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, 2020, filed with the SEC on March 23, 2021
(the “2020 Annual Report”), 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-Julesburg 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.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The
Company has provided a discussion of significant accounting
policies, estimates and judgments in its 2020 Annual Report. There
have been no changes to the Company’s significant accounting
policies since December 31, 2020.
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
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
|
$3,433
|
$2,703
|
Natural
gas sales
|
75
|
89
|
Natural
gas liquids sales
|
23
|
40
|
Total
revenue from customers
|
$3,531
|
$2,832
|
There
were no significant contract liabilities or transaction price
allocations to any remaining performance obligations as of March
31, 2021.
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
in the periods indicated
(in
thousands):
|
|
|
Cash
|
$18,532
|
$8,027
|
Restricted
cash included in other assets
|
3,297
|
3,297
|
Total
cash and restricted cash
|
$21,829
|
$11,324
|
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,
2021 (in thousands):
|
Balance at
December 31, 2020
|
|
|
|
Balance at March
31, 2021
|
Oil and gas
properties, subject to amortization
|
$146,950
|
$755
|
$(66)
|
$-
|
$147,639
|
Oil and gas
properties, not subject to amortization
|
4
|
-
|
-
|
-
|
4
|
Asset retirement
costs
|
1,108
|
50
|
(5)
|
-
|
1,153
|
Accumulated
depreciation, depletion and impairment
|
(81,064)
|
(1,433)
|
-
|
-
|
(82,497)
|
Total oil and gas
assets
|
$66,998
|
$(628)
|
$(71)
|
$-
|
$66,299
|
For the
three-month period ended March 31, 2021, the Company incurred
$755,000 in capital costs primarily related to capital workovers
for three wells in our Permian Basin Asset, which included clean
outs, converting from an electric submersible pump
(“ESP”) to rod pump, and installation of an
ESP.
On
March 18, 2021, the Company, through its wholly-owned subsidiary
Red Hawk, consummated the sale of certain assets and associated
liabilities located in its D-J Basin Asset to third parties
pursuant to a Purchase and Sale Agreement. The Company
received net cash at closing of $1.9 million. The final
purchase price is further subject to customary post-closing
adjustments. As a result of the transaction, the Company recognized
a $1.8 million gain on sale of oil and gas properties on the
Statement of Operations for the three months ended March 31,
2021.
The
depletion recorded for production on proved properties for the
three months ended March 31, 2021 and 2020, amounted to $1,433,000,
compared to $3,378,000, respectively.
NOTE 7 – PPP LOANS
On April 22, 2020, the Company received loan
proceeds of $370,000 (the “Original PPP Loan”) under
the U.S. Small Business Administration’s (“SBA”)
Paycheck Protection Program (“PPP”) established as part of
the Coronavirus Aid, Relief and Economic Security Act (“CARES
Act”), and
on
April 23, 2020, the SBA issued 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 Original PPP Loan to Texas Capital Bank, N.A.
On June 2, 2020, the Company again received loan
proceeds of $370,000 (the “New PPP Loan”) under the SBA
PPP. The New PPP Loan is evidenced by a promissory note, dated as
of May 28, 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
New PPP Loan proceeds for eligible purposes, including payroll,
benefits, rent, and utilities, and otherwise complies with PPP
requirements, with the full principal and accrued interest expected
to be forgiven in full by the Company. As of March 31, 2021, the
Company had accrued $3,000 in interest on the Note. As of
March 31, 2021, the full amount of the loan was outstanding, with
$349,000 included in current liabilities on the balance
sheet.
As
of the issuance date of these financial statements, the Company
believes that it has used the loan proceeds only for eligible
expenses, has submitted the necessary loan forgiveness application
to Texas Capital Bank, N.A., and the SBA has notified the Company
that the SBA has selected its loan for review. The Company is
awaiting completion of the review and confirmation from the SBA on
its loan forgiveness determination.
NOTE 8 – ASSET RETIREMENT OBLIGATIONS
Activity
related to the Company’s asset retirement obligations is as
follows (in thousands):
|
Three Months
Ended
March 31,
2021
|
Balance at the
beginning of the period (1)
|
$1,907
|
Accretion
expense
|
121
|
Changes in
estimates, net
|
45
|
Balance at end of
period (2)
|
$2,073
|
(1)
Includes $234,000 of current asset retirement obligations at
December 31, 2020.
(2)
Includes $245,000 of current asset retirement obligations at March
31, 2021.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Lease Agreements
Currently, the
Company has one operating lease for office space that requires
Accounting Standards Codification (ASC) Topic 842 treatment,
discussed below.
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 the 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 (other than the New PPP Loan
which the Company expects to be forgiven), 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.
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.
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
|
$ 30
|
Supplemental
balance sheet information related to operating leases is included
in the table below (in thousands):
|
|
Operating
lease – right-of-use asset
|
$246
|
|
|
Operating
lease liabilities - current
|
$107
|
Operating
lease liabilities - long-term
|
167
|
Total
lease liability
|
$274
|
The
weighted-average remaining lease term for the Company’s
operating lease is 2.4 years as of March 31, 2021, 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 2021
|
$89
|
2022
|
121
|
2023
|
82
|
Thereafter
|
-
|
Total
lease payments
|
292
|
Less
imputed interest
|
(18)
|
Total
lease liability
|
$274
|
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 net acres expire during
the remainder of 2021, and no significant net acres expire
thereafter (net to our direct ownership interest only). In the
Permian Basin Asset, 2,731 acres are due to expire during the
remainder of 2021 and 1,475 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 10 – SHAREHOLDERS’ EQUITY
Common Stock
During
the three months ended March 31, 2021, the Company granted an
aggregate of 960,000 restricted stock awards to various employees
of the Company. Additionally, 16,667 shares of restricted common
stock were forfeited to the Company and canceled due to an employee termination (see
Note 11 below).
On
February 5, 2021, the Company closed an underwritten public offering of 5,968,500
shares of common stock at a public offering price of $1.50 per
share, which included the full exercise of the underwriter’s
over-allotment option, for net proceeds (after deducting the
underwriters’ discount equal to 6% of the public offering
price and expenses associated with the offering) of approximately
$8.3 million.
Warrants
During
the three months ended March 31, 2021, no warrants were granted,
exercised or cancelled, and as of March 31, 2021 and December 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, 2021 was
$171,000.
NOTE 11 – 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 19, 2021, restricted stock awards were granted to officers
of the Company for an aggregate of 940,000 of the Company’s
common stock, under the Company’s Amended and Restated 2012
Equity Incentive Plan. The grant for the 940,000 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 $1,307,000 based on the market price on the issuance
date.
On
February 5, 2021, the Company closed an underwritten public offering of 5,968,500
shares of common stock at a public offering price of $1.50 per
share, which included the full exercise of the underwriter’s
over-allotment option, for net proceeds (after deducting the
underwriters’ discount equal to 6% of the public offering
price and expenses associated with the offering) of approximately
$8.3 million.
On
February 28, 2021, 16,667 shares of restricted common stock were
rescinded due to an employee termination. As a result, these shares
were canceled and the shares once again became eligible for future
awards under the Company’s Amended and Restated 2012 Equity
Incentive Plan.
On
March 31, 2021, 20,000 restricted stock awards were granted to a
new employee of the Company, under the Company’s Amended and
Restated 2012 Equity Incentive Plan. The grant for the 20,000
shares of restricted stock vest as follows: 100% vest on March 23,
2022, contingent upon the recipient’s continued service with
the Company. These shares have a total fair value of $29,000 based
on the market price on the issuance date.
Stock-based
compensation expense recorded related to the vesting of restricted
stock for the three months ended March 31, 2021 was $570,000. The
remaining unamortized stock-based compensation expense at March 31,
2021 related to restricted stock was $1,881,000.
Options
On
January 19, 2021, the Company granted options to purchase an
aggregate of 550,000 shares of common stock to various Company
employees at an exercise price of $1.39 per share. The options have
a term of five years and fully vest in January 2024, with 33.3%
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 $654,000. Variables used in the
Black-Scholes option-pricing model for the options issued include:
(1) a discount rate of 0.45% based on the applicable US Treasury
bill rate, (2) expected term of 3.5 years, (3) expected volatility
of 156% based on the trading history of the Company, and (4) zero
expected dividends.
On
January 28, 2021, the Company issued 86,430 total shares of common
stock upon the cashless exercise of stock options to purchase an
aggregate of 191,999 shares of common stock with exercise prices
ranging between $1.10 and $1.68 per share, based on a then-current
market value of $2.89 per share, under the terms of the options.
The options had an intrinsic value of $250,000 on the exercise
date.
During
the three months ended March 31, 2021, the Company recognized stock
option expense of $114,000. The remaining amount of unamortized
stock options expense at March 31, 2021, was $722,000.
The
intrinsic value of outstanding and exercisable options at March 31,
2021 was $108,000.
Option
activity during the three months ended March 31, 2021
was:
|
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contract Term (Years)
|
Outstanding
at December 31, 2020
|
1,234,849
|
$2.43
|
2.7
|
Granted
|
550,000
|
$1.39
|
|
Exercised
|
(191,999)
|
$1.59
|
|
Expired/Canceled
|
(236,334)
|
$4.01
|
|
Outstanding
at March 31, 2021
|
1,354,516
|
$1.85
|
3.3
|
Exercisable
at March 31, 2021
|
532,515
|
$2.38
|
1.8
|
NOTE 12 – 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.
The
calculation of earnings (loss) per share for the periods ended
March 31, 2021 and 2020 were as follows (amounts in thousands,
except share and per share data):
Numerator:
|
|
|
Net
income (loss)
|
$728
|
$(4,257)
|
|
|
|
Effect
of common stock equivalents
|
-
|
-
|
Net
income (loss) adjusted for common stock equivalents
|
$728
|
$(4,257)
|
|
|
|
Denominator:
|
|
|
Weighted
average common shares – basic
|
76,839,795
|
71,996,295
|
|
|
|
Dilutive
effect of common stock equivalents:
|
|
|
Options
and Warrants
|
199,923
|
-
|
|
|
|
Denominator:
|
|
|
Weighted
average common shares – diluted
|
77,039,719
|
71,996,295
|
|
|
|
Earnings
(loss) per common share – basic
|
$0.01
|
$(0.06)
|
|
|
|
Earnings
(loss) per common share – diluted
|
$0.01
|
$(0.06)
|
For the
periods ended March 31, 2021 and 2020, share equivalents related to
options to purchase 1,202,849 and 1,179,849 shares of common stock,
respectively, were excluded from the computation of diluted net
income (loss) per share as the inclusion of such shares would be
anti-dilutive.
NOTE 13 – INCOME TAXES
The
Company has estimated that its effective tax rate for U.S. purposes
will be zero for the 2021 and 2020 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, 2021
and 2020, respectively.