,
2018. Refer to Note 4 – Revenue from Contracts
with Customers for additional information.
The
Company’s revenue is comprised entirely of revenue from
exploration and production activities. The Company’s oil is
sold primarily to marketers, gatherers, and refiners. Natural gas
is sold primarily to interstate and intrastate natural-gas
pipelines, direct end-users, industrial users, local distribution
companies, and natural-gas marketers. NGLs are sold primarily to
direct end-users, refiners, and marketers. Payment is generally
received from the customer in the month following
delivery.
Contracts
with customers have varying terms, including month-to-month
contracts, and contracts with a finite term. The Company recognizes
sales revenues for oil, natural gas, and NGLs based on the amount
of each product sold to a customer when control transfers to the
customer. Generally, control transfers at the time of delivery to
the customer at a pipeline interconnect, the tailgate of a
processing facility, or as a tanker lifting is completed. Revenue
is measured based on the contract price, which may be index-based
or fixed, and may include adjustments for market differentials and
downstream costs incurred by the customer, including gathering,
transportation, and fuel costs.
Revenues
are recognized for the sale of the Company’s net share of
production volumes. Sales on behalf of other working interest
owners and royalty interest owners are not recognized as
revenues.
Income Taxes.
The Company utilizes the asset and
liability method in accounting for income taxes. Under this method,
deferred tax assets and liabilities are recognized for operating
loss and tax credit carry-forwards and for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the year in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
the results of operations in the period that includes the enactment
date. A valuation allowance is recorded to reduce the carrying
amounts of deferred tax assets unless it is more likely than not
that the value of such assets will be realized.
Stock-Based Compensation.
The Company utilizes the
Black-Scholes option pricing model to estimate the fair value of
employee stock option awards at the date of grant, which requires
the input of highly subjective assumptions, including expected
volatility and expected life. Changes in these inputs and
assumptions can materially affect the measure of estimated fair
value of our share-based compensation. These assumptions are
subjective and generally require significant analysis and judgment
to develop. When estimating fair value, some of the assumptions
will be based on, or determined from, external data and other
assumptions may be derived from our historical experience with
stock-based payment arrangements. The appropriate weight to place
on historical experience is a matter of judgment, based on relevant
facts and circumstances.
The
Company estimates volatility by considering the historical stock
volatility. The Company has opted to use the simplified method for
estimating expected term, which is generally equal to the midpoint
between the vesting period and the contractual term.
Earnings (Loss) per Common Share.
Basic earnings (loss) per
share (“EPS”) is computed by dividing net income (loss)
available to common shareholders (numerator) by the weighted
average number of shares outstanding (denominator) during the
period. Diluted EPS give effect to all dilutive potential common
shares outstanding during the period using the treasury stock
method and convertible preferred stock using the if-converted
method. In computing diluted EPS, the average stock price for the
period is used to determine the number of shares assumed to be
purchased from the exercise of stock options and/or warrants.
Diluted EPS excluded all dilutive potential shares if their effect
is anti-dilutive. For the six months ended June 30, 2018, the
dilutive potential common shares outstanding during the period
included only the convertible preferred stock using the
if-converted method. The potentially issuable shares of common
stock related to options and warrants were not included as they
were anti-dilutive. The payment of the Bridge Notes occurred before
June 30, 2018 and so they were not included.
Basic
net loss per share is based on the weighted average number of
common and common-equivalent shares outstanding. The Company
incurred a net loss for the six months ended June 30, 2017, and
therefore, basic and diluted loss per share for the period ending
June 30, 2017 is the same as all potential common equivalent shares
would be anti-dilutive. The Company excluded 451,614 potentially
issuable shares of common stock related to options, 1,248,045
potentially issuable shares of common stock related to warrants and
144,822 potentially issuable shares of common stock related to the
conversion of Bridge Notes due to their anti-dilutive effect for
the six months ended June 30, 2017. Potential common shares
includable in the computation of fully-diluted per share results
are not presented in the consolidated financial statements for the
six-month period ended June 30, 2017 as their effect would be
anti-dilutive.
The
anti-dilutive shares of common stock outstanding for the three and
six months ended June 30, 2018 and 2017 were as follows (amounts in
thousands, except share and per share data):
|
For the Three
Months
Ended
June 30,
|
For the Six
Months
Ended June
30,
|
Numerator:
|
|
|
|
|
Net income
(loss)
|
$
66,290
|
$
(4,314
)
|
$
62,056
|
$
(8,486
)
|
|
|
|
|
|
Effect of common
stock equivalents
|
-
|
-
|
-
|
-
|
Net income (loss)
adjusted for common stock equivalents
|
$
66,290
|
$
(4,314
)
|
$
62,056
|
$
(8,486
)
|
|
|
|
|
|
Denominator:
|
|
|
|
|
Weighted average
– basic
|
7,357,234
|
5,687,690
|
7,318,211
|
5,590,938
|
|
|
|
|
|
Earnings (loss) per
share – basic
|
9.01
|
(0.76
)
|
8.48
|
(1.52
)
|
|
|
|
|
|
Dilutive effect of
common stock equivalents:
|
|
|
|
|
Options
|
6,988
|
-
|
1,973
|
-
|
Preferred
Stock
|
6,662,500
|
-
|
6,662,500
|
-
|
|
|
|
|
|
Denominator:
|
|
|
|
|
Weighted average
shares – diluted
|
14,026,722
|
-
|
13,982,684
|
-
|
|
|
|
|
|
Earnings per share
– diluted
|
4.73
|
-
|
4.44
|
-
|
Fair Value of Financial Instruments.
The Company follows
Fair Value Measurement
(“ASC 820”), which clarifies fair value as an exit
price, establishes a hierarchal disclosure framework for measuring
fair value, and requires extended disclosures about fair value
measurements. The provisions of ASC 820 apply to all financial
assets and liabilities measured at fair value.
As
defined in ASC 820, fair value, clarified as an exit price,
represents the amount that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants. As a result, fair value is a market-based
approach that should be determined based on assumptions that market
participants would use in pricing an asset or a
liability.
As a
basis for considering these assumptions, ASC 820 defines a
three-tier value hierarchy that prioritizes the inputs used in the
valuation methodologies in measuring fair value.
|
Level 1
– Quoted prices in active markets for identical assets or
liabilities.
|
|
Level 2
– Inputs other than Level 1 that are observable, either
directly or indirectly, such as quoted prices for similar assets or
liabilities, quoted prices in markets that are not active, or other
inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or
liabilities.
|
|
Level 3
– Unobservable inputs that are supported by little or no
market activity and that are significant to the fair value of the
assets or liabilities.
|
The
fair value hierarchy also requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when
measuring fair value.
Recently Issued Accounting Pronouncements.
In February
2016, the Financial Accounting Standards Board (“FASB”)
Accounting Standards Update (“ASU”) 2016-02, a new
lease standard requiring lessees to recognize lease assets and
lease liabilities for most leases classified as operating leases
under previous U.S. GAAP. The guidance is effective for fiscal
years beginning after December 15, 2018, with early adoption
permitted. The Company will be required to use a modified
retrospective approach for leases that exist or are entered into
after the beginning of the earliest comparative period in the
financial statements. The Company has evaluated the adoption of the
standard and, due to there being only one operating lease currently
in place, there will be minimal impact of the standard on its
consolidated financial statements.
In
April 2016, the FASB issued ASU No. 2016-09, “
Compensation – Stock
Compensation
” (Topic 718). The FASB issued this update
to improve the accounting for employee share-based payments and
affect all organizations that issue share-based payment awards to
their employees. Several aspects of the accounting for share-based
payment award transactions are simplified, including: (a) income
tax consequences; (b) classification of awards as either equity or
liabilities; and (c) classification on the statement of cash flows.
The updated guidance is effective for annual periods beginning
after December 15, 2016, including interim periods within those
fiscal years. Early adoption of the update is permitted.
The Company adopted the standard as of January 1, 2017.
There was no impact of the standard on its consolidated financial
statements.
In
August 2016, the FASB issued ASU 2016-15,
“Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash
Payments”
(“ASU 2016-15”). ASU 2016-15
will make eight targeted changes to how cash receipts and cash
payments are presented and classified in the statement of cash
flows. ASU 2016-15 is effective for fiscal years beginning after
December 15, 2017. The new standard will require adoption on a
retrospective basis unless it is impracticable to apply, in which
case it would be required to apply the amendments prospectively as
of the earliest date practicable. There was no impact
of the standard on its consolidated financial
statements.
In
November 2016, the FASB issued ASU 2016-18,
“Statement of Cash Flows (Topic
230)”
, requiring that the statement of cash flows
explain the change in the total cash, cash equivalents, and amounts
generally described as restricted cash or restricted cash
equivalents. This guidance is effective for fiscal years, and
interim reporting periods therein, beginning after December 15,
2017, with early adoption permitted. The provisions of this
guidance are to be applied using a retrospective approach which
requires application of the guidance for all periods presented.
There was no impact of the standard on its consolidated financial
statements.
In September 2016, the FASB issued ASU
2016-13,
Financial Instruments-Credit
Losses
. ASU 2016-13 was issued
to provide more decision-useful information about the expected
credit losses on financial instruments and changes the loss
impairment methodology. ASU 2016-13 is effective for reporting
periods beginning after December 15, 2019 using a modified
retrospective adoption method. A prospective transition approach is
required for debt securities for which an other-than-temporary
impairment had been recognized before the effective date. The
Company is currently assessing the impact this accounting standard
will have on its financial statements and related
disclosures.
The
Company does not expect the adoption of any recently issued
accounting pronouncements to have a significant impact on its
financial position, results of operations, or cash
flows.
Subsequent Events.
The Company has evaluated all
transactions through the date the consolidated financial statements
were issued for subsequent event disclosure
consideration.
NOTE 4 – REVENUE FROM CONTRACTS WITH
CUSTOMERS
Change in Accounting Policy.
The Company adopted ASU
2014-09,
“Revenue from
Contracts with Customers (Topic 606)”
, on January 1,
2018, using the modified retrospective method applied to contracts
that were not completed as of January 1, 2018. Refer to Note 3
– Summary of Significant Accounting Policies for additional
information.
Exploration and Production.
There were no significant
changes to the timing or valuation of revenue recognized for sales
of production from exploration and production
activities.
Disaggregation of Revenue from Contracts with Customers.
The
following table disaggregates revenue by significant product type
for the three and six months ended June 30, 2018 (in
thousands):
|
Three months
ended
June
30,
2018
|
Six months
ended
June
30,
2018
|
|
|
|
Oil
sales
|
$
830
|
1,379
|
Natural gas
sales
|
45
|
94
|
Natural gas liquids
sales
|
23
|
69
|
Total revenue from
customers
|
$
898
|
1,542
|
There
were no significant contract liabilities or transaction price
allocations to any remaining performance obligations as of December
31, 2017 or June 30, 2018.
NOTE 5 – OIL AND GAS PROPERTIES
The
following table summarizes the Company’s oil and gas
activities by classification for the six months ended June 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas
properties, subject to amortization
|
$
68,306
|
$
-
|
$
-
|
$
-
|
$
68,306
|
Oil and gas
properties, not subject to amortization
|
-
|
-
|
-
|
-
|
-
|
Asset retirement
costs
|
260
|
(7
)
|
-
|
-
|
253
|
Accumulated
depreciation, depletion and impairment
|
(33,644
)
|
(1,251
)
|
-
|
-
|
(34,895
)
|
Total oil and gas
assets
|
$
34,922
|
$
(1,258
)
|
$
-
|
$
-
|
$
33,664
|
The
depletion recorded for production on proved properties for the
three and six months ended June 30, 2018 and 2017, amounted to
$688,000 compared to $862,000, and $1,251,000 compared to
$1,520,000, respectively.
NOTE 6 – ACCOUNTS RECEIVABLE
On
November 19, 2015, the Company entered into a Letter Agreement with
certain parties including Dome Energy, pursuant to which Dome
Energy agreed to acquire the Company’s interests in eight
wells and fully fund the Company’s proportionate share of all
the corresponding working interest owner expenses with respect to
these eight wells. The Company assigned its interests in these
wells to Dome Energy effective November 18, 2015, and Dome Energy
assumed all amounts owed for the drilling and completion costs
corresponding to these interests acquired from the Company. As part
of this transaction, Dome Energy also agreed to pay an additional
$250,000 to the Company in the event the anticipated merger was not
consummated. In connection with the assignment of these well
interests, Dome Energy issued a contingent promissory note to the
Company, dated November 19, 2015 (the “Dome Promissory
Note”), with a principal amount of $250,000, which was due to
mature on December 29, 2015, upon the termination of the
anticipated merger with Dome Energy.
On
March 24, 2015, Red Hawk and Dome Energy entered into a Service
Agreement, pursuant to which Red Hawk agreed to provide certain
human resource and accounting services to Dome Energy, of which
$156,000 remained due and payable by Dome Energy to Red Hawk as of
December 31, 2015. On March 29, 2016, the Company entered into a
Settlement Agreement with Dome Energy and certain of its affiliated
entities, pursuant to which the Company and Dome Energy agreed to
terminate and cancel the Service Agreement and settle a number of
outstanding matters, with Dome Energy agreeing to pay to Red Hawk
$50,000 on May 2, 2016, in full satisfaction of the amounts due
under the Service Agreement, with all remaining amounts owed
forgiven by Red Hawk. As of December 31, 2015, the receivable due
from Dome Energy totaled $406,000. During the year ended December
31, 2016, the net receivable created by the Dome Promissory Note
was reduced to $25,000 by (i) the collection of the $250,000 as
described above, (ii) forgiveness by the Company of $106,000 due
from Dome Energy pursuant to the Settlement Agreement, and (iii)
the recording of an allowance of $25,000 as a doubtful account
(which was recognized as bad debt expense in selling, general and
administrative expense on the Company’s income statement). As
of December 31, 2016, the $50,000 was still due from Dome to
Red Hawk as a part of the Settlement Agreement. The Company
recorded an allowance for doubtful accounts as of December 31, 2016
of $25,000 related to this outstanding amount, as $25,000 of the
$50,000 was collected in early 2017. During the three months ended
March 31, 2017, the net receivable created by the Dome
Promissory Note was equal to $25,000 due to (i) the collection of
the $25,000 in January 2017, and (ii) the reversal of the allowance
of $25,000 as a doubtful account (and credited to bad debt expense
in selling, general and administrative expense on the
Company’s income statement) due to the collection in April
2017 of the final $25,000 that had been due (the Company had no
allowance for doubtful accounts as of March 31, 2017). As of
December 31, 2017 and June 30, 2018, the net receivable created by
the Dome Promissory Note was $-0-.
NOTE 7 – OTHER CURRENT ASSETS
On
September 11, 2013, the Company entered into a Shares Subscription
Agreement (“SSA”) to acquire an approximate 51%
ownership in Asia Sixth Energy Resources Limited (“Asia
Sixth”), which held an approximate 60% ownership interest in
Aral Petroleum Capital Limited Partnership (“Aral”), a
Kazakhstan entity. In August 2014 the SSA was restructured (the
“Aral Restructuring”), in connection with which the
Company received a promissory note in the principal amount of $10.0
million from Asia Sixth (the “A6 Promissory Note”),
which was to be converted into a 10.0% interest in Caspian Energy,
Inc. (“Caspian Energy”), an Ontario, Canada company
listed on the NEX board of the TSX Venture Exchange, upon the
consummation of the Aral Restructuring. The Aral Restructuring was
consummated on May 20, 2015, upon which date the A6 Promissory Note
was converted into 23,182,880 shares of common stock of Caspian
Energy. In addition, on the date of conversion of the A6 Promissory
Note, Mr. Frank Ingriselli, our Chairman and then Chief Executive
Officer, was appointed as a non-executive director of Caspian
Energy and currently serves as the Chairman of its Board of
Directors.
In
February 2015, the Company expanded its D-J Basin position through
the acquisition of acreage from Golden Globe Energy (US), LLC
(“GGE”) (the “GGE Acquisition” and the
“GGE Acquired Assets”). In connection with the GGE
Acquisition, on February 23, 2015, the Company provided GGE an
option to acquire its interest in Caspian Energy for $100,000
payable upon exercise of the option (which expires the same date as
the RJC Subordinated Note, as defined below) recorded in prepaid
expenses and other current assets. As a result, the carrying value
of the 23,182,880 shares of common stock of Caspian Energy which
were issued upon conversion of the A6 Promissory Note at December
31, 2015 was $100,000. The $100,000 option is classified as part of
other current assets as of June 30, 2018 and December 31,
2017.
NOTE 8 – NOTES PAYABLE
Debt Restructuring
On June
26, 2018, the Company borrowed $7.7 million from SK Energy LLC,
which is 100% owned and controlled by Dr. Simon Kukes, the
Company’s Chief Executive Officer and director (“SK
Energy”), under a Promissory Note dated June 25, 2018, in the
amount of $7.7 million (the “SK Energy Note”), the
terms of which are discussed below.
Also on
June 25, 2018, the Company entered into Debt Repayment Agreements
(the “Repayment Agreements”, each described in greater
detail below) with (i) the holders of our outstanding Tranche A
Secured Promissory Notes (“Tranche A Notes”) and
Tranche B Secured Promissory Notes (“Tranche B Notes”),
which the Company entered into pursuant to the terms of the May 12,
2016 Amended and Restated Note Purchase Agreement, (ii) RJ Credit
LLC (“RJC”), which held a subordinated promissory note
issued by the Company pursuant to that certain Note and Security
Agreement, dated April 10, 2014, as amended (the “RJC
Subordinated Note”), and (iii) MIE Jurassic Energy
Corporation, which held a subordinated promissory note issued by
the Company pursuant to that certain Amended and Restated Secured
Subordinated Promissory Note, dated February 18, 2015, as amended
(the “MIEJ Note”, and together with the “Tranche
B Notes,” the “Junior Notes”), pursuant to which,
on June 26, 2018, the Company retired all of the then outstanding
Tranche A Notes, in the aggregate amount of approximately
$7,260,000 in exchange for cash paid of $3,800,000 and all of the
then outstanding Junior Notes, in the aggregate amount of
approximately $70,299,000, in exchange for an aggregate amount of
cash paid of $3,876,000.
As part
of the same transactions, and as required conditions to closing the
sale of the SK Energy Note, SK Energy entered into a Stock Purchase
Agreement with GGE, the holder of the Company’s then
outstanding 66,625 shares of Series A Convertible Preferred Stock
(convertible pursuant to their terms into 6,662,500 shares of the
Company’s common stock – approximately 47.6% of the
Company’s then outstanding shares post-conversion), pursuant
to which, SK Energy purchased, for $100,000, all of the Series A
Convertible Preferred Stock (the “Stock Purchase
Agreement”).
Additionally,
on June 25, 2018, the Company entered into a Debt Repayment
Agreement (the “Bridge Note Repayment Agreement”) with
all of the holders of its convertible subordinated promissory notes
issued pursuant to the Second Amendment to Secured Promissory
Notes, dated March 7, 2014, originally issued on March 22, 2013
(the “Bridge Notes”), pursuant to which all the
holders, holding in aggregate $475,000 of outstanding principal
amount under the Bridge Notes, agreed to the payment and full
satisfaction of all outstanding amounts (including accrued interest
and additional payment-in-kind) for 25% of the principal amounts
owed thereunder, or an aggregate amount of cash paid of
$119,000.
The
result of the above transactions was a net reduction of liabilities
of approximately $70,728,000 that were removed from
the Company’s balance sheet as of June 25, 2018. For the
three and six months ended June 30, 2018, a gain on the settlement
of all of these debts in the amount of $70,309,000 was
recorded ($70,631,000, net of the expense related to
the issuance of warrants to certain of the Tranche A Note holders
with an estimated fair value of $322,000 based on the Black-Scholes
option pricing model). See the table below for a
summary (amounts in thousands).
Debt and accrued
interest retired as part of debt restructuring
|
$
78,331
|
New debt recorded
under troubled debt restructuring
|
(7,700
)
|
Expense for
issuance of warrants
|
(322
)
|
Net gain on
troubled debt restructuring
|
$
70,309
|
The
three-year promissory note of $7.7 million in principal with an 8%
annual interest rate was recorded at $7,700,000 (and
shown on the balance sheet as Note Payable – Related Party),
net
of debt discount from the issuance of 600,000 shares of common
stock (as described below) with a fair value of $185,000 based on
the market price at the issuance date
. The Company
accounted for the debt reduction as a troubled debt restructuring
as the debt balance, which the Company did not currently have the
funds to repay, was now to be classified as current due to the
principal and accumulated interest being due in May 2019. It is
probable that the Company would have been in payment default in the
foreseeable future without this restructuring modification. As
indicated in previous SEC financial filings, the Company had
indicated that there was doubt before the restructuring as to
whether the Company would be able to continue to
operate as a going concern. In recognition of this, the creditors
granted a concession on the debt balance that was paid and
considered payment in full on June 25, 2018. The warrants were
issued as an inducement for the previous creditors to cancel a
significant portion of the debt were an integral part
of this troubled debt restructuring and therefore were included as
a reduction to the gain recognized on the
restructuring.
SK Energy Note Terms
The SK
Energy Note accrues interest monthly at 8% per annum, payable
quarterly (beginning October 15, 2018), in either cash or shares of
common stock (at the option of the Company), or, with the consent
of SK Energy, such interest may be accrued and capitalized.
Additionally, in the event that the Company is prohibited from
paying the interest payments due on the SK Energy Note in cash
pursuant to the terms of its senior debt and/or the requirement
that the Company obtain shareholder approval for the issuance of
shares of common stock in lieu of interest due under the SK Energy
Note due to the Share Cap (described and defined below), such
interest will continue to accrue until such time as the Company can
either pay such accrued interest in cash or stock.
If
interest on the SK Energy Note is paid in common stock, SK Energy
will be due that number of shares of common stock as equals the
amount due divided by the average of the closing sales prices of
the Company’s common stock for the ten trading days
immediately preceding the last day of the calendar quarter prior to
the applicable payment date, rounded up to the nearest whole share
of common stock (the “Interest Shares”). The SK Energy
Note is due and payable on June 25, 2021, but may be prepaid at any
time, without penalty. Other than in connection with the Interest
Shares, the principal amount of the SK Energy Note is not
convertible into common stock of the Company. The SK Energy Note
contains standard and customary events of default, and, upon the
occurrence of an event of default, the amount owed under the SK
Energy Note accrues interest at 10% per annum.
As
additional consideration for SK Energy agreeing to the terms of the
SK Energy Note, the Company agreed to issue SK Energy 600,000
shares of common stock (the “Loan Shares”), with a fair
value of $185,000 based on the market price on the date of issuance
that was accounted for as a debt discount and is being
amortized over the term of the note. The SK Energy Note
includes a share issuance limitation preventing the Company from
issuing Interest Shares thereunder, if such issuance, together with
the number of Loan Shares, plus such number of Interest Shares
issued previously, as of the date of such new issuance, totals more
than 19.99% of the Company’s outstanding shares of common
stock as of June 25, 2018 (i.e., 1,455,023 shares) (the
“Share Cap”).
Repayment Agreement Terms
As
described above, pursuant to the Repayment Agreements, the holders
of the Company’s outstanding Tranche A Notes and Junior Notes
retired all of the then outstanding Tranche A Notes, in the
aggregate amount of $7,260,000, in exchange for an aggregate of
$3,800,000 of cash and all of the then outstanding Junior Notes, in
the aggregate amount of $70,299,000, in exchange for an aggregate
of $3,876,000 of cash. The note holders also agreed to forgive all
amounts owed under the terms of the Tranche A Notes and Junior
Notes, as applicable, other than the amounts paid. The Tranche A
Note Repayment Agreement was entered into by and between the
Company and each of the then holders of the Company’s Tranche
A Notes, BBLN-PEDCO Corp., BHLN-PEDCO Corp. and PBLA ULICO 2017
(collectively, the “Tranche A Noteholders”). The
Tranche B Note Repayment Agreement was entered into by and between
the Company and each of the then holders of the Company’s
Tranche B Notes, Senior Health Insurance Company of Pennsylvania,
Bankers Conseco Life Insurance Company, Washington National
Insurance Company, Principal Growth Strategies, LLC, Cadle Rock IV,
LLC, and RJ Credit LLC, and holders of the RJC Subordinated Note
held by RJ Credit LLC and the MIEJ Note held by MIE Jurassic Energy
Corporation (collectively, the “Junior Noteholders”).
Pursuant to the terms of the Repayment Agreement relating to the
Tranche B Notes, in addition to the cash consideration due to the
Tranche B Noteholders, as described above, the Company agreed to
grant to certain of the Junior Noteholders their pro rata share of
warrants to purchase an aggregate of 1,448,472 shares of common
stock of the Company (the “Tranche B Warrants”). The
Tranche B Warrants have a term of three years, an exercise price
equal to $0.328 per share, and the estimated fair value of $322,000
was based on the Black-Scholes option pricing model.
Amendment to Series A Convertible Preferred Stock Designation;
Rights of Shareholders
In
connection with the Stock Purchase Agreement, and immediately
following the closing of the acquisition described in the Stock
Purchase Agreement (discussed above), the Company and SK Energy, as
the then holder of all of the then outstanding shares of Series A
Convertible Preferred Stock, agreed to the filing of an Amendment
to the Amended and Restated Certificate of Designations of PEDEVCO
Corp. Establishing the Designations, Preferences, Limitations and
Relative Rights of Its Series A Convertible Preferred Stock (the
“Preferred Amendment”), which amended the designation
of our Series A Convertible Preferred Stock (the
“Designation”) to remove the beneficial ownership
restriction contained therein, which prevented any holder of Series
A Convertible Preferred Stock from converting such Series A
Convertible Preferred Stock into shares of common stock of the
Company if such conversion would result in the holder thereof
holding more than 9.9% of the Company’s then outstanding
common stock.
The
Company filed the Preferred Amendment with the Secretary of State
of Texas on June 26, 2018.
As a
result of the Stock Purchase Agreement (i.e., the sale of the
Series A Convertible Preferred Stock to a party other than GGE),
automatic termination, pursuant to the terms of the Designation, of
the right of GGE, upon notice to the Company, voting the Series A
Convertible Preferred Stock separately as a single class, to
appoint designees to fill up to two (2) seats on our Board of
Directors, one of which must be an independent director as defined
by applicable rules was triggered. As such, effective upon the
closing of the Stock Purchase Agreement, the Company’s common
stockholders have the right to appoint all members of our Board of
Directors via plurality vote.
Note Purchase Agreement and Sale of Secured Promissory
Notes
On
March 7, 2014, the Company entered into a $50 million financing
facility (the “Notes Purchase Agreement”) between the
Company, BRe BCLIC Primary, BRe BCLIC Sub, BRe WNIC 2013 LTC
Primary, BRe WNIC 2013 LTC Sub, and RJC, as investors
(collectively, the “Investors”), and BAM Administrative
Services LLC, as agent for the Investors (the “Agent”).
The Company issued the Investors Secured Promissory Notes in the
aggregate principal amount of $34.5 million (the “Initial
Notes”). On March 19, 2015, BRe WNIC 2013 LTC Primary
transferred a portion of its Initial Note to HEARTLAND Bank, and
effective April 1, 2015, BRe BCLIC Primary transferred its Initial
Note to Senior Health Insurance Company of Pennsylvania
(“SHIP”), with each of HEARTLAND Bank and SHIP becoming
an “Investor” for purposes of the discussion below.
Effective March 9, 2018, CadleRock IV, LLC acquired all of
HEARTLAND’s interests in the Senior Notes, becoming an
“Investor” for purposes of the discussion
below.
2016 Senior Note Restructuring
On May
12, 2016 (the “Closing Date”), the Company entered into
an Amended and Restated Note Purchase Agreement (the “Amended
NPA”), with existing lenders SHIP, BRe BCLIC Sub, BRe WINIC
2013 LTC Primary, BRe WNIC 2013 LTC Sub, Heartland Bank (assigned
to CadleRock IV, LLC in March 2018), and RJC, and new lenders
BHLN-Pedco Corp. (“BHLN”) and BBLN-Pedco Corp.
(“BBLN,” and together with BHLN and RJC, the
“Tranche A Investors”) (the investors in the Tranche B
Notes (defined below) and the Tranche A Investors, collectively,
the “Lenders”), and the Agent, as agent for the
Lenders. The Amended NPA amended and restated the Senior Notes held
by the Investors, and the Company issued new Senior Secured
Promissory Notes to each of the Investors (collectively, the
“Tranche B Notes”) in a transaction that qualified as a
troubled debt restructuring. RJC is also a party to the RJC Junior
Note (discussed below under Notes Payable - Related Party
Financings - Subordinated Note Payable
Assumed).
Subsequently,
certain of the Lenders transferred some or all of the principal
outstanding under the New Senior Notes (as defined below) held by
them and the term Lenders as used herein refers to the current
holders of the New Senior Notes, as applicable.
The
Amended NPA created and issued to the Tranche A Investors new
“Tranche A Notes,” in substantially the same form and
with similar terms as the Tranche B Notes, except as discussed
below, consisting of a term loan issuable in tranches with a
maximum aggregate principal amount of $25,960,000, with borrowed
funds accruing interest at 15% per annum, and maturing on May 11,
2019 (the “Tranche A Maturity Date”) (the
“Tranche A Notes,” and together with the Tranche B
Notes, the “New Senior Notes”).
On June
25, 2018, the Company entered into Debt Repayment Agreements (the
“Repayment Agreements”, each described in greater
detail above), pursuant to which, the holders of our outstanding
Tranche A Notes and Junior Notes retired all of the then
outstanding Tranche A Notes, in the aggregate amount of $7,260,000,
in exchange for an aggregate of $3,800,000 of cash and all of the
then outstanding Junior Notes, in the aggregate amount of
$70,299,000, in exchange for an aggregate of $3,876,000 in cash.
The note holders also agreed to forgive all amounts owed under the
terms of the Tranche A Notes and Junior Notes, as applicable, other
than the amounts paid.
The
amount of interest deferred under the Tranche A and Tranche B Notes
as of June 25, 2018 and December 31, 2017 equaled $4,125,000 and
$3,195,000, respectively, and was previously accounted for on the
balance sheet under long-term accrued expenses and accrued expenses
- related party.
All
debt discount amounts were amortized using the effective interest
rate method. The total amount of the remaining debt discount
reflected on the accompanying balance sheet as of June 30, 2018 was
$-0-. As of June 25, 2018 and December 31, 2017, the remaining
unamortized debt discount was $2,359,000 and $3,751,000,
respectively. Amortization of debt discount and total interest
expense for the notes (New Senior Notes – Tranche A and
Tranche B Notes and the Junior Notes) was $1,391,000 and
$4,732,000, respectively, for the six months ended June 30,
2018 and $1,643,000 and $3,278,000, respectively, for the six
months ended June 30, 2017.
Amortization
of debt discount and total interest expense for the notes was
$679,000 and $2,346,000, respectively, for the three months ended
June 30, 2018, and was $812,000 and $1,674,000, respectively, for
the three months ended June 30, 2017.
Bridge Note Financing
On June
25, 2018, the Company entered into a Debt Repayment Agreement (the
“Bridge Note Repayment Agreement”) with all of the
holders of its convertible subordinated promissory notes issued
pursuant to that certain Second Amendment to Secured Promissory
Notes, dated March 7, 2014, originally issued on March 22, 2013
(the “Bridge Notes”), which notes had an aggregate
principal balance of $475,000, plus accrued interest of $258,000
and additional payment-in-kind (“PIK”) of $48,000, as
of June 25, 2018, pursuant to which all the holders agreed to the
payment and full satisfaction of all outstanding amounts (including
accrued interest and additional payment-in-kind) for 25% of the
principal amounts owed thereunder, or an aggregate of
$119,000.
The
unamortized debt premium on the Convertible Bridge Notes as of June
25, 2018 and December 31, 2017, was $113,000. The gain recorded in
the three and six months ending June 30, 2018 on the settlement of
the bridge note debt was $775,000.
The
interest expense related to these notes for the three and six
months ended June 30, 2018 and 2017 was $13,000 compared to
$14,000, and $27,000 compared to $28,000,
respectively.
MIE Jurassic Energy Corporation
On
February 14, 2013, PEDCO entered into a Secured Subordinated
Promissory Note with MIE Jurassic Energy Corp. (“MIEJ”)
(as amended from time to time, the “MIEJ
Note”).
In
February 2015, the Company and PEDCO entered into a Settlement
Agreement with MIEJ and issued a new promissory note in the amount
of $4.925 million to MIEJ (the “NEW MIEJ Note”). The
Settlement Agreement related to the February 2015 disposition of
the Company’s interest in Condor Energy Technology, LLC, a
joint venture previously owned 20% by the Company and 80% by MIEJ.
As of June 25, 2018, the principal amount outstanding under the
MIEJ Note was $4,925,000 with accrued interest of
$1,718,000.
As
described above, on June 25, 2018, the Company entered into
Repayment Agreements, with various parties, including MIEJ,
pursuant to which the Company retired all of the then outstanding
MIEJ debt in exchange for an aggregate of $320,000 in cash. As
described above, pursuant to the Repayment Agreements, the note
holders also agreed to forgive all amounts owed under the terms of
the Junior Notes, as applicable, other than the amounts paid. The
gain recorded in the three and six months ending June 30, 2018 on
the settlement of the MIEJ debt was $6,323,000.
The
interest expense related to this note for the three and six months
ended June 30, 2018 and 2017 was $118,000 compared to $123,000 and
$241,000, compared to $246,000, respectively, with the total
cumulative interest equal to $1,718,000 through June 25,
2018.
Subordinated Note Payable Assumed
In
2015, the Company assumed approximately $8.35 million of
subordinated note payable from GGE in the acquisition of the GGE
Acquired Assets (the “RJC Junior Note”). The amount
outstanding on the RJC Junior Note as of June 25, 2018 and December
31, 2017 was $12,173,000 and $11,483,000, respectively. The lender
under the RJC Junior Note is RJC, which is one of the lenders under
the Senior Notes and is an affiliate of GGE.
As
described above, on June 25, 2018, the Company entered into
Repayment Agreements with various parties, including RJ Credit LLC,
pursuant to which, on June 26, 2018, the Company retired all of the
then outstanding Junior Notes, in exchange for an aggregate of
$3,876,000 in cash.
As
described above, pursuant to the Repayment Agreements, the note
holders also agreed to forgive all amounts owed under the terms of
the Junior Notes, as applicable, other than the amounts paid.
The
interest expense related to this note for the three and six months
ended June 30, 2018 and 2017 was $342,000 compared to $322,000, and
$690,000 compared to $630,000, respectively.
NOTE 9 – COMMITMENTS AND
CONTINGENCIES
Office Lease
In June
2018, the Company entered into a third lease addendum to the
original lease agreement signed in July 2012, the first lease
addendum signed in May 2016, and the second lease addendum signed
in July 2017, as amended, which extends the term of the lease by an
additional year, now ending in July 2019, for its corporate office
space located in Danville, California. The total current obligation
(thirteen months), including this one-year lease extension for the
remainder of the lease through July 2019, is $62,000.
Leasehold Drilling Commitments
The
Company’s oil and gas leasehold acreage is subject to
expiration of leases if the Company does not drill and hold such
acreage by production or otherwise exercises options to extend such
leases, if available, in exchange for payment of additional cash
consideration. In the D-J Basin Asset, 7 net acres are due to
expire during the six months remaining in 2018 (1,354 net acres did
expire during the six months ended June 30, 2018), 125 net acres
expire in 2019, 329 net acres expire thereafter (net to our direct
ownership interest only). The Company plans to hold significantly
all of this acreage through a program of drilling and completing
producing wells. If the Company is not able to drill and complete a
well before lease expiration, the Company may seek to extend leases
where able. As of June 30, 2018, the Company had fully
impaired its unproved leasehold costs based on management’s
revised re-leasing program.
Other Commitments
Although
the Company may, from time to time, be involved in litigation and
claims arising out of its operations in the normal course of
business, the Company is not currently a party to any material
legal proceeding. In addition, the Company is not aware of any
material legal or governmental proceedings against it, or
contemplated to be brought against it.
As part
of its regular operations, the Company may become party to various
pending or threatened claims, lawsuits and administrative
proceedings seeking damages or other remedies concerning its
commercial operations, products, employees and other
matters.
Although
the Company provides no assurance about the outcome of these or any
other pending legal and administrative proceedings and the effect
such outcomes may have on the Company, the Company believes that
any ultimate liability resulting from the outcome of such
proceedings, to the extent not otherwise provided for or covered by
insurance, will not have a material adverse effect on the
Company’s financial condition or results of
operations.
NOTE 10 – SHAREHOLDERS’ EQUITY
(DEFICIT)
PREFERRED STOCK
At June
30, 2018, the Company was authorized to issue 100,000,000 shares of
preferred stock with a par value of $0.001 per share, of which
25,000,000 shares have been designated “Series A”
preferred stock.
On
February 23, 2015, the Company issued 66,625 Series A Convertible
Preferred Stock shares to GGE as part of the consideration paid for
the GGE Acquired Assets. The grant date fair value of the
Series A Convertible Preferred Stock was $28,402,000, based on a
calculation using a binomial lattice option pricing
model.
On
November 23, 2015, the Company lost the right to redeem any of the
Series A Convertible Preferred Stock and the holder also lost the
right to force any redemption because, pursuant to the Series A
Certificate of Designations, the Company did not repurchase any
shares within nine months of the initial Series A issuance.
Accordingly, the Series A Convertible Preferred Stock is no longer
redeemable.
As part
of the required conditions to closing the sale of the SK Energy
Note as described further in Note 8, SK Energy entered into a Stock
Purchase Agreement with GGE, pursuant to which, SK Energy
purchased, for $100,000, all of the Series A Convertible Preferred
Stock (the “Stock Purchase Agreement”).
In
connection with the Stock Purchase Agreement, and immediately
following the closing of the acquisition described in the Stock
Purchase Agreement, the Company and SK Energy, as the then holder
of all of the outstanding shares of Series A Convertible Preferred
Stock, agreed to the filing of an Amendment to the Amended and
Restated Certificate of Designations of PEDEVCO Corp. Establishing
the Designations, Preferences, Limitations and Relative Rights of
Its Series A Convertible Preferred Stock (the “Preferred
Amendment”), which amended the designation of our Series A
Convertible Preferred Stock (the “Designation”) to
remove the beneficial ownership restriction contained therein,
which prevented any holder of Series A Convertible Preferred Stock
from converting such Series A Convertible Preferred Stock into
shares of common stock of the Company if such conversion would
result in the holder thereof holding more than 9.9% of the
Company’s then outstanding common stock. The Company filed
the Preferred Amendment with the Secretary of State of Texas on
June 26, 2018.
The
transactions affected pursuant to the Stock Purchase Agreement
(i.e., the sale of the Series A Convertible Preferred Stock to a
party other than GGE), triggered the automatic termination,
pursuant to the terms of the Designation, of the right of GGE, upon
notice to us, voting the Series A Convertible Preferred Stock
separately as a single class, to appoint designees to fill up to
two (2) seats on our Board of Directors, one of which must be an
independent director as defined by applicable rules. As such,
effective upon the closing of the Stock Purchase Agreement, our
common stockholders have the right to appoint all members of our
Board of Directors via plurality vote.
As of
June 30, 2018 and December 31, 2017, there were 66,625 shares of
the Company’s Series A Convertible Preferred Stock
outstanding.
COMMON STOCK
At June
30, 2018, the Company was authorized to issue 200,000,000 shares of
its common stock with a par value of $0.001 per share.
During
the three and six months ended June 30, 2018, the Company issued
shares of common stock and restricted common stock as follows:
600,000 shares of common stock issued to SK energy with a fair
value of $185,000 based on the market price on the date of
issuance, 80,000 shares of restricted stock were issued to the CEO
with a fair value of $27,000 based on the market price on the date
of issuance, and 30,848 shares were issued to employees for the
cashless exercise of options.
The
80,000 shares of restricted stock were issued i
n
consideration for Mr. Ingriselli rejoining the Company as its
President and Chief Executive Officer in May 2018, with 60,000
shares vesting on December 1, 2018 and 20,000 of the shares vesting
on March 1, 2019, subject to his continued service as an employee
or consultant of the Company on such vesting dates.
As of
June 30, 2018, there were 7,989,602 shares of common stock
outstanding.
Stock-based
compensation expense recorded related to the vesting of restricted
stock for the three and six months ended June 30, 2018 and 2017 was
$148,000 compared to $214,000, and $314,000 compared to $462,000,
respectively. The remaining unamortized stock-based compensation
expense at June 30, 2018 related to restricted stock was
$121,000.
NOTE 11 – STOCK OPTIONS AND
WARRANTS
Blast 2003 Stock Option Plan and 2009 Stock Incentive
Plan
Prior
to June 2005, the Company was known as Blast Energy Services, Inc.
(“Blast”). Under Blast’s 2003 Stock Option Plan
and 2009 Stock Incentive Plan, options to acquire 298 and 343
shares of common stock were granted and remained outstanding and
exercisable as of June 30, 2018 and December 31, 2017,
respectively. No new options were issued under these plans in 2018
or 2017.
2012 Incentive Plan
On July
27, 2012, the shareholders of the Company approved the 2012 Equity
Incentive Plan (the “2012 Incentive Plan”), which was
previously approved by the Board of Directors on June 27, 2012, and
authorizes the issuance of various forms of stock-based awards,
including incentive or non-qualified options, restricted stock
awards, performance shares and other securities as described in
greater detail in the 2012 Incentive Plan, to the Company’s
employees, officers, directors and consultants. The 2012 Incentive
Plan was amended on June 27, 2014, October 7, 2015 and December 28,
2016 and December 28, 2017 to increase by 500,000, 300,000, 500,000
and 1,500,000 (to 3,000,000 currently), respectively, the number of
shares of common stock reserved for issuance under the 20102
Incentive Plan.
A total
of 3,000,000 shares of common stock are eligible to be issued under
the 2012 Incentive Plan as of June 30, 2018 and December 31, 2017,
of which 2,376,130 shares have been issued as restricted
stock, 501,700 shares are subject to issuance upon exercise of
issued and outstanding options, and 122,170 remain
available for future issuance as of June 30,
2018.
PEDCO 2012 Equity Incentive Plan
As a
result of the July 27, 2012 merger by and between the Company,
Blast Acquisition Corp., a wholly-owned Nevada subsidiary of the
Company (“MergerCo”), and Pacific Energy Development
Corp., a privately-held Nevada corporation (“PEDCO”)
pursuant to which MergerCo was merged with and into PEDCO, with
PEDCO continuing as the surviving entity and becoming a
wholly-owned subsidiary of the Company, in a transaction structured
to qualify as a tax-free reorganization (the “Merger”),
the Company assumed the PEDCO 2012 Equity Incentive Plan (the
“PEDCO Incentive Plan”), which was adopted by PEDCO on
February 9, 2012. The PEDCO Incentive Plan authorized PEDCO to
issue an aggregate of 100,000 shares of common stock in the form of
restricted shares, incentive stock options, non-qualified stock
options, share appreciation rights, performance shares, and
performance units under the PEDCO Incentive Plan. As of June 30,
2018 and December 31, 2017, options to purchase an aggregate of
31,015 shares of the Company’s common stock and 66,625 shares
of the Company’s restricted common stock have been granted
under this plan (all of which were granted by PEDCO prior to the
closing of the merger with the Company, with such grants being
assumed by the Company and remaining subject to the PEDCO Incentive
Plan following the consummation of the merger). The Company does
not plan to grant any additional awards under the PEDCO Incentive
Plan.
Options
The
Company did not grant any options during the six-month period ended
June 30, 2018.
During
the three and six months ended June 30, 2018 and 2017, the Company
recognized stock option expense of $18,000 compared to $27,000 and
$35,000 compared to $55,000, respectively. The remaining amount of
unamortized stock options expense at June 30, 2018, was
$12,000.
The
intrinsic value of outstanding and exercisable options at June 30,
2018 was $484,000 and $263,000, respectively.
The
intrinsic value of outstanding and exercisable options at December
31, 2017 was $-0- and $-0-, respectively.
Option
activity during the six months ended June 30, 2018
was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
January 1, 2018
|
743,727
|
$
3.45
|
3.8
|
Granted
|
-
|
-
|
-
|
Exercised
|
(30,848
)
|
0.55
|
-
|
Forfeited and
cancelled
|
(14,197
)
|
3.02
|
-
|
|
|
|
|
Outstanding at June
30, 2018
|
698,682
|
$
3.69
|
3.2
|
|
|
|
|
Exercisable at June
30, 2018
|
586,182
|
$
4.34
|
3.0
|
Warrants
During
the three and six months ended June 30, 2018, the Company granted
warrants to certain of the Junior Noteholders to purchase an
aggregate of 1,448,472 shares of common stock. These warrants have
a term of three years, an exercise price of $0.322, and the
estimated fair value of $322,000 was based on the Black-Scholes
option pricing model.
During
the three and six months ended June 30, 2018 and 2017, the Company
recognized warrant expense (included in the net gain for the debt
restructuring) of $322,000 and $-0-, and $322,000 and $-0-,
respectively. The remaining amount of unrecognized warrant expense
at June 30, 2018 was $-0-.
The
intrinsic value of outstanding as well as exercisable warrants at
June 30, 2018 and December 31, 2017 was $2,822,000 and $-0-,
respectively.
Warrant
activity during the six months ended June 30, 2018
was:
|
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contract
Term
(#
years)
|
Outstanding at
January 1, 2018
|
1,231,373
|
$
7.44
|
1.4
|
Granted
|
1,448,472
|
0.32
|
-
|
Exercised
|
-
|
-
|
-
|
Forfeited and
cancelled
|
-
|
-
|
-
|
|
|
|
|
Outstanding at June
30, 2018
|
2,679,845
|
$
3.59
|
2.0
|
|
|
|
|
Exercisable at June
30, 2018
|
2,679,845
|
$
3.59
|
2.0
|
NOTE 12 – RELATED PARTY
TRANSACTIONS
See
Note 8 above for further discussion of the debt restructuring on
June 25, 2018, the Promissory Note dated June 25, 2018 with SK
Energy in the amount of $7.7 million, and the Debt Repayment
Agreements with various previous debt holders including the
previous debt held by GGE, which was retired effective on June 25,
2018. As part of these transactions, SK Energy entered into a Stock
Purchase Agreement with Golden Globe Energy, the holder of the
Company’s then outstanding 66,625 shares of Series A
Convertible Preferred Stock (convertible pursuant to their terms
into 6,662,500 shares of the Company’s common stock –
approximately 47.6% of the Company’s then outstanding shares
post-conversion), pursuant to which on June 25, 2018, SK Energy
purchased, for $100,000, all of the Series A Convertible Preferred
Stock.
As a
result of the transactions discussed above and the Notes above, as
of June 30, 2018, SK Energy is now a related party while GGE
is no longer a related party as of June 30, 2018. This is based on
the 66,625 shares of the Company’s Series A
Convertible Preferred Stock owned by SK Energy as of June 30, 2018
(which could be converted into shares of the Company’s common
stock on a 100:1 basis) and the termination, effective June 25,
2018, of GGE’s right to appoint up to two
representatives to the Company’s Board of
Directors.
The
following table reflects the related party amounts for GGE included
in the December 31, 2017 balance sheet and the related party
amounts for SK Energy included in the June 30, 2018 balance sheet
(in thousands):
|
|
|
Accrued
expenses
|
$
-
|
$
1,733
|
Long-term notes
payable – Secured Promissory Notes, net of discount of $-0-
and $1,148, respectively
|
-
|
15,930
|
Long notes payable
– Subordinated
|
-
|
11,483
|
Long-term notes
payable, net of discount of $185 and $-0-,
respectively
|
7,515
|
-
|
Total related party
liabilities
|
$
7,515
|
$
29,146
|
NOTE 13 – INCOME TAXES
Due to
the Company’s cumulative net losses, there was no provision
for income taxes for the six months ended June 30, 2018 and
2017.
On
December 22, 2017, new federal tax reform legislation was enacted
in the United States (the “2017 Tax Act”), resulting in
significant changes from previous tax law. The 2017 Tax Act reduces
the federal corporate income tax rate to 21% from 34% effective
January 1, 2018. The rate change, along with certain immaterial
changes in tax basis resulting from the 2017 Tax Act, resulted in a
reduction of the Company’s deferred tax assets of $18,589,000
and a corresponding reduction in the valuation allowance as of
December 31, 2017. The following table reconciles the U.S. federal
statutory income tax rate in effect for the six months ended June
30, 2018 and 2017 and the Company’s effective tax rate
(amounts in thousands):
|
Six Months
Ended
June
30,
2018
|
Six Months
Ended
June
30,
2017
|
|
|
|
U.S. federal
statutory income tax
|
$
13,032
|
$
(2,885
)
|
State and local
income tax, net of benefits
|
4,121
|
(393
)
|
Amortization of
debt discount
|
383
|
224
|
Gain on debt
restructuring
|
(19,433
)
|
-
|
Officer life
insurance and D&O insurance
|
11
|
15
|
Stock-based
compensation
|
96
|
199
|
Tax rate changes
and other
|
-
|
-
|
Change in valuation
allowance for deferred income tax assets
|
1,790
|
2,840
|
Effective income
tax rate
|
$
-
|
$
-
|
|
|
|
Deferred
income tax assets as of June 30, 2018 and December 31, 2017 are as
follows (in thousands):
Deferred
Tax Assets
|
|
|
Difference in
depreciation, depletion, and capitalization methods – oil and
natural gas properties
|
$
3,807
|
$
3,649
|
Net operating loss
– federal taxes
|
31,563
|
30,322
|
Net operating loss
– state taxes
|
5,789
|
5,398
|
Total deferred tax
asset
|
41,159
|
39,369
|
|
|
|
Less valuation
allowance
|
(41,159
)
|
(39,369
)
|
Total deferred tax
assets
|
$
-
|
$
-
|
In
assessing the realization of deferred tax assets, management
considers whether it is more likely than not that some portion or
all of deferred assets will not be realized. The ultimate
realization of the deferred tax assets is dependent upon the
generation of future taxable income during the periods in which
those temporary differences become deductible.
Based
on the available objective evidence, management believes it is more
likely than not that the net deferred tax assets will not be fully
realizable. Accordingly, management has applied a full valuation
allowance against its net deferred tax assets at June 30, 2018. The
net change in the total valuation allowance from December 31, 2017
to June 30, 2018, was an increase of
$1,790,000.
The
Company’s policy is to recognize interest and penalties
accrued on any unrecognized tax benefits as a component of income
tax expense. As of June 30, 2018, the Company did not have any
significant uncertain tax positions or unrecognized tax benefits.
The Company did not have associated accrued interest or penalties,
nor were there any interest expense or penalties recognized during
the period from February 9, 2011 (Inception) through June 30,
2018.
As of
June 30, 2018, the Company had net operating loss carryforwards
(“NOLs”) of approximately $100,379,000,
plus $49,922,000 subject to limitations, for federal and state tax
purposes. If not utilized, these losses will begin to expire
beginning in 2033 and 2023, respectively, for both federal and
state purposes.
Utilization
of NOL and tax credit carryforwards may be subject to a substantial
annual limitation due to ownership change limitations that may have
occurred or that could occur in the future, as required by the
Internal Revenue Code (the “Code”), as amended, as well
as similar state provisions. In general, an “ownership
change” as defined by the Code results from a transaction or
series of transactions over a three-year period resulting in an
ownership change of more than 50% of the outstanding stock of a
company by certain stockholders or public groups.
The
Company currently has tax returns open for examination by the
Internal Revenue Service for all years
since 2010.
NOTE 14
–
SUBSEQUENT EVENTS
On July
3, 2018, SK Energy, converted all of its 66,625 outstanding shares
of Series A Convertible Preferred Stock into 6,662,500 shares of
the Company’s common stock, representing 45.8% of the
Company’s then outstanding common stock. The shares of common
stock issued upon conversion of the Series A Convertible Preferred
Stock, together with the 600,000 shares of common stock issued to
SK Energy in connection with its entry into a $7.7 million
promissory note on June 25, 2017, totaled 49.9% of our currently
outstanding shares of common stock. SK Energy is wholly-owned and
controlled by Dr. Simon Kukes.
Also on
July 11, 2018, the Board of Directors of the Company, appointed Dr.
Simon Kukes as the Chief Executive Officer of the Company and as a
member of the Board of Directors of the Company, and further
appointed Mr. Ivar Siem and Mr. John J. Scelfo as members of the
Board of Directors (the “Appointees” and the
“Appointments”).
As a
result of the appointment of Dr. Kukes as Chief Executive Officer
of the Company as discussed above, the Company’s then current
Chief Executive Officer, Frank C. Ingriselli, stepped down as Chief
Executive Officer of the Company, effective July 12, 2018, provided
that Mr. Ingriselli continues to serve as the President and
Chairman of the Company and advisor to the Chief Executive
Officer.
Dr.
Kukes has agreed to receive an annual salary of $1 as his
compensation for serving as Chief Executive Officer of the Company
and as a member of the Board of Directors and to not charge the
Company for any business expenses he incurs in connection with such
positions.
On July
11, 2018, David Steinberg tendered his resignation as a member of
the Board of Directors. Immediately prior to the resignation of Mr.
Steinberg, the Board of Directors of the Company agreed to
accelerate the vesting of 150,000 shares of common stock granted to
him on December 28, 2017, that would have otherwise vested on July
15, 2018, assuming he was still serving as a member of the Board of
Directors of the Company on such date.
Additionally,
on July 11, 2018, the Board of Directors granted restricted stock
awards to Messrs. Frank C. Ingriselli (President) and Clark R.
Moore (Executive Vice President, General Counsel and Secretary) of
60,000 and 50,000 shares, respectively, under the Company’s
Amended and Restated 2012 Equity Incentive Plan. The restricted
stock awards vest as follows: 100% on the six (6) month anniversary
of the grant date, in each case subject to the recipient of the
shares being an employee of or consultant to the Company on such
vesting date, and subject to the terms and conditions of a
Restricted Shares Grant Agreement, as applicable, entered into by
and between the Company and the recipient. These shares have a
total fair value of $164,000 based on the market price on the
issuance date.