NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION
The
accompanying consolidated financial statements of PEDEVCO Corp.
(“PEDEVCO” or the “Company”), have been
prepared in accordance with generally accepted accounting
principles in the United States of America (“GAAP”) and
the rules of the Securities and Exchange Commission
(“SEC”) and should be read in conjunction with the
audited financial statements and notes thereto contained in
PEDEVCO’s latest Annual Report filed with the SEC on Form
10-K. In the opinion of management, all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of
the financial position and the results of operations for the
interim periods presented have been reflected herein. The results
of operations for interim periods are not necessarily indicative of
the results to be expected for the full year. Notes to the
financial statements that would substantially duplicate disclosures
contained in the audited financial statements for the most recent
fiscal year, as reported in the Annual Report on Form 10-K for the
year ended December 31, 2018, filed with the SEC on April 1, 2019,
have been omitted.
The
Company’s consolidated financial statements include the
accounts of the Company, its wholly-owned subsidiaries and
subsidiaries in which the Company has a controlling financial
interest. All significant inter-company accounts and transactions
have been eliminated in consolidation.
The Company's future financial condition and
liquidity will be impacted by, among other factors, the success of
our
drilling program, the
number of commercially viable oil and natural gas discoveries made
and the quantities of oil and natural gas discovered, the speed
with which we can bring such discoveries to production, and the
actual cost of exploration, appraisal and development of our
prospects.
NOTE 2 – DESCRIPTION OF BUSINESS
PEDEVCO
is
an oil and gas company focused on
the development, acquisition and production of oil and natural
gas
assets where the latest in modern drilling and
completion techniques and technologies have yet to be applied. In
particular, the Company focuses on legacy proven properties where
there is a long production history, well defined geology and
existing infrastructure that can be leveraged when applying modern
field management technologies. The Company’s current
properties are located in the San Andres formation of the Permian
Basin situated in West Texas and eastern New Mexico (the
“Permian Basin”) and in
the Denver-Julesberg Basin (“D-J Basin”) in
Colorado. The Company holds its Permian Basin acres located
in Chavez and Roosevelt Counties, New Mexico, through its
wholly-owned operating subsidiary, Pacific Energy Development Corp.
(“PEDCO”), which asset the Company refers to as its
“Permian Basin Asset,” and it holds its D-J Basin acres
located in Weld and Morgan Counties, Colorado, through its
wholly-owned operating subsidiary, Red Hawk Petroleum, LLC
(“Red Hawk”), which asset the Company refers to as its
“D-J Basin Asset.”
The Company’s
strategy is to be the
operator, directly or through its subsidiaries and joint ventures,
in the majority of its acreage so it can dictate the pace of
development in order to execute its business plan. The majority of
its capital expenditure budget through 2019 will be focused on the
development of the Company’s Permian Basin Asset, with a
secondary focus on development of its D-J Basin Asset. The
Company’s 2019 total development plan calls for the
deployment of an estimated $52.1 million in capital, of which
approximately $22.0 million has been raised to date. On the
Company’s Permian Basin Asset, four initial horizontal wells
were drilled in December 2018 and January 2019 in Phase One of its
development plan, followed by Phase Two which contemplates the
drilling and completion of an additional eight horizontal wells
through 2020, subject to, and based upon, the results from Phase
One, and in each case, available funding. The Company’s 2019
D-J Basin Asset development plan is currently under evaluation for
its operated acreage and its non-operated acreage, and is projected
to require approximately $7.6 million in capital through 2019. Due
to the held-by-production nature of the Company’s Permian
Basin assets, the Company believes capital can be readily allocated
to its D-J Basin assets if needed. The Company expects that it will
have sufficient cash available to meet its needs over the
foreseeable future, which cash the Company anticipates being
available from (i) its projected cash flows from operations, (ii)
its existing cash on hand, (iii) equity infusions or loans (which
may be convertible) made available from SK Energy LLC, which is
100% owned and controlled by Dr. Simon Kukes, the Company’s
Chief Executive Officer and director (“SK Energy”),
which funding SK Energy is under no obligation to provide, and (iv)
funding through credit or loan facilities. In addition, the Company
may seek additional funding through asset sales, farm-out
arrangements, lines of credit, or public or private debt or equity
financings to fund additional 2019 capital expenditures and/or
acquisitions. If market conditions are not conducive to raising
additional funds, the Company may choose to extend the drilling
program and associated capital expenditures further into
2020.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The
Company has provided a discussion of significant accounting
policies, estimates and judgments in its 2018 Annual Report. There
have been no changes to the Company’s significant accounting
policies since December 31, 2018.
Recently Adopted Accounting Pronouncements
Revenue
Recognition. Accounting Standards Update (“ASU”)
2014-09,
“Revenue from
Contracts with Customers (Topic 606)”
, supersedes the
revenue recognition requirements and industry-specific guidance
under
Revenue Recognition (Topic
605)
. Topic 606 requires an entity to recognize revenue when
it transfers promised goods or services to customers in an amount
that reflects the consideration the entity expects to be entitled
to in exchange for those goods or services. The Company adopted
Topic 606 on January 1, 2018, using the modified retrospective
method applied to contracts that were not completed as of January
1, 2018. Under the modified retrospective method, prior period
financial positions and results will not be adjusted. The
cumulative effect adjustment recognized in the opening balances
included no significant changes as a result of this adoption. While
the Company’s net earnings are not materially impacted by
revenue recognition timing changes, Topic 606 requires certain
changes to the presentation of revenues and related expenses
beginning January 1, 2018. Refer to Note 4 – Revenue from
Contracts with Customers for additional information.
Leases. In February 2016, the Financial Accounting
Standards Board (“FASB”) issued
ASU No. 2016-02,
“Leases (Topic
842)”
. The new lease
guidance supersedes Topic 840. The core principle of the guidance
is that entities should recognize the assets and liabilities that
arise from leases. Topic 840 does not apply to leases to explore
for or use minerals, oil, natural gas and similar nonregenerative
resources, including the intangible right to explore for those
natural resources and rights to use the land in which those natural
resources are contained. In July 2018, the FASB issued
ASU No. 2018-11,
“
Leases (Topic 842): Targeted
Improvements”
,
which
provides entities with an alternative modified
transition method to elect not to recast the comparative periods
presented when adopting Topic 842. The Company adopted Topic 842 as
of January 1, 2019, using the alternative modified transition
method, for which,
comparative
periods, including the disclosures related to those periods, are
not restated.
In
addition, the Company elected practical expedients provided by the
new standard whereby,
the Company has
elected to not reassess
its prior conclusions about lease
identification, lease classification, and initial direct costs
and to retain off-balance sheet
treatment of short-term leases (i.e., 12 months or less and does
not contain a purchase option that the Company is reasonably
certain to exercise). As a result of the short-term expedient
election, the Company has no leases that require the recording of a
net lease asset and lease liability on the Company’s
consolidated balance sheet or have a material impact on
consolidated earnings or cash flows as of March 31, 2019. Moving
forward, the Company will evaluate any new lease commitments for
application of Topic 842.
Compensation-Stock
Compensation. In June 2018, the FASB issued ASU 2018-07,
“Compensation—Stock
Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting”.
The amendments in this update
maintain or improve the usefulness of the information provided to
the users of financial statements while reducing cost and
complexity in financial reporting. The areas for simplification in
this update involve several aspects of the accounting for
nonemployee share-based payment transactions resulting from
expanding the scope of Topic 718, to include share-based payment
transactions for acquiring goods and services from nonemployees.
Some of the areas for simplification apply only to nonpublic
entities. The amendments in this update are effective for all
entities for fiscal years beginning after December 15, 2018, and
interim periods within those fiscal years. The Company adopted the
standard as of January 1, 2019. There was no impact of the standard
on its consolidated financial statements.
Recently Issued Accounting Pronouncements
The
Company does not expect the adoption of any other recently issued
accounting pronouncements to have a significant impact on its
financial position, results of operations, or cash
flows.
Subsequent Events
The
Company has evaluated all transactions through the date the
consolidated financial statements were issued for subsequent event
disclosure consideration.
NOTE 4 – REVENUE FROM CONTRACTS WITH CUSTOMERS
Change in Accounting Policy.
The Company
adopted ASU 2014-09,
“Revenue from Contracts with Customers
(Topic 606)”
, on January 1, 2018, using the modified
retrospective method applied to contracts that were not completed
as of January 1, 2018. Refer to Note 3 – Summary of
Significant Accounting Policies above for additional
information.
Exploration and Production.
There were
no significant changes to the timing or valuation of revenue
recognized for sales of production from exploration and production
activities.
Disaggregation of Revenue from Contracts with
Customers.
The following table disaggregates revenue by
significant product type for the three months ended in the periods
indicated (in thousands):
|
|
|
Oil
sales
|
$
1,453
|
$
549
|
Natural
gas sales
|
109
|
49
|
Natural
gas liquids sales
|
6
|
46
|
Total
revenue from customers
|
$
1,568
|
$
644
|
There
were no significant contract liabilities or transaction price
allocations to any remaining performance obligations as of March
31, 2019 or 2018, respectively.
NOTE 5 – OIL AND GAS PROPERTIES
The
following table summarizes the Company’s oil and gas
activities by classification for the three months ended March 31,
2019 (in thousands):
|
Balance at
December 31, 2018
|
|
|
|
Balance
at
March 31,
2019
|
Oil and gas
properties, subject to amortization
|
$
70,803
|
$
13,635
|
$
(255
)
|
$
6,596
|
$
90,779
|
Oil and gas
properties, not subject to amortization
|
8,516
|
-
|
-
|
(6,596
)
|
1,920
|
Asset retirement
costs
|
2,188
|
22
|
-
|
-
|
2,210
|
Accumulated
depreciation and depletion
|
(21,045
)
|
(2,140
)
|
-
|
-
|
(23,185
)
|
Total oil and gas
assets
|
$
60,462
|
$
11,517
|
$
(255
)
|
$
-
|
$
71,724
|
On
February 1, 2019, for consideration of $700,000, the Company
completed an asset purchase from Manzano, LLC and Manzano Energy
Partners II, LLC, whereby the Company purchased approximately
18,000 net leasehold acres, ownership and operated production from
one horizontal well currently producing from the San Andres play in
the Permian Basin, ownership of three additional shut-in wells and
ownership of one saltwater disposal well. The Company subsequently
drilled one Manzano well, which has yet to be completed as March
31, 2019.
On
March 7, 2019, Red Hawk sold rights to 85.5 net acres of oil and
gas leases located in Weld County, Colorado, to a third party, for
aggregate proceeds of $1.2 million and recognized a gain on sale of
oil and gas properties of $920,000 on the statement of operations.
The sale agreement included a provision whereby the purchaser was
required to assign Red Hawk 85 net acres of leaseholds in an area
located where the Company already owns other leases in Weld County,
Colorado, within nine months from the date of the sale, or to repay
the Company up to $200,000 (proportionally adjusted for the amount
of leasehold delivered). The purchaser has not yet identified or
assigned the required leasehold acreage to the
Company.
For the
three-month period ended March 31, 2019, the Company has incurred
$12.8 million in drilling costs for the drilling of five wells,
four of which were completed. There were no drilling costs for the
three-month period ended March 31, 2018.
The
depletion recorded for production on proved properties for the
three months ended March 31, 2019 and 2018, amounted to $2,140,000,
compared to $563,000, respectively.
NOTE 6 – OTHER CURRENT ASSETS
On
September 11, 2013, the Company entered into a Shares Subscription
Agreement (“SSA”) to acquire an approximate 51%
ownership in Asia Sixth Energy Resources Limited (“Asia
Sixth”), which held an approximate 60% ownership interest in
Aral Petroleum Capital Limited Partnership (“Aral”), a
Kazakhstan entity. In August 2014 the SSA was restructured (the
“Aral Restructuring”), in connection with which the
Company received a promissory note in the principal amount of $10.0
million from Asia Sixth (the “A6 Promissory Note”),
which was to be converted into a 10.0% interest in Caspian Energy,
Inc. (“Caspian Energy”), an Ontario, Canada company
listed on the NEX board of the TSX Venture Exchange, upon the
consummation of the Aral Restructuring. The Aral Restructuring was
consummated on May 20, 2015, upon which date the A6 Promissory
Note was converted into 23,182,880 shares of common stock of
Caspian Energy.
In
February 2015, the Company expanded its D-J Basin position through
the acquisition of acreage from Golden Globe Energy (US), LLC
(“GGE”)(the “GGE Acquisition” and the
“GGE Acquired Assets”). In connection with the GGE
Acquisition, on February 23, 2015, the Company provided GGE an
option to acquire its interest in Caspian Energy for $100,000
payable upon exercise of the option (which was to expire on May 12,
2019) recorded in prepaid expenses and other current assets. As a
result, the carrying value of the 23,182,880 shares of common stock
of Caspian Energy which were issued upon conversion of the A6
Promissory Note at December 31, 2015 was $100,000. The $100,000
option was classified as part of other current assets as of
December 31, 2018, and, since the option expired without being
exercised on May 12, 2019 prior to the filing date of these
financial statements, the Company fully reserved the $100,000 and
recognized no value related to the option on the Company’s
balance sheet as of March 31, 2019.
NOTE 7 – NOTES PAYABLE
The
Company’s notes payable consisted of the following
(in thousands):
|
|
|
|
|
|
Notes
Payable - Subordinated
|
$
-
|
$
400
|
Notes
Payable - Subordinated Related Party
|
-
|
30,200
|
Notes
Payable - Related Party
|
-
|
7,855
|
|
-
|
38,455
|
Unamortized
Debt Discount
|
-
|
(161
)
|
Total
Notes Payable
|
$
-
|
$
38,294
|
Convertible Note Issuances
On June
26, 2018, the Company borrowed $7.7 million from SK Energy under a
Promissory Note dated June 25, 2018, in the amount of $7.7 million
(the “June 2018 SK Energy Note”) and shown on the
balance sheet as Note Payable – Related Party, net of debt
discount from the issuance of 600,000 shares of common stock (as
described below) with a fair value of $185,000 based on the market
price at the issuance date. The June 2018 SK Energy Note accrues
interest monthly at 8% per annum, payable quarterly, in either cash
or shares of common stock (at the option of the Company), or, with
the consent of SK Energy, such interest may be accrued and
capitalized.
As
additional consideration for SK Energy agreeing to the terms of the
June 2018 SK Energy Note, the Company agreed to issue SK Energy
600,000 shares of common stock (the “Loan Shares”),
with a fair value of $185,000 based on the market price on the date
of issuance that was accounted for as a debt discount and is being
amortized over the term of the note.
Based
on a conversion price equal to $2.18,
pursuant to the conversion terms of the June 2018
SK Energy Note
, the amount of interest under the June 2018
SK Energy Note as of December 31, 2018 equaled $155,000 and was
included in the outstanding principal balance of $7,855,000, for
interest not paid or issued in common stock when due, the amount is
recapitalized into the face value of the note, per the terms of the
June 2018 SK Energy Note. The total amount of the remaining debt
discount reflected on the accompanying balance sheet as of December
31, 2018 was $161,000, which was amortized in full as of March 31,
2019, due to the note conversions, which included $107,000 of
additional interest that was included in the principal balance,
noted below under “Convertible Notes Amendment and
Conversion” and “SK Energy Note Amendment; Note
Purchases and Conversion”.
On
August 1, 2018, the Company received total proceeds of $23,600,000
from the sale of multiple Convertible Promissory Notes (the
“Convertible Notes”). A total of $22,000,000 in
Convertible Notes were purchased by SK Energy (the “August
2018 SK Energy Note”); $200,000 in Convertible Notes were
purchased by an executive officer of SK Energy; $500,000 in
Convertible Notes were purchased by a trust affiliated with John J.
Scelfo, a director of the Company; $500,000 in Convertible Notes
were purchased by an entity affiliated with Ivar Siem, our
director, and J. Douglas Schick, President of the Company;
$200,000 in Convertible Notes was
purchased by H. Douglas Evans
(who became a Director and
related party on September 27, 2018)
;
and $200,000 in Convertible Notes were
purchased by an unaffiliated party. The $23,600,000 is accounted
for on the balance sheet as $23,200,000 of subordinated notes
payable – related party and $400,000 as subordinated notes,
as these notes are subordinated to the original June 2018 SK Energy
Note.
The
Convertible Notes accrue interest monthly at 8.5% per annum, which
interest is payable on the maturity date unless otherwise converted
into our common stock as described below. The accrued interest is
accounted for on the balance sheet as of December 31, 2018 as
$943,000 of accrued interest – related party and $14,000 of
accrued interest. As of March 31, 2019, there was no accrued
interest – related party or accrued interest, as $347,000 of
accrued interest – related party and $6,000 of accrued
interest incurred during 2019 together with the accrued interest
outstanding as of December 31, 2018 was converted into shares of
common stock due to the note conversions described
below.
The
Convertible Notes and all accrued interest thereon are convertible
into shares of our common stock, from time to time after August 29,
2018, at the option of the holders thereof, at a conversion price
equal to $2.13 per share, per terms of the Convertible
Notes.
On October 25, 2018, the Company borrowed an
additional $7.0 million from SK Energy, through the sale of a
convertible promissory note in the amount of $7.0 million (the
“October 2018 SK Energy Note”)
.
The October 2018 SK Energy Note had substantially
similar terms as the August 2018 SK Energy Note, except that it had
a conversion price of $1.79 per share. The October 2018 SK Energy
Note is due and payable on October 25, 2021, but may be prepaid at
any time without penalty.
The accrued interest expense
related to this note for the year ended December 31, 2018 was
$109,000 and is accounted for on the balance sheet as accrued
interest – related party. As of March 31, 2019, there was no
accrued interest – related party, as accrued interest of
$78,000 incurred during 2019 together with the accrued interest
outstanding as of December 31, 2018 was converted into shares of
common stock due to the note conversions described
below.
January 2019 SK Energy Convertible Note
On January 11, 2019, the Company borrowed an
additional $15.0 million from SK Energy, through the sale of a
convertible promissory note in the amount of $15.0 million (the
“January 2019 SK Energy Note”)
. The January 2019 SK Energy Note had
substantially similar terms as the August 2018 SK Energy Note,
except that it had a conversion price of $1.50 per share. The
January 2019 SK Energy Note is due and payable on January 11, 2022,
but may be prepaid at any time without penalty.
As of March
31, 2019, there was no outstanding principal or accrued interest
– related party due to the note conversions noted below.
Accrued interest-related party for this note prior to the
conversion totaled $126,000.
Convertible Notes Amendment and Conversion
On
February 15, 2019, the Company and SK Energy agreed to amend the
Convertible Notes (including the August 2018 SK Energy Note),
October 2018 SK Energy Note, and the January 2019 SK Energy Note,
to remove the conversion limitation that previously prevented SK
Energy from converting any portion of the notes into common stock
of the Company if such conversion would have resulted in SK Energy
beneficially owning more than 49.9% of the Company’s
outstanding shares of common stock
Immediately
following the entry into the amendment, on February 15, 2019, SK
Energy elected to convert (i) all $15,000,000 of the outstanding
principal and all $126,000 of accrued interest then owed under the
January 2019 SK Energy Note into common stock of the Company at a
conversion price of $1.50 per share, as set forth in the January
2019 SK Energy Note into 10,083,819 shares of restricted common
stock of the Company, and (ii) all $7,000,000 of the outstanding
principal and all $187,000 of accrued interest under the October
2018 SK Energy Note into common stock of the Company at a
conversion price of $1.79 per share, as set forth in the October
2018 SK Energy Note, into 4,014,959 shares of restricted common
stock of the Company.
On
March 1, 2019, the Company and SK Energy amended the June 2018
SK Energy Note, to provide SK Energy the right, at any time, at its
option, to convert the principal and interest owed under such June
2018 SK Energy Note, into shares of the Company’s common
stock, at a conversion price of $2.13 per share.
In
addition, on March 1, 2019, the holders of $1,500,000 in aggregate
principal amount of Convertible sold their Convertible Notes at
face value plus accrued and unpaid interest through March 1, 2019
to SK Energy (the “Convertible Note Sale”). Holders
which sold their Convertible Notes pursuant to the Convertible Note
Sale to SK Energy, including an executive officer of SK Energy
($200,000 in principal amount of Convertible Notes); a trust
affiliated with John J. Scelfo, a director of the Company ($500,000
in principal amount of Convertible Notes); an entity affiliated
with Ivar Siem, a director of the Company, and J. Douglas Schick
the President of the Company ($500,000 in principal amount of
Convertible Notes); and Harold Douglas Evans, a director of the
Company ($200,000 in principal amount of Convertible
Notes).
Immediately
following the effectiveness of the SK Energy Note Amendment and
Convertible Note Sale, on March 1, 2019, SK Energy and the
Unaffiliated Holder elected to convert all $31,300,000 of
outstanding principal and an aggregate of $1,460,000 of accrued
interest under the June 2018 SK Energy Note, SK Energy’s $22
million Convertible Note and all other Convertible Notes, into
common stock of the Company at a conversion price of $2.13 per
share (the “Conversion Price” and the
“Conversions”) as set forth in the June 2018 SK Energy
Note, as amended, and the Convertible Notes (including SK
Energy’s $22 million Convertible Note (collectively, the
“Notes”), into an aggregate of 15,381,605 shares of
restricted common stock of the Company (the “Conversion
Shares”).
NOTE 8 – ASSET RETIREMENT OBLIGATIONS
Activity
related to the Company’s asset retirement obligations is as
follows (in thousands):
|
Three Months
Ended
March
31,
2019
|
Balance at the
beginning of the period
(1)
|
$
2,571
|
Accretion
expense
|
106
|
Obligations
incurred for acquisition
|
33
|
Changes in
estimates
|
(11
)
|
Balance at end of
period
(2)
|
$
2,699
|
(1)
Includes $119,000 of current asset retirement obligations included
in accrued liabilities at December 31, 2018.
(2)
Includes $124,000 of current asset retirement obligations included
in accrued liabilities at March 31, 2019.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Office Lease
Change in Accounting Policy.
The Company
adopted
ASU No. 2016-02,
“Leases
(Topic 842)” and
ASU No.
2018-11, “
Leases (Topic 842): Targeted
Improvements”
,
January 1, 2019, using the alternative modified transition method,
for which,
comparative periods,
including the disclosures related to those periods, are not
restated
as of January 1, 2019. Refer to Note 3 –
Summary of Significant Accounting Policies above for additional
information.
In June
2018, the Company assumed the lease for its corporate office space
located in Houston, Texas from American Resources, Inc., an entity
beneficially owned and controlled by Ivar Siem, a director of the
Company, and J. Douglas Schick, the Company’s President. The
term of the lease ends on August 31, 2019, and the obligation for
the remainder of this lease is $55,000.
The
Company also leased space for its former corporate headquarters in
Danville, California that was scheduled to expire July 31, 2019,
but was terminated in January 2019 without penalty or other amounts
due. The obligation for this lease through January 2019 was $5,000.
In February 2019, the Company entered into a six-month lease
agreement for 187 square feet of new office space located in
Danville, California for the Company’s general counsel. The
monthly rent is $1,000, and the Company paid a $1,000 security
deposit. The total current obligation for the remainder of this
lease through July 2019 is $5,000.
For the
three months ended March 31, 2019 and 2018, the Company incurred
lease expense of $23,000 and $14,000, respectively, for the
combined leases.
Leasehold Drilling Commitments
The
Company’s oil and gas leasehold acreage is subject to
expiration of leases if the Company does not drill and hold such
acreage by production or otherwise exercises options to extend such
leases, if available, in exchange for payment of additional cash
consideration. In the D-J Basin Asset, 49 net acres expire during
the remainder of 2019, and 170 net acres expire thereafter (net to
our direct ownership interest only). In the Permian Basin Asset, no
net acres are due to expire in 2019 and 2,886 net acres expire
thereafter (net to our direct ownership interest only). For the
Manzano acquisition (the assets acquired on February 1, 2019),
6,981
net
acres expire during the remainder of 2019 and
6,526
net acres expire thereafter (net to our direct ownership interest
only). The Company plans to hold significantly all of this acreage
through a program of drilling and completing producing wells. If
the Company is not able to drill and complete a well before lease
expiration, the Company may seek to extend leases where
able.
Other Commitments
Although the
Company may, from time to time, be involved in litigation and
claims arising out of its operations in the normal course of
business, the Company is not currently a party to any material
legal proceeding. In addition, the Company is not aware of any
material legal or governmental proceedings against it or
contemplated to be brought against it.
As part
of its regular operations, the Company may become party to various
pending or threatened claims, lawsuits and administrative
proceedings seeking damages or other remedies concerning its
commercial operations, products, employees and other
matters.
Although the
Company provides no assurance about the outcome of these or any
other pending legal and administrative proceedings and the effect
such outcomes may have on the Company, the Company believes that
any ultimate liability resulting from the outcome of such
proceedings, to the extent not otherwise provided for or covered by
insurance, will not have a material adverse effect on the
Company’s financial condition or results of
operations.
NOTE 10 – SHAREHOLDERS’ EQUITY
Preferred Stock
The
Company is authorized to issue 100,000,000 shares of preferred
stock with a par value of $0.001 per share, of which 25,000,000
shares have been designated “Series A” preferred stock.
As of March 31, 2019 and December 31, 2018, there were no
shares of the Company’s Series A Convertible Preferred Stock
outstanding, respectively.
Common Stock
At
March 31, 2019, the Company was authorized to issue 200,000,000
shares of its common stock with a par value of $0.001 per
share.
The
following summarizes the Company’s common stock activity
during the three-month period ended March 31, 2019 (amounts in
thousands, except share and per share amounts):
|
|
|
|
|
|
Issued
and Outstanding Shares
|
Balance
at December 31, 2018
|
|
|
15,808,445
|
January
2019 Note Conversion*
|
$
15,126
|
$
1.50
|
10,083,819
|
October
2018 Note Conversion*
|
7,187
|
1.79
|
4,014,959
|
SK
Energy Note and August 2018 Notes Conversions*
|
32,763
|
2.13
|
15,381,605
|
Balance
at March 31, 2019
|
|
|
45,288,828
|
*See
Note 7 above for further discussion of the Note
Conversions.
Stock-based
compensation expense recorded related to the vesting of restricted
stock for the three months ended March 31, 2019 and 2018 was
$186,000 and $166,000, respectively. The remaining unamortized
stock-based compensation expense at March 31, 2019 related to
restricted stock was $781,000.
NOTE 11 – STOCK OPTIONS AND WARRANTS
Blast 2003 Stock Option Plan and 2009 Stock Incentive
Plan
Prior
to June 2005, the Company was known as Blast Energy Services, Inc.
(“Blast”). Under Blast’s 2003 Stock Option Plan
and 2009 Stock Incentive Plan, options to acquire 298 shares of
common stock were granted and remained outstanding and exercisable
as of March 31, 2018 and December 31, 2018, respectively. No new
options were issued under these plans in 2019 or 2018.
2012 Incentive Plan
On July
27, 2012, the shareholders of the Company approved the 2012 Equity
Incentive Plan (the “2012 Incentive Plan”), which was
previously approved by the Board of Directors on June 27, 2012, and
authorizes the issuance of various forms of stock-based awards,
including incentive or non-qualified options, restricted stock
awards, performance shares and other securities as described in
greater detail in the 2012 Incentive Plan, to the Company’s
employees, officers, directors and consultants. The 2012 Incentive
Plan was amended on June 27, 2014, October 7, 2015 and December 28,
2016, December 28, 2017 and September 27, 2018 to increase by
500,000, 300,000, 500,000, 1,500,000, and 3,000,000 (to 6,000,000
currently), respectively, the number of shares of common stock
reserved for issuance under the 2012 Incentive Plan.
A total
of 6,000,000 shares of common stock are eligible to be issued under
the 2012 Incentive Plan as of March 31, 2019, of which 3,200,130
shares have been issued as restricted stock, 768,250 shares are
subject to issuance upon exercise of issued and outstanding
options, and 2,031,620 shares remain available for future issuance
as of March 31, 2019.
PEDCO 2012 Equity Incentive Plan
As a
result of the July 27, 2012 merger by and between the Company,
Blast Acquisition Corp., a wholly-owned Nevada subsidiary of the
Company (“MergerCo”), and Pacific Energy Development
Corp., a privately-held Nevada corporation (“PEDCO”)
pursuant to which MergerCo was merged with and into PEDCO, with
PEDCO continuing as the surviving entity and becoming a
wholly-owned subsidiary of the Company, in a transaction structured
to qualify as a tax-free reorganization (the “Merger”),
the Company assumed the PEDCO 2012 Equity Incentive Plan (the
“PEDCO Incentive Plan”), which was adopted by PEDCO on
February 9, 2012. The PEDCO Incentive Plan authorized PEDCO to
issue an aggregate of 100,000 shares of common stock in the form of
restricted shares, incentive stock options, non-qualified stock
options, share appreciation rights, performance shares, and
performance units under the PEDCO Incentive Plan. As of March 31,
2019, options to purchase an aggregate of 31,016 shares of the
Company’s common stock and 55,168 shares of the
Company’s restricted common stock have been granted under
this plan (all of which were granted by PEDCO prior to the closing
of the merger with the Company, with such grants being assumed by
the Company and remaining subject to the PEDCO Incentive Plan
following the consummation of the merger). The Company does not
plan to grant any additional awards under the PEDCO Incentive
Plan.
Options
During
the three months ended March 31, 2019, no options were granted,
exercised or expired. As of March 31, 2019, a total of 890,232
stock options are outstanding, with exercise prices ranging from
$0.3088 to $302.40 per share and a weighted-average exercise price
of $3.26 per share. Of the total amount of stock options
outstanding, 595,232 are exercisable as of March 31, 2019, with a
weighted-average exercise price of $4.06 per share
During
the three months ended March 31, 2019 and 2018, the Company
recognized stock option expense of $113,000 and $17,000,
respectively. The remaining amount of unamortized stock options
expense at March 31, 2019, was $207,000.
The
intrinsic value of outstanding and exercisable options at March 31,
2019 and December 31, 2018 was $448,000 and $36,000,
respectively.
Warrants
During
the three months ended March 31, 2019, no warrants were granted or
exercised, and warrants to purchase 100,000 shares of common stock
expired.
The
intrinsic value of outstanding, as well as exercisable, warrants at
March 31, 2019 and December 31, 2018, was $536,000 compared to
$65,000, respectively.
Warrant
activity during the three months ended March 31, 2019
was:
|
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contract Term (Years)
|
Outstanding
at December 31, 2018
|
1,216,686
|
$
7.44
|
1.4
|
Expired/Cancelled
|
(100,000
)
|
$
25.00
|
|
Outstanding
at March 31, 2019
|
1,116,686
|
$
4.69
|
0.6
|
Exercisable
at March 31, 2019
|
|
|
|
NOTE 12 – RELATED PARTY TRANSACTIONS
The
following table reflects the related party amounts for SK Energy,
Directors and Officers included in the balance sheets of the period
indicated (in thousands):
|
|
|
|
|
|
Long-term accrued
expenses
|
$
-
|
$
943
|
Long-term notes
payable – subordinated
|
-
|
30,200
|
Long-term notes
payable, net of discount of $-0- and $161,
respectively
|
-
|
7,694
|
Total related party
liabilities
|
$
-
|
$
38,837
|
See
Note 7 above for further discussion of the debt conversions and
subsequent retirement of all related party debt.
NOTE 13 – INCOME TAXES
The
Company has estimated that its effective tax rate for U.S. purposes
will be zero for the 2019 and 2018 fiscal years as a result of net
losses and a full valuation allowance against the net deferred tax
assets. Consequently, the Company has recorded no provision or
benefit for income taxes for the three months ended March 31, 2019
and 2018.
NOTE 14
– SUBSEQUENT
EVENTS
Effective April 1,
2019, the Company issued 60,056 total shares of common stock upon
the cashless exercise of two warrants to purchase an aggregate of
596,280 shares of common stock with an exercise price of $2.50 per
share, based on a current market value of $2.78 per share, under
the terms of each warrant.
In
April 2019, restricted stock awards were granted to three new
employees and one consultant an aggregate of 160,000 shares of the
Company’s common stock, under the Company’s Amended and
Restated 2012 Equity Incentive Plan. The grant for a total of
50,000 of the restricted stock awards vest as follows: 100% on the
one-year anniversary of the grant date, subject to the
recipient’s continued service with the Company. These shares
have a total fair value of $135,000 based on the market price on
the issuance date. The grants for 110,000 shares of restricted
stock vest as follows: 50% on the one-year anniversary of the grant
date and 50% on the second-year anniversary of the grant date,
subject to the recipient’s continued service with the
Company. These shares have a total fair value of $253,000 based on
the market price on the issuance date.