NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION
The
accompanying interim unaudited 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, 2018, filed with the SEC on April 1, 2019,
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
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.
NOTE 2 – DESCRIPTION OF BUSINESS
PEDEVCO
is
an oil and gas company focused on
the development, acquisition and production of oil and natural
gas
assets where the latest in modern drilling and
completion techniques and technologies have yet to be applied. In
particular, the Company focuses on legacy proven properties where
there is a long production history, well defined geology and
existing infrastructure that can be leveraged when applying modern
field management technologies. The Company’s current
properties are located in the San Andres formation of the Permian
Basin situated in West Texas and eastern New Mexico (the
“Permian Basin”) and in
the Denver-Julesberg Basin (“D-J Basin”) in
Colorado. The Company holds its Permian Basin acres located
in Chavez and Roosevelt Counties, New Mexico, through its
wholly-owned operating subsidiary, Pacific Energy Development Corp.
(“PEDCO”), which asset the Company refers to as its
“Permian Basin Asset,” and it holds its D-J Basin acres
located in Weld and Morgan Counties, Colorado, through its
wholly-owned operating subsidiary, Red Hawk Petroleum, LLC
(“Red Hawk”), which asset the Company refers to as its
“D-J Basin Asset.”
The Company’s
strategy is to be the
operator, directly or through its subsidiaries and joint ventures,
in the majority of its acreage so it can dictate the pace of
development in order to execute its business plan. The majority of
its capital expenditure budget through 2019 will be focused on the
development of the Company’s Permian Basin Asset, with a
secondary focus on development of its D-J Basin Asset. The
Company’s 2019 total development plan calls for the
deployment of an estimated $50 million in capital, of which
approximately $40 million has been raised to date. On the
Company’s Permian Basin Asset, four initial horizontal wells
were drilled in the first quarter of 2019 in Phase One of its
development plan. Phase Two of the development program began in
July 2019, which plans for the drilling and completion of four new
horizontal San Andres wells, drilling of one salt water disposal
well, the completion of one drilled uncompleted horizontal well,
and putting on first production of a well drilled and completed in
Phase One which was not put on production during Phase One due to
salt water disposal constraints. The Company’s future D-J
Basin Asset development plans are currently under evaluation for
its operated acreage, but the Company anticipates deploying
approximately $1 million in capital to participate in drilling and
completion operations by other operators on its non-operated
acreage through 2019. The Company expects that it will have
sufficient cash available to meet its needs over the foreseeable
future, which cash the Company anticipates being available from (i)
its projected cash flows from operations, (ii) its existing cash on
hand, (iii) equity infusions or loans (which may be convertible)
made available from SK Energy LLC, which is 100% owned and
controlled by Dr. Simon Kukes, the Company’s Chief Executive
Officer and director (“SK Energy”), which funding SK
Energy is under no obligation to provide, and (iv) funding through
credit or loan facilities. 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 2019 capital expenditures and/or acquisitions. If
market conditions are not conducive to raising additional funds,
the Company may choose to extend the drilling program and
associated capital expenditures further into 2020.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The
Company has provided a discussion of significant accounting
policies, estimates and judgments in its 2018 Annual Report. There
have been no changes to the Company’s significant accounting
policies since December 31, 2018.
Recently Adopted Accounting Pronouncements
Revenue
Recognition. Accounting Standards Update (“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’s net earnings are not 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.
Leases. In February 2016, the Financial Accounting
Standards Board (“FASB”) issued
ASU No. 2016-02,
“Leases (Topic
842)”
. The new lease
guidance supersedes Topic 840. The core principle of the guidance
is that entities should recognize the assets and liabilities that
arise from leases. Topic 840 does not apply to leases to explore
for or use minerals, oil, natural gas and similar nonregenerative
resources, including the intangible right to explore for those
natural resources and rights to use the land in which those natural
resources are contained. In July 2018, the FASB issued
ASU No. 2018-11,
“
Leases (Topic 842): Targeted
Improvements”
,
which
provides entities with an alternative modified
transition method to elect not to recast the comparative periods
presented when adopting Topic 842. The Company adopted Topic 842 as
of January 1, 2019, using the alternative modified transition
method, for which,
comparative
periods, including the disclosures related to those periods, are
not restated.
In
addition, the Company elected practical expedients provided by the
new standard whereby,
the Company has
elected to not reassess
its prior conclusions about lease
identification, lease classification, and initial direct costs
and to retain off-balance sheet
treatment of short-term leases (i.e., 12 months or less and does
not contain a purchase option that the Company is reasonably
certain to exercise). As a result of the short-term expedient
election, the Company has no leases that require the recording of a
net lease asset and lease liability on the Company’s
consolidated balance sheet or have a material impact on
consolidated earnings or cash flows as of June 30, 2019. Moving
forward, the Company will evaluate any new lease commitments for
application of Topic 842.
Compensation-Stock
Compensation. In June 2018, the FASB issued ASU 2018-07,
“Compensation—Stock
Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting”.
The amendments in this update
maintain or improve the usefulness of the information provided to
the users of financial statements while reducing cost and
complexity in financial reporting. The areas for simplification in
this update involve several aspects of the accounting for
nonemployee share-based payment transactions resulting from
expanding the scope of Topic 718, to include share-based payment
transactions for acquiring goods and services from nonemployees.
Some of the areas for simplification apply only to nonpublic
entities. The amendments in this update are effective for all
entities for fiscal years beginning after December 15, 2018, and
interim periods within those fiscal years. The Company adopted the
standard as of January 1, 2019. There was no impact of the standard
on its consolidated financial statements.
Recently Issued Accounting Pronouncements
The
Company does not expect the adoption of any other 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
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 in the periods indicated (in
thousands):
|
|
|
|
|
|
|
|
|
Oil
sales
|
$
4,037
|
$
5,490
|
|
Natural
gas sales
|
26
|
135
|
|
Natural
gas liquids sales
|
7
|
13
|
|
Total
revenue from customers
|
$
4,070
|
$
5,638
|
There
were no significant contract liabilities or transaction price
allocations to any remaining performance obligations as of June 30,
2019.
NOTE 5 – RESTRICTED CASH
The following table provides a reconciliation of
cash and restricted cash reported within the balance sheets, which
sum to the total of such amounts shown in the accompanying
consolidated statements of cash flows (in
thousands):
|
|
|
|
|
|
|
|
Cash
|
$
13,370
|
$
917
|
|
Restricted
cash included in other assets
|
3,297
|
-
|
|
Total
cash and restricted cash as shown in the consolidated statements of
cash flows
|
$
16,667
|
$
917
|
NOTE 6 – OIL AND GAS PROPERTIES
The
following table summarizes the Company’s oil and gas
activities by classification for the six months ended June 30, 2019
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas
properties, subject to amortization
|
$
70,803
|
$
19,016
|
$
(255
)
|
$
6,596
|
$
96,160
|
|
Oil and gas
properties, not subject to amortization
|
8,516
|
270
|
-
|
(6,596
)
|
2,190
|
|
Asset retirement
costs
|
2,188
|
(96
)
|
-
|
-
|
2,092
|
|
Accumulated
depreciation and depletion
|
(21,045
)
|
(4,856
)
|
-
|
-
|
(24,901
)
|
|
Total oil and gas
assets
|
$
60,462
|
$
14,334
|
$
(255
)
|
$
-
|
$
74,541
|
On
February 1, 2019, for consideration of $700,000, the Company
completed an asset purchase from Manzano, LLC and Manzano Energy
Partners II, LLC, whereby the Company purchased approximately
18,000 net leasehold acres, ownership and operated production from
one horizontal well currently producing from the San Andres play in
the Permian Basin, ownership of three additional shut-in wells and
ownership of one saltwater disposal well. The Company subsequently
drilled one Manzano well in Phase Two of its 2019 development plan,
which has yet to be completed as of June 30, 2019.
On
March 7, 2019, Red Hawk sold rights to 85.5 net acres of oil and
gas leases located in Weld County, Colorado, to a third party, for
aggregate proceeds of $1.2 million and recognized a gain on sale of
oil and gas properties of $920,000 on the statement of operations.
The sale agreement included a provision whereby the purchaser was
required to assign Red Hawk 85 net acres of leaseholds in an area
located where the Company already owns other leases in Weld County,
Colorado, within nine months from the date of the sale, or to repay
the Company up to $200,000 (proportionally adjusted for the amount
of leasehold delivered). The purchaser has not yet identified or
assigned the required leasehold acreage to the
Company.
Effective June 10,
2019, for consideration of $350,000, the Company completed an asset
purchase from a private operator, whereby the Company purchased
approximately 2,076 net leasehold acres, ownership and operated
production from 22 vertical wells currently producing from the San
Andres play in the Permian Basin and ownership of three injection
wells.
For the
three and six months ended June 30, 2019, the Company has incurred
$5.4 million and $18.2 million, respectively, in capital cost which
included drilling costs for the drilling of five wells (four of
which were completed), and corresponding facility costs. There were
no drilling costs for the three and six months ended June 30,
2018.
The
depletion recorded for production on proved properties for the
three and six months ended June 30, 2019 and 2018, amounted to
$2,715,000 compared to $688,000, and $4,855,000, compared to
$1,251,000, respectively.
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 at that time 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
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 (with an expiration date of May
12, 2019) 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 shares of
Caspian Energy underlying the option were classified as part of
other current assets. The option expired without being exercised on
May 12, 2019. The Company fully reserved the $100,000 and
recognized no value related to the shares of Caspian Energy on the
Company’s balance sheet as of June 30, 2019 as the Company
determined the value of the shares to be $0 as a result of it
delisting from the NEX Board of the TSX Venture
Exchange.
NOTE 8 – NOTES PAYABLE
The
Company’s notes payable consisted of the following
(in thousands):
|
|
|
|
|
|
|
|
|
Notes
Payable - Subordinated
|
$
-
|
$
400
|
|
Notes
Payable - Subordinated Related Party
|
-
|
30,200
|
|
Notes
Payable - Related Party
|
-
|
7,855
|
|
|
-
|
38,455
|
|
Unamortized
Debt Discount
|
-
|
(161
)
|
|
Total
Notes Payable
|
$
-
|
$
38,294
|
Convertible Note Issuances
On June
26, 2018, the Company borrowed $7.7 million from SK Energy under a
Promissory Note dated June 25, 2018, in the amount of $7.7
million (the “June 2018 SK Energy Note”) 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 June 2018 SK Energy Note
accrues interest monthly at 8% per annum, payable quarterly, 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.
As
additional consideration for SK Energy agreeing to the terms of the
June 2018 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.
Based
on a conversion price equal to $2.18 per share,
pursuant to the conversion terms of the June 2018
SK Energy Note
, the amount of interest under the June 2018
SK Energy Note as of December 31, 2018 equaled $155,000 and was
included in the outstanding principal balance of $7,855,000, for
interest not paid or issued in common stock when due, the amount is
recapitalized into the face value of the note, per the terms of the
June 2018 SK Energy Note. The total amount of the remaining debt
discount reflected on the accompanying balance sheet as of December
31, 2018 was $161,000, which was amortized in full as of June 30,
2019, due to the note conversions, which included $107,000 of
additional interest that was included in the principal balance,
noted below under “Convertible Notes Amendment and
Conversion” and “SK Energy Note Amendment; Note
Purchases and Conversion”.
On
August 1, 2018, the Company received total proceeds of $23,600,000
from the sale of multiple Convertible Promissory Notes (the
“Convertible Notes”). A total of $22,000,000 in
Convertible Notes were purchased by SK Energy (the “August
2018 SK Energy Note”); $200,000 in Convertible Notes were
purchased by an executive officer of SK Energy; $500,000 in
Convertible Notes were purchased by a trust affiliated with John J.
Scelfo, a director of the Company; $500,000 in Convertible Notes
were purchased by an entity affiliated with Ivar Siem, our
director, and J. Douglas Schick, President of the Company;
$200,000 in Convertible Notes was
purchased by H. Douglas Evans
(who became a Director and
related party on September 27, 2018)
;
and $200,000 in Convertible Notes were
purchased by an unaffiliated party. The $23,600,000 is accounted
for on the balance sheet as $23,200,000 of subordinated notes
payable – related party and $400,000 as subordinated notes,
as these notes are subordinated to the original June 2018 SK Energy
Note.
The
Convertible Notes accrue interest monthly at 8.5% per annum, which
interest is payable on the maturity date unless otherwise converted
into our common stock as described below. The accrued interest is
accounted for on the balance sheet as of December 31, 2018 as
$943,000 of accrued interest – related party and $14,000 of
accrued interest. As of June 30, 2019, there was no accrued
interest – related party or accrued interest, as $347,000 of
accrued interest – related party and $6,000 of accrued
interest incurred during 2019 together with the accrued interest
outstanding as of December 31, 2018 was converted into shares of
common stock due to the note conversions described
below.
The
Convertible Notes and all accrued interest thereon are convertible
into shares of our common stock, from time to time after August 29,
2018, at the option of the holders thereof, at a conversion price
equal to $2.13 per share, per terms of the Convertible
Notes.
On October 25, 2018, the Company borrowed an
additional $7.0 million from SK Energy, through the sale of a
convertible promissory note in the amount of $7.0 million (the
“October 2018 SK Energy Note”)
.
The October 2018 SK Energy Note had substantially
similar terms as the August 2018 SK Energy Note, except that it had
a conversion price of $1.79 per share. The October 2018 SK Energy
Note is due and payable on October 25, 2021 but may be prepaid at
any time without penalty.
The accrued interest expense
related to this note for the year ended December 31, 2018 was
$109,000 and is accounted for on the balance sheet as accrued
interest – related party. As of June 30, 2019, there was no
accrued interest – related party, as accrued interest of
$78,000 incurred during 2019 together with the accrued interest
outstanding as of December 31, 2018 was converted into shares of
common stock due to the note conversions described
below.
January 2019 SK Energy Convertible Note
On January 11, 2019, the Company borrowed an
additional $15.0 million from SK Energy, through the sale of a
convertible promissory note in the amount of $15.0 million (the
“January 2019 SK Energy Note”)
.
The January 2019 SK Energy Note had substantially
similar terms as the August 2018 SK Energy Note, except that it had
a conversion price of $1.50 per share. The January 2019 SK Energy
Note is due and payable on January 11, 2022 but may be prepaid at
any time without penalty.
As of June 30, 2019, there was no
outstanding principal or accrued interest – related party due
to the note conversions described below. Accrued interest-related
party for this note prior to the conversion totaled
$126,000.
Convertible Notes Amendment and Conversion
On
February 15, 2019, the Company and SK Energy agreed to amend the
Convertible Notes (including the August 2018 SK Energy Note),
October 2018 SK Energy Note, and the January 2019 SK Energy Note,
to remove the conversion limitation that previously prevented SK
Energy from converting any portion of the notes into common stock
of the Company if such conversion would have resulted in SK Energy
beneficially owning more than 49.9% of the Company’s
outstanding shares of common stock
Immediately
following the entry into the amendment, on February 15, 2019, SK
Energy elected to convert (i) all $15,000,000 of the outstanding
principal and all $126,000 of accrued interest then owed under the
January 2019 SK Energy Note into common stock of the Company at a
conversion price of $1.50 per share, as set forth in the January
2019 SK Energy Note into 10,083,819 shares of restricted common
stock of the Company, and (ii) all $7,000,000 of the outstanding
principal and all $187,000 of accrued interest under the October
2018 SK Energy Note into common stock of the Company at a
conversion price of $1.79 per share, as set forth in the October
2018 SK Energy Note, into 4,014,959 shares of restricted common
stock of the Company.
On
March 1, 2019, the Company and SK Energy amended the June 2018
SK Energy Note, to provide SK Energy the right, at any time, at its
option, to convert the principal and interest owed under such June
2018 SK Energy Note, into shares of the Company’s common
stock, at a conversion price of $2.13 per share.
In
addition, on March 1, 2019, the holders of $1,500,000 in aggregate
principal amount of Convertible Notes sold their Convertible Notes
at face value plus accrued and unpaid interest through March 1,
2019 to SK Energy (the “Convertible Note Sale”).
Holders which sold their Convertible Notes pursuant to the
Convertible Note Sale to SK Energy, included an executive officer
of SK Energy ($200,000 in principal amount of Convertible Notes); a
trust affiliated with John J. Scelfo, a director of the Company
($500,000 in principal amount of Convertible Notes); an entity
affiliated with Ivar Siem, a director of the Company, and J.
Douglas Schick the President of the Company ($500,000 in principal
amount of Convertible Notes); and Harold Douglas Evans, a director
of the Company ($200,000 in principal amount of Convertible
Notes).
Immediately
following the effectiveness of the SK Energy Note Amendment and
Convertible Note Sale, on March 1, 2019, SK Energy and the
Unaffiliated Holder elected to convert all $31,300,000 of
outstanding principal and an aggregate of $1,460,000 of accrued
interest under the June 2018 SK Energy Note, SK Energy’s $22
million Convertible Note and all other Convertible Notes, into
common stock of the Company at a conversion price of $2.13 per
share (the “Conversion Price” and the
“Conversions”) as set forth in the June 2018 SK Energy
Note, as amended, and the Convertible Notes (including SK
Energy’s $22 million Convertible Note (collectively, the
“Notes”), into an aggregate of 15,381,605 shares of
restricted common stock of the Company (the “Conversion
Shares”).
NOTE 9 – ASSET RETIREMENT OBLIGATIONS
Activity
related to the Company’s asset retirement obligations is as
follows (in thousands):
|
|
Six
Months
Ended
June
30,
2019
|
|
Balance at the
beginning of the period
(1)
|
$
2,571
|
|
Accretion
expense
|
170
|
|
Obligations
incurred for acquisition
|
33
|
|
Changes in
estimates
|
(129
)
|
|
Balance at end of
period
(2)
|
$
2,645
|
(1)
Includes $119,000 of current asset retirement obligations included
in accrued liabilities at December 31, 2018.
(2)
Includes $129,000 of current asset retirement obligations included
in accrued liabilities at June 30, 2019.
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Office Lease
Change in Accounting Policy.
The Company
adopted
ASU No. 2016-02,
“Leases
(Topic 842)” and
ASU No.
2018-11, “
Leases (Topic 842): Targeted
Improvements”
,
January 1, 2019, using the alternative modified transition method,
for which,
comparative periods,
including the disclosures related to those periods, are not
restated
as of January 1, 2019. Refer to Note 3 –
Summary of Significant Accounting Policies above for additional
information.
In June
2018, the Company assumed the lease for its corporate office space
located in Houston, Texas from American Resources, Inc., an entity
beneficially owned and controlled by Ivar Siem, a director of the
Company, and J. Douglas Schick, the Company’s President. The
term of the lease ends on August 31, 2019, and the obligation for
the remainder of this lease is $22,000.
Effective September
1, 2019, the Company plans to move its corporate headquarters from
1250 Wood Branch Park Dr., Suite 400, Houston, Texas 77079 to 575
N. Dairy Ashford, Houston, Texas 77079 in connection with the
expiration of its current office space lease. The Company entered
into a sublease on approximately 5,200 square feet of office space
that expires on August 31, 2023, and has a base monthly rent of
approximately $10,000 with the first month rent due beginning on
January 1, 2020. The Company will be required to pay a security
deposit of $9,600. On the effective date of the new lease, the
Company will apply the new lease Topic 842 and does not expect
the lease to have a significant impact
on its consolidated balance sheet or statements of operations or
cash flows.
The
Company also leased space for its former corporate headquarters in
Danville, California that was scheduled to expire July 31, 2019,
but was terminated in January 2019 without penalty or other amounts
due. In February 2019, the Company entered into a six-month lease
agreement for 187 square feet of new office space located in
Danville, California for the Company’s General Counsel. The
monthly rent is $1,200, and the Company paid a $1,200 security
deposit. In August 2019, the lease was extended for an additional
six months. The total current obligation for the remainder of this
lease through January 2020 is $7,200.
For the
six months ended June 30, 2019 and 2018, the Company incurred lease
expense of $76,000 and $28,800, respectively, for the combined
leases.
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, no significant net acres
expire during the remainder of 2019, and 31 net acres expire
thereafter (net to our direct ownership interest only). In the
Permian Basin Asset, no net acres are due to expire in 2019 and
14,500 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.
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 11 – SHAREHOLDERS’ EQUITY
Common Stock
On
February 15, 2019 and March 1, 2019, $22.3 million and $32.8
million of outstanding note payables and accrued interest were
converted into 14,098,778 and 15,381,605 shares of the
Company’s common stock, respectively (see Note 8 above for
further discussion of the note conversions).
On May
21, 2019, SK Energy, which is owned and controlled by Dr. Kukes,
the Company’s Chief Executive Officer and a member of the
Board of Directors, purchased 6,818,181 shares of restricted common
stock from the Company at a price of $2.20 per share, or $15
million in aggregate, pursuant to a subscription agreement. As a
result of the purchase, SK Energy, which beneficially owned 78.2%
of our outstanding common stock prior to the subscription
agreement, beneficially owned 81.0% of our outstanding common stock
after the purchase.
In
addition, on May 16, 2019, the Company sold an aggregate of
1,500,000 shares of its restricted common stock to two third party
purchasers at a price a price of $2.00 per share, or $3 million in
aggregate, pursuant to subscription agreements.
Warrants
During
the six months ended June 30, 2019, no warrants were granted, and
warrants to purchase 100,000 shares of common stock expired.
Additionally, on April 1, 2019, the Company issued 60,056 total
shares of common stock upon the cashless exercise of two warrants
to purchase an aggregate of 596,280 shares of common stock with an
exercise price of $2.50 per share, based on a current market value
of $2.78 per share, under the terms of each warrant.
The
intrinsic value of outstanding, as well as exercisable, warrants,
at June 30, 2019 was $265,000.
Warrant
activity during the six months ended June 30, 2019
was:
|
|
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contract Term (Years)
|
|
Outstanding
at December 31, 2018
|
1,216,686
|
$
7.44
|
1.4
|
|
Exercised
|
(596,280
)
|
$
2.50
|
|
|
Expired/Cancelled
|
(100,000
)
|
$
25.00
|
|
|
Outstanding
at June 30, 2019
|
520,406
|
$
7.20
|
0.9
|
|
Exercisable
at June 30, 2019
|
520,406
|
$
7.20
|
0.9
|
NOTE 12 – SHARE-BASED COMPENSATION
The
Company measures the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair
value of the award over the vesting period.
Common Stock
In
April 2019, restricted stock awards were granted to three new
employees and one consultant for an aggregate of 160,000 shares of
the Company’s common stock, under the Company’s Amended
and Restated 2012 Equity Incentive Plan. The grant for a total of
50,000 of the restricted stock awards vests as follows: 100% on the
one-year anniversary of the grant date, subject to the
recipient’s continued service with the Company. These shares
have a total fair value of $135,000 based on the market price on
the issuance date. The grants for 110,000 shares of restricted
stock vest as follows: 50% on the one-year anniversary of the grant
date and 50% on the second-year anniversary of the grant date,
subject to the recipient’s continued service with the
Company. These shares have a total fair value of $253,000 based on
the market price on the issuance date. The awarded shares above are
subject to trading restrictions, and forfeiture, subject to the
vesting terms
described
above
. When such securities are vested in accordance with
their terms, the trading restrictions are lifted.
Stock-based
compensation expense recorded related to the vesting of restricted
stock for the three and six months ended June 30, 2019 and 2018 was
$285,000, compared to $148,000 and $471,000, compared to $314,000,
respectively. The remaining unamortized stock-based compensation
expense at June 30, 2019 related to restricted stock was
$883,000.
Options
During
the six months ended June 30, 2019, no options were granted,
exercised or expired, and a total of 890,232 options to purchase
common stock are outstanding, with exercise prices ranging from
$0.3088 to $302.40 per share, and a weighted-average exercise price
of $3.26 per share. Of the total amount of options to purchase
common stock outstanding, 620,232 are exercisable as of June 30,
2019, with a weighted-average exercise price of $3.91 per share and
a weighted average remaining life of 2.1 years.
During
the three and six months ended June 30, 2019 and 2018, the Company
recognized stock option expense of $113,000 compared to $18,000 and
$226,000 compared to $35,000, respectively. The remaining amount of
unamortized stock options expense at June 30, 3019, was
$93,000.
The
intrinsic value of outstanding and exercisable options at June 30,
2019 was $290,000.
NOTE 13 – EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per
common share-basic is calculated by dividing net income (loss) by
the weighted average number of shares of common stock outstanding
during the period. Net income (loss) per common share-diluted
assumes the conversion of all potentially dilutive securities and
is calculated by dividing net (loss) income by the sum of the
weighted average number of shares of common stock, as defined
above, outstanding plus potentially dilutive securities. Net (loss)
income per common share-diluted considers the impact of potentially
dilutive securities except in periods in which there is a loss
because the inclusion of the potential common shares, as defined
above, would have an anti-dilutive effect.
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
Net
income (loss)
|
$
(2,460
)
|
$
66,290
|
$
(5,455
)
|
$
62,056
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
Weighted
average common shares – basic
|
49,198,625
|
7,357,234
|
38,572,537
|
7,318,211
|
|
|
|
|
|
|
|
Dilutive
effect of common stock equivalents:
|
|
|
|
|
|
Options
and Warrants
|
-
|
6,988
|
-
|
1,973
|
|
Preferred
Stock
|
-
|
6,662,500
|
-
|
6,662,500
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
Weighted
average common shares – diluted
|
49,198,625
|
14,026,722
|
38,572,537
|
13,982,684
|
|
|
|
|
|
|
|
Earnings
(loss) per share – basic
|
$
(0.05
)
|
$
9.01
|
$
(0.14
)
|
$
8.48
|
|
Earnings
(loss) per share – diluted
|
$
(0.05
)
|
$
4.73
|
$
(0.14
)
|
$
4.44
|
For the
three and six months periods ended June 30, 2019 and 2018, the
following share equivalents related to preferred stock, and options
and warrants to purchase shares of common stock were excluded from
the computation of diluted net income (loss) per share as the
inclusion of such shares would be anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares Issuable for:
|
|
|
|
|
|
Options
and Warrants
|
1,410,638
|
3,259,939
|
1,410,638
|
3,264,954
|
|
Series
A Preferred Stock
|
-
|
662,500
|
-
|
662,500
|
|
Total
|
1,410,638
|
3,922,439
|
1,410,638
|
3,927,454
|
NOTE 14 – RELATED PARTY TRANSACTIONS
The
following table reflects the related party amounts for SK Energy,
Directors and Officers included in the balance sheets of the period
indicated (in thousands):
|
|
|
|
|
|
|
|
|
Long-term accrued
expenses
|
$
-
|
$
943
|
|
Long-term notes
payable – subordinated
|
-
|
30,200
|
|
Long-term notes
payable, net of discount of $-0- and $161,
respectively
|
-
|
7,694
|
|
Total related party
liabilities
|
$
-
|
$
38,837
|
See
Note 8 above for a further discussion of the debt conversions and
subsequent retirement of all related party debt.
Additionally, on
May 21, 2019, SK Energy, which is owned and controlled by Dr.
Kukes, our Chief Executive Officer and a member of the Board of
Directors, purchased 6,818,181 shares of restricted common stock
from the Company at a price of $2.20 per share, or $15 million in
aggregate (see Note 11 above for a further discussion of the
issuance of the restricted common stock).
NOTE 15 – INCOME TAXES
The
Company has estimated that its effective tax rate for U.S. purposes
will be zero for the 2019 and 2018 fiscal years as a result of net
losses and a full valuation allowance against the net deferred tax
assets. Consequently, the Company has recorded no provision or
benefit for income taxes for the six months ended June 30, 2019 and
2018.
NOTE 16
– SUBSEQUENT
EVENTS
Effective July 18,
2019, 50,000 shares of restricted stock were awarded to an advisor
under the Company’s Amended and Restated 2012 Equity
Incentive Plan. The restricted stock vests as follows: 100% on the
six-month anniversary of the grant date, subject to the
recipient’s continued service with the Company. These shares
have a total fair value of $82,500, based on the market price on
the issuance date.