UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(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, 2022

 

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_10qimg1.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 11, 2022, there were 85,790,267 shares of the Registrant’s common stock outstanding.

 

 

 

 

PEDEVCO CORP.

 

TABLE OF CONTENTS

 

 

 

Page

Cautionary Note Regarding Forward-Looking Statements

 

 

 

 

 

PART I – FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

4

 

Condensed Consolidated Balance Sheets as of September 30, 2022 (Unaudited) and December 31, 2021

4

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited)

5

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (Unaudited)

6

 

Condensed Consolidated Statements of Shareholders’ Equity for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited)

7

 

Notes to Unaudited Condensed 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

27

 

Item 4.

Controls and Procedures

27

 

PART II – OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

29

 

Item 1A.

Risk Factors

29

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

 

Item 3.

Defaults Upon Senior Securities

31

 

Item 4.

Mine Safety Disclosures

31

 

Item 5.

Other Information

31

 

Item 6.

Exhibits

32

 

Signatures

33

 

 
2

Table of Contents

 

CAUTIONARY NOTE REGARDING 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 the federal securities laws, including 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. Statements preceded by, followed by or that otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “projects,” “estimates,” “plans,” “may,” and similar expressions or future or conditional verbs such as “should”, “would”, and “could” are generally forward-looking in nature and not historical facts. Forward-looking statements which are subject to a number of risks and uncertainties, many of which are beyond our control. All statements, other than statements of historical fact included in this Report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs and cash flows, prospects, plans and objectives of management are forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements. Forward-looking statements include the information concerning our future financial performance, business strategy, projected plans and objectives. These factors include, among others, the factors set forth below under the heading “Risk Factors.” Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Most of these factors are difficult to predict accurately and are generally beyond our control. Readers are cautioned not to place undue reliance on these 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;

changes in, and interpretations and enforcement of, environmental and other laws and other political and regulatory developments, including in particular additional permit scrutiny in Colorado;

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, the 2019 coronavirus (“COVID-19”));

the continued effects of the COVID-19 pandemic, including its effects on commodity prices, downstream capacity, employee health and safety, business continuity and regulatory matters;

political conditions in or affecting other oil-producing and natural gas-producing countries, including the current conflicts in the Middle East and involving Russia and Ukraine;

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;

increased inflation, rising interest rates and possible U.S. and global recessions;

future acquisition transactions; 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, 2021, filed with the SEC on March 11, 2022. 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 Contents

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

PEDEVCO CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

 

 

 

September 30, 2022 (Unaudited)

 

 

December 31, 2021

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash

 

$ 27,361

 

 

$ 25,930

 

Accounts receivable – oil and gas

 

 

2,681

 

 

 

1,782

 

Prepaid expenses and other current assets

 

 

316

 

 

 

326

 

Total current assets

 

 

30,358

 

 

 

28,038

 

 

 

 

 

 

 

 

 

 

Oil and gas properties – successful efforts method:

 

 

 

 

 

 

 

 

Oil and gas properties, subject to amortization, net

 

 

69,699

 

 

 

63,908

 

Oil and gas properties, not subject to amortization, net

 

 

592

 

 

 

2,559

 

Total oil and gas properties, net

 

 

70,291

 

 

 

66,467

 

 

 

 

 

 

 

 

 

 

Operating lease – right-of-use asset

 

 

98

 

 

 

173

 

Other assets

 

 

3,722

 

 

 

3,543

 

Total assets

 

$ 104,469

 

 

$ 98,221

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$ 719

 

 

$ 2,626

 

Accrued expenses

 

 

1,820

 

 

 

1,454

 

Revenue payable

 

 

996

 

 

 

938

 

Operating lease liabilities – current

 

 

110

 

 

 

114

 

Asset retirement obligations – current

 

 

11

 

 

 

49

 

Total current liabilities

 

 

3,656

 

 

 

5,181

 

 

 

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Operating lease liabilities, net of current portion

 

 

-

 

 

 

81

 

Asset retirement obligations, net of current portion

 

 

2,080

 

 

 

1,476

 

Total liabilities

 

 

5,736

 

 

 

6,738

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, 200,000,000 shares authorized; 85,790,267 and 84,263,146 shares issued and outstanding, respectively

 

 

86

 

 

 

84

 

Additional paid-in capital

 

 

222,604

 

 

 

220,984

 

Accumulated deficit

 

 

(123,957 )

 

 

(129,585 )

Total shareholders’ equity

 

 

98,733

 

 

 

91,483

 

Total liabilities and shareholders’ equity

 

$ 104,469

 

 

$ 98,221

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 
4

Table of Contents

 

PEDEVCO CORP.

CONDENSED 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:

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Oil and gas sales

 

$ 7,472

 

 

$ 4,069

 

 

$ 24,109

 

 

$ 11,340

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease operating costs

 

 

2,918

 

 

 

1,423

 

 

 

8,076

 

 

 

4,164

 

Selling, general and administrative expense

 

 

1,220

 

 

 

1,337

 

 

 

4,108

 

 

 

4,434

 

Depreciation, depletion, amortization and accretion

 

 

2,313

 

 

 

1,666

 

 

 

6,427

 

 

 

4,829

 

Total operating expenses

 

 

6,451

 

 

 

4,426

 

 

 

18,611

 

 

 

13,427

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on sale of oil and gas properties

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,805

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

1,021

 

 

 

(357 )

 

 

5,498

 

 

 

(282 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1 )

Interest income

 

 

33

 

 

 

4

 

 

 

40

 

 

 

11

 

Other income

 

 

25

 

 

 

28

 

 

 

90

 

 

 

76

 

Gain on forgiveness of PPP loan

 

 

-

 

 

 

-

 

 

 

-

 

 

 

374

 

Total other income

 

 

58

 

 

 

32

 

 

 

130

 

 

 

460

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$ 1,079

 

 

$ (325 )

 

$ 5,628

 

 

$ 178

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$ 0.01

 

 

$ (0.00 )

 

$ 0.07

 

 

$ 0.00

 

Diluted

 

$ 0.01

 

 

$ (0.00 )

 

$ 0.07

 

 

$ 0.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

85,644,180

 

 

 

79,533,016

 

 

 

85,419,689

 

 

 

78,628,077

 

Diluted

 

 

85,644,180

 

 

 

79,533,016

 

 

 

85,419,689

 

 

 

78,700,140

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 
5

Table of Contents

 

PEDEVCO CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(amounts in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

Net income

 

$ 5,628

 

 

$ 178

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation, depletion, amortization and accretion

 

 

6,427

 

 

 

4,829

 

Gain on sale of oil and gas properties

 

 

-

 

 

 

(1,805 )

Amortization of right-of-use asset

 

 

75

 

 

 

72

 

Share-based compensation expense

 

 

1,572

 

 

 

1,867

 

Gain on forgiveness of PPP loan

 

 

-

 

 

 

(374 )

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable – oil and gas

 

 

(899 )

 

 

(860 )

Prepaid expenses and other current assets

 

 

10

 

 

 

(295 )

Accounts payable

 

 

(243 )

 

 

51

 

Accrued expenses

 

 

366

 

 

 

184

 

Revenue payable

 

 

58

 

 

 

124

 

Net cash provided by operating activities

 

 

12,994

 

 

 

3,971

 

 

 

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

 

Cash paid for drilling, completion, acquisition costs

 

 

(11,413 )

 

 

(2,145 )

Cash paid for property and equipment

 

 

-

 

 

 

(35 )

Proceeds from the sale of oil and gas property

 

 

-

 

 

 

1,871

 

Net cash used in investing activities

 

 

(11,413 )

 

 

(309 )

 

 

 

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of offering costs

 

 

50

 

 

 

8,237

 

Net cash provided by financing activities

 

 

50

 

 

 

8,237

 

 

 

 

 

 

 

 

 

 

Net increase in cash and restricted cash

 

 

1,631

 

 

 

11,899

 

Cash and restricted cash at beginning of period

 

 

29,227

 

 

 

11,324

 

Cash and restricted cash at end of period

 

$ 30,858

 

 

$ 23,223

 

 

 

 

 

 

 

 

 

 

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

 

$ 1,791

 

 

$ 54

 

Changes in estimates of asset retirement costs, net

 

$ 158

 

 

$ 16

 

Issuance of restricted common stock

 

$ 2

 

 

$ 1

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 
6

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PEDEVCO CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

(Unaudited)

(amounts in thousands, except share amounts)

 

 

 

Common Stock

 

 

 Additional Paid-in

 

 

 Accumulated

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Totals

 

Balances at December 31, 2021

 

 

84,263,146

 

 

$ 84

 

 

$ 220,984

 

 

$ (129,585 )

 

$ 91,483

 

Issuance of restricted common stock

 

 

1,200,000

 

 

 

1

 

 

 

(1 )

 

 

-

 

 

 

-

 

Share-based compensation

 

 

-

 

 

 

-

 

 

 

563

 

 

 

-

 

 

 

563

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,339

 

 

 

1,339

 

Balances at March 31, 2022

 

 

85,463,146

 

 

 

85

 

 

 

221,546

 

 

 

(128,246 )

 

 

93,385

 

Sale of common stock to non-affiliate

 

 

87,121

 

 

 

-

 

 

 

50

 

 

 

-

 

 

 

50

 

Share-based compensation

 

 

-

 

 

 

-

 

 

 

537

 

 

 

-

 

 

 

537

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,210

 

 

 

3,210

 

Balances at June 30, 2022

 

 

85,550,267

 

 

 

85

 

 

 

222,133

 

 

 

(125,036 )

 

 

97,182

 

Issuance of restricted common stock

 

 

240,000

 

 

 

1

 

 

 

(1 )

 

 

-

 

 

 

-

 

Share-based compensation

 

 

-

 

 

 

-

 

 

 

472

 

 

 

-

 

 

 

472

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,079

 

 

 

1,079

 

Balances at September 30, 2022

 

 

85,790,267

 

 

$ 86

 

 

$ 222,604

 

 

$ (123,957 )

 

$ 98,733

 

 

 

 

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 loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(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 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

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 
7

Table of Contents

 

PEDEVCO CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION

 

The accompanying interim unaudited condensed 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, 2021, filed with the SEC on March 11, 2022 (the “2021 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 2021 Annual Report. There have been no changes to the Company’s significant accounting policies since December 31, 2021.

 

 
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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 condensed 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,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Oil sales

 

$ 6,978

 

 

$ 3,697

 

 

$ 22,098

 

 

$ 10,635

 

Natural gas sales

 

 

398

 

 

 

319

 

 

 

1,292

 

 

 

604

 

Natural gas liquids sales

 

 

96

 

 

 

53

 

 

 

719

 

 

 

101

 

Total revenue from customers

 

$ 7,472

 

 

$ 4,069

 

 

$ 24,109

 

 

$ 11,340

 

 

There were no significant contract liabilities or transaction price allocations to any remaining performance obligations as of September 30, 2022. 

 

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, 2022

 

 

December 31, 2021

 

Cash

 

$ 27,361

 

 

$ 25,930

 

Restricted cash included in other assets

 

 

3,497

 

 

 

3,297

 

Total cash and restricted cash

 

$ 30,858

 

 

$ 29,227

 

 

                Total restricted cash increased $200,000 during the current period due to an additional collateralized deposit related to an increase in a plugging and abandonment bond with the State of New Mexico.

 

 

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, 2022 (in thousands):

 

 

 

Balance at

December 31,

2021

 

 

Additions

 

 

Disposals

 

 

Transfers

 

 

Balance at

September 30,

2022

 

Oil and gas properties, subject to amortization

 

$ 151,338

 

 

$ 9,030

 

 

$ -

 

 

$ 2,559

 

 

$ 162,927

 

Oil and gas properties, not subject to amortization

 

 

2,559

 

 

 

592

 

 

 

-

 

 

 

(2,559 )

 

 

592

 

Asset retirement costs

 

 

789

 

 

 

158

 

 

 

-

 

 

 

-

 

 

 

947

 

Accumulated depreciation, depletion and impairment

 

 

(88,219 )

 

 

(5,956 )

 

 

-

 

 

 

-

 

 

 

(94,175 )

Total oil and gas properties, net

 

$ 66,467

 

 

$ 3,824

 

 

$ -

 

 

$ -

 

 

$ 70,291

 

 

 
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For the nine-month period ended September 30, 2022, the Company incurred $9,622,000 of capital costs primarily related to drilling operations, completion and facility construction for the two new wells started at the end of 2021 for our Permian Basin Asset and the acquisition and development of assets in the D-J Basin.

 

In January 2022, the Company consummated the acquisition of certain additional assets located in the D-J Basin from a third-party effective July 1, 2021, for approximately $500,000 in cash consideration. These assets include approximately 46.6 net leasehold acres and interests in 14 horizontal wells currently producing from the acreage.  The Company incurred $1.2 million (included in the total number above) in net capital costs for its working interest in these 14 new well interests during the nine months ended September 30, 2022.

 

During the nine months ended September 30, 2022, the Company acquired approximately 289 net mineral acres and 612 net lease acres in and around its existing footprint in the D-J Basin through multiple transactions at total acquisition and due diligence costs of $443,000 and $534,000, respectively.

 

The depletion recorded for production on proved properties for the three and nine months ended September 30, 2022 and 2021, amounted to $2,084,000, compared to $1,576,000, and $5,956,000, compared to $4,520,000, respectively. 

 

NOTE 7 – ASSET RETIREMENT OBLIGATIONS

 

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

 

 

 

Nine Months Ended September 30, 2022

 

Balance at the beginning of the period (1)

 

$ 1,525

 

Accretion expense

 

 

450

 

Liabilities settled

 

 

(42 )

Changes in estimates, net

 

 

158

 

Balance at end of period (2)

 

$ 2,091

 

 

 

(1)

Includes $49,000 of current asset retirement obligations at December 31, 2021.

 

 

 

 

(2)

Includes $11,000 of current asset retirement obligations at September 30, 2022.

 

NOTE 8 – 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.

 

 
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Supplemental cash flow information related to the Company’s operating lease is included in the table below (in thousands):

 

 

 

Nine Months Ended

 

September 30, 2022

Cash paid for amounts included in the measurement of lease liabilities

 

$ 91

 

 

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

 

 

 

September 30, 2022

 

Operating lease – right-of-use asset

 

$ 98

 

 

 

 

 

 

Operating lease liabilities - current

 

$ 110

 

Operating lease liabilities - long-term

 

 

-

 

Total lease liability

 

$ 110

 

 

The weighted-average remaining lease term for the Company’s operating lease is 0.9 years as of September 30, 2022, 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 2022

 

$ 30

 

2023

 

 

82

 

Thereafter

 

 

-

 

Total lease payments

 

 

112

 

Less imputed interest

 

 

(2 )

Total lease liability

 

$ 110

 

 

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 2022, and 612 net acres expire thereafter (net to our direct ownership interest only). In the Permian Basin Asset, 63 acres are due to expire during the remainder of 2022 and 106 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 sufficient to hold the acreage 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.

 

 

 
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Although the Company provides no assurance about the outcome of any future legal and administrative proceedings and the effect such outcomes may have on the Company, the Company believes that any ultimate liability resulting from the outcome of such proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on the Company’s financial condition or results of operations.

 

 

NOTE 9 – SHAREHOLDERS’ EQUITY

 

Common Stock

 

During the nine months ended September 30, 2022, the Company granted an aggregate of 1,440,000 restricted stock awards to various employees and board members of the Company (see Note 10 below).

 

On June 10, 2022, the Company sold 87,121 shares of common stock at a sales price of $1.66 per share via an ongoing “at the market offering” (the “ATM Offering”) for net proceeds of $141,000, which includes $4,000 in commission fees. The Company also incurred $91,000 in initial legal and audit fees for registration and placement of the ATM Offering.

 

The ATM Offering was made pursuant to the terms of that certain November 17, 2021, Sales Agreement (the “Sales Agreement”) with Roth Capital Partners, LLC (“Roth Capital”, or the “Agent”). The Company will pay the sales agent a commission of 3.0% of the gross sales price of any shares sold under the Sales Agreement, less reimbursement of the first $40,000 of such gross proceeds. The Company has also provided the Agent with customary indemnification rights and has agreed to reimburse the sales agent for certain specified expenses up to $25,000. The Company currently has $3.5 million remaining available in securities which it may sell in the future under the Sales Agreement.

 

NOTE 10 – SHARE-BASED COMPENSATION

 

The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award over the vesting period.

 

Common Stock

 

On January 25, 2022, an aggregate of 1,200,000 shares of restricted common stock were granted to officers of the Company, under the Company’s 2021 Equity Incentive Plan. The grant of the 1,200,000 shares of restricted common 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 $1,404,000 based on the market price on the issuance date.

 

On August 25, 2022, restricted stock awards were granted to three board members for an aggregate of 240,000 shares of the Company’s restricted common stock, under the Company’s 2021 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, 2023 and September 27, 2023, respectively, contingent upon each recipient’s continued service with the Company. These shares have a total fair value of $280,000, 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, 2022, was $1,260,000. The remaining unamortized stock-based compensation expense at September 30, 2022 related to restricted stock was $1,291,000.

 

Options

 

On January 25, 2022, the Company granted options to purchase an aggregate of 520,000 shares of common stock to various Company employees at an exercise price of $1.17 per share. The options have a term of five years and fully vest on January 2025, with 33.3% vesting each subsequent year from the date of grant, contingent upon the 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 $454,000. Variables used in the Black-Scholes option-pricing model for the options issued include: (1) a discount rate of 1.56% based on the applicable US Treasury bill rate, (2) expected term of 3.5 years, (3) expected volatility of 120% based on the trading history of the Company, and (4) zero expected dividends.

 

 
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During the nine months ended September 30, 2022, the Company recognized stock option expense of $312,000. The remaining amount of unamortized stock options expense at September 30, 2022 was $318,000.

 

The intrinsic value of outstanding and exercisable options at September 30, 2022 was $-0-.

 

Option activity during the nine months ended September 30, 2022 was: 

 

 

 

Number of

Options

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contract Term

(Years)

 

Outstanding at December 31, 2021

 

 

1,123,435

 

 

$ 1.80

 

 

 

3.0

 

Granted

 

 

520,000

 

 

$ 1.17

 

 

 

 

 

Expired/Canceled

 

 

(187,435 )

 

$ 2.34

 

 

 

 

 

Outstanding at September 30, 2022

 

 

1,456,000

 

 

$ 1.51

 

 

 

2.8

 

Exercisable at September 30, 2022

 

 

624,000

 

 

$ 1.77

 

 

 

1.7

 

 

 

NOTE 11 – EARNINGS PER COMMON SHARE

 

Earnings (loss) per common share-basic is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Net income (loss) per common share-diluted assumes the conversion of all potentially dilutive securities and is calculated by dividing net (loss) income by the sum of the weighted average number of shares of common stock, as defined above, outstanding plus potentially dilutive securities. Net (loss) income per common share-diluted considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares, as defined above, would have an anti-dilutive effect.

 

The calculation of earnings per share for the periods indicated below were as follows (amounts in thousands, except share and per share data):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

Numerator:

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net income (loss)

 

$ 1,079

 

 

$ (325 )

 

$ 5,628

 

 

$ 178

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares – basic

 

 

85,644,180

 

 

 

79,533,016

 

 

 

85,419,689

 

 

 

78,628,077

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of common stock equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options

 

 

-

 

 

 

-

 

 

 

-

 

 

 

72,063

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares – diluted

 

 

85,644,180

 

 

 

79,533,016

 

 

 

85,419,689

 

 

 

78,700,140

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share – basic

 

$ 0.01

 

 

$ (0.00 )

 

$ 0.07

 

 

$ 0.00

 

Earnings (loss) per share – diluted

 

$ 0.01

 

 

$ (0.00 )

 

$ 0.07

 

 

$ 0.00

 

 

 
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For the three and nine months ended September 30, 2022 and 2021, share equivalents related to options to purchase 1,456,000, compared to 1,143,436, and 1,456,000, compared to 1,126,769, shares of common stock, respectively, were excluded from the computation of diluted net income per share as the inclusion of such shares would be anti-dilutive.

 

NOTE 12 – INCOME TAXES

 

The Company has estimated that its effective tax rate for U.S. purposes will be zero for the 2022 and 2021 fiscal years as a result of prior 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, 2022 and 2021, respectively.

 

NOTE 13 – SUBSEQUENT EVENTS

 

On August 2, 2022, the Company received correspondence from the State of New Mexico Energy, Minerals and Natural Resources Department (“EMNRD”) alleging that the Company’s New Mexico operating subsidiaries, Ridgeway Arizona Oil Corp. (“Ridgeway”) and EOR Operating Company (“EOR”), failed to comply with certain requirements of Agreed Compliance Orders previously negotiated and entered into by each of Ridgeway and EOR with the EMNRD (the “ACOs”), specifically alleging that Ridgeway and EOR failed to provide reports and proof of conducting certain well tests by dates specified in the ACOs.  Further, in the correspondence, the EMNRD notified us that the ACOs were now void due to alleged non-compliance, that an aggregate of approximately 333 legacy vertical wells inherited by the Company when it acquired the fields in 2018 were required to be brought back online or plugged immediately, and further demanded that Ridgway and EOR pay civil penalties totaling an aggregate of $850,500 no later than August 31, 2022, with additional penalties accruing thereafter as a result of our alleged non-compliance and interest accruing on unpaid portions thereof at 8.75% per annum.  The Company immediately engaged in discussions with the EMNRD regarding the issues raised in the correspondence, and in mid-August 2022 the EMNRD confirmed that it had erred in alleging that Ridgeway was in violation of its ACO pertaining to approximately 284 legacy vertical wells operated by Ridgeway, and that the EMNRD’s demand letter related to the Ridgeway ACO was invalid and withdrawn.  Following additional correspondence between the Company and the EMNRD related to EOR’s ACO pertaining to approximately 49 legacy vertical wells operated by EOR, on November 10, 2022, EOR entered into an amended ACO with the EMNRD (the “Amended EOR ACO”), which provides, among other things, that (i) the EMNRD’s demand for payment of penalties was resolved, (ii) EOR would restore to production, or plug and abandon, the 49 wells listed in the Amended EOR ACO by no later than December 31, 2024, (iii) EOR would provide monthly reports to the Director of the Oil Conservation Division (“OCD”) regarding actions taken for each well, (iv) EOR would maintain financial assurance for the wells and place $50,000 cash in an escrow account in New Mexico designating the OCD as beneficiary, which escrowed funds will be forfeit in the event EOR fails to meet any well plugging deadline, (v) EOR may request, and the OCD may grant, an extension of the deadlines under the Amended EOR ACO for good cause shown, and (vi) EOR may not transfer a well to another operator unless approved by the OCD.  Accordingly, the Company believes that the issues raised in the August 2, 2022 correspondence from the EMNRD regarding compliance failures by its New Mexico operating subsidiaries, Ridgeway and EOR, have been favorably resolved.

 

 
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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, 2021, 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 2 of our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission on March 11, 2022.

 

Our fiscal year ends on December 31st. Interim results are presented on a quarterly basis for the quarters ended March 31st, June 30th, and September 30th, the first quarter, second quarter and third quarter, respectively, with the quarter ending December 31st being referenced herein as our fourth quarter. Fiscal 2022 means the year ended December 31, 2022, whereas fiscal 2021 means the year ended December 31, 2021.

 

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, 2022, 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:

 

 

·

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 month periods ended September 30, 2022, and 2021, 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, 2022, we held approximately 31,309 net Permian Basin acres located in Chaves and Roosevelt Counties, New Mexico, through our wholly-owned operating subsidiary, Pacific Energy Development Corp. (“PEDCO”), and approximately 12,188 net D-J Basin acres located in Weld and Morgan Counties, Colorado, through our wholly-owned operating subsidiary, Red Hawk Petroleum, LLC (“Red Hawk”). As of September 30, 2022, we held interests in 382 gross (303 net) wells in our Permian Basin Asset of which 35 are active  producers, 16 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 86 gross (22.1 net) wells in our D-J Basin Asset, of which 18 gross (16.2 net) wells are operated by Red Hawk and currently producing, 47 gross (5.8 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 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 oil and gas fields characterized by widespread vertical and horizontal 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 or build strong relationships with our operating partners in areas where we do not operate. We believe that by retaining high operational control and by building strong partnerships with operators in areas where we do not operate, 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 funding which we expect to be available through the sale of debt or equity, to continuously fund development and operations.

 

We also are committed to developing and monitoring environmental, social and governance (“ESG”) initiatives and the Board of Directors plans to evaluate the potential adoption of ESG initiatives from time to time, provided that no definitive ESG plans have been adopted to date.

 

 
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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 Permian Basin acreage so we can dictate the pace of development in order to execute our business plan. Our D-J Basin strategy is to participate in projects we deem highly economic on an operated or non-operated basis as our acreage position does not always allow for us to serve as operator in the D-J Basin. Our net capital expenditures for 2022 are estimated at the time of this Quarterly Report to range between $24 million to $30 million (of which we have incurred approximately $9.6 million in expenses through September 30, 2022). This estimate includes a range of $22 million to $28 million for drilling and completion costs on our Permian Basin and D-J Basin Assets (of which we have incurred approximately $7.4 million in expenses through September 30, 2022) and approximately $2.8 million in estimated capital expenditures through the end of the year for electric submersible pumps (“ESP”) purchases, rod pump conversions, recompletions, well cleanouts, leasing, facilities, and other miscellaneous capital expenses (of which we have incurred $2.2 million in expenses through September 30, 2022).  The remaining $14.4 million to $20.4 million in capital expenditures estimated to be incurred in 2022 relates to our anticipated proportionate share of drilling and completion expenses incurred by third party operators in 2022 with respect to non-operated wells in the D-J Basin in which we have elected to participate in 2022, but for which we have not yet been invoiced by the operators (and may not be invoiced for in full in 2022). These estimates do not include anything for acquisitions or other projects that may arise but are not currently anticipated. We periodically review our capital expenditures and adjust our capital forecasts and allocations based on liquidity, drilling results, leasehold acquisition opportunities, proposals from third party operators, and commodity prices, while prioritizing our financial strength and liquidity.

 

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. If new proposals are received that meet our economic thresholds and require material capital expenditures, we have flexibility to move capital from our Permian Asset to our D-J Basin Asset, or vice versa, as our Permian Asset is 100% operated and nearly all held by production (“HBP”), allowing for flexibility of timing on development. Our 2022 development program incorporates an increase in both basins relating to service cost and materials inflation resulting in an estimated cost increase of approximately 25 to 30 percent per well on our Permian Asset and 10 to 20 percent on our D-J Asset, based on costs we have experienced commencing in the third quarter of 2021 and continuing through the second quarter of 2022.  Our 2022 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, 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.

 

We expect that we will have sufficient cash available to meet our needs over the foreseeable future, including to fund the remainder of our 2022 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 Simon Kukes, our Chief Executive Officer and director, which funding he is under no obligation to provide, (iv) public or private debt or equity financings, including up to $3.5 million in securities which we may sell in the future under our “at the market” Sales Agreement, 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 over the next twelve months.

 

How We Conduct Our Business and Evaluate Our Operations

 

Our use of capital for acquisitions and development allows us to direct our capital resources to what we believe to be the most attractive opportunities as market conditions evolve. We have historically acquired properties that we believe had significant appreciation potential. We intend to continue to acquire both operated and non-operated properties to the extent we believe they meet our return objectives.

 

We will use a variety of financial and operational metrics to assess the performance of our oil and natural gas operations, including:

 

 

·

production volumes;

 

·

realized prices on the sale of oil and natural gas, including the effects of our commodity derivative contracts;

 

·

oil and natural gas production and operating expenses;

 

·

capital expenditures;

 

·

general and administrative expenses;

 

·

net cash provided by operating activities; and

 

·

net income.

 

 
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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, 2022 and 2021, 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, 2022 vs. Three Months Ended September 30, 2021

 

We reported net income for the three-month period ended September 30, 2022 of $1.1 million, or $0.01 per share, compared to a net loss for the three-month period ended September 30, 2021 of $0.3 million or ($0.00) per share. The increase in net income of $1.4 million, when comparing the current period to the prior year’s period, was primarily due to a $3.4 million increase in net revenues offset by a $2.0 million increase in total operating expenses. (which are discussed in more detail below). 

 

Net Revenues

 

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

 

 

 

Three Months Ended

September 30,

 

 

Increase

 

 

% Increase

 

 

 

2022

 

 

2021

 

 

(Decrease)

 

 

(Decrease)

 

Sale Volumes:

 

 

 

 

 

 

 

 

 

 

 

 

Crude Oil (Bbls)

 

 

76,644

 

 

 

55,106

 

 

 

21,538

 

 

39%

Natural Gas (Mcf)

 

 

51,564

 

 

 

60,949

 

 

 

(9,385 )

 

(15%) 

NGL (Bbls)

 

 

3,140

 

 

 

1,592

 

 

 

1,548

 

 

97%

Total (Boe) (1)

 

 

88,378

 

 

 

66,856

 

 

 

21,522

 

 

32%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crude Oil (Bbls per day)

 

 

833

 

 

 

599

 

 

 

234

 

 

39%

Natural Gas (Mcf per day)

 

 

560

 

 

 

662

 

 

 

(102 )

 

(15%) 

NGL (Bbls per day)

 

 

34

 

 

 

17

 

 

 

17

 

 

100%

Total (Boe per day) (1)

 

 

960

 

 

 

726

 

 

 

234

 

 

32%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Sale Price:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crude Oil ($/Bbl)

 

$ 91.04

 

 

$ 67.08

 

 

$ 23.96

 

 

36%

Natural Gas ($/Mcf)

 

 

7.72

 

 

 

5.24

 

 

 

2.48

 

 

47%

NGL ($/Bbl)

 

 

30.57

 

 

 

33.17

 

 

 

(2.60 )

 

(8%) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Operating Revenues (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crude Oil

 

$ 6,978

 

 

$ 3,697

 

 

$ 3,281

 

 

89%

Natural Gas

 

 

398

 

 

 

319

 

 

 

79

 

 

25%

NGL

 

 

96

 

 

 

53

 

 

 

43

 

 

81%

           Total Revenues

 

$ 7,472

 

 

$ 4,069

 

 

$ 3,403

 

 

84%

 

(1)

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

 

 
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Total crude oil, natural gas and NGL revenues for the three-month period ended September 30, 2022, increased $3.4 million, or 84%, to $7.5 million, compared to $4.1 million for the same period a year ago, due to a favorable price variance of $1.5 million, due to the average sales prices for crude oil, natural gas and NGLs realized by the Company increasing compared to the three-month period ended September 30, 2021, coupled with a favorable volume variance of $1.9 million. The increase in production volume is related to the positive performance from our participation in non-operated wells in the D-J Basin Asset, as well as production contributions from two new wells in our operated Permian Basin Asset that were completed in the first quarter of 2022.

 

Operating Expenses and Other Income

 

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

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

September 30,

 

 

Increase

 

 

% Increase

 

 

 

2022

 

 

2021

 

 

 (Decrease)

 

 

 (Decrease)

 

Direct Lease Operating Expenses

 

$ 1,250

 

 

$ 879

 

 

$ 371

 

 

42%

Workovers

 

 

886

 

 

 

151

 

 

 

735

 

 

487%

Other+

 

 

782

 

 

 

393

 

 

 

389

 

 

99%

Total Lease Operating Expenses

 

$ 2,918

 

 

$ 1,423

 

 

$ 1,495

 

 

105%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, Depletion,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Amortization and Accretion

 

$ 2,313

 

 

$ 1,666

 

 

$ 647

 

 

39%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and Administrative (Cash)

 

$ 748

 

 

$ 745

 

 

$ 3

 

 

*%

Share-Based Compensation (Non-Cash)

 

 

472

 

 

 

592

 

 

 

(120 )

 

(20%) 

Total General and Administrative Expense

 

$ 1,220

 

 

$ 1,337

 

 

$ (117 )

 

(9%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income

 

$ 33

 

 

$ 4

 

 

$ 29

 

 

725%

Other Income

 

$ 25

 

 

$ 28

 

 

$ (3 )

 

(11%) 

 

+ Includes severance, ad valorem taxes and marketing costs.

                * Less than 1%.

 

Lease Operating Expenses. The increase of $1.5 million was primarily related to non-recurring workovers for artificial lift repairs and optimizations that were executed to maximize production volumes, as well as approximately $0.6 million of one-time non-recurring operating expenses for improving the Permian Basin Asset’s water handling infrastructure and approximately $0.2 million of non-recurring costs for environmental cleanup and reclamations of historic well and facility sites that were inherited from previous operators in our Permian Basin Asset.  Increased commodity pricing period over period caused increased production taxes coupled with increased marketing fees from higher production volumes.  Service and materials costs have also increased accordingly with general supply chain and inflation issues seen throughout the industry leading to increased operating costs.

 

 
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Table of Contents

 

Depreciation, Depletion, Amortization and Accretion. The $0.6 million increase was primarily the result of an increase in production (noted above) in the current period when compared to the prior period.

 

General and Administrative Expenses (excluding share-based compensation). There was a nominal increase in general and administrative expenses (excluding share-based compensation) as the Company continues to strive to contain costs and remain within budget from period to period.

 

Share-Based Compensation. Share-based compensation, which is included in general and administrative expenses in the Statements of Operations, decreased by $0.1 million, primarily due to the forfeiture of certain employee stock-based options and nonvested restricted shares due to certain voluntary employee terminations. Share-based compensation is utilized for the purpose of conserving cash resources for use in field development activities and operations.

 

Interest Income and Other Income (Expense). Includes interest earned from our interest-bearing cash accounts, for which interest rates have increased in the current period, compared to the prior period. Other income in the current period is primarily related to a $24,000 non-refundable two-year rent payment made in September 2022 to the Company for office space leased by SK Energy, which is 100% owned and controlled by Simon Kukes, our Chief Executive Officer and director, coupled with a $9,000 sale of old equipment.

 

Nine Months Ended September 30, 2022 vs. Nine Months Ended September 30, 2021

 

We reported net income for the nine-month period ended September 30, 2022 of $5.6 million, or $0.07 per share, compared to net income for the nine-month period ended September 30, 2021 of $0.2 million or $0.00 per share. The increase in net income of $5.4 million was primarily due to a $12.8 million increase in revenue, offset by an increase of $5.2 million in total operating expenses in the current period, offset further by a $0.4 million gain from forgiveness of our $0.4 million Paycheck Protection Program loan (the “New PPP Loan”) in May 2021, coupled with a $1.8 million gain on sale of oil and gas properties each in the prior 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,

 

 

 

 

 

 

 

2022

 

 

2021

 

 

Increase

 

 

% Increase

 

Sale Volumes:

 

 

 

 

 

 

 

 

 

 

 

 

Crude Oil (Bbls)

 

 

233,851

 

 

 

172,357

 

 

 

61,494

 

 

 

36%

Natural Gas (Mcf)

 

 

194,280

 

 

 

149,614

 

 

 

44,666

 

 

 

30%

NGL (Bbls)

 

 

17,455

 

 

 

3,328

 

 

 

14,127

 

 

 

424%

Total (Boe) (1)

 

 

283,686

 

 

 

200,621

 

 

 

83,065

 

 

 

41%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crude Oil (Bbls per day)

 

 

857

 

 

 

631

 

 

 

226

 

 

 

36%

Natural Gas (Mcf per day)

 

 

712

 

 

 

548

 

 

 

164

 

 

 

30%

NGL (Bbls per day)

 

 

64

 

 

 

12

 

 

 

52

 

 

 

433%

Total (Boe per day) (1)

 

 

1,040

 

 

 

734

 

 

 

306

 

 

 

42%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Sale Price:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crude Oil ($/Bbl)

 

$ 94.49

 

 

$ 61.70

 

 

$ 32.79

 

 

 

53%

Natural Gas ($/Mcf)

 

 

6.65

 

 

 

4.04

 

 

 

2.61

 

 

 

65%

NGL ($/Bbl)

 

 

41.19

 

 

 

30.32

 

 

 

10.87

 

 

 

36%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Operating Revenues (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crude Oil

 

$ 22,098

 

 

$ 10,635

 

 

$ 11,463

 

 

 

108%

Natural Gas

 

 

1,292

 

 

 

604

 

 

 

688

 

 

 

114%

NGL

 

 

719

 

 

 

101

 

 

 

618

 

 

 

612%

           Total Revenues

 

$ 24,109

 

 

$ 11,340

 

 

$ 12,769

 

 

 

113%

 

(1)

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

 

 
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Total crude oil, natural gas and NGL revenues for the nine-month period ended September 30, 2022 increased $12.8 million, or 113%, to $24.1 million, compared to $11.3 million for the same period a year ago, due primarily to a favorable price variance of $6.1 million, coupled with a favorable volume variance of $6.7 million. The increase in production volume is primarily driven by two main factors including, production from two new wells in the operated Permian Basin asset, and the positive performance from our participation in non-operated wells in the D-J Basin Asset.

 

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

 

 

 

2022

 

 

2021

 

 

 (Decrease)

 

 

 (Decrease)

 

Direct Lease Operating Expenses

 

$ 3,446

 

 

$ 2,700

 

 

$ 746

 

 

 

28%

Workovers

 

 

2,299

 

 

 

481

 

 

 

1,818

 

 

 

378%

Gain on ARO Settlement

 

 

(6 )

 

 

-

 

 

 

(6 )

 

 

100%

Other*

 

 

2,337

 

 

 

983

 

 

 

1,354

 

 

 

138%

Total Lease Operating Expenses

 

$ 8,076

 

 

$ 4,164

 

 

$ 3,912

 

 

 

94%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, Depletion,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization and Accretion

 

$ 6,427

 

 

$ 4,829

 

 

$ 1,598

 

 

 

33%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and Administrative (Cash)

 

$ 2,536

 

 

$ 2,567

 

 

$ (31 )

 

(1%)

 

Share-Based Compensation (Non-Cash)

 

 

1,572

 

 

 

1,867

 

 

 

(295 )

 

(16%)

 

Total General and Administrative Expense

 

$ 4,108

 

 

$ 4,434

 

 

$ (326 )

 

(7%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on Sale of Oil and Gas Properties

 

$ -

 

 

$ 1,805

 

 

$ (1,805 )

 

(100%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

$ -

 

 

$ (1 )

 

$ 1

 

 

(100%)

 

Interest Income

 

$ 40

 

 

$ 11

 

 

$ 29

 

 

 

264%

Other Income

 

$ 90

 

 

$ 76

 

 

$ 14

 

 

 

18%

Gain on Forgiveness of New PPP Loan

 

$ -

 

 

$ 374

 

 

$ (374 )

 

(100%) 

 

*Includes severance, ad valorem taxes and marketing costs.

 

Lease Operating Expenses. The increase of $3.9 million was primarily due to increased overall activity compared to the prior period as well as increased taxes and marketing fees from higher production volumes. Also, additional workovers for artificial lift repairs and optimizations have been executed during the current period in an effort to maximize production volumes during the current increased commodity pricing environment.  Workover expense included approximately $0.6 million of one-time non-recurring operating expenses for improving the Permian Basin Asset’s water handling infrastructure and approximately $0.2 million of non-recurring costs for environmental cleanup and reclamations of historic well and facility sites that were inherited from previous operators in our Permian Basin Asset.  Increased commodity pricing period over period caused increased production taxes coupled with increased marketing fees from higher production volumes.  Service and materials costs have also increased accordingly with general supply chain and inflation issues seen throughout the industry leading to increased operating costs. The two new wells with high production volume brought online in the Permian Basin asset also carry higher lease operating expenses to support the fluid production volumes.

 

 
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Depreciation, Depletion, Amortization and Accretion. The $1.6 million increase was primarily the result of an increase in production (noted above) in the current period when compared to the prior period.

 

General and Administrative Expenses (excluding share-based compensation). There was a nominal decrease in general and administrative expenses (excluding share-based compensation) as the Company continues to strive to contain costs and remain within budget from period to period.

 

Share-Based Compensation. Share-based compensation, which is included in general and administrative expenses in the Statements of Operations, decreased by $0.3 million primarily due to the forfeiture of certain employee stock-based options and nonvested restricted shares due to certain voluntary 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 prior period.

 

Interest Expense. The $0.01 million of interest expense in the prior period was due to accrued interest related to the Company’s New PPP Loan, which was forgiven in the prior period.

 

Interest Income and Other Income. Includes interest earned from our interest-bearing cash accounts, for which interest rates have increased in the current period, compared to the prior period.  Other income in the current period is primarily related to an $80,000 vendor dispute settlement coupled with a $24,000 non-refundable two-year rent payment made in September 2022, to the Company for office space leased by SK Energy, which is 100% owned and controlled by Simon Kukes, our Chief Executive Officer and director, offset by a $15,000 royalty adjustment.

 

Gain on Forgiveness of New PPP Loan. Includes principal and accrued interest from our New PPP Loan that was fully forgiven during the prior period.

 

Liquidity and Capital Resources

 

The primary sources of cash for the Company during the nine-month period ended September 30, 2022 were from $24.1 million in sales of crude oil and natural gas. The primary uses of cash were funds used for drilling, completion, acquisition 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. 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 continued effectiveness of the containment of the virus. 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, including as a result of ongoing supply constraints, increased inflation and increased interest rates, 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 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 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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Table of Contents

 

Ukraine Conflict

 

In late February 2022, Russia launched a significant military action against Ukraine. The conflict has caused, and could intensify, volatility in natural gas, oil and NGL prices, and the extent and duration of the military action, sanctions and resulting market disruptions could be significant and could potentially have a substantial negative impact on the global economy and/or our business for an unknown period of time. We believe that the increase in crude oil prices during the first three quarters of 2022 has partially been due to the impact of the conflict between Russia and Ukraine on the global commodity and financial markets, and in response to economic and trade sanctions that certain countries have imposed on Russia.

 

We plan to continue to closely monitor the global energy markets and oil and gas pricing, with the remainder of our 2022 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, 2022, the Company’s total current assets of $30.4 million exceeded its total current liabilities of $3.7 million, resulting in a working capital surplus of $26.7 million, while at December 31, 2021, the Company’s total current assets of $28.0 million exceeded its total current liabilities of $5.2 million, resulting in a working capital surplus of $22.8 million. The $3.9 million increase in our working capital surplus is primarily related to increases in our oil and gas sales (described above).

 

Financing

 

The Company has an ongoing $3.6 million offering of securities in an “at the market offering”, pursuant to which the Company may sell securities from time to time (the “ATM Offering”). On June 10, 2022, the Company sold 87,121 shares of common stock at a sales price of $1.66 per share in the ATM Offering for net proceeds of $141,000, which includes $4,000 in commission fees. The Company also incurred $91,000 in initial legal and audit fees for registration and placement of the ATM Offering.

 

The ATM Offering was made pursuant to the terms of that certain November 17, 2021, Sales Agreement (the “Sales Agreement”) with Roth Capital Partners, LLC (“Roth Capital”, or the “Agent”). The Company will pay the sales agent a commission of 3.0% of the gross sales price of any shares sold under the Sales Agreement, less reimbursement of the first $40,000 of such gross proceeds. The Company has also provided the Agent with customary indemnification rights and has agreed to reimburse the sales agent for certain specified expenses up to $25,000. The Company currently has $3.5 million remaining available in securities which we may sell in the future via the Sales Agreement.

 

We expect that we will have sufficient cash available to meet our needs over the foreseeable future, including to fund the remainder of our 2022 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 Simon Kukes, our Chief Executive Officer and director, which funding he is under no obligation to provide, (iv) public or private debt or equity financings, including up to $3.5 million in securities which we may sell in the future under the ATM Offering Sales Agreement, 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 over the next twelve months.

 

 
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Table of Contents

 

Cash Flows (in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

Cash flows provided by operating activities

 

$ 12,994

 

 

$ 3,971

 

Cash flows used in investing activities

 

 

(11,413 )

 

 

(309 )

Cash flows provided by financing activities

 

 

50

 

 

 

8,237

 

Net increase in cash and restricted cash

 

$ 1,631

 

 

$ 11,899

 

 

Cash flows provided by operating activities. Net cash provided by operating activities increased by $9.0 million for the current year’s period, when compared to the prior year’s period, primarily due to an increase in net income of $5.5 million, coupled with a $1.6 million increase in depreciation, depletion and amortization (due to increased sales production), offset by a $0.1 million net decrease to our other components of working capital (predominantly from accounts payable) in the current period. During the nine months ended September 30, 2021, we also had a $1.8 million gain on the sale of oil and gas properties and a $0.4 million gain from forgiveness of our New PPP Loan.

 

Cash flows used in investing activities. Net cash used in investing activities increased by $11.1 million for the current year’s period, when compared to the prior year’s period, primarily due to increased capital spending relating to our drilling and completion activities.

 

Cash flows provided by financing activities. In the prior period, 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) which generated $8.2 million of proceeds, net of offering costs.  The current period sale of our common stock via our ATM Offering is discussed directly above.

 

Non-GAAP Financial Measures

 

We have included EBITDA and Adjusted EBITDA in this Report as supplements to GAAP measures of performance to provide investors with an additional financial analytical framework which management uses, in addition to historical operating results, as the basis for financial, operational and planning decisions and present measurements that third parties have indicated are useful in assessing the Company and its results of operations. “EBITDA” represents net income before interest, taxes, depreciation and amortization. “Adjusted EBITDA” represents EBITDA, less share-based compensation, gain on sale of oil and gas properties, gain on forgiveness of PPP loan, and accounts payable settlements. Adjusted EBITDA excludes certain items that we believe affect the comparability of operating results and can exclude items that are generally non-recurring in nature or whose timing and/or amount cannot be reasonably estimated. EBITDA and Adjusted EBITDA are presented because we believe they provide additional useful information to investors due to the various noncash items during the period. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our operating results as reported under GAAP. Some of these limitations are: EBITDA and Adjusted EBITDA do not reflect cash expenditures, future requirements for capital expenditures, or contractual commitments; EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, working capital needs; and EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on debt or cash income tax payments. For example, although depreciation and amortization are noncash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements. Additionally, other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than PEDEVCO Corp. does, limiting its usefulness as a comparative measure. You should not consider EBITDA and Adjusted EBITDA in isolation, or as substitutes for analysis of the Company’s results as reported under GAAP. The Company’s presentation of these measures should not be construed as an inference that future results will be unaffected by unusual or nonrecurring items. We compensate for these limitations by providing a reconciliation of each of these non-GAAP measures to the most comparable GAAP measure. We encourage investors and others to review our business, results of operations, and financial information in their entirety, not to rely on any single financial measure, and to view these non-GAAP measures in conjunction with the most directly comparable GAAP financial measure. The following table presents a reconciliation of the GAAP financial measure of net income to the non-GAAP financial measure of Adjusted EBITDA (in thousands):

 

 
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Three Months Ended 

 

 

Nine Months Ended 

 

 

 

September 30,

 

 

September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net income (loss)

 

$ 1,079

 

 

$ (325 )

 

$ 5,628

 

 

$ 178

 

Add (deduct)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, depletion, amortization and accretion

 

 

2,313

 

 

 

1,666

 

 

 

6,427

 

 

 

4,829

 

Interest expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1

 

EBITDA

 

 

3,392

 

 

 

1,341

 

 

 

12,055

 

 

 

5,008

 

Add (deduct)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

472

 

 

 

592

 

 

 

1,572

 

 

 

1,867

 

Gain on sale of oil and gas properties

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,805 )

Gain on forgiveness of PPP loan

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(374 )

Accounts payable settlements

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(32 )

Adjusted EBITDA

 

$ 3,864

 

 

$ 1,933

 

 

$ 13,627

 

 

$ 4,664

 

 

Critical Accounting Policies

 

Our discussion and analysis of our financial condition and results of operations is based on our 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. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our most significant judgments and estimates used in preparation of our financial statements.

 

Oil and Gas Properties, Successful Efforts Method. The successful efforts method of accounting is used for oil and gas exploration and production activities. Under this method, all costs for development wells, support equipment and facilities, and proved mineral interests in oil and gas properties are capitalized. Geological and geophysical costs are expensed when incurred. Costs of exploratory wells are capitalized as exploration and evaluation assets pending determination of whether the wells find proved oil and gas reserves. Proved oil and gas reserves are the estimated quantities of crude oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, (i.e., prices and costs as of the date the estimate is made). Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions.

 

Exploratory wells in areas not requiring major capital expenditures are evaluated for economic viability within one year of completion of drilling. The related well costs are expensed as dry holes if it is determined that such economic viability is not attained. Otherwise, the related well costs are reclassified to oil and gas properties and subject to impairment review. For exploratory wells that are found to have economically viable reserves in areas where major capital expenditure will be required before production can commence, the related well costs remain capitalized only if additional drilling is under way or firmly planned. Otherwise, the related well costs are expensed as dry holes.

 

Exploration and evaluation expenditures incurred subsequent to the acquisition of an exploration asset in a business combination are accounted for in accordance with the policy outlined above.

 

 
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Depreciation, depletion and amortization of capitalized oil and gas properties is calculated on a field-by-field basis using the unit of production method. Lease acquisition costs are amortized over the total estimated proved developed and undeveloped reserves and all other capitalized costs are amortized over proved developed reserves. Costs specific to developmental wells for which drilling is in progress or uncompleted are capitalized as wells in progress and not subject to amortization until completion and production commences, at which time amortization on the basis of production will begin.

 

Revenue Recognition. The Company’s revenue is comprised entirely of revenue from exploration and production activities. The Company’s oil is sold primarily to marketers, gatherers, and refiners. Natural gas is sold primarily to interstate and intrastate natural-gas pipelines, direct end-users, industrial users, local distribution companies, and natural-gas marketers. NGLs are sold primarily to direct end-users, refiners, and marketers. Payment is generally received from the customer in the month following delivery.

 

Contracts with customers have varying terms, including month-to-month contracts, and contracts with a finite term. The Company recognizes sales revenues for oil, natural gas, and NGLs based on the amount of each product sold to a customer when control transfers to the customer. Generally, control transfers at the time of delivery to the customer at a pipeline interconnect, the tailgate of a processing facility, or as a tanker lifting is completed. Revenue is measured based on the contract price, which may be index-based or fixed, and may include adjustments for market differentials and downstream costs incurred by the customer, including gathering, transportation, and fuel costs.

 

Revenues are recognized for the sale of the Company’s net share of production volumes. Sales on behalf of other working interest owners and royalty interest owners are not recognized as revenues.

 

Stock-Based Compensation. Pursuant to the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718, Compensation – Stock Compensation, which establishes accounting for equity instruments exchanged for employee service, we utilize the Black-Scholes option pricing model to estimate the fair value of employee stock option awards at the date of grant, which requires the input of highly subjective assumptions, including expected volatility and expected life. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our share-based compensation. These assumptions are subjective and generally require significant analysis and judgment to develop. When estimating fair value, some of the assumptions will be based on, or determined from, external data and other assumptions may be derived from our historical experience with stock-based payment arrangements. The appropriate weight to place on historical experience is a matter of judgment, based on relevant facts and circumstances. We estimate volatility by considering historical stock volatility. We have opted to use the simplified method for estimating expected term, which is equal to the midpoint between the vesting period and the contractual term.

 

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).

 

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.

 

 
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Table of Contents

 

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, 2022, that our disclosure controls and procedures were designed at a reasonable assurance level and were effective to provide reasonable assurance that the information we are required to disclose in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

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, 2022, 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, some members of our workforce began operating primarily in a work from home environment starting in April 2020, and several continue to work from home on a full or part-time basis as of the date of this filing. While pre-existing controls were not specifically designed to operate in our current work from home operating environment, we don’t 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 Contents

 

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, 2021, filed with the Commission on March 11, 2022 (the “Form 10-K”), under the heading “Item 1A. Risk Factors”, except 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 of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating results and stock price.

 

Our industry and the broader US economy have experienced higher than expected inflationary pressures in the first three quarters of 2022, related to continued supply chain disruptions, labor shortages and geopolitical instability. Should these conditions persist our business, results of operations and cash flows could be materially and adversely affected.

 

The first three quarters of 2022 have seen significant increases in the costs of certain materials, including steel, sand and fuel, as a result of availability constraints, supply chain disruption, increased demand, labor shortages associated with a fully employed US labor force, high inflation, interest rates and other factors. Supply and demand fundamentals have been further aggravated by disruptions in global energy supply caused by multiple geopolitical events, including the ongoing conflict between Russia and Ukraine. Our 2022 development program incorporates an increase in both basins relating to service cost and materials inflation resulting in an estimated cost increase of approximately 25 to 30 percent per well on our Permian Asset and 10 to 20 percent on our D-J Asset, based on costs we have experienced commencing in the third quarter of 2021 and continuing through the third quarter of 2022.  Service and materials costs have also increased accordingly with general supply chain and inflation issues seen throughout the industry leading to increased operating costs. Recent supply chain constraints and inflationary pressures may continue to adversely impact our operating costs and may negatively impact our ability to procure materials and equipment in a timely and cost-effective manner, if at all, which could result in reduced margins and production delays and, as a result, our business, financial condition, results of operations and cash flows could be materially and adversely affected.

 

The conflict in Ukraine and related price volatility and geopolitical instability could negatively impact our business.

 

In late February 2022, Russia launched significant military action against Ukraine. The conflict has caused, and could intensify, volatility in natural gas, oil and NGL prices, and the extent and duration of the military action, sanctions and resulting market disruptions could be significant and could potentially have a substantial negative impact on the global economy and/or our business for an unknown period of time. We believe that the increase in crude oil prices during the first half of 2022 has partially been due to the impact of the conflict between Russia and Ukraine on the global commodity and financial markets, and in response to economic and trade sanctions that certain countries have imposed on Russia. Any such volatility and disruptions may also magnify the impact of other risks described under “Risk Factors” in Item 1A of our 2021 Annual Report on Form 10-K.

 

We have been and may continue to be negatively impacted by inflation.

 

Increases in inflation have had an adverse effect on us. Current and future inflationary effects may be driven by, among other things, supply chain disruptions and governmental stimulus or fiscal policies, and geopolitical instability, including the ongoing conflict between the Ukraine and Russia. Continuing increases in inflation, have in the past, and could in the future, impact our costs of labor, equipment and services and the margins we are able to realize on our wells, all of which could have an adverse impact on our business, financial position, results of operations and cash flows. Inflation has also resulted in higher interest rates, which in turn raises our cost of debt borrowing.

 

 
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Table of Contents

 

Economic uncertainty may affect our access to capital and/or increase the costs of such capital.

 

Global economic conditions continue to be volatile and uncertain due to, among other things, consumer confidence in future economic conditions, fears of recession and trade wars, the price of energy, fluctuating interest rates, the availability and cost of consumer credit, the availability and timing of government stimulus programs, levels of unemployment, increased inflation, and tax rates. These conditions remain unpredictable and create uncertainties about our ability to raise capital in the future. In the event required capital becomes unavailable in the future, or more costly, it could have a material adverse effect on our business, results of operations, and financial condition.

 

Prices of oil, NGL and natural gas prices, have in the past, and will continue in the future, to be volatile and such volatility may adversely affect our business, financial condition or results of operations and our ability to meet our capital expenditure obligations or targets and financial commitments.

 

The price we receive for our oil and, to a lesser extent, natural gas and NGLs, heavily influences our revenue, profitability, cash flows, liquidity, access to capital, present value and quality of our reserves, the nature and scale of our operations and future rate of growth. Oil, NGL and natural gas are commodities and, therefore, their prices are subject to wide fluctuations in response to relatively minor changes in supply and demand. In recent years, the markets for oil and natural gas have been volatile. These markets will likely continue to be volatile in the future. Further, oil prices and natural gas prices do not necessarily fluctuate in direct relation to each other. Because approximately 88% of our estimated proved reserves as of December 31, 2021 were oil, our financial results are more sensitive to movements in oil prices. The price of crude oil has experienced significant volatility over the last five years, with the price per barrel of West Texas Intermediate (“WTI”) crude rising from a low of $27 in February 2016 to a high of $76 in October 2018, then, in 2020, dropping below $20 per barrel due in part to reduced global demand stemming from the recent global COVID-19 outbreak, and more recently surging to over $123 a barrel in early March 2022, following Russia’s invasion of the Ukraine, with current trading prices around $85-92 a barrel. A prolonged period of low market prices for oil and natural gas, or further declines in the market prices for oil and natural gas, will likely result in capital expenditures being further curtailed and will adversely affect our business, financial condition and liquidity and our ability to meet obligations, targets or financial commitments and could ultimately lead to restructuring or filing for bankruptcy, which would have a material adverse effect on our stock price and indebtedness.

 

The below table highlights the recent volatility in oil and gas prices by summarizing the high and low daily NYMEX WTI oil spot price and daily NYMEX natural gas Henry Hub spot price for the periods presented:

 

 

Daily NYMEX WTI oil spot price (per Bbl)

Daily NYMEX natural gas Henry Hub spot price (per MMBtu)

 

High

Low

High

Low

Year ended December 31, 2019

$66.24

$46.31

$4.25

$1.75

Year ended December 31, 2020

$63.27

($36.98)

$3.14

$1.33

Year ended December 31, 2021

$85.64

$47.47

$23.86

$2.43

Nine months ended September 30, 2022

$123.64

$75.99

$9.85

$3.73

 

We have entered into Agreed Compliance Orders, as amended (“ACOs”), with the State of New Mexico Energy, Minerals and Natural Resources Department (“EMNRD”) which require the restoration of production, or plugging and abandonment, of an aggregate of approximately 333 legacy vertical wells in our New Mexico Asset, with any failure by us to comply with the ACOs likely to materially and adversely affect our business, results of operations and cash flows.

 

 
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Table of Contents

 

The Company has previously entered into ACOs with the EMNRD through its New Mexico operating subsidiaries, Ridgeway Arizona Oil Corp. (“Ridgeway”) and EOR Operating Company (“EOR”), which require the Company to restore to production, or plug and abandon, an aggregate of approximately 333 legacy vertical wells by certain specified dates.  In the event the Company is unable to fully comply with the terms of these ACOs, then the Company could be subject to significant civil penalties and sanctions, which would likely have a material adverse effect on our business, financial condition and results of operations, could require us to raise additional funding which may not be available on commercially reasonable terms, if at all, and may negatively affect our drilling plans in the future, and may cause the value of our securities to decline in value.

 

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, 2022, and through the date of the filing of this Report.

 

Use of Proceeds From Sale of Registered Securities

 

None.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable.

 

ITEM 5. OTHER INFORMATION

 

On August 2, 2022, the Company received correspondence from the EMNRD alleging that the Company’s New Mexico operating subsidiaries, Ridgeway and EOR, failed to comply with certain requirements of ACOs previously negotiated and entered into by each of Ridgeway and EOR with the EMNRD, specifically alleging that Ridgeway and EOR failed to provide reports and proof of conducting certain well tests by dates specified in the ACOs.  Further, in the correspondence, the EMNRD notified us that the ACOs were now void due to alleged non-compliance, that an aggregate of approximately 333 legacy vertical wells inherited by the Company when it acquired the fields in 2018 were required to be brought back online or plugged immediately, and further demanded that Ridgway and EOR pay civil penalties totaling an aggregate of $850,500 no later than August 31, 2022, with additional penalties accruing thereafter as a result of our alleged non-compliance and interest accruing on unpaid portions thereof at 8.75% per annum.  The Company immediately engaged in discussions with the EMNRD regarding the issues raised in the correspondence, and in mid-August 2022 the EMNRD confirmed that it had erred in alleging that Ridgeway was in violation of its ACO pertaining to approximately 284 legacy vertical wells operated by Ridgeway, and that the EMNRD’s demand letter related to the Ridgeway ACO was invalid and withdrawn.  Following additional correspondence between the Company and the EMNRD related to EOR’s ACO pertaining to approximately 49 legacy vertical wells operated by EOR, on November 10, 2022, EOR entered into an amended ACO with the EMNRD (the “Amended EOR ACO”), which provides, among other things, that (i) the EMNRD’s demand for payment of penalties was resolved, (ii) EOR would restore to production, or plug and abandon, the 49 wells listed in the Amended EOR ACO by no later than December 31, 2024, (iii) EOR would provide monthly reports to the Director of the Oil Conservation Division (“OCD”) regarding actions taken for each well, (iv) EOR would maintain financial assurance for the wells and place $50,000 cash in an escrow account in New Mexico designating the OCD as beneficiary, which escrowed funds will be forfeit in the event EOR fails to meet any well plugging deadline, (v) EOR may request, and the OCD may grant, an extension of the deadlines under the Amended EOR ACO for good cause shown, and (vi) EOR may not transfer a well to another operator unless approved by the OCD.  Accordingly, the Company believes that the issues raised in the August 2, 2022 correspondence from the EMNRD regarding compliance failures by its New Mexico operating subsidiaries, Ridgeway and EOR, have been favorably resolved.

 

 
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Table of Contents

 

ITEM 6. EXHIBITS

 

 

 

 

 

Incorporated By Reference

Exhibit No.

 

Description

 

Form

 

Exhibit

 

Filing Date

 

File Number

3.1

 

Amendment to Bylaws (August 25, 2022)

 

8-K

 

3.1

 

8/26/22

 

001-35922

10.1#

 

Sublease Letter Agreement, dated August 25, 2022, entered into by and between PEDEVCO Corp. and SK Energy, LLC

 

8-K

 

10.1

 

8/26/22

 

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*

 

XBRL Taxonomy Extension Schema Document

 

 

 

 

 

 

 

 

101.CAL*

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

 

 

 

 

 

101.DEF*

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 

 

 

 

 

101.LAB*

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

 

 

 

 

 

101.PRE*

 

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.

# Indicates management contract or compensatory plan or arrangement. 

 

 
32

Table of Contents

 

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 14, 2022

By:

/s/ Dr. Simon Kukes

 

 

 

Dr. Simon Kukes

 

 

 

Chief Executive Officer

 

 

 

(Principal Executive Officer)

 

 

 

PEDEVCO Corp.

 

 

 

 

November 14, 2022

By:

/s/ Paul A. Pinkston

 

 

 

Paul A. Pinkston

 

 

 

Chief Accounting Officer

 

 

 

(Principal Financial and Accounting Officer)

 

 

 
33

 

PEDEVCO (AMEX:PED)
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