UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

   

FORM 10-Q/A 

(Amendment No. 1)

 

(Mark One) 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: September 30, 2021 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to ______

 

Commission file number: 001-35922   

PED_8KIMG1.JPG

 

PEDEVCO Corp.

(Exact name of registrant as specified in its charter)

 

Texas

 

22-3755993

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

575 N. Dairy Ashford, Suite 210, Houston, Texas  

 

77079

(Address of principal executive offices)

 

(Zip Code)

 

(713) 221-1768

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 par value per share

PED

NYSE American

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒     No ☐

 

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

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes ☐     No ☒

 

At November 12, 2021, there were 84,210,203 shares of the Registrant’s common stock outstanding.

 

 

 

 

EXPLANATORY NOTE

 

PEDEVCO Corp. (the “Company”, “we” and “us”) is filing this Amendment No. 1 (“Amendment No. 1”) to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 (the “Original Report”), as filed with the Securities and Exchange Commission on November 15, 2021 (the “Original Filing Date”), for the sole purpose of correcting a technical error with the software of the Company’s Edgar service provider, which caused Exhibits 31.1, 31.2, 32.1 and 32.2, which were executed by the Registrant, to be inadvertently omitted from the Original Report. Such exhibits have been included in this amended filing.

 

Except as described above, no changes have been made to the Original Report and this Amendment No. 1 does not modify, amend or update in any way any of the financial or other information contained in the Original Report. This Amendment No. 1 does not reflect events that may have occurred subsequent to the Original Filing Date.

 

 

PEDEVCO CORP.

 

TABLE OF CONTENTS

 

 

 

Page

Cautionary Note About Forward-Looking Statements

 

3

 

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Financial Statements

 

4

 

 

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020 (Unaudited)

 

 4

 

 

 

 

 

 

 

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2021 and 2020 (Unaudited)

 

5

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020 (Unaudited)

 

6

 

 

 

 

 

 

 

Consolidated Statements of Shareholders’ Equity for the Three and Nine Months Ended September 30, 2021 and 2020 (Unaudited)

 

7

 

 

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

 8

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

15

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

25

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

26

 

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

 27

 

 

 

 

 

 

Item 1A.

Risk Factors

 

27

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

28

 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

28

 

 

 

 

 

 

Item 4.

Mine Safety Disclosures

 

28

 

 

 

 

 

 

Item 5.

Other Information

 

 28

 

 

 

 

 

 

Item 6.

Exhibits

 

29

 

 

 

 

 

 

Signatures

 

 

30

 

 

2

Table of Content

 

CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS

 

Some of the statements contained in this Quarterly Report on Form 10-Q (this “Report”) include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended and the Private Securities Litigation Reform Act of 1995. These forward-looking statements discuss future expectations, contain projections of results of operations or financial conditions. The words “believe,” “intend,” “plan,” “expect,” “anticipate,” “estimate,” “project,” “goal” and similar expressions identify such a statement was made, although not all forward-looking statements contain such identifying words. These statements are subject to known and unknown risks, uncertainties, and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking information is based on various factors and is derived using numerous assumptions. Factors that might cause or contribute to such a discrepancy include, but are not limited to, the risks discussed in this and our other Securities and Exchange Commission (SEC) filings. We do not promise to or take any responsibility to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements except as required by law. Future events and actual results could differ materially from those expressed in, contemplated by, or underlying such forward-looking statements.

 

Forward-looking statements may include statements about our:

 

 

business strategy;

 

reserves;

 

technology;

 

cash flows and liquidity;

 

financial strategy, budget, projections and operating results;

 

oil and natural gas realized prices;

 

timing and amount of future production of oil and natural gas;

 

availability of oil field labor;

 

the amount, nature and timing of capital expenditures, including future exploration and development costs;

 

drilling of wells;

 

government regulation and taxation of the oil and natural gas industry;

 

marketing of oil and natural gas;

 

exploitation projects or property acquisitions;

 

costs of exploiting and developing our properties and conducting other operations;

 

general economic conditions in the United States and around the world, including the effect of regional or global health pandemics (such as, for example, COVID-19);

 

the continued effect of COVID-19 on the U.S. and global economy, the effect of U.S. and global efforts to reduce the spread of the virus, and the resulting effect of such pandemic and governmental responses thereto on the market for oil and gas and the U.S. and global economy in general;

 

competition in the oil and natural gas industry;

 

effectiveness of our risk management activities;

 

environmental liabilities;

 

counterparty credit risk;

 

developments in oil-producing and natural gas-producing countries;

 

future operating results;

 

future acquisition transactions;

 

estimated future reserves and the present value of such reserves; and

 

plans, objectives, expectations and intentions contained in this Quarterly Report that are not historical.

 

All forward-looking statements speak only at the date of the filing of this Quarterly Report. The reader should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this Quarterly Report are reasonable, we provide no assurance that these plans, intentions or expectations will be achieved. We disclose important factors that could cause our actual results to differ materially from our expectations under “Risk Factors“ and “Management’s Discussion and Analysis of Financial Condition and Results of Operations“ and elsewhere in this Quarterly Report and our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 23, 2021. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf. We do not undertake any obligation to update or revise publicly any forward-looking statements except as required by law, including the securities laws of the United States and the rules and regulations of the SEC.

 

3

Table of Content

    

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

PEDEVCO CORP.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(amounts in thousands, except share and per share data)

 

 

 

September 30,

2021

 

 

December 31,

2020

 

Assets

 

Current assets:

 

 

 

 

 

 

Cash

 

$ 19,926

 

 

$ 8,027

 

Accounts receivable – oil and gas

 

 

1,520

 

 

 

660

 

Prepaid expenses and other current assets

 

 

361

 

 

 

66

 

Total current assets

 

 

21,807

 

 

 

8,753

 

 

 

 

 

 

 

 

 

 

Oil and gas properties:

 

 

 

 

 

 

 

 

Oil and gas properties, subject to amortization, net

 

 

64,789

 

 

 

66,994

 

Oil and gas properties, not subject to amortization, net

 

 

4

 

 

 

4

 

Total oil and gas properties, net

 

 

64,793

 

 

 

66,998

 

 

 

 

 

 

 

 

 

 

Operating lease – right-of-use asset

 

 

198

 

 

 

270

 

Other assets

 

 

3,553

 

 

 

3,543

 

Total assets

 

$ 90,351

 

 

$ 79,564

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$ 752

 

 

$ 212

 

Accrued expenses

 

 

483

 

 

 

303

 

Revenue payable

 

 

960

 

 

 

836

 

PPP loan, current

 

 

-

 

 

 

288

 

Operating lease liabilities – current

 

 

111

 

 

 

105

 

Asset retirement obligations – current

 

 

173

 

 

 

234

 

Total current liabilities

 

 

2,479

 

 

 

1,978

 

 

 

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

 

 

 

PPP loan, net of current portion

 

 

-

 

 

 

82

 

Operating lease liabilities, net of current portion

 

 

110

 

 

 

195

 

Asset retirement obligations, net of current portion

 

 

1,844

 

 

 

1,673

 

Total liabilities

 

 

4,433

 

 

 

3,928

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, 200,000,000 shares authorized; 79,751,603 and 72,463,340 shares issued and outstanding, respectively

 

 

80

 

 

 

72

 

Additional paid-in capital

 

 

213,946

 

 

 

203,850

 

Accumulated deficit

 

 

(128,108 )

 

 

(128,286 )

Total shareholders’ equity

 

 

85,918

 

 

 

75,636

 

Total liabilities and shareholders’ equity

 

$ 90,351

 

 

$ 79,564

 

  

See accompanying notes to unaudited consolidated financial statements.

 

4

Table of Content

 

PEDEVCO CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(amounts in thousands, except share and per share data)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

Revenue:

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Oil and gas sales

 

$ 4,069

 

 

$ 2,417

 

 

$ 11,340

 

 

$ 5,905

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease operating costs

 

 

1,423

 

 

 

1,054

 

 

 

4,164

 

 

 

3,326

 

Exploration expense

 

 

-

 

 

 

1

 

 

 

-

 

 

 

31

 

Selling, general and administrative expense

 

 

1,337

 

 

 

1,281

 

 

 

4,434

 

 

 

4,826

 

Depreciation, depletion, amortization and accretion

 

 

1,666

 

 

 

2,974

 

 

 

4,829

 

 

 

8,323

 

Total operating expenses

 

 

4,426

 

 

 

5,310

 

 

 

13,427

 

 

 

16,506

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on sale of oil and gas properties

 

 

-

 

 

 

-

 

 

 

1,805

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(357 )

 

 

(2,893 )

 

 

(282 )

 

 

(10,601 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

-

 

 

 

(1 )

 

 

(1 )

 

 

(1 )

Interest income

 

 

4

 

 

 

4

 

 

 

11

 

 

 

36

 

Other income

 

 

28

 

 

 

597

 

 

 

76

 

 

 

1,275

 

Gain on forgiveness of PPP loan

 

 

-

 

 

 

-

 

 

 

374

 

 

 

-

 

Total other income

 

 

32

 

 

 

600

 

 

 

460

 

 

 

1,310

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$ (325 )

 

$ (2,293 )

 

$ 178

 

 

$ (9,291 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$ (0.00 )

 

$ (0.03 )

 

$ 0.00

 

 

$ (0.13 )

Diluted

 

$ (0.00 )

 

$ (0.03 )

 

$ 0.00

 

 

$ (0.13 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

79,533,016

 

 

 

72,250,014

 

 

 

78,628,077

 

 

 

72,124,339

 

Diluted

 

 

79,533,016

 

 

 

72,250,014

 

 

 

78,700,140

 

 

 

72,124,339

 

 

See accompanying notes to unaudited consolidated financial statements.

  

5

Table of Content

   

PEDEVCO CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(amounts in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

Net income (loss)

 

$ 178

 

 

$ (9,291 )

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation, depletion, amortization and accretion

 

 

4,829

 

 

 

8,323

 

Gain on sale of oil and gas properties

 

 

(1,805 )

 

 

-

 

Loss on disposal of fixed asset

 

 

-

 

 

 

24

 

Amortization of right-of-use asset

 

 

72

 

 

 

67

 

Share-based compensation expense

 

 

1,867

 

 

 

2,073

 

Gain on forgiveness of PPP loan

 

 

(374 )

 

 

-

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable – oil and gas

 

 

(860 )

 

 

3,658

 

Prepaid expenses and other current assets

 

 

(295 )

 

 

(146 )

Accounts payable

 

 

51

 

 

 

(3,087 )

Accrued expenses

 

 

184

 

 

 

(1,647 )

Revenue payable

 

 

124

 

 

 

2

 

Net cash provided by (used in) operating activities

 

 

3,971

 

 

 

(24 )

 

 

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

 

Cash paid for property and equipment

 

 

(35 )

 

 

-

 

Cash paid for drilling and completion costs

 

 

(2,145 )

 

 

(14,379 )

Proceeds from the sale of oil and gas property

 

 

1,871

 

 

 

-

 

Net cash used in investing activities

 

 

(309 )

 

 

(14,379 )

 

 

 

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from PPP loans

 

 

-

 

 

 

740

 

Repayment of PPP loan

 

 

-

 

 

 

(370 )

Proceeds from issuance of shares, net of offering costs

 

 

8,237

 

 

 

-

 

Net cash provided by financing activities

 

 

8,237

 

 

 

370

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and restricted cash

 

 

11,899

 

 

 

(14,033 )

Cash and restricted cash at beginning of period

 

 

11,324

 

 

 

25,712

 

Cash and restricted cash at end of period

 

$ 23,223

 

 

$ 11,679

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

Interest

 

$ -

 

 

$ -

 

Income taxes

 

$ -

 

 

$ -

 

 

 

 

 

 

 

 

 

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

 

Change in accrued oil and gas development costs

 

$ 287

 

 

$ 8,581

 

Changes in estimates of asset retirement costs, net

 

$ 51

 

 

$ 247

 

Issuance of restricted common stock

 

$ 2

 

 

$ 1

 

 

See accompanying notes to unaudited consolidated financial statements.

 

6

Table of Content

 

 

PEDEVCO CORP.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

(Unaudited)

(amounts in thousands, except share amounts)

 

 

 

Common Stock

 

 

Additional

Paid-in 

 

 

Accumulated 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Totals

 

Balances at December 31, 2020

 

 

72,463,340

 

 

$ 72

 

 

$ 203,850

 

 

$ (128,286 )

 

$ 75,636

 

Issuance of restricted common stock

 

 

960,000

 

 

 

1

 

 

 

(1 )

 

 

-

 

 

 

-

 

Rescinded restricted common stock

 

 

(16,667 )

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Issuance of common stock to non-affiliate

 

 

5,968,500

 

 

 

6

 

 

 

8,297

 

 

 

-

 

 

 

8,303

 

Cashless exercise of stock options

 

 

86,430

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Share-based compensation

 

 

-

 

 

 

-

 

 

 

684

 

 

 

-

 

 

 

684

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

728

 

 

 

728

 

Balances at March 31, 2021

 

 

79,461,603

 

 

 

79

 

 

 

212,830

 

 

 

(127,558 )

 

 

85,351

 

Offering costs incurred for issuance of common stock to non-affiliate

 

 

-

 

 

 

-

 

 

 

(66 )

 

 

-

 

 

 

(66 )

Share-based compensation

 

 

-

 

 

 

-

 

 

 

591

 

 

 

-

 

 

 

591

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(225 )

 

 

(225 )

Balances at June 30, 2021

 

 

79,461,603

 

 

 

79

 

 

 

213,355

 

 

 

(127,783 )

 

 

85,651

 

Issuance of restricted common stock

 

 

240,000

 

 

 

1

 

 

 

(1 )

 

 

-

 

 

 

-

 

Issuance of common stock to a non-affiliate

 

 

50,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Share-based compensation

 

 

-

 

 

 

-

 

 

 

592

 

 

 

-

 

 

 

592

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(325 )

 

 

(325 )

Balances at September 30, 2021

 

 

79,751,603

 

 

$ 80

 

 

$ 213,946

 

 

$ (128,108 )

 

$ 85,918

 

 

 

 

Common Stock

 

 

Additional

Paid-in 

 

 

Accumulated  

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Totals

 

Balances at December 31, 2020

 

 

71,061,328

 

 

$ 71

 

 

$ 201,027

 

 

$ (95,596 )

 

$ 105,502

 

Issuance of restricted common stock

 

 

1,119,000

 

 

 

1

 

 

 

(1 )

 

 

-

 

 

 

-

 

Rescinded restricted common stock

 

 

(55,000 )

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

853

 

 

 

-

 

 

 

853

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,257 )

 

 

(4,257 )

Balances at March 31, 2020

 

 

72,125,328

 

 

 

72

 

 

 

201,879

 

 

 

(99,853 )

 

 

102,098

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

719

 

 

 

-

 

 

 

719

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,741 )

 

 

(2,741 )

Balances at June 30, 2020

 

 

72,125,328

 

 

 

72

 

 

 

202,598

 

 

 

(102,594 )

 

 

100,076

 

Issuance of restricted common stock

 

 

240,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Rescinded restricted common stock

 

 

(74,000 )

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Issuance of restricted common stock to non-affiliate

 

 

70,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Issuance of restricted common stock to affiliate

 

 

70,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Cashless exercise of stock options

 

 

32,012

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

501

 

 

 

-

 

 

 

501

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,293 )

 

 

(2,293 )

Balances at September 30, 2020

 

 

72,463,340

 

 

$ 72

 

 

$ 203,099

 

 

$ (104,887 )

 

$ 98,284

 

 

See accompanying notes to unaudited consolidated financial statements.

  

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PEDEVCO CORP.

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.

 

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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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Oil sales

 

$ 3,697

 

 

$ 2,262

 

 

$ 10,635

 

 

$ 5,569

 

Natural gas sales

 

 

319

 

 

 

91

 

 

 

604

 

 

 

221

 

Natural gas liquids sales

 

 

53

 

 

 

64

 

 

 

101

 

 

 

115

 

Total revenue from customers

 

$ 4,069

 

 

$ 2,417

 

 

$ 11,340

 

 

$ 5,905

 

 

There were no significant contract liabilities or transaction price allocations to any remaining performance obligations as of September 30, 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):

 

 

 

September 30,

2021

 

 

December 31,

2020

 

Cash

 

$ 19,926

 

 

$ 8,027

 

Restricted cash included in other assets

 

 

3,297

 

 

 

3,297

 

Total cash and restricted cash

 

$ 23,223

 

 

$ 11,324

 

 

NOTE 6 – OIL AND GAS PROPERTIES

 

The following table summarizes the Company’s oil and gas activities by classification for the nine months ended September 30, 2021 (in thousands):

 

 

 

Balance at

December 31,

2020

 

 

Additions

 

 

Disposals

 

 

Transfers

 

 

Balance at

September 30,

2021

 

Oil and gas properties, subject to amortization

 

$ 146,950

 

 

$ 2,432

 

 

$ (66 )

 

$ -

 

 

$ 149,316

 

Oil and gas properties, not subject to amortization

 

 

4

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4

 

Asset retirement costs

 

 

1,108

 

 

 

(46 )

 

 

(5 )

 

 

-

 

 

 

1,057

 

Accumulated depreciation, depletion and impairment

 

 

(81,064 )

 

 

(4,520 )

 

 

-

 

 

 

-

 

 

 

(85,584 )

Total oil and gas assets

 

$ 66,998

 

 

$ (2,134 )

 

$ (71 )

 

$ -

 

 

$ 64,793

 

 

For the nine-month period ended September 30, 2021, the Company incurred $2,432,000 in capital costs related to capital workovers for our Permian Basin Asset, which included four clean outs, converting two wells from electric submersible pumps (“ESP”) to rod pumps, installation of a new ESP, and purchase in place of ESP systems that were previously rentals. The Company incurred additional capital costs upon implementation of a recompletions and reactivation program for our existing vertical wells in the Permian Basin Asset, and in our DJ-Basin Asset, the Company incurred capital costs related to converting a well from gas lift to rod pump.

  

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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 was further subject to customary post-closing adjustments, resulting in an additional $52,000 paid by Red Hawk in July 2021. 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 nine months ended September 30, 2021.

 

The depletion recorded for production on proved properties for the three and nine months ended September 30, 2021 and 2020, amounted to $1,576,000 compared to $2,890,000, and $4,520,000, compared to $8,076,000, 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.

 

Effective May 20, 2021, the Company received notification from Texas Capital Bank, N.A. that the SBA had fully forgiven the Company’s New PPP Loan principal and accrued interest of $370,000 and $4,000, respectively. Therefore, as of September 30, 2021, the Company recognized no debt or accrued interest related to the New PPP Loan on the balance sheet, and a gain on forgiveness of PPP Loan of $374,000 for the nine months ended September 30, 2021 in connection with such forgiveness.

 

NOTE 8 – ASSET RETIREMENT OBLIGATIONS

 

Activity related to the Company’s asset retirement obligations is as follows (in thousands):

 

 

 

Nine Months

Ended

September 30,

2021

 

Balance at the beginning of the period (1)

 

$ 1,907

 

Accretion expense

 

 

284

 

Liabilities settled

 

 

(123 )

Changes in estimates, net

 

 

(51 )

Balance at end of period (2)

 

$ 2,017

 

 

(1)

Includes $234,000 of current asset retirement obligations at December 31, 2020.

 

 

(2)

Includes $173,000 of current asset retirement obligations at September 30, 2021.

  

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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, 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):

 

 

 

Nine Months

Ended

 

 

 

September 30,

2021

 

Cash paid for amounts included in the measurement of lease liabilities

 

$ 89

 

 

Supplemental balance sheet information related to operating leases is included in the table below (in thousands):

 

 

 

September 30,

2021

 

Operating lease – right-of-use asset

 

$ 198

 

 

 

 

 

 

Operating lease liabilities - current

 

$ 111

 

Operating lease liabilities - long-term

 

 

110

 

Total lease liability

 

$ 221

 

 

The weighted-average remaining lease term for the Company’s operating lease is 1.9 years as of September 30, 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

 

$ 29

 

2022

 

 

121

 

2023

 

 

82

 

Thereafter

 

 

-

 

Total lease payments

 

 

232

 

Less imputed interest

 

 

(11 )

Total lease liability

 

$ 221

 

 

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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, 522 net acres are due to expire during the remainder of 2021 and 1,331 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.

 

NOTE 10 – SHAREHOLDERS’ EQUITY

 

Common Stock

 

During the nine months ended September 30, 2021, the Company granted an aggregate of 1,250,000 restricted stock awards to various employees, board members and a non-affiliated advisor 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 $8.2 million. 

Warrants

 

During the nine months ended September 30, 2021, warrants to purchase 150,329 shares of common stock outstanding, with an exercise price of $0.32 per share expired unexercised on June 25, 2021. As of September 30, 2021, the Company has no warrants outstanding.

 

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.

  

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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 $8.2 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 22, 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.

 

On September 1, 2021, restricted stock awards were granted to three board members and an advisor for an aggregate of 240,000, and 50,000 shares, respectively, of the Company’s restricted common stock, under the Company’s Amended and Restated 2012 Equity Incentive Plan. The grant of the 240,000 shares of restricted common stock vest as follows: 100% of 170,000 shares and 100% of 70,000 shares vesting on July 12, 2022 and September 27, 2022, respectively, contingent upon each recipient’s continued service with the Company. These shares have a total fair value of $276,000, based on the market price on the grant date. The grant of the remaining aggregate of 50,000 shares of restricted common stock vest as follows: 100% on the six-month anniversary of the grant date, subject to recipient’s continued service with the Company. These advisor shares have a total fair value of $58,000, based on the market price on the grant date.

 

Stock-based compensation expense recorded related to the vesting of restricted stock for the nine months ended September 30, 2021 was $1,486,000. The remaining unamortized stock-based compensation expense at September 30, 2021 related to restricted stock was $1,297,000.

 

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 nine months ended September 30, 2021, the Company recognized stock option expense of $381,000. The remaining amount of unamortized stock options expense at September 30, 2021, was $443,000.

 

The intrinsic value of outstanding and exercisable options at September 30, 2021 was $156,000.

 

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Option activity during the nine months ended September 30, 2021 was:

 

 

 

Number of

Options

 

 

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

 

 

(314,414 )

 

$ 4.11

 

 

 

 

 

Outstanding at September 30, 2021

 

 

1,278,436

 

 

$ 1.70

 

 

 

3.0

 

Exercisable at September 30, 2021

 

 

456,435

 

 

$ 2.04

 

 

 

1.5

 

 

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 (amounts in thousands, except share and per share data).

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

Numerator:

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net income (loss)

 

$ (325 )

 

$ (2,293 )

 

$ 178

 

 

$ (9,291 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares – basic

 

 

79,533,016

 

 

 

72,250,014

 

 

 

78,628,077

 

 

 

72,124,339

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of common stock equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options and Warrants

 

 

-

 

 

 

-

 

 

 

72,063

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares – diluted

 

 

79,533,016

 

 

 

72,250,014

 

 

 

78,700,140

 

 

 

72,124,339

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share – basic

 

$ (0.00 )

 

$ (0.03 )

 

$ 0.00

 

 

$ (0.13 )

Earnings (loss) per share – diluted

 

$ (0.00 )

 

$ (0.03 )

 

$ 0.00

 

 

$ (0.13 )

 

For the three and nine-month periods ended September 30, 2021 and 2020, share equivalents related to options and warrants to purchase 1,143,436, compared to 1,234,849, and 1,126,769, compared to 1,234,849, 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 and nine months ended September 30, 2021 and 2020, respectively.

 

NOTE 14 – SUBSEQUENT EVENTS

 

On October 6, 2021, the Company closed a registered direct offering of 4,458,600 shares of common stock at a price of $1.57 per share for net proceeds (after deducting the placement agent’s fees and other estimated offering expenses associated with the offering) of approximately $6.5 million.

 

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

 

Introduction

 

The following is management’s discussion and analysis of the significant factors that affected the Company’s financial position and results of operations during the periods included in the accompanying unaudited consolidated financial statements. You should read this in conjunction with the discussion under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations“ and the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020, and the unaudited consolidated financial statements included in this quarterly Report.

 

Certain abbreviations and oil and gas industry terms used throughout this Quarterly Report are described and defined in greater detail under “Glossary of Oil And Natural Gas Terms“ on page 4 of our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the Securities and Exchange Commission on March 23, 2021.

 

Our fiscal year ends on December 31st. Interim results are presented on a quarterly basis for the quarters ended March 31, June 30, and September 30, the first quarter, second quarter and third quarter, respectively, with the quarter ending December 31st being referenced herein as our fourth quarter. Fiscal 2021 means the year ended December 31, 2021, whereas fiscal 2020 means the year ended December 31, 2020.

 

Certain capitalized terms used below but not otherwise defined, are defined in, and shall be read along with the meanings given to such terms in, the notes to the unaudited financial statements of the Company for the three and nine months ended September 30, 2021, above.

 

Unless the context requires otherwise, references to the “Company,” “we,” “us,” “our,” “PEDEVCO” and “PEDEVCO Corp.” refer specifically to PEDEVCO Corp. and its wholly and majority-owned subsidiaries.

 

In addition, unless the context otherwise requires and for the purposes of this Report only:

 

 

Bbl” refers to one stock tank barrel, or 42 U.S. gallons liquid volume, used in this Report in reference to crude oil or other liquid hydrocarbons;

 

 

 

 

Boe” refers to barrels of oil equivalent, determined using the ratio of one Bbl of crude oil, condensate or natural gas liquids, to six Mcf of natural gas;

 

 

 

 

Bopd” refers to barrels of oil day;

 

 

 

 

Mcf” refers to a thousand cubic feet of natural gas;

 

 

 

 

NGL” refers to natural gas liquids;

 

 

 

 

Exchange Act” refers to the Securities Exchange Act of 1934, as amended;

 

 

 

 

SEC” or the “Commission” refers to the United States Securities and Exchange Commission;

 

 

 

 

SWD” means a saltwater disposal well; and

 

 

 

 

Securities Act” refers to the Securities Act of 1933, as amended.

 

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Available Information

 

The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Exchange Act, are filed with the SEC. The Company is subject to the informational requirements of the Exchange Act and files or furnishes reports, proxy statements and other information with the SEC. Such reports and other information filed by the Company with the SEC are available free of charge at our website (www.pedevco.com) under “Investors” – “SEC Filings”, when such reports are available on the SEC’s website. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. The Company periodically provides other information for investors on its corporate website, www.pedevco.com. This includes press releases and other information about financial performance, information on corporate governance and details related to the Company’s annual meeting of shareholders. The information contained on the websites referenced in this Form 10-Q is not incorporated by reference into this filing. Further, the Company’s references to website URLs are intended to be inactive textual references only.

 

Summary of The Information Contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. Our MD&A is organized as follows:

 

 

General Overview. Discussion of our business and overall analysis of financial and other highlights affecting us, to provide context for the remainder of our MD&A.

 

 

 

 

Strategy. Discussion of our strategy moving forward and how we plan to seek to increase stockholder value.

 

 

 

 

Results of Operations and Financial Condition. An analysis of our financial results comparing the three and nine months ended September 30, 2021, and 2020, and a discussion of changes in our consolidated balance sheets, cash flows and a discussion of our financial condition.

 

 

 

 

Critical Accounting Policies. Accounting estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.

 

General Overview

 

We are 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, we focus 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. Our current properties are located in the San Andres formation of the Permian Basin situated in West Texas and eastern New Mexico and in the Denver-Julesburg Basin in Colorado. As of September 30, 2021, we held approximately 33,392 net Permian Basin acres located in Chaves, Roosevelt and Lea Counties, New Mexico, through PEDCO and approximately 11,580 net D-J Basin acres located in Weld and Morgan Counties, Colorado, through our wholly-owned operating subsidiary, Red Hawk. As of September 30, 2021, we held interests in 382 gross (303 net) wells in our Permian Basin Asset of which 35 are active producers, 14 are active injectors and two are active Saltwater Disposal Wells (“SWDs”), all of which are held by PEDCO and operated by its wholly-owned operating subsidiaries, and interests in 74 gross (21.0 net) wells in our D-J Basin Asset, of which 18 gross (16.2 net) wells are operated by Red Hawk and currently producing, 35 gross (5.2 net) wells are non-operated, and 21 wells have an after-payout interest.

 

Strategy

 

We believe 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 U.S. We plan to optimize our existing assets and opportunistically seek additional acreage proximate to our currently held core acreage, as well as other attractive onshore U.S. oil and gas assets that fit our acquisition criteria, that Company management believes can be developed using our technical and operating expertise and be accretive to stockholder value.

 

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Specifically, we seek to increase stockholder value through the following strategies:

 

 

Grow production, cash flow and reserves by developing our operated drilling inventory and participating opportunistically in non-operated projects. We believe our extensive inventory of drilling locations in the Permian Basin and the D-J Basin, combined with our operating expertise, will enable us to continue to deliver accretive production, cash flow and reserves growth. We have identified approximately 150 gross drilling locations across our Permian Basin acreage based on 20-acre spacing. We believe the location, concentration and scale of our core leasehold positions, coupled with our technical understanding of the reservoirs will allow us to efficiently develop our core areas and to allocate capital to maximize the value of our resource base.

 

 

 

 

Apply modern drilling and completion techniques and technologies. We own and intend to acquire additional properties that have been historically underdeveloped and underexploited. We believe our attention to detail and application of the latest industry advances in horizontal drilling, completions design, frac intensity and locally optimal frac fluids will allow us to successfully develop our properties.

 

 

 

 

Optimization of well density and configuration. We own properties that are legacy conventional oil fields characterized by widespread vertical development and geological well control. We utilize the extensive petrophysical and production data of such legacy properties to confirm optimal well spacing and configuration using modern reservoir evaluation methodologies.

 

 

 

 

Maintain a high degree of operational control. We believe that by retaining high operational control, we can efficiently manage the timing and amount of our capital expenditures and operating costs, and thus key in on the optimal drilling and completions strategies, which we believe will generate higher recoveries and greater rates of return per well.

 

 

 

 

Leverage extensive deal flow, technical and operational experience to evaluate and execute accretive acquisition opportunities. Our management and technical teams have an extensive track record of forming and building oil and gas businesses. We also have significant expertise in successfully sourcing, evaluating and executing acquisition opportunities. We believe our understanding of the geology, geophysics and reservoir properties of potential acquisition targets will allow us to identify and acquire highly prospective acreage in order to grow our reserve base and maximize stockholder value.

 

 

 

 

Preserve financial flexibility to pursue organic and external growth opportunities. We intend to maintain a disciplined financial profile in order to provide us flexibility across various commodity and market cycles. We intend to utilize our strategic partners and public currency to continuously fund development and operations.

 

Our strategy is to be the operator and/or a significant working interest owner, directly or through our subsidiaries and joint ventures, in the majority of our acreage so that we can dictate the pace of development in order to execute our business plan. Our 2021 development plan includes several projects delayed from our 2019 Phase II Permian Basin Asset development program, which were put on hold through 2020 due to the COVID-19 outbreak and the related low oil price environment through most of 2020. In late 2020, we resumed work on these carryover projects, including the completion of a SWD well in the Chaveroo field (Chaves and Roosevelt Counties, New Mexico) which was brought online in September 2020. In September 2020, we brought online one horizontal San Andres well from our 2019 Phase I Permian Basin Asset development program that was previously shut in due to salt water disposal capacity constraints. In January 2021, we initiated production hookup and commencement of two horizontal San Andres wells drilled in our 2019/2020 Phase II Permian Basin Asset development program. Over the remainder of 2021, we plan to permit up to ten horizontal San Andres wells in our Permian Basin Asset and anticipate drilling and completing at least two of these wells in late 2021 or early 2022, with the remainder planned to be drilled and completed in 2022. We have also completed several well reactivation projects and completed several enhancement and facilities projects across our operated Permian Basin Asset. We also plan to spend approximately $1.2 million for participation in four non-operated well projects (with a working interest of 6.52%) on our D-J Basin Asset that were drilled and completed in the third quarter of 2021. We expect to pay those costs and begin to receive revenue from those four wells in the fourth quarter of 2021. Additionally, we have elected to participate in eight wells in the D-J Basin that are currently planned to be drilled in the first quarter of 2022, at a net cost of approximately $2.1 million (with a working interest of 4.699%) pursuant to well proposals received from third party operators on lands in which we share a leasehold interest; provided that no money has been spent to date on these eight well proposals. We have advanced our business development activities in the D-J Basin over the past year, which we believe will add opportunities for growth and development. We plan to continue to evaluate D-J Basin well proposals as received from third party operators and participate in those we deem most economic and prospective. Our 2021 development program is based upon our current outlook for the remainder of the year and is subject to revision, if and as necessary, to react to market conditions, product pricing, contractor availability, requisite permitting and capital availability, additional non-operated well projects on our D-J Basin Asset that may become available, capital allocation changes between assets, acquisitions, divestitures and other adjustments determined by the Company in the best interest of its shareholders while prioritizing our financial strength and liquidity.

 

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We expect that we will have sufficient cash available to meet our needs over the foreseeable future, including to fund the remainder of our 2021 development program, discussed above, which cash we anticipate being available from (i) projected cash flow from our operations, (ii) existing cash on hand, (iii) equity infusions or loans (which may be convertible) made available from SK Energy LLC (“SK Energy”), which is 100% owned and controlled by Simon Kukes, our Chief Executive Officer and director, which funding SK Energy is under no obligation to provide, (iv) public or private debt or equity financings, and (v) funding through credit or loan facilities. In addition, we may seek additional funding through asset sales, farm-out arrangements, and credit facilities to fund potential acquisitions during the remainder of 2021.

 

Results of Operations and Financial Condition

 

Market Conditions and Commodity Prices

 

Our financial results depend on many factors, particularly the price of natural gas and crude oil and our ability to market our production on economically attractive terms. Commodity prices are affected by many factors outside of our control, including changes in market supply and demand, which are impacted by among other factors, weather conditions, inventory storage levels, basis differentials and other factors. As a result, we cannot accurately predict future commodity prices and, therefore, we cannot determine with any degree of certainty what effect increases or decreases in these prices will have on our production volumes or revenues. In addition to production volumes and commodity prices, finding and developing sufficient amounts of natural gas and crude oil reserves at economical costs are critical to our long-term success. We expect prices to remain volatile for the remainder of the year. For information about the impact of realized commodity prices on our natural gas and crude oil and condensate revenues, refer to “Results of Operations” below.

 

Results of Operations

 

The following discussion and analysis of the results of operations for the three and nine-month periods ended September 30, 2021 and 2020, should be read in conjunction with our consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q. The majority of the numbers presented below are rounded numbers and should be considered as approximate.

 

Three Months Ended September 30, 2021 vs. Three Months Ended September 30, 2020

 

We reported a net loss for the three-month period ended September 30, 2021 of $0.3 million, or ($0.00) per share, compared to a net loss for the three-month period ended September 30, 2020 of $2.3 million or ($0.03) per share. The decrease in net loss of $2.0 million was primarily due to a $1.7 million increase in revenue coupled with a $0.9 million decrease in total operating expenses offset with a $0.6 million decrease in other income, when comparing the current period to the prior year period (all of which are discussed in more detail below).

 

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Net Revenues

 

The following table sets forth the operating results and production data for the periods indicated:

 

 

 

Three Months Ended

September 30,

 

 

Increase

 

 

% Increase

 

 

 

2021

 

 

2020

 

 

(Decrease)

 

 

(Decrease)

 

Sale Volumes:

 

 

 

 

 

 

 

 

 

 

 

 

Crude Oil (Bbls)

 

 

55,106

 

 

 

60,786

 

 

 

(5,680 )

 

 

(9 )%

Natural Gas (Mcf)

 

 

60,949

 

 

 

44,051

 

 

 

16,898

 

 

 

38 %

NGL (Bbls)

 

 

1,592

 

 

 

5,072

 

 

 

(3,480 )

 

 

(69 )%

Total (Boe) (1)

 

 

66,856

 

 

 

73,200

 

 

 

(6,344 )

 

 

(9 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crude Oil (Bbls per day)

 

 

599

 

 

 

661

 

 

 

(62 )

 

 

(9 )%

Natural Gas (Mcf per day)

 

 

662

 

 

 

479

 

 

 

183

 

 

 

38 %

NGL (Bbls per day)

 

 

17

 

 

 

55

 

 

 

(38 )

 

 

(69 )%

Total (Boe per day) (1)

 

 

726

 

 

 

796

 

 

 

(70 )

 

 

(9 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Sale Price:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crude Oil ($/Bbl)

 

$ 67.08

 

 

$ 37.21

 

 

$ 29.87

 

 

 

80 %

Natural Gas ($/Mcf)

 

 

5.24

 

 

 

2.06

 

 

 

3.18

 

 

 

154 %

NGL ($/Bbl)

 

 

33.17

 

 

 

12.66

 

 

 

20.51

 

 

 

162 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Operating Revenues (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crude Oil

 

$ 3,697

 

 

$ 2,262

 

 

$ 1,435

 

 

 

63 %

Natural Gas

 

 

319

 

 

 

91

 

 

 

228

 

 

 

251 %

NGL

 

 

53

 

 

 

64

 

 

 

(11 )

 

 

(17 )%

Total Revenues

 

$ 4,069

 

 

$ 2,417

 

 

$ 1,652

 

 

 

68 %

 

(1)

Assumes 6 Mcf of natural gas equivalents to 1 barrel of oil.

 

Total crude oil, natural gas and NGL revenues for the three-month period ended September 30, 2021 increased $1.7 million, or 68%, to $4.1 million, compared to $2.4 million for the same period a year ago, due primarily to a favorable price variance of $2.1 million, offset by an unfavorable volume variance of $0.4 million. The production decrease is primarily related to several of our newer wells having higher peak production early in the prior year, coupled with normal production declines, offset by an increase in natural gas production in the current period, as the Company began selling gas from additional well locations in our Permian Basin Asset.

 

Operating Expenses and Other Income (Expense)

 

The following table summarizes our production costs and operating expenses for the periods indicated (in thousands):

 

 

 

Three Months Ended

 

 

 

 

 

 

 

September 30,

 

 

Increase

 

 

% Increase

 

 

 

2021

 

 

2020

 

 

(Decrease)

 

 

(Decrease)

 

Direct Lease Operating Expenses

 

$ 879

 

 

$ 763

 

 

$ 116

 

 

 

15 %

Workovers

 

 

151

 

 

 

2

 

 

 

149

 

 

 

7,450 %

Other*

 

 

393

 

 

 

289

 

 

 

104

 

 

 

36 %

Total Lease Operating Expenses

 

$ 1,423

 

 

$ 1,054

 

 

$ 369

 

 

 

35 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exploration Expenses

 

$ -

 

 

$ 1

 

 

$ (1 )

 

 

(100 )%

Depreciation, Depletion,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization and Accretion

 

$ 1,666

 

 

$ 2,974

 

 

$ (1,308 )

 

 

(44 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and Administrative (Cash)

 

$ 745

 

 

$ 780

 

 

$ (35 )

 

 

(4 )%

Share-Based Compensation (Non-Cash)

 

 

592

 

 

 

501

 

 

 

91

 

 

 

18 %

Total General and Administrative Expense

 

$ 1,337

 

 

$ 1,281

 

 

$ 56

 

 

 

4 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

$ -

 

 

$ 1

 

 

$ (1 )

 

 

(100 )%

Interest Income

 

$ 4

 

 

$ 4

 

 

$ -

 

 

 

-

 

Other Income

 

$ 28

 

 

$ 597

 

 

$ (569 )

 

 

(95 )%

 

*Includes severance, ad valorem taxes and marketing costs.

 

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Lease Operating Expenses. The increase of $0.4 million in lease operating expenses was primarily due to the Company increasing its active well count for previously shut-in wells due to the commodity price increases during the current period, compared to the prior period’s well count, which resulted in increased lease operating and workover expenses.

 

Exploration Expense. There was minimal to no expenses in exploration activity undertaken by the Company in the current year’s period and the prior year’s period.

 

Depreciation, Depletion, Amortization and Accretion. The $1.3 million decrease in depreciation, depletion, amortization and accretion was primarily the result of a decrease in our depletable base due to the impairment of our oil and gas properties at the prior year end (discussed below), when compared to the prior period. For the year ended December 31, 2020, due to falling oil and gas prices, we incurred a $19.3 million impairment of our oil and gas properties located in our D-J Basin Asset.

 

General and Administrative Expenses (excluding share-based compensation). There was a nominal decrease in general and administrative expenses (excluding share-based compensation) primarily due to savings in payroll expenses from the Company outsourcing payroll functions to a new payroll provider in November 2020, as well as other cost decreases, offset by increases in payroll expenses from the return of all the salaries of the Company’s salaried employees and officers to original levels on April 1, 2021, from a previously implemented 20% salary reduction on April 1, 2020. The salary reduction was put in place to reduce costs at the time that oil and gas prices were falling as a result of decreased demand due to the COVID-19 pandemic at the end of March 2020. The salaries of the Company’s employees and officers returned to prior levels beginning April 1, 2021, as the Company determined that the oil markets have recovered to acceptable levels.

 

Share-Based Compensation. Share-based compensation, which is included in general and administrative expenses in the Statements of Operations, increased by $0.1 million primarily due to an increase in the awarding of employee stock-based options and restricted stock as compensation. Share-based compensation is utilized for the purpose of conserving cash resources for use in field development activities and operations.

 

Interest Expense. There was minimal to no interest expense in the current year’s period and the prior year’s period. The interest expense in the prior period was due to prior period accrued interest related to the Company’s New PPP Loan (see Note 7 to the notes to the unaudited financial statements of the Company included above), which was forgiven during the current period as discussed below.

 

Interest Income and Other Income. Interest income and other income includes interest earned from our interest-bearing cash accounts, and the settlement of $0.3 million in accounts payables and working interest credits of $0.3 million in the prior period.

 

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Nine Months Ended September 30, 2021 vs. Nine Months Ended September 30, 2020

 

We reported net income for the nine-month period ended September 30, 2021 of $178,000, or $0.00 per share, compared to a net loss for the nine-month period ended September 30, 2020 of $9.3 million or ($0.13) per share. The increase in net income of $9.5 million was primarily due to a $5.4 million increase in revenue coupled with a $1.8 million gain on sale of oil and gas properties, a $3.1 million decrease in total operating expenses and a $0.4 million gain from forgiveness of our New PPP Loan, offset by a $1.2 million decrease in other income, when comparing the current period to the prior year period (all of which are discussed in more detail below).

 

Net Revenues

 

The following table sets forth the operating results and production data for the periods indicated:

 

 

 

Nine Months Ended

September 30,

 

 

Increase

 

 

% Increase

 

 

 

2021

 

 

2020

 

 

(Decrease)

 

 

(Decrease)

 

Sale Volumes:

 

 

 

 

 

 

 

 

 

 

 

 

Crude Oil (Bbls)

 

 

172,357

 

 

 

179,167

 

 

 

(6,810 )

 

 

(4 )%

Natural Gas (Mcf)

 

 

149,614

 

 

 

149,417

 

 

 

197

 

 

*

 

NGL (Bbls)

 

 

3,328

 

 

 

12,176

 

 

 

(8,848 )

 

 

(73 )%

Total (Boe) (1)

 

 

200,621

 

 

 

216,246

 

 

 

(15,625 )

 

 

(7 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crude Oil (Bbls per day)

 

 

631

 

 

 

654

 

 

 

(23 )

 

 

(4 )%

Natural Gas (Mcf per day)

 

 

548

 

 

 

545

 

 

 

3

 

 

 

1 %

NGL (Bbls per day)

 

 

12

 

 

 

44

 

 

 

(32 )

 

 

(73 )%

Total (Boe per day) (1)

 

 

734

 

 

 

789

 

 

 

(55 )

 

 

(7 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Sale Price:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crude Oil ($/Bbl)

 

$ 61.70

 

 

$ 31.08

 

 

$ 30.62

 

 

 

99 %

Natural Gas ($/Mcf)

 

 

4.04

 

 

 

1.48

 

 

 

2.56

 

 

 

173 %

NGL ($/Bbl)

 

 

30.32

 

 

 

9.41

 

 

 

20.91

 

 

 

222 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Operating Revenues (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crude Oil

 

$ 10,635

 

 

$ 5,569

 

 

$ 5,066

 

 

 

91 %

Natural Gas

 

 

604

 

 

 

221

 

 

 

383

 

 

 

173 %

NGL

 

 

101

 

 

 

115

 

 

 

(14 )

 

 

(12 )%

Total Revenues

 

$ 11,340

 

 

$ 5,905

 

 

$ 5,435

 

 

 

92 %

 

(1)

Assumes 6 Mcf of natural gas equivalents to 1 barrel of oil.

* Less than 1%.

 

Total crude oil, natural gas and NGL revenues for the nine-month period ended September 30, 2021 increased $5.4 million, or 92%, to $11.3 million, compared to $5.9 million for the same period a year ago, due primarily to a favorable price variance of $6.1 million, offset by an unfavorable volume variance of $0.7 million. Production decreases are primarily related to several of our newer wells having higher peak production early in the prior year, coupled with our oil and gas property sale and well shut-ins related to the winter storms that occurred earlier in the current 2021 period.

 

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Operating Expenses and Other Income (Expense)

 

The following table summarizes our production costs and operating expenses for the periods indicated (in thousands):

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

September 30,

 

 

Increase

 

 

% Increase

 

 

 

2021

 

 

2020

 

 

(Decrease)

 

 

(Decrease)

 

Direct Lease Operating Expenses

 

$ 2,700

 

 

$ 2,483

 

 

$ 217

 

 

 

9 %

Workovers

 

 

481

 

 

 

139

 

 

 

342

 

 

 

246 %

Other*

 

 

983

 

 

 

704

 

 

 

279

 

 

 

40 %

Total Lease Operating Expenses

 

$ 4,164

 

 

$ 3,326

 

 

$ 838

 

 

 

25 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exploration Expenses

 

$ -

 

 

$ 31

 

 

$ (31 )

 

 

(100 )%

Depreciation, Depletion,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization and Accretion

 

$ 4,829

 

 

$ 8,323

 

 

$ (3,494 )

 

 

(42 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and Administrative (Cash)

 

$ 2,567

 

 

$ 2,753

 

 

$ (186 )

 

 

(7 )%

Share-Based Compensation (Non-Cash)

 

 

1,867

 

 

 

2,073

 

 

 

(206 )

 

 

(10 )%

Total General and Administrative Expense

 

$ 4,434

 

 

$ 4,826

 

 

$ (392 )

 

 

(8 )%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on Sale of Oil and Gas Properties

 

$ 1,805

 

 

$ -

 

 

$ 1,805

 

 

 

100 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

$ 1

 

 

$ 1

 

 

$ -

 

 

 

-

 

Interest Income

 

$ 11

 

 

$ 36

 

 

$ (25 )

 

 

(69 )%

Other Income

 

$ 76

 

 

$ 1,275

 

 

$ (1,199 )

 

 

(94 )%

Gain on forgiveness of PPP loan

 

$ 374

 

 

$ -

 

 

$ 374

 

 

 

100 %

 

*Includes severance, ad valorem taxes and marketing costs.

 

Lease Operating Expenses. The increase of $0.8 million in lease operating expenses was primarily due to the shut-in of all of our operated wells for 42 days in the prior period related to the severe reduction in pricing from the decreased demand related to the start of the global spread of the COVID-19 outbreak, notwithstanding the Company continuing to maintain certain cost cutting initiatives that were implemented during the prior year, coupled with overall lower operating expense rates.

 

Exploration Expense. There was no exploration activity undertaken by the Company in the current year’s period compared to minimal activity in the prior year’s period.

 

Depreciation, Depletion, Amortization and Accretion. The $3.5 million decrease in depreciation, depletion, amortization and accretion was primarily the result of a decrease in our depletable base due to the impairment of our oil and gas properties at the prior year end (discussed below) coupled with production decreases in the current period, when compared to the prior period. For the year ended December 31, 2020, due to falling oil and gas prices, we incurred a $19.3 million impairment of our oil and gas properties located in our D-J Basin Asset.

 

General and Administrative Expenses (excluding share-based compensation). The decrease of $0.2 million in general and administrative expenses (excluding share-based compensation) was primarily due to decreases in payroll, as well as other cost decreases, resulting from a 20% reduction in salary for all of the Company’s salaried employees and officers implemented on April 1, 2020, which was put in place to reduce costs at the time that oil and gas prices were falling as a result of decreased demand due to the COVID-19 pandemic, and a reduction of non-essential contractors. The salaries of the Company’s employees and officers returned to prior levels beginning April 1, 2021, as the Company determined that the oil markets have recovered to acceptable levels.

 

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Share-Based Compensation. Share-based compensation, which is included in general and administrative expenses in the Statements of Operations, decreased by $0.2 million primarily due to the forfeiture of certain employee stock-based options and nonvested restricted shares due to employee terminations. Share-based compensation is utilized for the purpose of conserving cash resources for use in field development activities and operations.

 

Gain on Sale of Oil and Gas Properties. The Company sold rights to 230 net acres and interests in three non-operated wells located in the D-J Basin for net cash proceeds of $1.9 million and recognized a gain on sale of oil and gas properties of $1.8 million during the nine months ended September 30, 2021. We had no sales of oil and gas properties during the nine months ended September 30, 2020.

 

Interest Expense. There was minimal interest expense in the current year’s period and the prior year’s period. The accrued interest related to the Company’s New PPP Loan (see Note 7 to the notes to the unaudited financial statements of the Company included above), which was forgiven during the period as discussed below.

 

Interest Income and Other Income. Includes interest earned from our interest-bearing cash accounts, for which interest rates have decreased significantly when comparing the current period to the prior period, and the settlement of $0.9 million in accounts payables and working interest credits of $0.3 million in the prior period.

 

Gain on forgiveness of New PPP loan. Includes principal and accrued interest from our New PPP Loan that was fully forgiven during the current period (see Note 7 to the notes to the unaudited financial statements of the Company included above).

 

Liquidity and Capital Resources

 

The primary sources of cash for the Company during the nine-month period ended September 30, 2021 were from an underwritten public offering pursuant to which we sold 5,968,500 shares of common stock at a public offering price of $1.50 per share, and generated net proceeds of approximately $8.2 million, $1.9 million in the sale of oil and gas properties, and the sales of crude oil and natural gas. The primary uses of cash were funds used for well completion and operating costs.

 

Impact of COVID-19

 

In December 2019, a novel strain of coronavirus, which causes the infectious disease known as COVID-19, was reported in Wuhan, China. The World Health Organization declared COVID-19 a “Public Health Emergency of International Concern” on January 30, 2020, and a global pandemic on March 11, 2020. COVID-19 and the governmental responses thereto significantly reduced worldwide economic activity during much of 2020, and continues to threaten the global economy, as variants and mutations of the disease continue to spread, even as vaccines have become more widely available. While oil and gas prices have increased above pre-pandemic levels, it is not possible at this time for the Company to estimate the full impact that COVID-19 will have on the Company’s business in the future as such estimate would need to be based on whether or not COVID-19 continues to spread and the effectiveness of the containment of the virus, by the governments of countries affected and in which the Company operates. However, the Company’s operations have previously been disrupted, and may be disrupted again in the future due to COVID-19. The COVID-19 outbreak and mitigation measures have also had an adverse impact on global economic conditions, as well as an adverse effect on the Company’s business and financial condition and may continue to have an adverse effect on the Company, including on its potential to conduct financings on terms acceptable to the Company, if at all. The Company implemented temporary precautionary measures intended to help minimize the risk of the virus to its employees, vendors, and guests, including limiting the number of occupants at the Company’s Houston headquarters and requiring all others to work remotely, and discouraged employee attendance at in-person work-related meetings, which could negatively affect the Company’s business, which measures have recently eased in accordance with federal, state and local guidance, and the vaccination of substantially all of the Company’s office-based employees. The extent to which the COVID-19 outbreak will continue to impact the Company’s results will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus, the continued availability and efficacy of vaccines and booster shots, the willingness of individuals to be vaccinated initially, and to obtain booster shots, the effect of virus mutations, and the actions to contain its impact. Any future decrease in the price of oil, or the demand for oil and gas, as a result of COVID-19 or otherwise, will likely have a negative impact on our results of operations and cash flows.

 

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In response to the effects of COVID-19, the Company has adopted policies, procedures, and practices both in its Houston office headquarters and across its field operations to protect its employees, contractors, and guests from COVID-19, including the adoption of a COVID-19 Response Plan, implementation of contractor questionnaires to assess COVID-19 risk and exposure prior to entering any Company facility or worksite, adopting best practices, guidelines and protocols recommended by the Centers for Disease Control (the “CDC”) and the Office of the Texas Governor for the prevention of exposure and spread of COVID-19, and instituting twice-monthly management calls discussing the COVID-19 pandemic and the Company’s ongoing response to the COVID-19 pandemic and effectiveness thereof. Given the Company’s robust online systems and workflow practices and procedures, the Company has not experienced any material challenges or reductions in efficiency or effectiveness of its office-based workforce, while its field personnel continue to attend to their daily field operations uninterrupted, while mindful of social distancing and other preventative measures and safeguards recommended by the CDC, and subject to the CDC’s updated guidance.

 

We plan to continue to closely monitor the global energy markets and oil and gas pricing, with the remainder of our 2021 development plan being subject to revision, if and as necessary, to react to market conditions in the best interest of its shareholders, while prioritizing its financial strength and liquidity.

 

Working Capital

 

At September 30, 2021, the Company’s total current assets of $21.8 million exceeded its total current liabilities of $2.5 million, resulting in a working capital surplus of $19.3 million, while at December 31, 2020, the Company’s total current assets of $8.8 million exceeded its total current liabilities of $2.0 million, resulting in a working capital surplus of $6.8 million. The $12.5 million increase in our working capital surplus is primarily related to cash received from the sale of common stock in our February 2021 underwritten offering (discussed below), the sale of certain oil and gas properties and the forgiveness in full of our New PPP Loan principal and accrued interest, during the nine months ended September 30, 2021.

 

Financing

 

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 $8.2 million.

 

Subsequently, on October 6, 2021, after the date of the September 30, 2021 balance sheet discussed above, the Company closed a registered direct offering of 4,458,600 shares of common stock at a price of $1.57 per share for net proceeds (after deducting the placement agent’s fees and other estimated offering expenses associated with the offering) of approximately $6.5 million.

 

We expect that we will have sufficient cash available to meet our needs over the foreseeable future, which cash we anticipate being available from (i) projected cash flow from our operations, (ii) existing cash on hand, (iii) equity infusions or loans (which may be convertible) made available from SK Energy, which is 100% owned and controlled by Simon Kukes, our Chief Executive Officer and director, which funding SK Energy is under no obligation to provide, (iv) public or private debt or equity financings, and (v) funding through credit or loan facilities. In addition, we may seek additional funding through asset sales, farm-out arrangements, and credit facilities to fund potential acquisitions during the remainder of 2021 and into 2022. If market conditions are not conducive to developing our assets consistent with our remaining 2021 development program, the Company may choose to delay or extend the drilling program and associated capital expenditures into the future. Furthermore, as a result of the COVID-19 outbreak, and the 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, in mid-April 2020, the Company 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, with the Company now back on full production from its operated wells in the Permian Basin and the D-J Basin that the Company had shut-in in mid-April 2020 due to the partial recovery of oil prices in early June 2020. If oil prices deteriorate significantly from current levels, the Company may again shut-in some or all of its oil and gas production, which would result in reduced or no cash flow being generated from operations during the period such wells are shut-in, have a material adverse effect on the Company’s projected cash flow from operations, and, once our cash on hand is depleted, eventually require additional infusions of capital through debt and/or equity financings, asset sales, farm-out arrangements, lines of credit, or other means, which may not be available on favorable terms, if at all.

 

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Cash Flows (in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

Cash flows provided by (used in) operating activities

 

$ 3,971

 

 

$ (24 )

Cash flows used in investing activities

 

 

(309 )

 

 

(14,379 )

Cash flows provided by financing activities

 

 

8,237

 

 

 

370

 

Net increase (decrease) in cash and restricted cash

 

$ 11,899

 

 

$ (14,033 )

 

Cash flows provided by (used in) operating activities. Net cash operating activities increased by $4.0 million for the current year’s period, when compared to the prior year’s period, primarily due to an increase in net income of $9.5 million, which includes a decrease of $3.5 million in depreciation, depletion and amortization and a $1.8 million gain on the sale of oil and gas properties, coupled with net increases to our other components of working capital, which are related to our increased revenue in the current period, when compared to the prior period.

 

Cash flows used in investing activities. Net cash used in investing activities decreased by $14.1 million for the current year’s period, when compared to the prior year’s period, primarily due to $12.2 million less in capital spending, coupled with $1.9 million in proceeds from the sale of oil and gas properties.

 

Cash flows provided by financing activities. In the current period, the Company generated net cash from financing activities by selling common stock, net of offering costs, of $8.2 million, compared to net cash from financing activities of $0.4 million in the prior period, due to proceeds from obtaining the New PPP Loan financing.

 

Off-Balance Sheet Arrangements

 

The Company does not participate in financial transactions that generate relationships with unconsolidated entities or financial partnerships. As of September 30, 2021, we did not have any off-balance sheet arrangements.

 

Critical Accounting Policies

 

Our discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. See Part II, Item 7, “Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2020. There have been no material changes to our critical accounting policies and estimates since our Annual Report on Form 10‑K for the year ended December 31, 2020, as disclosed under “Note 3 – Summary of Significant Accounting Policies” to the notes to the audited financial statements included under Part II, Item 8 of the Annual Report on Form 10-K.

 

Recently Adopted and Recently Issued Accounting Pronouncements

 

None.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).

 

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ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms and is accumulated and communicated to the Company’s management, as appropriate, in order to allow timely decisions in connection with required disclosure.

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”)(the Principal Executive Officer) and Chief Accounting Officer (“CAO”)(the Principal Financial/Accounting Officer), we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this Quarterly Report. Based on this evaluation, our CEO and CAO concluded as of September 30. 2021, that our disclosure controls and procedures were effective.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the three months ended September 30, 2021, that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting, including any corrective actions regarding significant deficiencies and material weaknesses.

 

As a result of COVID-19, our workforce has continued to operate primarily in a work from home environment for the quarter ended September 30, 2021. While pre-existing controls were not specifically designed to operate in our current work from home operating environment, we do not believe that such work from home actions have had a material adverse effect on our internal controls over financial reporting. We have continued to re-evaluate and refine our financial reporting process to provide reasonable assurance that we could report our financial results accurately and timely.

 

Limitations on Effectiveness of Controls and Procedures

 

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

  

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Table of Content

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

Although we may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business, we are not currently a party to any material legal proceeding. In addition, we are not aware of any material legal or governmental proceedings against us or contemplated to be brought against us.

 

ITEM 1A. RISK FACTORS

 

There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Commission on March 23, 2021 (the “Form 10-K”), under the heading “Item 1A. Risk Factors“, other than as set forth below, and investors are encouraged to review such risk factors in the Annual Report and below, prior to making an investment in the Company. Any one or more of which could, directly or indirectly, cause the Company’s actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results and/or could materially and adversely affect the Company’s business and stock price.

 

The Federal Government previously instituted a moratorium on new oil and gas leases and permits on federal onshore and offshore lands, which may have a material adverse effect on the Company and its results of operations.

 

On January 20, 2021, the Acting U.S. Interior Secretary, instituted a 60-day moratorium on new oil and gas leases and permits on federal onshore and offshore lands, which was subsequently extended indefinitely. In June 2021, a federal judge issued an injunction lifting the moratorium, provided that the federal government it is appealing the injunction. A total of approximately 26% of the Company’s acreage in New Mexico and 1% of the Company’s acreage in Colorado are located on federal lands. It is currently unclear whether the moratorium will be reinstated, or whether such moratorium is the start of a change in federal policies regarding the grant of oil and gas permits on federal lands. The moratorium does not affect the Company, as the Company has no plans to drill new wells on any leases held on federal lands; however, if such prior moratorium was to become permanent, or the federal government in the future were to grant less permits on federal lands, make such permitting process more difficult, costly, or to institute more stringent rules relating to such permitting process, it could have a material adverse effect on the value of the Company’s leases and/or its ability to undertake oil and gas operations on such the portion of its leases on federal lands.

 

Simon Kukes, our Chief Executive Officer and a member of board of directors, beneficially owns 64.8% of our common stock, which gives him majority voting control over stockholder matters and his interests may be different from your interests; and as a result of such ownership, we are a “controlled company” under applicable NYSE American rules.

 

Simon Kukes, our Chief Executive Officer and member of the board of directors, through his individual ownership of the Company and through his position as principal and sole owner of SK Energy LLC, which beneficially owns approximately 61.5% of our issued and outstanding common stock and Mr. Kukes, together with the ownership of SK Energy, beneficially owns approximately 64.8% of our issued and outstanding common stock. As such, Mr. Kukes can control the outcome of all matters requiring a stockholder vote, including the election of directors, the adoption of amendments to our certificate of formation or bylaws and the approval of mergers and other significant corporate transactions. Subject to any fiduciary duties owed to the stockholders generally, while Mr. Kukes’ interests may generally be aligned with the interests of our stockholders, in some instances Mr. Kukes may have interests different than the rest of our stockholders, including but not limited to, future potential company financings in which SK Energy may participate, or his leadership at the Company. Mr. Kukes’ influence or control of our company as a stockholder may have the effect of delaying or preventing a change of control of our company and may adversely affect the voting and other rights of other stockholders. Because Mr. Kukes controls the stockholder vote, investors may find it difficult to replace Mr. Kukes (and such persons as he may appoint from time to time) as members of our management if they disagree with the way our business is being operated. Additionally, the interests of Mr. Kukes may differ from the interests of the other stockholders and thus result in corporate decisions that are adverse to other stockholders.

 

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Because of Mr. Kukes’ ownership of the Company, as discussed above, we are a “controlled company” under the rules of the NYSE American. Under these rules, a company of which more than 50% of the voting power is held by an individual, a group or another company is a “controlled company” and, as such, can elect to be exempt from certain corporate governance requirements, including requirements that:

 

 

a majority of the Board of Directors consist of independent directors (or 50% in the case of a smaller reporting company such as the Company);

 

 

 

 

the board maintain a nominations committee with prescribed duties and a written charter; and

 

 

 

 

the board maintain a compensation committee with prescribed duties and a written charter and comprised solely of independent directors.

 

As a “controlled company,” we may elect to rely on some or all of these exemptions, provided that we have to date not taken advantage of any of these exemptions and do not currently intend to take advantage of any of these exemptions moving forward. Notwithstanding that, should the interests of Mr. Kukes differ from those of other stockholders, the other stockholders may not have the same protections afforded to stockholders of companies that are subject to all of the NYSE American corporate governance standards. Even if we do not avail ourselves of these exemptions, our status as a controlled company could make our common stock less attractive to some investors or otherwise harm our stock price.

 

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

 

The Company did not issue or sell any unregistered equity securities during the quarter ended September 30, 2021, and through the date of the filing of this Report, which were not previously disclosed in a prior Quarterly Report on Form 10-Q, our Annual Report on Form 10-K or in a Current Report on Form 8-K.

 

Use of Proceeds From Sale of Registered Securities

 

Our shelf Registration Statement on Form S-3 (Reg. No. 333-250904) in connection with the sale by us of up to $100 million in securities (common stock, preferred stock, warrants and units) was declared effective by the Securities and Exchange Commission on December 2, 2020.

 

On February 3, 2021, we filed a final Rule 424(b)(5) prospectus supplement relating to the primary offering by us in a firm commitment underwritten public offering of 5,190,000 shares of common stock at a public offering price per share of $1.50. The underwriters of the offering (EF Hutton (formerly Kingswood Capital Markets), a division of Benchmark Investments, Inc. as sole bookrunner and Dawson James Securities) were also provided an option to purchase an additional 778,500 shares from us, at the public offering price less the underwriting discount, within 45 days of the offering to cover over-allotments, if any, which overallotment option was exercised in full by the underwriters. The offering (including the sale of the underwriters’ overallotment shares) closed on February 5, 2021. The net proceeds to us from our sale of the common stock (including the shares sold in connection with the exercise of the underwriters’ overallotment) were approximately $8.2 million (after deducting the underwriting discount and commissions and offering expenses payable by us). No further shares will be sold under the prospectus supplement.

 

On October 3, 2021, we filed a final Rule 424(b)(5) prospectus supplement relating to the registered direct offering by us of 4,458,600 shares of common stock at an offering price per share of $1.57. EF Hutton, division of Benchmark Investments, LLC and Roth Capital Partners acted as joint placement agents in the offering. The offering closed on October 6, 2021. The net proceeds to us from our sale of the common stock was approximately $6.5 million (after deducting the placement agent’s fees and other estimated offering expenses associated with the offering). No further shares will be sold under the prospectus supplement.

 

No payments for our expenses were made in the offerings described above directly or indirectly to (i) any of our directors, officers or their associates, (ii) any person(s) owning 10% or more of any class of our equity securities or (iii) any of our affiliates. There has been no material change in the planned use of proceeds from our offerings as described in our final prospectuses filed with the SEC pursuant to Rule 424(b).

   

Issuer Purchases of Equity Securities

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

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Table of Content

 

ITEM 6. EXHIBITS

 

 

 

 

 

Incorporated By Reference

Exhibit No.

 

Description

 

Form

 

Exhibit

 

Filing Date

 

File Number

1.1

 

Placement Agency Agreement, dated October 3, 2021, by and between PEDEVCO Corp. and EF Hutton, division of Benchmark Investments, LLC and Roth Capital Partners, LLC

 

8-K

 

1.1

 

October 6, 2021

 

 

001-35922

10.1

 

PEDEVCO Corp. 2021 Equity Incentive Plan

 

8-K

 

10.1

 

September 1, 2021

 

001-35922

10.2

 

PEDEVCO Corp. 2012 Equity Incentive Plan Form of Restricted Shares Grant Agreement

 

S-8

 

4.5

 

October 31, 2013

 

333-192002

10.3

 

Form of Securities Purchase Agreement, dated October 3, 2021, by and between PEDEVCO Corp. and the investor party thereto

 

8-K

 

10.1

 

October 6, 2021

 

001-35922

10.4

 

Form of Lock-Up Agreement (October 2021 Offering)

 

8-K

 

10.2

 

October 6, 2021

 

001-35922

31.1*

 

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

 

 

 

31.2*

 

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

 

 

 

32.1**

 

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

 

 

 

32.2**

 

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

 

 

 

101.INS*

 

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

 

 

 

 

 

 

 

101.SCH*

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

 

 

 

 

 

101.CAL*

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

 

 

 

 

 

 

101.DEF*

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 

 

 

 

 

 

101.LAB*

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

 

 

 

 

 

 

101.PRE*

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

 

 

 

 

 

104*

 

Inline XBRL for the cover page of this Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Document Set

 

 

 

 

 

 

 

 

 

 

* Filed herewith.

** Furnished herewith.

  

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Table of Content

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

PEDEVCO Corp.

 

 

 

 

November 16, 2021

By:

/s/ Simon Kukes

 

 

 

Simon Kukes

 

 

 

Chief Executive Officer

 

 

 

(Principal Executive Officer)

 

 

 

PEDEVCO Corp.

 

 

 

 

November 16, 2021

By:

/s/ Paul A. Pinkston

 

 

 

Paul A. Pinkston

 

 

 

Chief Accounting Officer

 

 

 

(Principal Financial and Accounting Officer)

 

 

 
30

 

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