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, 2019, filed with the SEC on March 30, 2020,
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, the actual
cost of exploration, appraisal and development of our prospects,
the prevailing prices for, and demand for, oil and natural
gas.
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 Chaves 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 believes that horizontal development
and exploitation of conventional assets in the Permian Basin and
development of the Wattenberg and Wattenberg Extension in the D-J
Basin represent among the most economic oil and natural gas plays
in the United States (“U.S.”). Moving forward,
the Company plans to optimize its existing assets and
opportunistically seek additional acreage proximate to its
currently held core acreage, as well as other attractive onshore
U.S. oil and gas assets that fit the Company’s acquisition
criteria, that Company management believes can be developed using
its technical and operating expertise and be accretive to
shareholder value.
As a result of the recent COVID-19 outbreak, and
the recent sharp decline in oil prices which occurred partially as
a result of the decreased demand for oil caused by such outbreak
and the actions taken globally to stop the spread of such virus, as
of April 24, 2020, the Company has shut-in all of its operated
producing wells in its Permian Basin Asset and D-J Basin Asset to
preserve the Company’s oil and gas reserves for production
during a more favorable oil price environment. The Company
anticipates resuming production once the realized wellhead price
recovers to the mid-$20’s/Bbl for a reasonable period of
time. Wellhead prices as of the filing of this report were
approximately $13.00/Bbl
for our Permian Basin Asset properties and $17.00/Bbl for our D-J
Basin Asset properties.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The
Company has provided a discussion of significant accounting
policies, estimates and judgments in its 2019 Annual Report. There
have been no changes to the Company’s significant accounting
policies since December 31, 2019.
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):
|
Three Months Ended March 31,
|
|
|
|
Oil
sales
|
$2,703
|
$1,453
|
Natural
gas sales
|
89
|
109
|
Natural
gas liquids sales
|
40
|
6
|
Total
revenue from customers
|
$2,832
|
$1,568
|
There
were no significant contract liabilities or transaction price
allocations to any remaining performance obligations as of March
31, 2020.
NOTE 5 – 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 as of March 31, 2020 and December
31, 2019 (in thousands):
|
|
|
Cash
|
$12,401
|
$22,415
|
Restricted
cash included in other assets
|
3,297
|
3,297
|
Total
cash and restricted cash
|
$15,698
|
$25,712
|
NOTE 6 – OIL AND GAS PROPERTIES
The
following table summarizes the Company’s oil and gas
activities by classification for the three months ended March 31,
2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas
properties, subject to amortization
|
$107,164
|
$4,475
|
$-
|
$7,284
|
$118,923
|
Oil and gas
properties, not subject to amortization
|
14,896
|
117
|
-
|
(7,284)
|
7,729
|
Asset retirement
costs
|
1,547
|
(210)
|
-
|
-
|
1,337
|
Accumulated
depreciation and depletion
|
(31,759)
|
(3,378)
|
-
|
-
|
(35,137)
|
Total oil and gas
assets
|
$91,848
|
$1,004
|
$-
|
$-
|
$92,852
|
For the
three-month period ended March 31, 2020, the Company incurred
$4,592,000 in capital costs primarily related to the drilling of a
salt water disposal well (“SWD”) in our Permian Basin
Asset in order to increase the produced water injection capacity
for the Company’s Chaveroo field and, in turn, increase
production of the corresponding wells therein. The drilling and
completion of the SWD has currently been postponed due to the
recent downturn in the economic conditions in the oil and gas
industry. The Company will continue to monitor the environment for
future completion opportunities.
Also,
the Company transferred $7,284,000 in capital costs from three
recently completed wells, for which production had not commenced,
from unproved properties to proved properties, when production
began during the early part of 2020. Additionally, drilling and
completion costs of $7,729,000, the majority of which were incurred
in the prior year and for the uncompleted SWD noted above, and one
well in the Permian Asset, for which production had not yet
commenced; therefore, these amounts were included in the amount not
subject to amortization at March 31, 2020.
The
depletion recorded for production on proved properties for the
three months ended March 31, 2020 and 2019, amounted to $3,378,000,
compared to $2,140,000, respectively.
NOTE 7 – ASSET RETIREMENT OBLIGATIONS
Activity
related to the Company’s asset retirement obligations is as
follows (in thousands):
|
Three
Months Ended March 31, 2020
|
Balance at the
beginning of the period (1)
|
$2,099
|
Accretion
expense
|
49
|
Changes in
estimates
|
(210)
|
Balance at end of
period (2)
|
$1,938
|
(1)
Includes $225,000 of current asset retirement obligations at
December 31, 2019.
(2)
Includes $43,000 of current asset retirement obligations at March
31, 2020.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
Lease Agreements
Currently, the
Company has one operating lease for office space that requires ASC
Topic 842 treatment, discussed below.
Discount Rate
The
Company’s leases typically do not provide an implicit rate.
Accordingly, the Company is required to use its incremental
borrowing rate in determining the present value of lease payments
based on the information available at commencement date. The
Company’s incremental borrowing rate would reflect the
estimated rate of interest that it would pay to borrow on a
collateralized basis over a similar term, an amount equal to the
lease payments in a similar economic environment. However, the
Company currently maintains no debt, and in order to apply an
appropriate discount rate, the Company used an average discount
rate of eight publicly-traded peer group companies similar to it
based on size, geographic location, asset types and/or operating
characteristics.
Office Lease
The
Company has a sublease for its corporate offices in Houston, Texas
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.
The
Company also has a lease for 187 square feet of office space
located in Danville, California for the Company’s General
Counsel. The monthly rent is $1,200, and the lease is renewable on
a six-month basis and was extended for an additional six months in
February 2020. The Company did not apply ASC Topic 842 to this
lease, as the lease term and extension period are for 12-months or
less, and we cannot currently conclude if the lease will be renewed
or extended beyond a 12-month period. In April 2020, the Company
was granted a 20% discount on the remaining lease term. Therefore,
the total current obligation for the remainder of this lease
through July 2020 is $3,800.
For the
three months ended March 31, 2020, the Company incurred lease
expense of $32,500, for the combined leases.
Supplemental cash
flow information related to the Company’s operating lease is
included in the table below (in thousands):
|
|
|
|
Cash
paid for amounts included in the measurement of lease liabilities
$
|
$29
|
Supplemental
balance sheet information related to operating leases is included
in the table below (in thousands):
|
|
Operating
lease – right-of-use asset
|
$338
|
|
|
Operating
lease liabilities - current
|
$99
|
Operating
lease liabilities - long-term
|
274
|
Total
lease liability
|
$373
|
The
weighted-average remaining lease term for the Company’s
operating lease is 3.4 years as of March 31, 2020, with a
weighted-average discount rate of 5.35%.
Lease
liability with enforceable contract terms that have greater than
one-year terms are as follows (in thousands):
Remainder
of 2020
|
$87
|
2021
|
118
|
2022
|
121
|
2023
|
82
|
Thereafter
|
-
|
Total
lease payments
|
408
|
Less
imputed interest
|
(35)
|
Total
lease liability
|
$373
|
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, 170 net acres expire during
the remainder of 2020, and no significant net acres expire
thereafter (net to our direct ownership interest only). In the
Permian Basin Asset, 1,190 acres are due to expire in 2020 and
7,645 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 9 – SHAREHOLDERS’ EQUITY
Common Stock
During
the three months ended March 31, 2020, the Company granted an
aggregate of 1,119,000 restricted stock awards to various employees
and a consultant of the Company. Additionally, 55,000 shares of
restricted common stock were forfeited to the Company and
cancelled due to an
employee termination (see Note 10 below).
Warrants
During
the three months ended March 31, 2020, no warrants were granted,
exercised or cancelled, and as of March 31, 2020, the Company had
warrants to purchase 150,329 shares of common stock outstanding,
with an exercise price of $0.32 per share and a June 25, 2021
expiration date. The intrinsic value of these outstanding, as well
as exercisable, warrants at March 31, 2020 was
$83,000.
NOTE 10 – 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
On
January 13, 2020, restricted stock awards were granted to various
employees and one consultant for an aggregate of 1,049,000
(including 924,000 restricted stock awards to officers of the
Company) and 70,000 shares, respectively, of the Company’s
common stock, under the Company’s Amended and Restated 2012
Equity Incentive Plan. The grant of the 1,049,000 shares of
restricted stock vest as follows: 33.3% vest each subsequent year
from the date of grant, contingent upon the recipient’s
continued service with the Company. These shares have a total fair
value of $1,172,000, based on the market price on the issuance
date. The grant of the 70,000 shares of restricted stock vest 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 $118,000, based on
the market price on the issuance date.
In February 2020, 55,000 shares of restricted
common stock were forfeited to the Company and cancelled
due to an employee termination. As a
result, these shares are once again eligible to be awarded under
the Company’s Amended and Restated 2012 Equity Incentive
Plan.
Stock-based
compensation expense recorded related to the vesting of restricted
stock for the three months ended March 31, 2020 was $708,000. The
remaining unamortized stock-based compensation expense at March 31,
2020 related to restricted stock was $2,066,000.
Options
During
the three months ended March 31, 2020, no options were exercised,
options to purchase 733,000 shares of common stock were granted
(discussed below), options to purchase 34,000 shares of common
stock expired, and options to purchase 90,000 shares of common
stock were cancelled.
On January
13, 2020, the Company granted options to purchase an aggregate of
733,000 shares of common stock to various Company employees at an
exercise price of $1.68 per share. The options have a term of five
years and fully vest in January 2023, with 33.3% of each grant
vesting each subsequent year from the date of grant, contingent
upon each recipient’s continued service with the Company. The
aggregate fair value of the options on the date of grant, using the
Black-Scholes model, was $1,053,000. Variables used in the
Black-Scholes option-pricing model for the options issued include:
(1) a discount rate of 1.63%, (2) expected term of 3.5 years, (3)
expected volatility of 155%, and (4) zero expected
dividends.
During
the three months ended March 31, 2020, the Company recognized stock
option expense of $145,000. The remaining amount of unamortized
stock options expense at March 31, 2020, was $801,000.
The
intrinsic value of outstanding and exercisable options at March 31,
2020 was $64,000.
Option
activity during the three months ended March 31, 2020
was:
|
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contract Term (Years)
|
Outstanding
at December 31, 2019
|
753,349
|
$3.30
|
2.4
|
Granted
|
733,000
|
$1.68
|
|
Expired/Canceled
|
(124,000)
|
$2.23
|
|
Outstanding
at March 31, 2020
|
1,362,349
|
$2.32
|
1.8
|
Exercisable
at March 31, 2020
|
686,016
|
$2.97
|
2.3
|
NOTE 11 – INCOME TAXES
The
Company has estimated that its effective tax rate for U.S. purposes
will be zero for the 2020 and 2019 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 three months ended March 31, 2020
and 2019.
NOTE 12 – SUBSEQUENT EVENTS
On
April 22, 2020, the Company received loan proceeds of $370,000 (the
“PPP Loan”) under the U. S. Small Business
Administration’s (“SBA”) Paycheck Protection
Program (“PPP”). The PPP Loan is evidenced by a
promissory note, dated as of April 11, 2020 (the
“Note”), between the Company and Texas Capital Bank,
N.A. The Note has a two-year term, bears interest at the rate of
1.00% per annum, and may be prepaid at any time without payment of
any premium. No payments of principal or interest are
due during the six-month period beginning on the date of the Note.
The principal and accrued interest under the Note are forgivable
after eight weeks if the Company uses the PPP Loan proceeds for
eligible purposes, including payroll, benefits, rent and utilities,
and otherwise complies with PPP requirements.
On April 23, 2020, the
SBA issued new guidance that cast doubt on the ability of public
companies to qualify for a PPP loan. As a result, out of an
abundance of caution, on May 1, 2020, the Company repaid the full
amount of the PPP loan to Texas
Capital Bank, N.A.