PEDEVCO CORP - Quarter Report: 2019 June (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended: June 30, 2019

 

☐	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

 

PEDEVCO Corp.

(Exact name of registrant as specified in its charter)

 

Texas		22-3755993
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

 

1250 Wood Branch Park Dr., Suite 400

Houston, Texas 77079

(Address of Principal Executive Offices)

 

(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 August 9, 2019, there were 53,877,065 shares of the Registrant’s common stock outstanding.

 

 

PEDEVCO CORP.

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION		Page
Item 1. Financial Statements		3
Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018 (Unaudited)		3
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited)		4
Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited)		5
Consolidated Statements of Shareholders’ Equity for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited)		6
Notes to Unaudited Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3. Quantitative and Qualitative Disclosures About Market Risk		28
Item 4. Controls and Procedures		28
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		30
Item 3. Defaults Upon Senior Securities		30
Item 4. Mine Safety Disclosures		30
Item 5. Other Information		30
Item 6. Exhibits		30
Signatures		31
Exhibit Index		32

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

PEDEVCO CORP.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

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

 

	June 30,	December 31,
	2019	2018
Assets
Current assets:
Cash	$13,370	$3,463
Restricted cash – current	-	2,316
Accounts receivable – oil and gas	1,381	842
Prepaid expenses and other current assets	62	204
Total current assets	14,813	6,825
Oil and gas properties:
Oil and gas properties, subject to amortization, net	72,351	51,946
Oil and gas properties, not subject to amortization, net	2,190	8,516
Total oil and gas properties, net	74,541	60,462
Other assets	3,575	238
Total assets	$92,929	$67,525
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$2,843	$4,509
Accrued expenses	1,335	3,391
Revenue payable	817	831
Asset retirement obligations - current	129	119
Total current liabilities	5,124	8,850
Long-term liabilities:
Accrued expenses	-	14
Accrued expenses – related party	-	943
Notes payable – subordinated	-	400
Notes payable – subordinated – related party	-	30,200
Notes payable – related party, net of debt discount of $-0- and $161, respectively	-	7,694
Asset retirement obligations	2,516	2,452
Total liabilities	7,640	50,553
Commitments and contingencies
Shareholders’ equity:
Common stock, $0.001 par value, 200,000,000 shares authorized; 53,827,065 and 15,808,445 shares issued and outstanding, respectively	53	16
Additional paid-in capital	175,185	101,450
Accumulated deficit	(89,949)	(84,494)
Total shareholders’ equity	85,289	16,972
Total liabilities and shareholders’ equity	$92,929	$67,525

 

See accompanying notes to unaudited consolidated financial statements.

 

 

PEDEVCO CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

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

 

	Three Months Ended		Six Months Ended
	June 30,		June 30,
Revenue:	2019	2018	2019	2018
Oil and gas sales	$4,070	$898	$5,638	$1,542
Operating expenses:
Lease operating costs	2,095	417	3,065	729
Exploration expense	13	28	23	38
Selling, general and administrative expense	1,644	616	2,972	1,354
Depreciation, depletion, amortization and accretion	2,784	701	5,033	1,283
Total operating expenses	6,536	1,762	11,093	3,404
Gain on sale of oil and gas properties	-	-	920	-
Operating income (loss)	(2,466)	(864)	(4,535)	(1,862)
Other income (expense):
Interest expense	-	(3,155)	(826)	(6,391)
Interest Income	9	-	9	-
Gain on debt restructuring	-	70,309	-	70,309
Other expense	(3)	-	(103)	-
Total other income (expense)	6	67,154	(920)	63,918
Net income (loss)	$(2,460)	$66,290	$(5,455)	$62,056
Earnings (loss) per common share:
Basic	$(0.05)	$9.01	$(0.14)	$8.48
Diluted	$(0.05)	$4.73	$(0.14)	$4.44
Weighted average number of common shares outstanding:
Basic	49,198,625	7,357,234	38,572,537	7,318,211
Diluted	49,198,625	14,026,722	38,572,537	13,982,684

 

See accompanying notes to unaudited consolidated financial statements.

 

PEDEVCO CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(amounts in thousands)

 

	Six Months Ended June 30,
	2019	2018
Cash Flows From Operating Activities:
Net loss	$(5,455)	$62,056
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation, depletion and amortization	5,033	1,283
Share-based compensation expense	697	349
Interest expense deferred and capitalized in debt restructuring	-	3,803
Gain on debt restructuring	-	(70,309)
Gain on sale of oil and gas properties	(920)	-
Amortization of debt discount	161	1,391
Changes in operating assets and liabilities:
Accounts receivable – oil and gas	(539)	(345)
Prepaid expenses and other current assets	142	46
Accounts payable	4,373	244
Accrued expenses	(450)	1,109
Accrued expenses – related parties	(943)	-
Revenue payable	(14)	97
Net cash provided by (used in) operating activities	2,085	(276)
Cash Flows From Investing Activities:
Cash paid for the acquisition of oil and gas properties	(1,056)	-
Cash paid for drilling and completion costs	(24,269)	-
Proceeds from the sale of oil and gas property	1,175	-
Cash paid for property and equipment	(47)	-
Net cash used in investing activities	(24,197)	-
Cash Flows From Financing Activities:
Proceeds from notes payable – related parties	15,000	7,700
Repayment of notes payable	-	(7,795)
Proceeds from issuance of common shares	18,000	-
Net cash provided by (used in) financing activities	33,000	(95)
Net increase (decrease) in cash and restricted cash	10,888	(371)
Cash and restricted cash at beginning of period	5,779	917
Cash and restricted cash at end of period	$16,667	$546
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	$6,039	$-
Acquisition of asset retirement obligations	$33	$-
Changes in estimates of asset retirement costs	$129	$7
Common stock issued as debt inducement	$-	$185
Common stock issued for debt conversion	$55,075	$-

 

See accompanying notes to unaudited consolidated financial statements.

 

 

PEDEVCO CORP.

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

(Unaudited)

(amounts in thousands, except share amounts)

  

	Series A Convertible Preferred Stock		Common Stock		Additional Paid-in	Accumulated
	Shares	Amount	Shares	Amount	Capital	Deficit	Totals
Balances at January 1, 2019	-	$-	15,808,445	$16	$101,450	$(84,494)	$16,972
Issuance of common stock for debt conversion	-	-	29,480,383	29	55,046	-	55,075
Stock-based compensation	-	-	-	-	299	-	299
Net loss	-	-	-	-	-	(2,995)	(2,995)
Balances at March 31, 2019	-	-	45,288,828	45	156,795	(87,489)	69,351
Issuance of restricted common stock	-	-	160,000	-	-	-	-
Issuance of common stock to non-affiliates	-	-	1,500,000	1	2,999	-	3,000
Issuance of common stock to affiliate	-	-	6,818,181	7	14,993	-	15,000
Warrants exercised	-	-	60,056	-	-	-	-
Stock-based compensation	-	-	-	-	398	-	398
Net loss	-	-	-	-	-	(2,460)	(2,460)
Balances at June 30, 2019	-	$-	53,827,065	$53	$175,185	$(89,949)	$85,289

 

	Series A Convertible Preferred Stock		Common Stock		Additional Paid-in	Accumulated
	Shares	Amount	Shares	Amount	Capital	Deficit	Totals
Balances at January 1, 2018	66,625	$-	7,278,754	$7	$100,954	$(138,101)	$(37,140)
Stock-based compensation	-	-	-	-	183	-	183
Net Income	-	-	-	-	-	(4,234)	(4,234)
Balances at March 31, 2018	66,625	-	7,278,754	7	101,137	(142,335)	(41,191)
Conversion of stock options	-	-	30,848	-	-	-	-
Issuance of restricted common stock	-	-	80,000	-	-	-	-
Issuance of warrants for debt repayment	-	-	-	-	322	-	322
Issuance of common stock for debt inducement	-	-	600,000	1	184	-	185
Stock-based compensation	-	-	-	-	166	-	166
Net Income	-	-	-	-	-	66,290	66,290
Balances at June 30, 2018	66,625	$-	7,989,602	$8	$101,809	$(76,045)	$25,772

 

See accompanying notes to unaudited consolidated financial statements.  

 

 

PEDEVCO CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION

 

The accompanying interim unaudited consolidated financial statements of PEDEVCO Corp. (“PEDEVCO” or the “Company”), have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements and notes thereto contained in PEDEVCO’s latest Annual Report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements that would substantially duplicate disclosures contained in the audited financial statements for the most recent fiscal year, as reported in the Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on April 1, 2019, have been omitted.

 

The Company’s consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and subsidiaries in which the Company has a controlling financial interest. All significant inter-company accounts and transactions have been eliminated in consolidation.

 

The Company's future financial condition and liquidity will be impacted by, among other factors, the success of our drilling program, the number of commercially viable oil and natural gas discoveries made and the quantities of oil and natural gas discovered, the speed with which we can bring such discoveries to production, and the actual cost of exploration, appraisal and development of our prospects.

  

NOTE 2 – DESCRIPTION OF BUSINESS

 

PEDEVCO is an oil and gas company focused on the development, acquisition and production of oil and natural gas assets where the latest in modern drilling and completion techniques and technologies have yet to be applied. In particular, the Company focuses on legacy proven properties where there is a long production history, well defined geology and existing infrastructure that can be leveraged when applying modern field management technologies. The Company’s current properties are located in the San Andres formation of the Permian Basin situated in West Texas and eastern New Mexico (the “Permian Basin”) and in the Denver-Julesberg Basin (“D-J Basin”) in Colorado.  The Company holds its Permian Basin acres located in Chavez and Roosevelt Counties, New Mexico, through its wholly-owned operating subsidiary, Pacific Energy Development Corp. (“PEDCO”), which asset the Company refers to as its “Permian Basin Asset,” and it holds its D-J Basin acres located in Weld and Morgan Counties, Colorado, through its wholly-owned operating subsidiary, Red Hawk Petroleum, LLC (“Red Hawk”), which asset the Company refers to as its “D-J Basin Asset.”

 

The Company’s strategy is to be the operator, directly or through its subsidiaries and joint ventures, in the majority of its acreage so it can dictate the pace of development in order to execute its business plan. The majority of its capital expenditure budget through 2019 will be focused on the development of the Company’s Permian Basin Asset, with a secondary focus on development of its D-J Basin Asset. The Company’s 2019 total development plan calls for the deployment of an estimated $50 million in capital, of which approximately $40 million has been raised to date. On the Company’s Permian Basin Asset, four initial horizontal wells were drilled in the first quarter of 2019 in Phase One of its development plan. Phase Two of the development program began in July 2019, which plans for the drilling and completion of four new horizontal San Andres wells, drilling of one salt water disposal well, the completion of one drilled uncompleted horizontal well, and putting on first production of a well drilled and completed in Phase One which was not put on production during Phase One due to salt water disposal constraints. The Company’s future D-J Basin Asset development plans are currently under evaluation for its operated acreage, but the Company anticipates deploying approximately $1 million in capital to participate in drilling and completion operations by other operators on its non-operated acreage through 2019. The Company expects that it will have sufficient cash available to meet its needs over the foreseeable future, which cash the Company anticipates being available from (i) its projected cash flows from operations, (ii) its existing cash on hand, (iii) equity infusions or loans (which may be convertible) made available from SK Energy LLC, which is 100% owned and controlled by Dr. Simon Kukes, the Company’s Chief Executive Officer and director (“SK Energy”), which funding SK Energy is under no obligation to provide, and (iv) funding through credit or loan facilities. In addition, the Company may seek additional funding through asset sales, farm-out arrangements, lines of credit, or public or private debt or equity financings to fund additional 2019 capital expenditures and/or acquisitions. If market conditions are not conducive to raising additional funds, the Company may choose to extend the drilling program and associated capital expenditures further into 2020.

 

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The Company has provided a discussion of significant accounting policies, estimates and judgments in its 2018 Annual Report. There have been no changes to the Company’s significant accounting policies since December 31, 2018.

 

Recently Adopted Accounting Pronouncements

 

Revenue Recognition. Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)”, supersedes the revenue recognition requirements and industry-specific guidance under Revenue Recognition (Topic 605). Topic 606 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. The Company adopted Topic 606 on January 1, 2018, using the modified retrospective method applied to contracts that were not completed as of January 1, 2018. Under the modified retrospective method, prior period financial positions and results will not be adjusted. The cumulative effect adjustment recognized in the opening balances included no significant changes as a result of this adoption. While the Company’s net earnings are not materially impacted by revenue recognition timing changes, Topic 606 requires certain changes to the presentation of revenues and related expenses beginning January 1, 2018. Refer to Note 4 – Revenue from Contracts with Customers for additional information.

 

Leases. In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, “Leases (Topic 842)”. The new lease guidance supersedes Topic 840. The core principle of the guidance is that entities should recognize the assets and liabilities that arise from leases. Topic 840 does not apply to leases to explore for or use minerals, oil, natural gas and similar nonregenerative resources, including the intangible right to explore for those natural resources and rights to use the land in which those natural resources are contained. In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements”, which provides entities with an alternative modified transition method to elect not to recast the comparative periods presented when adopting Topic 842. The Company adopted Topic 842 as of January 1, 2019, using the alternative modified transition method, for which, comparative periods, including the disclosures related to those periods, are not restated.

 

In addition, the Company elected practical expedients provided by the new standard whereby, the Company has elected to not reassess its prior conclusions about lease identification, lease classification, and initial direct costs and to retain off-balance sheet treatment of short-term leases (i.e., 12 months or less and does not contain a purchase option that the Company is reasonably certain to exercise). As a result of the short-term expedient election, the Company has no leases that require the recording of a net lease asset and lease liability on the Company’s consolidated balance sheet or have a material impact on consolidated earnings or cash flows as of June 30, 2019. Moving forward, the Company will evaluate any new lease commitments for application of Topic 842.

Compensation-Stock Compensation. In June 2018, the FASB issued ASU 2018-07, “Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting”. The amendments in this update maintain or improve the usefulness of the information provided to the users of financial statements while reducing cost and complexity in financial reporting. The areas for simplification in this update involve several aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the scope of Topic 718, to include share-based payment transactions for acquiring goods and services from nonemployees. Some of the areas for simplification apply only to nonpublic entities. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company adopted the standard as of January 1, 2019. There was no impact of the standard on its consolidated financial statements.

 

 

Recently Issued Accounting Pronouncements

The Company does not expect the adoption of any other recently issued accounting pronouncements to have a significant impact on its financial position, results of operations, or cash flows.

Subsequent Events

The Company has evaluated all transactions through the date the consolidated financial statements were issued for subsequent event disclosure consideration.

NOTE 4 – REVENUE FROM CONTRACTS WITH CUSTOMERS

 

Exploration and Production. There were no significant changes to the timing or valuation of revenue recognized for sales of production from exploration and production activities.

 

Disaggregation of Revenue from Contracts with Customers. The following table disaggregates revenue by significant product type in the periods indicated (in thousands):

 

	Three Months Ended	Six Months Ended
	June 30, 2019	June 30, 2019
Oil sales	$4,037	$5,490
Natural gas sales	26	135
Natural gas liquids sales	7	13
Total revenue from customers	$4,070	$5,638

 

There were no significant contract liabilities or transaction price allocations to any remaining performance obligations as of June 30, 2019. 

  

NOTE 5 – RESTRICTED 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 shown in the accompanying consolidated statements of cash flows (in thousands): 

 

	As of June 30,
	2019	2018
Cash	$13,370	$917
Restricted cash included in other assets	3,297	-
Total cash and restricted cash as shown in the consolidated statements of cash flows	$16,667	$917

 

NOTE 6 – OIL AND GAS PROPERTIES

 

The following table summarizes the Company’s oil and gas activities by classification for the six months ended June 30, 2019 (in thousands):

 

	Balance at December 31,				Balance at June 30,
	2018	Additions	Disposals	Transfers	2019
Oil and gas properties, subject to amortization	$70,803	$19,016	$(255)	$6,596	$96,160
Oil and gas properties, not subject to amortization	8,516	270	-	(6,596)	2,190
Asset retirement costs	2,188	(96)	-	-	2,092
Accumulated depreciation and depletion	(21,045)	(4,856)	-	-	(24,901)
Total oil and gas assets	$60,462	$14,334	$(255)	$-	$74,541

 

 

On February 1, 2019, for consideration of $700,000, the Company completed an asset purchase from Manzano, LLC and Manzano Energy Partners II, LLC, whereby the Company purchased approximately 18,000 net leasehold acres, ownership and operated production from one horizontal well currently producing from the San Andres play in the Permian Basin, ownership of three additional shut-in wells and ownership of one saltwater disposal well. The Company subsequently drilled one Manzano well in Phase Two of its 2019 development plan, which has yet to be completed as of June 30, 2019.

 

On March 7, 2019, Red Hawk sold rights to 85.5 net acres of oil and gas leases located in Weld County, Colorado, to a third party, for aggregate proceeds of $1.2 million and recognized a gain on sale of oil and gas properties of $920,000 on the statement of operations. The sale agreement included a provision whereby the purchaser was required to assign Red Hawk 85 net acres of leaseholds in an area located where the Company already owns other leases in Weld County, Colorado, within nine months from the date of the sale, or to repay the Company up to $200,000 (proportionally adjusted for the amount of leasehold delivered). The purchaser has not yet identified or assigned the required leasehold acreage to the Company.

 

Effective June 10, 2019, for consideration of $350,000, the Company completed an asset purchase from a private operator, whereby the Company purchased approximately 2,076 net leasehold acres, ownership and operated production from 22 vertical wells currently producing from the San Andres play in the Permian Basin and ownership of three injection wells.

 

For the three and six months ended June 30, 2019, the Company has incurred $5.4 million and $18.2 million, respectively, in capital cost which included drilling costs for the drilling of five wells (four of which were completed), and corresponding facility costs. There were no drilling costs for the three and six months ended June 30, 2018.

 

The depletion recorded for production on proved properties for the three and six months ended June 30, 2019 and 2018, amounted to $2,715,000 compared to $688,000, and $4,855,000, compared to $1,251,000, respectively.

 

NOTE 7 – OTHER CURRENT ASSETS

 

On September 11, 2013, the Company entered into a Shares Subscription Agreement (“SSA”) to acquire an approximate 51% ownership in Asia Sixth Energy Resources Limited (“Asia Sixth”), which held an approximate 60% ownership interest in Aral Petroleum Capital Limited Partnership (“Aral”), a Kazakhstan entity. In August 2014 the SSA was restructured (the “Aral Restructuring”), in connection with which the Company received a promissory note in the principal amount of $10.0 million from Asia Sixth (the “A6 Promissory Note”), which was to be converted into a 10.0% interest in Caspian Energy, Inc. (“Caspian Energy”), an Ontario, Canada company listed at that time on the NEX Board of the TSX Venture Exchange, upon the consummation of the Aral Restructuring. The Aral Restructuring was consummated on May 20, 2015, upon which date the A6 Promissory Note was converted into 23,182,880 shares of common stock of Caspian Energy.

In February 2015, the Company expanded its D-J Basin position through the acquisition of acreage from Golden Globe Energy (US), LLC (“GGE”)(the “GGE Acquisition” and the “GGE Acquired Assets”). In connection with the GGE Acquisition, on February 23, 2015, the Company provided GGE an option to acquire its interest in Caspian Energy for $100,000 payable upon exercise of the option (with an expiration date of May 12, 2019) recorded in prepaid expenses and other current assets. As a result, the carrying value of the 23,182,880 shares of common stock of Caspian Energy which were issued upon conversion of the A6 Promissory Note at December 31, 2015 was $100,000. The shares of Caspian Energy underlying the option were classified as part of other current assets. The option expired without being exercised on May 12, 2019. The Company fully reserved the $100,000 and recognized no value related to the shares of Caspian Energy on the Company’s balance sheet as of June 30, 2019 as the Company determined the value of the shares to be $0 as a result of it delisting from the NEX Board of the TSX Venture Exchange.

 

 

NOTE 8 – NOTES PAYABLE

 

The Company’s notes payable consisted of the following (in thousands):

 

	June 30,	December 31,
	2019	2018
Notes Payable - Subordinated	$-	$400
Notes Payable - Subordinated Related Party	-	30,200
Notes Payable - Related Party	-	7,855
	-	38,455
Unamortized Debt Discount	-	(161)
Total Notes Payable	$-	$38,294

 

Convertible Note Issuances

 

On June 26, 2018, the Company borrowed $7.7 million from SK Energy under a Promissory Note dated June 25, 2018, in the amount of $7.7 million (the “June 2018 SK Energy Note”) and shown on the balance sheet as Note Payable – Related Party, net of debt discount from the issuance of 600,000 shares of common stock (as described below) with a fair value of $185,000 based on the market price at the issuance date. The June 2018 SK Energy Note accrues interest monthly at 8% per annum, payable quarterly, in either cash or shares of common stock (at the option of the Company), or, with the consent of SK Energy, such interest may be accrued and capitalized.

 

As additional consideration for SK Energy agreeing to the terms of the June 2018 SK Energy Note, the Company agreed to issue SK Energy 600,000 shares of common stock (the “Loan Shares”), with a fair value of $185,000 based on the market price on the date of issuance that was accounted for as a debt discount and is being amortized over the term of the note.

Based on a conversion price equal to $2.18 per share, pursuant to the conversion terms of the June 2018 SK Energy Note, the amount of interest under the June 2018 SK Energy Note as of December 31, 2018 equaled $155,000 and was included in the outstanding principal balance of $7,855,000, for interest not paid or issued in common stock when due, the amount is recapitalized into the face value of the note, per the terms of the June 2018 SK Energy Note. The total amount of the remaining debt discount reflected on the accompanying balance sheet as of December 31, 2018 was $161,000, which was amortized in full as of June 30, 2019, due to the note conversions, which included $107,000 of additional interest that was included in the principal balance, noted below under “Convertible Notes Amendment and Conversion” and “SK Energy Note Amendment; Note Purchases and Conversion”.

On August 1, 2018, the Company received total proceeds of $23,600,000 from the sale of multiple Convertible Promissory Notes (the “Convertible Notes”). A total of $22,000,000 in Convertible Notes were purchased by SK Energy (the “August 2018 SK Energy Note”); $200,000 in Convertible Notes were purchased by an executive officer of SK Energy; $500,000 in Convertible Notes were purchased by a trust affiliated with John J. Scelfo, a director of the Company; $500,000 in Convertible Notes were purchased by an entity affiliated with Ivar Siem, our director, and J. Douglas Schick, President of the Company; $200,000 in Convertible Notes was purchased by H. Douglas Evans (who became a Director and related party on September 27, 2018); and $200,000 in Convertible Notes were purchased by an unaffiliated party. The $23,600,000 is accounted for on the balance sheet as $23,200,000 of subordinated notes payable – related party and $400,000 as subordinated notes, as these notes are subordinated to the original June 2018 SK Energy Note.

 

The Convertible Notes accrue interest monthly at 8.5% per annum, which interest is payable on the maturity date unless otherwise converted into our common stock as described below. The accrued interest is accounted for on the balance sheet as of December 31, 2018 as $943,000 of accrued interest – related party and $14,000 of accrued interest. As of June 30, 2019, there was no accrued interest – related party or accrued interest, as $347,000 of accrued interest – related party and $6,000 of accrued interest incurred during 2019 together with the accrued interest outstanding as of December 31, 2018 was converted into shares of common stock due to the note conversions described below.

 

 

The Convertible Notes and all accrued interest thereon are convertible into shares of our common stock, from time to time after August 29, 2018, at the option of the holders thereof, at a conversion price equal to $2.13 per share, per terms of the Convertible Notes.

 

On October 25, 2018, the Company borrowed an additional $7.0 million from SK Energy, through the sale of a convertible promissory note in the amount of $7.0 million (the “October 2018 SK Energy Note”). The October 2018 SK Energy Note had substantially similar terms as the August 2018 SK Energy Note, except that it had a conversion price of $1.79 per share. The October 2018 SK Energy Note is due and payable on October 25, 2021 but may be prepaid at any time without penalty. The accrued interest expense related to this note for the year ended December 31, 2018 was $109,000 and is accounted for on the balance sheet as accrued interest – related party. As of June 30, 2019, there was no accrued interest – related party, as accrued interest of $78,000 incurred during 2019 together with the accrued interest outstanding as of December 31, 2018 was converted into shares of common stock due to the note conversions described below.

 

January 2019 SK Energy Convertible Note

 

On January 11, 2019, the Company borrowed an additional $15.0 million from SK Energy, through the sale of a convertible promissory note in the amount of $15.0 million (the “January 2019 SK Energy Note”). The January 2019 SK Energy Note had substantially similar terms as the August 2018 SK Energy Note, except that it had a conversion price of $1.50 per share. The January 2019 SK Energy Note is due and payable on January 11, 2022 but may be prepaid at any time without penalty. As of June 30, 2019, there was no outstanding principal or accrued interest – related party due to the note conversions described below. Accrued interest-related party for this note prior to the conversion totaled $126,000.

 

Convertible Notes Amendment and Conversion

 

On February 15, 2019, the Company and SK Energy agreed to amend the Convertible Notes (including the August 2018 SK Energy Note), October 2018 SK Energy Note, and the January 2019 SK Energy Note, to remove the conversion limitation that previously prevented SK Energy from converting any portion of the notes into common stock of the Company if such conversion would have resulted in SK Energy beneficially owning more than 49.9% of the Company’s outstanding shares of common stock

 

Immediately following the entry into the amendment, on February 15, 2019, SK Energy elected to convert (i) all $15,000,000 of the outstanding principal and all $126,000 of accrued interest then owed under the January 2019 SK Energy Note into common stock of the Company at a conversion price of $1.50 per share, as set forth in the January 2019 SK Energy Note into 10,083,819 shares of restricted common stock of the Company, and (ii) all $7,000,000 of the outstanding principal and all $187,000 of accrued interest under the October 2018 SK Energy Note into common stock of the Company at a conversion price of $1.79 per share, as set forth in the October 2018 SK Energy Note, into 4,014,959 shares of restricted common stock of the Company.

 

On March 1, 2019, the Company and SK Energy amended the June 2018 SK Energy Note, to provide SK Energy the right, at any time, at its option, to convert the principal and interest owed under such June 2018 SK Energy Note, into shares of the Company’s common stock, at a conversion price of $2.13 per share.

 

In addition, on March 1, 2019, the holders of $1,500,000 in aggregate principal amount of Convertible Notes sold their Convertible Notes at face value plus accrued and unpaid interest through March 1, 2019 to SK Energy (the “Convertible Note Sale”). Holders which sold their Convertible Notes pursuant to the Convertible Note Sale to SK Energy, included an executive officer of SK Energy ($200,000 in principal amount of Convertible Notes); a trust affiliated with John J. Scelfo, a director of the Company ($500,000 in principal amount of Convertible Notes); an entity affiliated with Ivar Siem, a director of the Company, and J. Douglas Schick the President of the Company ($500,000 in principal amount of Convertible Notes); and Harold Douglas Evans, a director of the Company ($200,000 in principal amount of Convertible Notes).

 

Immediately following the effectiveness of the SK Energy Note Amendment and Convertible Note Sale, on March 1, 2019, SK Energy and the Unaffiliated Holder elected to convert all $31,300,000 of outstanding principal and an aggregate of $1,460,000 of accrued interest under the June 2018 SK Energy Note, SK Energy’s $22 million Convertible Note and all other Convertible Notes, into common stock of the Company at a conversion price of $2.13 per share (the “Conversion Price” and the “Conversions”) as set forth in the June 2018 SK Energy Note, as amended, and the Convertible Notes (including SK Energy’s $22 million Convertible Note (collectively, the “Notes”), into an aggregate of 15,381,605 shares of restricted common stock of the Company (the “Conversion Shares”).

 

 

NOTE 9 – ASSET RETIREMENT OBLIGATIONS

 

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

 

	Six Months Ended June 30, 2019
Balance at the beginning of the period (1)	$2,571
Accretion expense	170
Obligations incurred for acquisition	33
Changes in estimates	(129)
Balance at end of period (2)	$2,645

 

 

 

NOTE 10 – COMMITMENTS AND CONTINGENCIES

 

Office Lease

 

Change in Accounting Policy. The Company adopted ASU No. 2016-02, “Leases (Topic 842)” and ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements”, January 1, 2019, using the alternative modified transition method, for which, comparative periods, including the disclosures related to those periods, are not restated as of January 1, 2019. Refer to Note 3 – Summary of Significant Accounting Policies above for additional information.

In June 2018, the Company assumed the lease for its corporate office space located in Houston, Texas from American Resources, Inc., an entity beneficially owned and controlled by Ivar Siem, a director of the Company, and J. Douglas Schick, the Company’s President. The term of the lease ends on August 31, 2019, and the obligation for the remainder of this lease is $22,000.

Effective September 1, 2019, the Company plans to move its corporate headquarters from 1250 Wood Branch Park Dr., Suite 400, Houston, Texas 77079 to 575 N. Dairy Ashford, Houston, Texas 77079 in connection with the expiration of its current office space lease. The Company entered into a sublease 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 with the first month rent due beginning on January 1, 2020. The Company will be required to pay a security deposit of $9,600. On the effective date of the new lease, the Company will apply the new lease Topic 842 and does not expect the lease to have a significant impact on its consolidated balance sheet or statements of operations or cash flows.

The Company also leased space for its former corporate headquarters in Danville, California that was scheduled to expire July 31, 2019, but was terminated in January 2019 without penalty or other amounts due. In February 2019, the Company entered into a six-month lease agreement for 187 square feet of new office space located in Danville, California for the Company’s General Counsel. The monthly rent is $1,200, and the Company paid a $1,200 security deposit. In August 2019, the lease was extended for an additional six months. The total current obligation for the remainder of this lease through January 2020 is $7,200.

 

For the six months ended June 30, 2019 and 2018, the Company incurred lease expense of $76,000 and $28,800, respectively, for the combined leases.

Leasehold Drilling Commitments

The Company’s oil and gas leasehold acreage is subject to expiration of leases if the Company does not drill and hold such acreage by production or otherwise exercises options to extend such leases, if available, in exchange for payment of additional cash consideration. In the D-J Basin Asset, no significant net acres expire during the remainder of 2019, and 31 net acres expire thereafter (net to our direct ownership interest only). In the Permian Basin Asset, no net acres are due to expire in 2019 and 14,500 net acres expire thereafter (net to our direct ownership interest only). The Company plans to hold significantly all of this acreage through a program of drilling and completing producing wells. If the Company is not able to drill and complete a well before lease expiration, the Company may seek to extend leases where able. 

 

 

Other Commitments

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

As part of its regular operations, the Company may become party to various pending or threatened claims, lawsuits and administrative proceedings seeking damages or other remedies concerning its commercial operations, products, employees and other matters.

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

  

NOTE 11 – SHAREHOLDERS’ EQUITY

 

Common Stock

 

On February 15, 2019 and March 1, 2019, $22.3 million and $32.8 million of outstanding note payables and accrued interest were converted into 14,098,778 and 15,381,605 shares of the Company’s common stock, respectively (see Note 8 above for further discussion of the note conversions).

 

On May 21, 2019, SK Energy, which is owned and controlled by Dr. Kukes, the Company’s Chief Executive Officer and a member of the Board of Directors, purchased 6,818,181 shares of restricted common stock from the Company at a price of $2.20 per share, or $15 million in aggregate, pursuant to a subscription agreement. As a result of the purchase, SK Energy, which beneficially owned 78.2% of our outstanding common stock prior to the subscription agreement, beneficially owned 81.0% of our outstanding common stock after the purchase.

 

In addition, on May 16, 2019, the Company sold an aggregate of 1,500,000 shares of its restricted common stock to two third party purchasers at a price a price of $2.00 per share, or $3 million in aggregate, pursuant to subscription agreements.

 

Warrants

 

During the six months ended June 30, 2019, no warrants were granted, and warrants to purchase 100,000 shares of common stock expired. Additionally, on April 1, 2019, the Company issued 60,056 total shares of common stock upon the cashless exercise of two warrants to purchase an aggregate of 596,280 shares of common stock with an exercise price of $2.50 per share, based on a current market value of $2.78 per share, under the terms of each warrant.

 

The intrinsic value of outstanding, as well as exercisable, warrants, at June 30, 2019 was $265,000.

 

 

Warrant activity during the six months ended June 30, 2019 was:  

 

	Number of Warrants	Weighted Average Exercise Price	Weighted Average Remaining Contract Term (Years)
Outstanding at December 31, 2018	1,216,686	$7.44	1.4
Exercised	(596,280)	$2.50
Expired/Cancelled	(100,000)	$25.00
Outstanding at June 30, 2019	520,406	$7.20	0.9
Exercisable at June 30, 2019	520,406	$7.20	0.9

 

NOTE 12 – 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

 

In April 2019, restricted stock awards were granted to three new employees and one consultant for an aggregate of 160,000 shares of the Company’s common stock, under the Company’s Amended and Restated 2012 Equity Incentive Plan. The grant for a total of 50,000 of the restricted stock awards vests as follows: 100% on the one-year anniversary of the grant date, subject to the recipient’s continued service with the Company. These shares have a total fair value of $135,000 based on the market price on the issuance date. The grants for 110,000 shares of restricted stock vest as follows: 50% on the one-year anniversary of the grant date and 50% on the second-year anniversary of the grant date, subject to the recipient’s continued service with the Company. These shares have a total fair value of $253,000 based on the market price on the issuance date. The awarded shares above are subject to trading restrictions, and forfeiture, subject to the vesting terms described above. When such securities are vested in accordance with their terms, the trading restrictions are lifted.

Stock-based compensation expense recorded related to the vesting of restricted stock for the three and six months ended June 30, 2019 and 2018 was $285,000, compared to $148,000 and $471,000, compared to $314,000, respectively. The remaining unamortized stock-based compensation expense at June 30, 2019 related to restricted stock was $883,000.

 

Options

 

During the six months ended June 30, 2019, no options were granted, exercised or expired, and a total of 890,232 options to purchase common stock are outstanding, with exercise prices ranging from $0.3088 to $302.40 per share, and a weighted-average exercise price of $3.26 per share. Of the total amount of options to purchase common stock outstanding, 620,232 are exercisable as of June 30, 2019, with a weighted-average exercise price of $3.91 per share and a weighted average remaining life of 2.1 years.

 

During the three and six months ended June 30, 2019 and 2018, the Company recognized stock option expense of $113,000 compared to $18,000 and $226,000 compared to $35,000, respectively. The remaining amount of unamortized stock options expense at June 30, 3019, was $93,000.

 

The intrinsic value of outstanding and exercisable options at June 30, 2019 was $290,000.

 

 

NOTE 13 – EARNINGS (LOSS) PER COMMON SHARE

 

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

 

	Three Months Ended June 30,		Six Months Ended June 30,
	2019	2018	2019	2018
Numerator:
Net income (loss)	$(2,460)	$66,290	$(5,455)	$62,056
Denominator:
Weighted average common shares – basic	49,198,625	7,357,234	38,572,537	7,318,211
Dilutive effect of common stock equivalents:
Options and Warrants	-	6,988	-	1,973
Preferred Stock	-	6,662,500	-	6,662,500
Denominator:
Weighted average common shares – diluted	49,198,625	14,026,722	38,572,537	13,982,684
Earnings (loss) per share – basic	$(0.05)	$9.01	$(0.14)	$8.48
Earnings (loss) per share – diluted	$(0.05)	$4.73	$(0.14)	$4.44

 

For the three and six months periods ended June 30, 2019 and 2018, the following share equivalents related to preferred stock, and options and warrants to purchase shares of common stock were excluded from the computation of diluted net income (loss) per share as the inclusion of such shares would be anti-dilutive.

 

	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2019	2018	2019	2018
Common Shares Issuable for:
Options and Warrants	1,410,638	3,259,939	1,410,638	3,264,954
Series A Preferred Stock	-	662,500	-	662,500
Total	1,410,638	3,922,439	1,410,638	3,927,454

 

 

NOTE 14 – RELATED PARTY TRANSACTIONS

 

The following table reflects the related party amounts for SK Energy, Directors and Officers included in the balance sheets of the period indicated (in thousands):

 

	June 30,	December 31
	2019	2018
Long-term accrued expenses	$-	$943
Long-term notes payable – subordinated	-	30,200
Long-term notes payable, net of discount of $-0- and $161, respectively	-	7,694
Total related party liabilities	$-	$38,837

 

See Note 8 above for a further discussion of the debt conversions and subsequent retirement of all related party debt.

 

Additionally, on May 21, 2019, SK Energy, which is owned and controlled by Dr. Kukes, our Chief Executive Officer and a member of the Board of Directors, purchased 6,818,181 shares of restricted common stock from the Company at a price of $2.20 per share, or $15 million in aggregate (see Note 11 above for a further discussion of the issuance of the restricted common stock).

 

NOTE 15 – INCOME TAXES

 

The Company has estimated that its effective tax rate for U.S. purposes will be zero for the 2019 and 2018 fiscal years as a result of net losses and a full valuation allowance against the net deferred tax assets. Consequently, the Company has recorded no provision or benefit for income taxes for the six months ended June 30, 2019 and 2018.

 

NOTE 16 – SUBSEQUENT EVENTS

 

Effective July 18, 2019, 50,000 shares of restricted stock were awarded to an advisor under the Company’s Amended and Restated 2012 Equity Incentive Plan. The restricted stock vests as follows: 100% on the six-month anniversary of the grant date, subject to the recipient’s continued service with the Company. These shares have a total fair value of $82,500, based on the market price on the issuance date.

 

 

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

 

Forward-Looking Statements

 

Some of the statements contained in this report discuss future expectations, contain projections of results of operations or financial condition, or state other “forward-looking” information. The words “believe,” “intend,” “plan,” “expect,” “anticipate,” “estimate,” “project,” “goal” and similar expressions identify such a statement was made, although not all forward-looking statements contain such identifying words. These statements are subject to known and unknown risks, uncertainties, and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking information is based on various factors and is derived using numerous assumptions. Factors that might cause or contribute to such a discrepancy include, but are not limited to, the risks discussed in this and our other SEC filings. We do not promise to or take any responsibility to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements except as required by law. Future events and actual results could differ materially from those expressed in, contemplated by, or underlying such forward-looking statements.

 

Forward-looking statements may include statements about our:

 

●	business strategy;
●	reserves;
●	technology;
●	cash flows and liquidity;
●	financial strategy, budget, projections and operating results;
●	oil and natural gas realized prices;
●	timing and amount of future production of oil and natural gas;
●	availability of oil field labor;
●	the amount, nature and timing of capital expenditures, including future exploration and development costs;
●	drilling of wells;
●	government regulation and taxation of the oil and natural gas industry;
●	marketing of oil and natural gas;
●	exploitation projects or property acquisitions;
●	costs of exploiting and developing our properties and conducting other operations;
●	general economic conditions;
●	competition in the oil and natural gas industry;
●	effectiveness of our risk management activities;
●	environmental liabilities;
●	counterparty credit risk;
●	developments in oil-producing and natural gas-producing countries;
●	future operating results;
●	future acquisition transactions;
●	estimated future reserves and the present value of such reserves; and
●	plans, objectives, expectations and intentions contained in this Quarterly Report that are not historical.

 

All forward-looking statements speak only at the date of the filing of this Quarterly Report. The reader should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this Quarterly Report are reasonable, we provide no assurance that these plans, intentions or expectations will be achieved. We disclose important factors that could cause our actual results to differ materially from our expectations under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report and our Annual Report on Form 10-K filed with the SEC on April 1, 2019. 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. 

 

 

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, 2018, and the unaudited consolidated financial statements included in this quarterly report.

 

Certain abbreviations and oil and gas industry terms used throughout this Quarterly Report are described and defined in greater detail under “Glossary of Oil And Natural Gas Terms” on page 4 of our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission on April 1, 2019.

 

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 six months ended June 30, 2019, 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:

 

 

 

 

 

 

 

 

 

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.pacificenergydevelopment.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.pacificenergydevelopment.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.

 

 

General Overview

 

We are an oil and gas company focused on the acquisition and development 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 (the “Permian Basin”) and in the Denver-Julesberg Basin (“D-J Basin”) in Colorado.  As of June 30, 2019, we held approximately 40,200 net Permian Basin acres located in Chaves and Roosevelt Counties, New Mexico, through our wholly-owned operating subsidiary, Pacific Energy Development Corp. (“PEDCO”), which we refer to as our “Permian Basin Asset,” and approximately 11,700 net D-J Basin acres located in Weld and Morgan Counties, Colorado, through our wholly-owned operating subsidiary, Red Hawk Petroleum, LLC (“Red Hawk”), which asset we refer to as our “D-J Basin Asset.” As of June 30, 2019, we held interests in 359 gross (290 net) wells in our Permian Basin Asset of which 87 are active producers, 33 are active injectors, one well is an active Salt Water Disposal well (“SWD”), all of which are held by PEDCO and operated by its wholly-owned operating subsidiaries, and interests in 66 gross (21.3 net) wells in our D-J Basin Asset, of which 18 gross (16.2 net) wells are operated by Red Hawk and currently producing, 27 gross (5.1 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 shareholder value. 

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

 

 

Our strategy is to be the operator, directly or through our subsidiaries and joint ventures, in the majority of our acreage so we can dictate the pace of development in order to execute our business plan. The majority of our capital expenditure budget through 2019 will be focused on the development of our Permian Basin Asset, with a secondary focus on development of our D-J Basin Asset. Our 2019 total development plan calls for the deployment of an estimated $50 million in capital, of which approximately $40.0 million has been raised to date. On our Permian Basin Asset, four initial horizontal wells were drilled in the first quarter of 2019 in Phase One of our development plan. Phase Two of the development program began in July 2019, which plans for the drilling and completion of four new horizontal San Andres wells, drilling of one salt water disposal well, the completion of one drilled uncompleted horizontal well, and putting on first production of a well drilled and completed in Phase One which was not put on production during Phase One due to salt water disposal constraints. Our future D-J Basin Asset development plans are currently under evaluation for our operated acreage, but we anticipate deploying approximately $1 million in capital to participate in drilling and completion operations by other operators on our non-operated acreage through 2019. We expect that we will have sufficient cash available to meet our needs over the foreseeable future, which cash we anticipate being available from (i) our projected cash flow from operations, (ii) our existing cash on hand, (iii) equity infusions or loans (which may be convertible) made available from SK Energy LLC, which is 100% owned and controlled by Dr. Simon Kukes, the Company’s Chief Executive Officer and director (“SK Energy”), which funding SK Energy is under no obligation to provide, and (iv) funding through credit or loan facilities. In addition, we may seek additional funding through asset sales, farm-out arrangements, lines of credit, or public or private debt or equity financings to fund additional 2019 capital expenditures and/or acquisitions. If market conditions are not conducive to raising additional funds, the Company may choose to extend the drilling program and associated capital expenditures further into 2020.

 

Recent Events

 

Common Stock Issuances

 

In May 2019, the Company raised $15.0 million through the sale of 6,818,181 shares of restricted common stock to SK Energy, and an additional $3.0 million through the sale of an aggregate of 1,500,000 shares of restricted common stock to two non-affiliated purchasers (for additional information, see “Part I - Financial Information” - “Item 1. Financial Statements” - “Note 11 – Shareholders’ Equity”, above).

 

Borrowings and Conversions

 

Information regarding recent borrowings and the conversion of such debt into common stock of the Company is described in greater detail under “Part I - Financial Information” - “Item 1. Financial Statements” - “Note 8 – Notes Payable”, above.

 

Manzano Acquisition

 

On February 1, 2019, for consideration of $700,000, the Company completed an asset purchase from Manzano, LLC and Manzano Energy Partners II, LLC, whereby the Company purchased approximately 18,000 net leasehold acres, ownership and operated production from one horizontal well currently producing from the San Andres play in the Permian Basin, ownership of three additional shut-in wells, and ownership of one saltwater disposal well.  The Company subsequently drilled one Manzano well in Phase Two of its 2019 development plan, which has yet to be completed as June 30, 2019.

 

Red Hawk Property Rights Sale

 

On March 7, 2019, Red Hawk sold rights to 85.5 net acres of oil and gas leases located in Weld County, Colorado, to a third party, for aggregate proceeds of $1.2 million. The sale agreement included a provision whereby the purchaser was required to assign Red Hawk 85 net acres of leaseholds in an area located where the Company already owns other leases in Weld County, Colorado, within nine months from the date of the sale, or to repay the Company up to $200,000 (proportionally adjusted for the amount of leasehold delivered). The purchaser has not yet identified or assigned the required leasehold acreage to the Company.

 

 

Drilling and Workover Activities

 

In December 2018, we commenced drilling four San Andres horizontal wells in our Permian Basin Asset acreage acquired from Hunter Oil Company in September 2018, which wells were completed in March 2019. Also, in February 2019, we completed workover operations to reactivate a San Andres horizontal well, and in March 2019 we completed the drilling of our fifth San Andres horizontal well, both of which operations were conducted on our Permian Basin acreage acquired from Manzano in February 2019.

 

Additional San Andres Acquisition

 

Effective June 10, 2019, for consideration of $350,000, the Company completed an asset purchase from a private operator, whereby the Company purchased approximately 2,076 net leasehold acres, ownership and operated production from 22 horizontal wells currently producing from the San Andres play in the Permian Basin and ownership of three injection wells.

 

Results of Operations and Financial Condition

 

Significant Capital Expenditures

 

The table below sets out the significant components of capital expenditures for the six months ended June 30, 2019. There were no significant capital expenditures for the six months ended June 30, 2018 (in thousands):

 

Capital Expenditures
Leasehold Acquisitions (1)	$340
Property Acquisitions (1)	862
Drilling and Facilities (2)	18,084
Total	$19,286

 

 

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 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 six-month periods ended June 30, 2019 and 2018, 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 June 30, 2019 vs. Three Months Ended June 30, 2018

 

We reported a net loss for the three-month period ended June 30, 2019 of $2.5 million, or ($0.05) per share, compared to net income for the three-month period ended June 30, 2018 of $66.3 million or $9.01 per share. The decrease in net income of $68.8 million was primarily due to the recognition of a one-time $70.3 million gain on debt restructuring in 2018, described in greater detail in our Annual Report on Form 10-K for the year ended December 31, 2018, under the heading “Item 1 and 2 Business and Properties” – “Business Operations” – Restructuring”. Excluding this significant non-recurring transaction, our net loss decreased by $1.6 million, due to a reduction in interest expense incurred of $3.2 million due to our debt restructuring, coupled with $3.2 million in additional revenue, offset by additional operating expenses of $4.8 million, from the Company’s production increases, as well as the hiring of additional staff and consultants, for the three months ended June 30, 2019, compared to the prior year’s period.

 

Net Revenues

 

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

 

	Three Months Ended June 30,		Increase	% Increase
	2019	2018	(Decrease)	(Decrease)
Sale Volumes:
Crude Oil (Bbls)	71,443	12,790	58,653	459%
Natural Gas (Mcf)	13,792	18,864	(5,072)	(27%)
NGL (Mcf)	2,868	9,100	(6,232)	(68%)
Total (Boe) (1)	74,220	17,451	56,769	325%
Crude Oil (Bbls per day)	785	141	644	457%
Natural Gas (Mcf per day)	152	207	(55)	(27%)
NGL (Mcf per day)	32	100	(68)	(68%)
Total (Boe per day) (1)	816	158	233	325%
Average Sale Price:
Crude Oil ($/Bbl)	$56.50	$64.85	$(8.35)	(13%)
Natural Gas ($/Mcf)	1.85	2.37	(0.53)	(22%)
NGL ($/Mcf)	2.68	2.53	0.14	6%
Net Operating Revenues (in thousands):
Crude Oil	$4,037	$830	$3,207	386%
Natural Gas	26	45	(19)	(42%)
NGL	7	23	(16)	(70%)
Total Revenues	$4,070	$898	$3,172	353%

 

(1)	Assumes 6 Mcf of natural gas and NGL equivalents to 1 barrel of oil.