PEDEVCO CORP
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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☑
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2017
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☐
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the transition period from
to
Commission file number: 001-35922
PEDEVCO Corp.
(Exact Name of Registrant as Specified in Its Charter)
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Texas
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22-3755993
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(State or other jurisdiction of incorporation or
organization)
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(IRS Employer Identification No.)
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4125 Blackhawk Plaza Circle, Suite 201
Danville, California 94506
(Address of Principal Executive Offices)
(855) 733-3826
(Registrant’s Telephone Number,
Including Area Code)
Securities
registered pursuant to Section 12(b) of the Act:
Common
Stock, $0.001 par value per share
NYSE American
Securities
registered pursuant to Section 12(g) of the Act:
None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes ☐ No ☑
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☑
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
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted 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 and post such files).
Yes ☑ No ☐
Indicate
by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ☑
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
” and
“
smaller reporting
company
” and
"
emerging growth
company
" in Rule 12b-2 of the
Exchange Act.
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Large
accelerated filer ☐
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Accelerated
filer ☐
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Non-accelerated
filer ☐
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Smaller
reporting company ☒
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Emerging
growth ☐
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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 ☑
The
aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant as of June 30, 2017 based
upon the closing price reported on such date was approximately
$3,360,000. Shares of voting stock held by each officer and
director and by each person who, as of June 30, 2017, may be deemed
to have beneficially owned more than 10% of the outstanding voting
stock have been excluded. This determination of affiliate status is
not necessarily a conclusive determination of affiliate status for
any other purpose.
As of
March 27, 2018, 7,278,754
shares of the registrant’s
common stock, $0.001 par value per share, were
outstanding.
Table of Contents
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Page
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PART I
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Item
1.
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Business
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5
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Item
1A.
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Risk
Factors
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32
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Item
1B.
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Unresolved
Staff Comments
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64
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Item
2.
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Properties
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64
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Item
3.
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Legal
Proceedings
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64
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Item
4.
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Mine
Safety Disclosures
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64
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PART II
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Item
5.
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Market
For Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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65
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Item
6.
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Selected
Financial Data
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68
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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69
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Item
7A.
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Quantitative
and Qualitative Disclosure About Market Risk
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83
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Item
8.
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Financial
Statements and Supplementary Data
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83
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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83
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Item
9A.
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Controls
and Procedures
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83
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Item
9B.
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Other
Information
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84
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PART III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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85
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Item
11.
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Executive
Compensation
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94
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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104
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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108
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Item
14.
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Principal
Accounting Fees and Services
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116
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PART IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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117
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2
Forward Looking Statements
ALL STATEMENTS IN THIS DISCUSSION THAT ARE NOT HISTORICAL ARE
FORWARD-LOOKING STATEMENTS. STATEMENTS PRECEDED BY, FOLLOWED BY OR
THAT OTHERWISE INCLUDE THE WORDS “
BELIEVES,
”
“
EXPECTS,
”
“
ANTICIPATES,
”
“
INTENDS,
”
“
PROJECTS,
”
“
ESTIMATES,
”
“
PLANS,
”
“
MAY
INCREASE,
” “
MAY FLUCTUATE
” AND
SIMILAR EXPRESSIONS OR FUTURE OR CONDITIONAL VERBS SUCH AS
“
SHOULD
”,
“
WOULD
”,
“
MAY
”
AND “
COULD
” ARE GENERALLY
FORWARD-LOOKING IN NATURE AND NOT HISTORICAL FACTS. 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. WE ARE UNDER NO OBLIGATION TO PUBLICLY UPDATE
ANY OF THE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS. REFERENCES IN THIS
FORM 10-K, UNLESS ANOTHER DATE IS STATED, ARE TO DECEMBER 31, 2017.
AS USED HEREIN, THE “
COMPANY,
”
“
WE,
”
“
US,
”
“
OUR
”
AND WORDS OF SIMILAR MEANING REFER TO PEDEVCO CORP. (D/B/A PACIFIC
ENERGY DEVELOPMENT), WHICH WAS KNOWN AS BLAST ENERGY SERVICES, INC.
UNTIL JULY 30, 2012, AND ITS WHOLLY-OWNED AND PARTIALLY-OWNED
SUBSIDIARIES, BLAST AFJ, INC., PACIFIC ENERGY DEVELOPMENT CORP.,
WHITE HAWK PETROLEUM, LLC (DISSOLVED EFFECTIVE NOVEMBER 30, 2016),
PACIFIC ENERGY & RARE EARTH LIMITED (DISSOLVED EFFECTIVE AUGUST
11, 2017), BLACKHAWK ENERGY LIMITED (TO BE DISSOLVED EFFECTIVE MAY
1, 2018), RED HAWK PETROLEUM, LLC, PACIFIC ENERGY DEVELOPMENT MSL
LLC (DISSOLVED EFFECTIVE SEPTEMBER 30, 2016), WHITE HAWK ENERGY,
LLC, AND PEDEVCO ACQUISITION SUBSIDIARY, INC. (DISSOLVED EFFECTIVE
APRIL 26, 2016), UNLESS OTHERWISE STATED.
This
Annual Report on Form 10-K (this “
Annual Report
”) may
contain 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 Annual 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. When used in this Annual Report, the
words “
could,
”
“
believe,
”
“
anticipate,
”
“
intend,
”
“
estimate,
”
“
expect,
”
“
may,
”
“
should,
”
“
continue,
”
“
predict,
”
“
potential,
”
“
project
” and similar
expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain such
identifying words.
Forward-looking
statements may include statements about our:
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business
strategy;
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reserves;
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technology;
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cash
flows and liquidity;
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financial
strategy, budget, projections and operating results;
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oil and
natural gas realized prices;
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timing
and amount of future production of oil and natural
gas;
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availability
of oil field labor;
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the
amount, nature and timing of capital expenditures, including future
exploration and development costs;
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availability
and terms of capital;
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3
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drilling
of wells;
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government
regulation and taxation of the oil and natural gas
industry;
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marketing
of oil and natural gas;
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exploitation
projects or property acquisitions;
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costs
of exploiting and developing our properties and conducting other
operations;
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general
economic conditions;
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competition
in the oil and natural gas industry;
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effectiveness
of our risk management activities;
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environmental
liabilities;
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counterparty
credit risk;
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developments
in oil-producing and natural gas-producing countries;
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future
operating results;
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future
acquisition transactions; and
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estimated
future reserves and the present value of such reserves; and plans,
objectives, expectations and intentions contained in this Annual
Report that are not historical.
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All
forward-looking statements speak only at the date of the filing of
this Annual 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 Annual Report are
reasonable, we can give 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 Annual Report. 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.
Certain
abbreviations and oil and gas industry terms used throughout this
Annual Report are described and defined in greater detail under
“
Glossary of Oil and
Natural Gas Terms
” on page 28, and readers are
encouraged to review that section.
Unless
the context otherwise requires and for the purposes of this report
only:
● “
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;
and
● “
Securities
Act
” refers to the
Securities Act of 1933, as amended.
Available Information
We are
subject to the information and reporting requirements of the
Exchange Act, under which we file periodic reports, proxy and
information statements and other information with the United States
Securities and Exchange Commission, or SEC. Copies of the reports,
proxy statements and other information may be examined without
charge at the Public Reference Room of the SEC, 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549, or on the Internet
at
http://www.sec.gov
. Copies of
all or a portion of such materials can be obtained from the Public
Reference Room of the SEC upon payment of prescribed fees. Please
call the SEC at 1-800-SEC-0330 for further information about the
Public Reference Room.
Financial and other
information about PEDEVCO Corp. is available on our website
(
www.pacificenergydevelopment.com
).
Information on our website is not incorporated by reference into
this report. We make available on our website, free of charge,
copies of our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after filing such
material electronically or otherwise furnishing it to the
SEC.
4
PART I
ITEM 1. BUSINESS.
History
We were
originally incorporated in September 2000 as Rocker & Spike
Entertainment, Inc. In January 2001 we changed our name to
Reconstruction Data Group, Inc., and in April 2003 we changed our
name to Verdisys, Inc. and were engaged in the business of
providing satellite services to agribusiness. In June 2005, we
changed our name to Blast Energy Services, Inc.
(“
Blast
”)
to reflect our new focus on the energy services business, and in
2010 we changed the direction of the Company to focus on the
acquisition of oil and gas producing properties.
On July
27, 2012, we acquired through a reverse acquisition, Pacific Energy
Development Corp., a privately held Nevada corporation, which we
refer to as Pacific Energy Development. As described below,
pursuant to the acquisition, the shareholders of Pacific Energy
Development gained control of approximately 95% of the voting
securities of our company. Since the transaction resulted in a
change of control, Pacific Energy Development was the acquirer for
accounting purposes. In connection with the merger, which we refer
to as the Pacific Energy Development merger, Pacific Energy
Development became our wholly-owned subsidiary and we changed our
name from Blast Energy Services, Inc. to PEDEVCO Corp. Following
the merger, we refocused our business plan on the acquisition,
exploration, development and production of oil and natural gas
resources in the United States, with a primary focus on oil and
natural gas shale plays and a secondary focus on conventional oil
and natural gas plays.
Business Operations
Overview
We are
an energy company engaged primarily in the acquisition,
exploration, development and production of oil and natural gas
shale plays in the Denver-Julesberg Basin (“
D-J Basin
”) in Colorado,
which contains hydrocarbon bearing deposits in several formations,
including the Niobrara, Codell, Greenhorn, Shannon, J-Sand, and
D-Sand. As of December 31, 2017, we held approximately 10,961 net
D-J Basin acres located in Weld County, Colorado through our
wholly-owned subsidiary Red Hawk Petroleum, LLC
(“
Red
Hawk
”), which acreage is located in the Wattenberg and
Wattenberg Extension areas of the D-J Basin, which we refer to as
our “
D-J Basin
Asset.
” As of December 31, 2017, we held interests in
61 gross (17.4 net) wells in our D-J Basin Asset, of which 14 gross
(12.5 net) wells are operated by Red Hawk and are currently
producing, 25 gross (4.9 net) wells are non-operated, and 22 wells
have an after-payout interest. During the quarter-ended
December 31, 2017, the Company produced an average of approximately
189 net barrels of oil equivalent per day (“
BOEPD
”) from its D-J
Basin Asset.
We have
listed below the total production volumes and total
revenue net to the Company for the years ended December 31,
2017, 2016, and 2015 attributable to our D-J Basin Asset that would
be net to our interest if reported on a consolidated basis,
including the calculated production volumes and revenue numbers for
our D-J Basin Asset held indirectly through Condor Energy
Technology LLC (“
Condor
”), an entity we
had a 20% interest in which we divested in February
2015.
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For the Years Ended December 31,
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2017
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2016
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2015
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Oil
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Total Production
(Bbls)
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52,260
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92,966
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117,365
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Average sales price
(per Bbl)
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$
47.15
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$
36.98
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$
41.13
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Natural
Gas:
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Total Production
(Mcf)
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100,254
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168,555
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224,222
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Average sales price
(per Mcf)
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$
2.97
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$
2.04
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$
2.16
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NGL:
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Total Production
(Mcf)
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73,254
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66,033
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24,815
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Average sales price
(per Mcf)
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$
3.46
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$
2.82
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$
1.81
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Oil
Equivalents:
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Total Production
(Boe) (1)
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81,178
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132,064
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158,870
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Average Daily
Production (Boe/d)
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222
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362
|
435
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Average Production Costs (per
Boe)
(2)
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$
13.62
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$
9.55
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$
7.29
|
_________________________
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(1)
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Assumes
6 Mcf of natural gas and NGL equivalents to 1 barrel of
oil.
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(2)
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Excludes
workover costs, marketing, ad valorem and severance
taxes.
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5
Business Strategy
We
believe that the D-J Basin shale play represents among the most
promising unconventional oil and natural gas plays in the U.S. We
plan to opportunistically seek additional acreage proximate to our
currently held core acreage located in the Wattenberg and
Wattenberg Extension areas of Weld County, Colorado. 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 for the next twenty four months will be focused
on the development of our D-J Basin Asset. Our development plan
calls for the development of approximately $8.37 million in capital
expenditures in order to drill and complete, participate in the
drilling and completion of, and/or acquire approximately 2.1 net
wells in our D-J Basin Asset in 2018 (with an additional 6.4 net
wells to be drilled and completed in 2019 for a combined total
2018-2019 drilling capital budget of $34.85
million).
We expect our projected cash flow from
operations combined with our existing cash on hand, up to $2.0
million of gross proceeds available from the issuance of our common
shares through National Securities Corporation under our current
“at the market offering”
(of which $1.359 million remains available for
issuance, subject to limitation under the SEC’s “Baby
Shelf Rules”), and
approximately $18.0 million gross available under our
current senior debt facility will be sufficient to fund our
drilling plans and our operations through 2019, noting
that
the advancement of all
or any portion of the approximately $18.0 million gross available
under our current senior debt facility is in the sole and absolute
discretion of the senior lenders and no senior lender is obligated
to fund all or any part of the requested funding (
See
“
Part I, Item 1.
Business
” — “
Material 2016-2017
Transactions
” — “
Senior Debt
Restructuring
” and “
Part I
” –
“
Item 1A. Risk
Factors
”, including “
Our Tranche A Notes and Tranche B
Notes include various covenants, reduces our flexibility, increases
our interest expense and may adversely impact our operations and
our costs.
”).
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 2018-2019 capital
expenditures and/or repay or refinance a portion or all of our
outstanding debt. 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
. The availability of additional borrowings under
the senior debt facility is subject to the Company providing
matching funds for all amounts borrowed, which additional borrowed
funds may only be used to fund development costs.
During
2017, the Company focused primarily on maintaining oil and gas
production levels, keeping operational costs down, and seeking to
restructure and/or satisfy its senior debt through a variety of
means, including, but not limited to, pursuing potential equity
investments, debt restructuring transactions, and business
combinations. The Company continues to pursue such transactions,
although there can be no guarantee that the Company will be
successful in its efforts to restructure and/or satisfy its senior
debt. See “
Risk
Factors
” below.
Management is
continually reviewing the recoverability of its oil and gas assets
given the reduction of crude oil and natural gas prices during the
year. Over the course of the year, we have identified acreage that
we believe has a low probability of development in the near future
and have not renewed such leases where appropriate and impaired the
values as necessary. We believe that a significant portion of the
effects of lower crude oil prices are now being offset by the
continuing reduction of drilling and completion, collection,
selling and LOE costs. We believe the leases we currently plan to
develop in our 2018-2019 development plan continue to be economic
due to our estimates of total recoverable reserves, expected
production rates and the continued reduction in development and
operational costs through this year. The recoverability of our oil
and gas assets is dependent on our ability to secure sufficient
funds to develop our properties. If we are unable to have access to
our credit facilities or alternative financing transactions, and
crude oil prices stay at their current prices or go lower or if the
new development and operational costs do not hold or such costs
return to higher levels, Company management may deem it appropriate
in the future to impair certain of our oil and gas properties in
the event we determine we will not be able to fully develop our
drilling program.
6
The
following chart reflects our current organizational
structure:
*Represents percentage of total
voting power based on 7,278,754 shares of common
stock and 66,625 shares of Series A Convertible Preferred Stock
(solely on an issued and outstanding basis) outstanding as of March
27, 2018, with beneficial ownership calculated in accordance with
Rule 13d-3 under the Exchange Act (but without reflecting the
conversion of convertible securities into voting securities,
including, notably, approximately 2,175,208 shares of common stock
issuable to MIEJ Holdings Corporation upon conversion of principal
and interest accrued through March 31, 2018 under the New MIEJ Note
at a “floor price” of $3.00 per share – See
“
Part
III
” – “
Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of
Operations
” – “
Liquidity and Capital
Resources
” – “
Liquidity Outlook
”
– “
Amendment
to PEDCO-MIEJ Note and Condor-MIEJ Note
” and see also
“
Part
III
” — “
Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters
.”
7
Competition
The oil
and natural gas industry is highly competitive. We compete and will
continue to compete with major and independent oil and natural gas
companies for exploration opportunities, acreage and property
acquisitions. We also compete for drilling rig contracts and other
equipment and labor required to drill, operate and develop our
properties. Most of our competitors have substantially greater
financial resources, staffs, facilities and other resources than we
have. In addition, larger competitors may be able to absorb the
burden of any changes in federal, state and local laws and
regulations more easily than we can, which would adversely affect
our competitive position. These competitors may be able to pay more
for drilling rigs or exploratory prospects and productive oil and
natural gas properties and may be able to define, evaluate, bid for
and purchase a greater number of properties and prospects than we
can. Our competitors may also be able to afford to purchase and
operate their own drilling rigs.
Our
ability to drill and explore for oil and natural gas and to acquire
properties will depend upon our ability to conduct operations, to
evaluate and select suitable properties and to consummate
transactions in this highly competitive environment. Many of our
competitors have a longer history of operations than we have, and
most of them have also demonstrated the ability to operate through
industry cycles.
Competitive Strengths
We
believe we are well positioned to successfully execute our business
strategies and achieve our business objectives because of the
following competitive strengths:
Management
. We have assembled a
management team at our Company with extensive experience in the
fields of international business development, petroleum
engineering, geology, petroleum field development and production,
petroleum operations and finance. Several members of the team
developed and ran successful energy ventures that were
commercialized at Texaco, Erin Energy Corp. and other international
and domestic energy companies. We believe that our management team
is highly qualified to identify, acquire and exploit energy
resources in the U.S.
Our
management team is headed by our President and Chief Executive
Officer, Michael L. Peterson, who brings extensive experience in
the energy, corporate finance and securities sectors, including as
a Vice President of Goldman Sachs & Co., Chairman and Chief
Executive Officer of Nevo Energy, Inc. (formerly Solargen Energy,
Inc.), and a former director of Aemetis, Inc. (formerly AE Biofuels
Inc.). In addition, our Executive Vice President and General
Counsel, Clark R. Moore, has over 10 years of energy industry
experience, and formerly served as acting general counsel of Erin
Energy Corp.
Our
board of directors also brings extensive oil and gas industry
experience, headed by our Chairman Frank C. Ingriselli, an
international oil and gas industry veteran with nearly 40 years of
experience in the energy industry, including as the President of
Texaco International Operations Inc., President and Chief Executive
Officer of Timan Pechora Company, President of Texaco Technology
Ventures, and President, Chief Executive Officer, Chairman and
founder of Erin Energy Corp. Also on our Board sits Ms. Elizabeth
P. Smith, who served in numerous executive-level capacities at
Texaco, including as Corporate Compliance Officer, Director of
Investor Relations, Vice President of Corporate Communications, and
Vice President of Texaco Inc. with responsibility and oversight of
Texaco’s Shareholder Services Group, and Adam McAfee, a
Certified Management Accountant and “
audit committee financial
expert
” with over 30 years’ experience, with
prior positions at Nevo Energy, Inc., Aemetis, Inc., Apple Computer
and others.
Key Advisors
. Our key advisors
include Tenet Advisory Group, LLC, which we refer to as TAG, and
other industry veterans. The TAG team replaced South Texas
Reservoir Alliance (“
STXRA
”) as our contract
operator with respect to our D-J Basin operations in January 2017,
pursuant to a customary written engagement providing for hourly
billing for work performed by TAG for us, and terminable upon 60
days prior notice by either party. TAG has experience in drilling
and completing horizontal wells, including over 150 horizontal
wells with lengths exceeding 4,000 feet from 2010 to 2017, as well
as experience in both slick water and hybrid multi-stage hydraulic
fracturing technologies and in the operation of shale wells and
fields. The TAG team has over 130 years of combined technical oil
and gas experience covering reservoir engineering, geology,
geophysics, drilling, completion, production operations, land and
marketing across multiple producing regions and basins including
East Texas, Onshore and Offshore Gulf Coast, Permian Basin,
Mid-Continent and the Rockies. We believe that our relationship
with TAG will supplement the core competencies of our management
team and provide us with petroleum and reservoir engineering,
petrophysical, and operational competencies that will help us to
evaluate, acquire, develop, and operate petroleum resources into
the future.
8
Significant acreage positions and
drilling potential
. We have accumulated interests in a total
of approximately 10,961 net acres in our core D-J Basin Asset
operating area, which we believe represents a significant
unconventional resource play. The majority of our interests are in
or near areas of considerable activity by both major and
independent operators, although such activity may not be indicative
of our future operations. Based on our current acreage position, we
believe our current D-J Basin Asset could contain up to
approximately 137 potential net wells based on 80 acre spacing,
providing us with a substantial drilling inventory for future
years.
Marketing
The
prices we receive for our oil and natural gas production fluctuate
widely. The past years’ collapse in oil prices was among the
most severe on record. The daily NYMEX WTI oil spot price went from
a high of $107.95 per Bbl in June 2014 to low of $26.19 per Bbl in
February 2016, the lowest settlement in over a decade and
rebounding up 100% from its February 2016 low but still
approximately 50% off its June 2014 high. The drop and volatility
in crude oil pricing is due in large part to increased production
levels, crude oil inventories and recessed global economic growth.
Oil prices are also impacted by real or perceived geopolitical
risks in oil producing regions, the relative strength of the U.S.
dollar, weather and the global economy. We expect, and have already
begun to see, that depressed oil prices will lead to cuts in the
exploration and production budgets to reduce incremental oil
supply, which should ultimately restore equilibrium to the world
oil market and rebalance oil prices. Decreases in these commodity
prices adversely affect the carrying value of our proved reserves
and our revenues, profitability and cash flows. Short-term
disruptions of our oil and natural gas production occur from time
to time due to downstream pipeline system failure, capacity issues
and scheduled maintenance, as well as maintenance and repairs
involving our own well operations. These situations can curtail our
production capabilities and ability to maintain a steady source of
revenue for our company. In addition, demand for natural gas has
historically been seasonal in nature, with peak demand and
typically higher prices during the colder winter months. See
“
Risk
Factors
” below.
Oil
. Our
crude oil is generally sold under short-term, extendable and
cancellable agreements with unaffiliated purchasers. As a
consequence, the prices we receive for crude oil move up and down
in direct correlation with the oil market as it reacts to supply
and demand factors. Transportation costs related to moving crude
oil are also deducted from the price received for crude
oil.
We are
a party to a 12-month crude oil purchase contract with a third
party buyer, expiring December 31, 2018, pursuant to which the
buyer purchases the crude oil produced from our 14 operated wells
in our D-J Basin Asset, at a price per barrel equal to the average
of the New York Mercantile Exchange’s ("NYMEX") daily settle
quoted price for Cushing/WTI for trade days only during a calendar
month, applicable to product delivered during any such calendar
month, less a per barrel differential of $3.15. The crude oil is
purchased at the wellhead, and we do not bear any incremental
transportation costs.
Natural
Gas
.
Our
natural gas is sold under both long-term and short-term natural gas
purchase agreements. Natural gas produced by us is sold at various
delivery points at or near producing wells to both unaffiliated
independent marketing companies and unaffiliated mid-stream
companies. We receive proceeds from prices that are based on
various pipeline indices less any associated fees for processing,
location or transportation differentials.
In
connection with our March 2014 acquisition of certain D-J Basin
assets from Continental Resources, Inc. (which we refer to as the
“
Continental
Acquisition
”), we became a party to a Gas Purchase
Contract, dated December 1, 2011, with DCP Midstream, LP (which we
refer to as “
DCP
”), pursuant to which
we have agreed to sell, and DCP has agreed to purchase, all gas
produced from six (6) of our D-J Basin Asset operated wells and
surrounding lands located in Weld County, Colorado, at a purchase
price equal to 83% of the net weighted average value for gas
attributable to us that is received by DCP at its facilities sold
during the month, less a $0.06/gallon local fractionation fee, for
a period of ten years, terminating December 1, 2021.
9
In
connection with our Continental Acquisition in March 2014, we also
became a party to a Gas Purchase Agreement, dated April 1, 2012, as
amended, with Sterling Energy Investments LLC, which we refer to as
Sterling, pursuant to which we have agreed to sell, and Sterling
has agreed to purchase, all gas produced from eight (8) of our D-J
Basin Asset wells and surrounding lands located in Weld County,
Colorado, at a purchase price equal to 85% of the revenue received
by Sterling from the sale of gas after processing at
Sterling’s plant that is attributable to us during the month,
less a $0.50/Mcf gathering fee, subject to escalation, for a period
of twenty years, terminating April 1, 2032.
We
endeavor to ensure that title to our properties is in accordance
with standards generally accepted in the oil and natural gas
industry. Some of our acreage may be obtained through farmout
agreements, term assignments and other contractual arrangements
with third parties, the terms of which often will require the
drilling of wells or the undertaking of other exploratory or
development activities in order to retain our interests in the
acreage. Our title to these contractual interests will be
contingent upon our satisfactory fulfillment of these obligations.
Our properties are also subject to customary royalty interests,
liens incident to financing arrangements, operating agreements,
taxes and other burdens that we believe will not materially
interfere with the use and operation of or affect the value of
these properties. We intend to maintain our leasehold interests by
making lease rental payments or by producing wells in paying
quantities prior to expiration of various time periods to avoid
lease termination.
Oil and Gas Properties
We
believe that the D-J Basin shale play represents among the most
promising unconventional oil and natural gas plays in the U.S. We
plan to opportunistically seek additional acreage proximate to our
currently held core acreage located in the Wattenberg and
Wattenberg Extension areas of Weld County, Colorado. 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 for 2018 will be focused on the development of
our D-J Basin Asset.
Unless otherwise noted,
the following table presents summary data for our leasehold acreage
in our core D-J Basin Asset as of December 31, 2017 and our
drilling capital budget with respect to this acreage from January
1, 2018 to December 31, 2019. If commodity prices do not increase
significantly, we may delay drilling activities. The ultimate
amount of capital we will expend may fluctuate materially based on,
among other things, market conditions, commodity prices, asset
monetizations, the success of our drilling results as the year
progresses, and availability of capital
(see
“
Part
I
” – “
Item 1A. Risk
Factors
”.)
|
|
|
|
|
Drilling Capital Budget
January 1,
2018 - December 31, 2019
|
||
|
Current
Core Assets:
|
Net Acres
|
Acre Spacing
|
Potential
Net
Wells
(1)
|
Net Wells
|
Gross
Costs
per Well
(2)
|
Capital Cost
to the Company (2)
|
|
D-J Basin
Asset
|
10,961
|
80
|
137
|
-
|
-
|
-
|
|
Short
lateral
|
|
|
|
2.14
|
$
3,601,000
|
$
7,697,000
|
|
Long
lateral
|
|
|
|
6.38
|
$
4,254,000
|
$
27,155,000
|
|
Total
Assets
|
10,961
|
|
137
|
8.52
|
|
$
34,852,000
|
|
(1)
|
Potential Net Wells are calculated using 80 acre spacing, and not
taking into account additional wells that could be drilled as a
result of forced pooling in Niobrara, Colorado, where the D-J Basin
Asset is located, which allows for forced pooling, and which may
create more potential gross drilling locations than acre spacing
alone would otherwise indicate
.
|
|
(2)
|
Costs per well are gross costs while capital costs presented are
net to our working interests.
We plan to drill
and complete 1.07 net short lateral and 1.06 net extended reach
lateral wells in 2018 with a net cost to us of $8,374,000 in
2018.
|
10
D-J Basin Asset
We
directly hold all of our interests in the D-J Basin Asset through
our wholly-owned subsidiary, Red Hawk. These interests are all
located in Weld County, Colorado. Red Hawk is currently the
operator of 14 gross (12.5 net) wells located in our D-J Basin
Asset. Our D-J Basin Asset acreage is located in the areas circled
in the map below.
11
Non-Core Assets
We own
23,182,880 shares of common stock of Caspian Energy, a Canadian
publicly-traded company, representing approximately 5% of its
common stock. Caspian Energy holds the rights to explore and
develop certain oil and gas properties in the Republic of
Kazakhstan known as the North Block, a 1,470 square kilometer area
located in the vicinity of the Kazakh pre-Caspian Basin. Our
Chairman, Mr. Frank Ingriselli, also serves as Chairman of Caspian
Energy. As partial consideration paid by the Company to Golden
Globe Energy (US), LLC (“
GGE
”) to restructure
certain junior Company debt held by GGE’s affiliates in May
2016, the Company provided GGE an option to acquire all of the
Company’s interests in Caspian Energy for an option exercise
price of $100,000, which expires May 12, 2019.
Our Core Areas
The
majority of our capital expenditure budget for the period from
January 2018 to December 2018 will be focused on the development of
our core oil and natural gas properties located in the D-J Basin
Asset. For additional information, see “
Management’s Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity
and Capital Resources.
”
D-J Basin Asset
As of
December 31, 2017 we held 10,961 net acres in oil and natural gas
properties related to our D-J Basin Asset. We currently own direct
interests in 61 gross (17.4 net) wells in our D-J Basin Asset, of
which 14 gross (12.5 net) wells are operated by Red Hawk and are
currently producing, 25 gross (4.9 net) wells are non-operated, and
22 wells have an after-payout interest.
Our development plan calls for the development of
approximately $8.37 million in capital expenditures in order to
drill and complete, participate in the drilling and completion of,
and/or acquire approximately 2.1 net wells in our D-J Basin Asset
in 2018
(with an additional 6.4 net wells to be drilled
and completed in 2019 for a combined total 2018-2019 drilling
capital budget of $34.85 million)
.
We
expect our projected cash flow from operations combined with our
existing cash on hand, up to $2.0 million of gross proceeds
available from the issuance of our common shares through National
Securities Corporation under our current “at the market
offering,” and approximately $18.0 million gross
available under our current senior debt facility, will be
sufficient to fund our drilling plans and our operations through
2019 (see “
Part
I
” – “
Item 1A. Risk Factors
”,
including “
Our
Tranche A Notes and Tranche B Notes include various covenants,
reduces our flexibility, increases our interest expense and may
adversely impact our operations and our
costs.
”).
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 2018-2019 capital
expenditures and/or repay or refinance a portion or all of our
outstanding debt. 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
. The availability of additional borrowings under
the senior debt facility is subject to the Company providing
matching funds for all amounts borrowed, which additional borrowed
funds may only be used to fund development costs.
Based
on publicly available information and information we have received
from our oilfield service vendors, average drilling and completion
costs for wells in our core area continue to be significantly below
prices we have seen in 2015 and prior years. In addition to more
favorable drilling and completion costs, average estimated ultimate
recoveries, or EURs, and initial 30-day average production rates
have continued to increase through improved completion techniques
in the area. The drilling and completion costs incurred, EURs and
initial production rates achieved by others may not be indicative
of the well costs we will incur or the results we will achieve from
our wells.
Our Non-Core Assets
As
described above, we own 23,182,880 shares of common stock of
Caspian Energy, a Canadian publicly-traded company, representing
approximately 5% of its common stock. As partial consideration paid
by the Company to GGE to restructure certain junior Company debt
held by GGE’s affiliates in May 2016, the Company provided
GGE an option to acquire all of the Company’s interests in
Caspian Energy for an option exercise price of $100,000, which
expires May 12, 2019, described in greater detail below under
“
Item 13. Certain
Relationships and Related Transactions, and Director
Independence
” – “
Agreements with Related Persons”
– “Golden Globe Energy (US), LLC
.
”
12
Material
2016-2017 Transactions
On May 12, 2016 (the “
Closing
Date
”), the Company
entered into an Amended and Restated Note Purchase Agreement (the
“
Amended
NPA
”), with SHIP, BRe
BCLIC Sub, BRe WINIC 2013 LTC Primary, BRe WNIC 2013 LTC Sub,
Heartland Bank (subsequently assigned to CadleRock IV, LLC,
effective March 9, 2018), BHLN-Pedco Corp.
(“
BHLN
”),
BBLN-Pedco Corp. (“
BBLN
”),
and RJC Credit LLC (“
RJC
”)(together with BHLN and BBLN, the
“
Tranche A
Investors
” and the
“
Lenders
”),
and
BAM Administrative Services LLC, as agent for the
Lenders (the “
Agent
”)
(upon notice received from the Agent on October
10, 2017, the Agent resigned as agent for the Lenders effective
December 31, 2017, and no replacement agent has been designated by
the Lenders subsequent to such date). The Amended NPA amended and
restated the March 2014
Senior
Notes (as defined and discussed below under
“
Item 7.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
” – “
Liquidity and Capital
Resources-Secured Debt Funding
”), and the Company issued new Senior
Secured Promissory Notes to each of the Lenders (collectively, the
“
Tranche B
Notes
”) in a transaction
that qualified as a troubled debt restructuring. RJC is also a
party to the RJC Junior Note (discussed below)(the
“
Senior Debt
Restructuring
”).
The Amended NPA amended the
Senior
Notes as follows:
|
●
|
Created
new “Tranche A Notes,” in substantially the same form
and with similar terms as the Tranche B Notes, except as discussed
below, consisting of a term loan issuable in tranches with a
maximum aggregate principal amount of $25,960,000, with borrowed
funds accruing interest at 15% per annum, and maturing on May 11,
2019 (the “Tranche A Maturity Date”) (the
“Tranche A Notes,” and together with the Tranche B
Notes, the “New Senior Notes”);
|
|
●
|
The
Company capitalized all accrued and unpaid interest under the
Senior Notes, renaming them “Tranche B Notes,” as a
term loan with an aggregate outstanding principal balance as of May
12, 2016 equal to $39,065,000. The Tranche B Notes mature on June
11, 2019 except for the Tranche B Note issued to RJC which matures
on July 11, 2019;
|
|
●
|
Amended
the provisions of the Senior Notes which required mandatory
prepayments from our revenues, replacing them with a Net Revenue
Sweep as described below; and
|
|
●
|
Provides
that interest on the Tranche B Notes will continue to accrue at the
rate of 15% per annum, but all accrued interest through December
31, 2017 shall be deferred until due and payable on the maturity
date, with all interest amounts deferred being added to the
principal of the Tranche B Notes on a monthly basis and that
following December 31, 2017, all interest will accrue and be paid
monthly in arrears in cash to the Tranche B Note holders, provided,
however, no payment may be made on the Tranche B Notes unless and
until the Tranche A Notes are repaid in full.
|
The
Tranche A Notes are substantially similar to the Tranche B Notes,
except that such notes are senior to the Tranche B Notes, accrue
interest until maturity and have priority to the payment of Monthly
Net Revenues as discussed below.
On the Closing Date, the Tranche A Investors
loaned the Company their pro rata share of an aggregate of
$6,422,000 (the “
Initial Tranche A
Funding
”). The Initial
Tranche A Funding net proceeds (also amounting to $6,422,000 less
legal fees of $127,000) were used by the Company to (i) fund
approximately $5.1 million due to a third party operator for
drilling and completion expenses related to the acquired working
interests in eight wells from Dome Energy, Inc.
(“
Dome
Energy
”), (ii) pay
$750,000 of the Company’s past due payables to Liberty
Oilfield Services, LLC (“
Liberty
”),
(iii) pay $445,000 of unpaid interest payments due to Heartland
Bank under its Tranche B Note through February 29, 2016, and (iv)
pay fees and expenses of $127,000 incurred in connection with the
transactions contemplated by the Amended NPA and related
documents.
13
Subject to the terms and conditions of the Amended
NPA, the Company may request each Tranche A Investor, from time to
time, to advance to the Company additional amounts of funding
(each, a “
Subsequent Tranche A
Funding
”), provided that:
(i) the Company may not request a Subsequent Tranche A Funding more
than one time in any calendar month; (ii) Agent shall have received
a written request from the Company at least 15 business days prior
to the requested date of such advance (the
“
Advance
Request
”); (iii) no Event
of Default or event that with the passage of time or the giving of
notice, or both, would become an Event of Default (a
“
Default
”)
shall have occurred and be continuing or would result therefrom;
and (iv) the Company shall provide to the Agent such documents,
instruments, certificates and other writings as the Agent shall
reasonably require in its sole and absolute discretion. The
advancement of all or any portion of the Subsequent Tranche A
Funding is in the sole and absolute discretion of the Agent and the
Investors and no Investor is obligated to fund all or any part of
the Subsequent Tranche A Funding. Each Subsequent Tranche A Funding
is required to be in a minimum amount of $500,000 and multiples of
$100,000 in excess thereof. The aggregate amount of Subsequent
Tranche A Fundings that may be made by the Investors under the
Amended NPA shall not exceed $18,577,876 and any Subsequent Tranche
A Funding repaid may not be re-borrowed.
In addition, subject to the terms and conditions
of the Amended NPA, RJC agreed to loan to the Company $240,000,
within 30 days of the Closing Date and within 30 days of each of
July 1, 2016, October 1, 2016 and January 1, 2017 (collectively,
the “
RJC
Fundings
” and
collectively with the Investor Tranche A Fundings, the
“
Fundings
”),
provided that no Event of Default or Default shall have occurred
and be continuing or would result therefrom. The aggregate amount
of the RJC Fundings made by RJC under the Amended NPA shall not
exceed $960,000 and any Funding repaid may not be
re-borrowed.
To guarantee RJC’s obligation in connection
with the RJC Fundings as required under the Amended NPA, GGE
entered into a Share Pledge Agreement with the Company, dated May
12, 2016 (the “
GGE Pledge
Agreement
”), pursuant to
which GGE agreed to pledge an aggregate of 10,000 shares of the
Company’s Series A Convertible Preferred Stock held by GGE
(convertible into 1,000,000 shares of Company common stock), which
pledged shares are subject to automatic cancellation and forfeiture
based on a schedule set forth in the GGE Share Pledge Agreement, in
the event RJC fails to meet each of its RJC Funding obligations
pursuant to the Amended NPA. To date, RJC has not met its RJC
Funding obligations under the Amended NPA and the Company is
entitled to cancel and forfeit 10,000 shares of the Company’s
Series A Convertible Preferred Stock held by GGE (convertible into
1,000,000 shares of Company common stock) pursuant to the terms of
the GGE Pledge Agreement, which determination to cancel shares has
not been made, and which shares have not been cancelled, as of the
date of this filing.
As additional consideration for the entry into the
Amended NPA and transactions related thereto, the Company has
granted to BHLN and BBLN, warrants exercisable for an aggregate of
596,280 shares of common stock of the Company (the
“
Investor
Warrants
”). The warrants
have a 3 year term, are transferrable, and are exercisable on a
cashless basis at any time at $2.50 per share. The Investor
Warrants include a beneficial ownership limitation that prohibits
the exercise of the Investor Warrants to the extent such exercise
would result in the holder, together with its affiliates, holding
more than 9.99% of the Company’s outstanding voting stock
(the “
Blocker
Provision
”). The fair
value of the Investor Warrants issued is approximately $707,000
based on the Black-Scholes option pricing model. The relative fair
value allocated to the Tranche A Notes and recorded as debt
discount was $636,000.
Other than the Investor Warrants, no additional
warrants exercisable for common stock of the Company are due,
owing, or shall be granted to the Lenders pursuant to the Senior
Notes. In addition, warrants exercisable for an aggregate of 34,913
shares of the Company’s common stock at an exercise price of
$15.00 per share and warrants exercisable for an aggregate of
120,104 shares of the Company’s common stock at an exercise
price of $7.50 per share previously granted by the Company to
certain of the Lenders on September 10, 2015, in connection with
prior interest payment deferrals have been amended and restated to
provide that all such warrants are exercisable on a cashless basis
and include a Blocker Provision (the “
Amended and Restated
Warrants
”).
14
Additionally, the Company also agreed to (a)
provide to the Agent and the Investors a monthly projected general
and administrative expense report (the “
Projected
G&A
”) and a monthly
comparison report of the Projected G&A provided for the
preceding month, with an explanation of any variances, provided
that in no event shall such variances exceed $150,000, and (B) pay
to the Agent within 2 business days following the end of each
calendar month all of the Company’s oil and gas revenue
received by the Company during such month (the
“
Net Revenue
Sweep
”), less (i) lease
operating expenses, (ii) interest payments due to Investors under
the New Senior Notes, (iii) general and administrative expenses not
to exceed $150,000 per month unless preapproved by the Agent (the
“
G&A
Cap
”), and (iv)
preapproved extraordinary expenses (together the
“
Monthly Net
Revenues
”). Amounts paid
to the Agent through the Net Revenue Sweep are applied first to the
repayment of principal and then interest due under the Tranche A
Notes until such notes are paid in full and then to the repayment
of principal and interest amounts due under the Tranche B
Notes.
The amounts outstanding under the New Senior Notes
are secured by a first priority security interest in all of the
Company’s and its subsidiaries’ assets, property, real
property, intellectual property, securities and proceeds therefrom,
granted in favor of the Agent for the benefit of the Lenders,
pursuant to a Security Agreement and a Patent Security Agreement,
each entered into as of March 7, 2014, as amended on May 12, 2016
(the “
Amended Security
Agreement
” and
“
Amended Patent
Agreement,
”
respectively). Additionally, the Agent, for the benefit of the
Lenders, was granted a mortgage and security interest in all of the
Company’s and its subsidiaries real property as located in
the State of Colorado and the State of Texas pursuant to (i) a
Leasehold Deed of Trust, Fixture Filing, Assignment of Rents and
Leases, and Security Agreements, dated March 7, 2014, as amended
May 12, 2016, filed in Weld County and Morgan County, Colorado; and
(ii) a Mortgage, Deed of Trust, Security Agreement, Financing
Statement and Assignment of Production to be filed in Matagorda
County, Texas (collectively, the “
Amended
Mortgages
”).
Additionally, the Company’s obligations
under the New Senior Notes, Amended NPA and related agreements were
guaranteed by the Company’s direct and indirect subsidiaries,
Pacific Energy Development Corp., White Hawk Petroleum, LLC
(“
White
Hawk
”), Pacific Energy
& Rare Earth Limited, Blackhawk Energy Limited, Pacific Energy
Development MSL, LLC and Red Hawk Petroleum, LLC pursuant to a
Guaranty Agreement, entered into on March 7, 2014, as amended
on May 12, 2016 (the “
Amended Guaranty
Agreement
”).
Other
than as described above, the terms of the Amended NPA (including
the covenants and obligations thereunder) are substantially the
same as the March 2014 Note Purchase Agreement, and the terms of
the Tranche A Notes and Tranche B Notes (including the events of
default, interest rates and conditions associated therewith) are
substantially the same as the original March 2014
Notes.
Junior Debt Restructuring
On May 12, 2016, the Company entered into an
Amendment No. 2 to Note and Security Agreement with RJC (the
“
Second
Amendment
”), pursuant to
which the Company and RJC agreed to amend the RJC Junior Note
(described and defined below under “
Item 7.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
” - “Liquidity and Capital
Resources” - “
Secured Debt
Funding”),
to (i)
capitalize all accrued and unpaid interest under the RJC Junior
Note as of the date of the parties’ entry into the Second
Amendment, and add it to note principal, making the then current
outstanding principal amount of the RJC Junior Note $9,379,000,
(ii) extend the “
Termination
Date
” thereunder (i.e.,
the maturity date) from December 31, 2017 to July 11, 2019, (iii)
provide that all future interest accruing under the RJC Junior Note
is deferred, due and payable on the Termination Date, with all
future interest amounts deferred being added to principal on the
first business day of the month following the month in which such
deferred interest is accrued, and (iv) subordinate the RJC Junior
Note to the New Senior Notes.
15
As additional consideration for RJC’s
agreement to enter into the Second Amendment, the Company entered
into a Call Option Agreement with GGE, an affiliate of RJC, dated
May 12, 2016 (the “
GGE Option
Agreement
”), pursuant to
which the Company provided GGE an option to purchase 23,182,880
common shares of Caspian Energy Inc., a British Columbia
corporation, held by the Company, upon payment of $100,000 by GGE
to the Company, which option expires on the
“
Termination
Date
” of the RJC Junior
Note, as amended, as described above, currently May 12, 2019. The
Company originally issued an option to GGE in February 2015 to
acquire the Company’s interest in these shares in connection
with the Company’s acquisition of certain producing oil and
gas assets from GGE, which option expired unexercised in February
2016, as more fully described in the Company’s Current Report
on Form 8-K filed with the Securities and Exchange Commission on
February 24, 2015.
GOM Holdings, LLC Merger Agreement
On
December 29, 2015, the Company entered into an
Agreement and
Plan of Merger (the
“
GOM Merger
Agreement
”) with White Hawk Energy, LLC, a Delaware
limited liability company and wholly-owned subsidiary of the
Company (“
Merger
Sub
”), and GOM Holdings, LLC (“
GOM
”). The GOM Merger
Agreement provided for the Company’s acquisition of GOM
through an exchange of certain of the shares of the Company’s
common and preferred stock (the “
Consideration Shares
”),
for 100% of the limited liability company membership units of GOM
(the “
GOM
Units
”), with the GOM Units being received by Merger
Sub and GOM receiving the Consideration Shares (the
“
Merger
”).
On
June 22, 2017, the Company terminated its then pending merger with
GOM, in order to pursue an alternative transaction with a Hong
Kong-based investor group as contemplated pursuant to a non-binding
term sheet entered into by the Company and the investor group,
which transaction was similarly terminated on September 29,
2017.
Amendment to the 2012 Equity Incentive Plan
At the
Company’s Annual Meeting of Stockholders held on December 28,
2017 (the “
Annual
Meeting
”), the Company’s stockholders approved
an amendment to the Company’s 2012 Equity Incentive Plan (the
“
Plan
”)
to increase by 1,500,000, the number of shares of common stock
reserved for issuance under the Plan to a total of 3,000,000
shares.
Reverse Stock Split
On
March 27, 2017, pursuant to the authorization provided by the
Company’s stockholders at the Company’s December 28,
2016 annual meeting, and in order to meet the continued listing
standards of the NYSE American, the Board of Directors approved the
filing of a Certificate of Amendment to the Company’s
Certificate of Formation with the Secretary of State of Texas to
effect a 1-for-10 reverse stock split of all outstanding common
stock shares of the Company, which was effective on April 7,
2017.
The
effect of the reverse stock split was to combine each 10 shares of
outstanding common stock into one new share, with no change in
authorized shares or par value per share. Proportional adjustments
were also made to the conversion and exercise prices of the
Company’s outstanding convertible preferred stock, warrants
and stock options, and to the number of shares issued and issuable
under the Company’s stock incentive plans.
The
effect of the reverse stock split has been retroactively affected
throughout this report.
16
Restricted Stock and Option Awards
On December 28, 2017, the Company granted 150,000
shares of restricted Company common stock under the Amended and
Restated 2012 Equity Incentive Plan (the “
Plan
”)
to each member of the Company’s Board of Directors –
Messrs. Ingriselli, McAfee and Steinberg, and Ms. Smith –
which shares vest on the date in 2018 that corresponds with each
director’s original appointment date to the Company’s
Board of Directors as a non-employee director, in each case subject
to the recipient of the shares being a member of the
Company’s Board of Directors on such vesting date, and
subject to the terms and conditions of a Restricted Shares Grant
Agreement entered into by and between the Company and the
recipient. These shares were granted in accordance with the terms
of the Company’s Board Compensation Program, as revised by
the Board of Directors for the 2018 year to reduce the number of
shares of restricted Company common stock issuable to each director
to a fixed 150,000 shares rather than shares valued at $60,000 as
of the date of grant, which would have otherwise exceeded 150,000
shares granted to each director.
In
addition, on December 28, 2017, in connection with the
Company’s annual compensation review process, the Company
granted restricted stock awards to Messrs. Michael L. Peterson
(President and Chief Executive Officer) and Clark R. Moore
(Executive Vice President, General Counsel and Secretary), of
410,000 and 260,000 shares, respectively, and options to purchase
150,000 shares of common stock to Gregory Overholtzer (Chief
Financial Officer), which options have an exercise price of $0.3088
per share and expire in five (5) years from the date of grant. The
restricted stock and option awards were granted under the Plan, as
amended. The restricted stock and option awards vest as follows:
50% of the shares/options on the six (6) month anniversary of
December 28, 2017 (the “Grant Date”); (ii) 30% on the
twelve (12) month anniversary of the Grant Date; and (iii) 20% on
the eighteen (18) month anniversary of the Grant Date, in each case
subject to the recipient of the shares or options being an employee
of or consultant to the Company on such vesting date, and subject
to the terms and conditions of a Restricted Shares Grant Agreement
or Stock Option Agreement, as applicable, entered into by and
between the Company and the recipient.
Notice of Delisting of Failure to Satisfy a Continued Listing Rule
or Standard; Transfer of Listing.
On December 27, 2016, the Company received notice
from the NYSE American LLC (the “
Exchange
”)
that the Company is not in compliance with Section 1003(a)(iii) of
the NYSE American Company Guide (“
Company
Guide
”) since it reported
stockholders’ equity of less than $6,000,000 at September 30,
2016 and has incurred net losses in its five most recent fiscal
years ended December 31, 2015.
Receipt of the letter did not have any immediate
effect upon the listing of the Company’s common stock,
provided that in order to maintain its listing on the Exchange, the
Exchange has requested that the Company submit a plan of compliance
(the “
Plan
”)
by January 27, 2017 addressing how the Company intends to regain
compliance with Section 1003(a)(iii) of the Company Guide by June
27, 2018.
The Company’s management submitted a Plan to
the Exchange by the January 27, 2017 deadline and the Exchange has
accepted the Company’s Plan. As such, the Company will be
able to continue its listing during the plan period and will be
subject to continued periodic review by the Exchange staff. If the
Company is unable to regain compliance with the continued listing
standards by June 27, 2018, or the Company does not make progress
consistent with the Plan during the plan period, the Company will
be subject to delisting procedures as set forth in the Company
Guide. The Company may then appeal such a determination by the
staff of the Exchange in accordance with the provisions of the
Company Guide. There can be no assurance that the Company will be
able to achieve compliance with the Exchange’s continued
listing standards within the required time frame. Until the Company
regains compliance with the Exchange’s listing standards, a
“
.BC
” indicator will be affixed to the
Company’s trading symbol to denote non-compliance with
the Exchange’s continued listing standards; provided that as
disclosed in the Current Report on Form 8-K filed by the Company on
November 9, 2016, a “
.BC
” indicator is already affixed to the
Company’s trading symbol due to the fact that the Company is
not in compliance with Section 1003(f)(v) of the Company
Guide.
17
On May
3, 2017, the Company received notice from the Exchange that the
Company was not in compliance with Sections 1003(a)(i) and (ii) (as
well as Section (iii) as described above) of the Company Guide
since it reported stockholders’ equity of less than
$2,000,000 at December 31, 2016 and had incurred net losses in its
five most recent fiscal years ended December 31, 2016. No new or
revised Plan was required to be submitted by the Exchange, and the
Company believes it is making progress consistent with the
Exchange-approved Plan.
Shale Oil and Natural Gas Overview
The
surge of oil and natural gas production from underground shale rock
formations has had a dramatic impact on the oil and natural gas
market in the U.S., where the practice was first developed, and
globally. Shale oil production is facilitated by the combination of
a set of technologies that had been applied separately to other
hydrocarbon reservoir types for many decades. In combination these
technologies and techniques have enabled large volumes of oil to be
produced from deposits with characteristics that would not
otherwise permit oil to flow at rates sufficient to justify its
exploitation. The application of horizontal drilling, hydraulic
fracturing and advanced reservoir assessment tools to these
reservoirs is unlocking a global resource of shale and other
unconventional oil and natural gas that the International Energy
Agency estimates could eventually double recoverable global oil
reserves.
Oil and
natural gas produced from shale is considered an unconventional
resource. Commercial oil and natural gas production from
unconventional sources requires special techniques in order to
achieve attractive oil and natural gas flow rates. Unlike
conventional oil and natural gas, which is typically generated in
deeper source rock and subsequently migrates into a sandstone
structure with an overlying impermeable layer forming a
“
trap,
”
shale oil and natural gas is generated from organic material
contained within the shale and retained by the rock’s
inherent low permeability. Permeability is a measure of the ease
with which natural gas, oil or other fluids can flow through the
material. The same low permeability that secures large volumes of
natural gas and liquids in place within the shale strata makes it
much more difficult to extract them, even with a large pressure
difference between the reservoir and the surface. The location and
potential of many of today’s productive shale reservoirs were
known for many years, but until the development of current shale
oil and natural gas techniques these deposits were considered
noncommercial or inaccessible.
The
main challenge of shale oil and natural gas drilling is to overcome
the low permeability of the shale reservoirs. A conventional
vertical oil or natural gas well drilled into one of these
reservoirs might achieve production, though at reduced rates and
for a limited duration before the oil or natural gas volume in
proximity to the wellbore is exhausted. That often renders such an
approach impractical and uneconomic for exploiting shale oil and
natural gas. The two main technologies associated with U.S. shale
oil and natural gas production are horizontal drilling and
hydraulic fracturing, or “
hydrofracking.
” They are
employed to overcome these constraints by greatly increasing the
exposure of each well to the shale stratum and enabling oil and
natural gas located farther from the well to flow through the rock
and replace the nearby oil and natural gas that has been extracted
to the surface.
Instead
of drilling a simple vertical well through the shale and then
perforating the well within the zone where it is in contact with
the shale, the drilling company drills a directional well
vertically to within proximity of the shale and then executes a
90-degree turn in order to intersect the shale and then travel for
a significant horizontal distance through it. A typical North
American shale well has a horizontal extent of 1,000 feet to 8,000
feet or more.
Once
the lateral portion of the well has reached the desired extent, the
other main technique of shale oil and natural gas drilling is
deployed. After the well has been completed, the farthest section
of the lateral is perforated, opening up holes through which fluid
can flow. This portion of the reservoir is then hydrofracked by
injecting fluid into the well under high pressure to fracture the
exposed shale rock and open up pathways through which oil and
natural gas can flow. The “
fracking fluid
” consists
mainly of water with a variety of chemical additives intended to
reduce friction and dissolve minerals, among other purposes, along
with sand or sand-like material to prop open the new pathways
created by hydrofracking. This process is then repeated at
intervals along the well’s horizontal extent, successively
perforating and hydrofracking each section in turn. This process
creates a producing well that emulates the effect of a vertical
well drilled into a conventional oil and natural gas reservoir by
substituting multiple horizontal “
pay zones
” in the shale
stratum for the thinner but more prolific vertical pay zone in a
more permeable reservoir. Compared to conventional oil and natural
gas drilling, the production of oil and natural gas from shale
reservoirs thus entails more drilling, on average, and requires a
substantial supply of water.
18
Beginning in 2014,
the oil and natural gas industry began to experience a sharp
decline in commodity prices, with the daily NYMEX WTI oil spot
price went from a high of $107.95 per Bbl in June 2014 to low of
$26.19 per Bbl in February 2016, the lowest settlement in over a
decade. This recent decline in oil prices has resulted in a slowing
of the pace of U.S. shale oil production, with Baker Hughes’
rig count data showing a decrease in the number of oil rigs
operating in the DJ-Niobrara from 42 rigs at the end of December
2014 to 26 rigs at the end of December 2017. However, this has also
led to average drilling and completion costs for wells in the
DJ-Niobrara significantly dropping from between $4.3 million
(short-lateral) and $8.3 million (long lateral) per well in early
2015 to between $3.6 million and $4.3 million per well currently,
which reduced costs partially offset the decline in commodity
prices, resulting in new shale oil wells drilled in more thermally
mature formations of the DJ-Niobrara expected to continue to yield
positive economic returns.
Regulation of the Oil and Gas Industry
Our operations are substantially affected by
federal, state and local laws and regulations. Failure to comply
with applicable laws and regulations can result in substantial
penalties. The regulatory burden on the industry increases the cost
of doing business and affects profitability. Historically, our
compliance costs have not had a material adverse effect on our
results of operations; however, we are unable to predict the future
costs or impact of compliance. Additional proposals and proceedings
that affect the oil and natural gas industry are regularly
considered by Congress, the states, the Federal Energy Regulatory
Commission (the “
FERC
”)
and the courts. We cannot predict when or whether any such
proposals may become effective. We do not believe that we would be
affected by any such action materially differently than similarly
situated competitors.
Regulation Affecting Production
The
production of oil and natural gas is subject to United States
federal and state laws and regulations, and orders of regulatory
bodies under those laws and regulations, governing a wide variety
of matters. All of the jurisdictions in which we own or operate
producing oil and natural gas properties have statutory provisions
regulating the exploration for and production of oil and natural
gas, including provisions related to permits for the drilling of
wells, bonding requirements to drill or operate wells, the location
of wells, the method of drilling and casing wells, the surface use
and restoration of properties upon which wells are drilled,
sourcing and disposal of water used in the drilling and completion
process, and the abandonment of wells. Our operations are also
subject to various conservation laws and regulations. These include
the regulation of the size of drilling and spacing units or
proration units, the number of wells which may be drilled in an
area, and the unitization or pooling of oil or natural gas wells,
as well as regulations that generally prohibit the venting or
flaring of natural gas, and impose certain requirements regarding
the ratability or fair apportionment of production from fields and
individual wells. These laws and regulations may limit the amount
of oil and gas we can drill. Moreover, each state generally imposes
a production or severance tax with respect to the production and
sale of oil, NGL and gas within its jurisdiction.
States
do not regulate wellhead prices or engage in other similar direct
regulation, but there can be no assurance that they will not do so
in the future. The effect of such future regulations may be to
limit the amounts of oil and gas that may be produced from our
wells, negatively affect the economics of production from these
wells or limit the number of locations we can drill.
The
failure to comply with the rules and regulations of oil and natural
gas production and related operations can result in substantial
penalties. Our competitors in the oil and natural gas industry are
subject to the same regulatory requirements and restrictions that
affect our operations.
Regulation Affecting Sales and Transportation of
Commodities
Sales prices of gas, oil, condensate and NGL are
not currently regulated and are made at market prices. Although
prices of these energy commodities are currently unregulated, the
United States Congress historically has been active in their
regulation. We cannot predict whether new legislation to regulate
oil and gas, or the prices charged for these commodities might be
proposed, what proposals, if any, might actually be enacted by the
United States Congress or the various state legislatures and
what
effect, if any, the proposals might have on our
operations. Sales of oil and natural gas may be subject to certain
state and federal reporting requirements.
19
The
price and terms of service of transportation of the commodities,
including access to pipeline transportation capacity, are subject
to extensive federal and state regulation. Such regulation may
affect the marketing of oil and natural gas produced by the
Company, as well as the revenues received for sales of such
production. Gathering systems may be subject to state ratable take
and common purchaser statutes. Ratable take statutes generally
require gatherers to take, without undue discrimination, oil and
natural gas production that may be tendered to the gatherer for
handling. Similarly, common purchaser statutes generally require
gatherers to purchase, or accept for gathering, without undue
discrimination as to source of supply or producer. These statutes
are designed to prohibit discrimination in favor of one producer
over another producer or one source of supply over another source
of supply. These statutes may affect whether and to what extent
gathering capacity is available for oil and natural gas production,
if any, of the drilling program and the cost of such capacity.
Further state laws and regulations govern rates and terms of access
to intrastate pipeline systems, which may similarly affect market
access and cost.
The
FERC regulates interstate natural gas pipeline transportation rates
and service conditions. The FERC is continually proposing and
implementing new rules and regulations affecting interstate
transportation. The stated purpose of many of these regulatory
changes is to ensure terms and conditions of interstate
transportation service are not unduly discriminatory or unduly
preferential, to promote competition among the various sectors of
the natural gas industry and to promote market transparency. We do
not believe that our drilling program will be affected by any such
FERC action in a manner materially differently than other similarly
situated natural gas producers.
In addition to the regulation of natural gas
pipeline transportation, FERC has additional, jurisdiction over the
purchase or sale of gas or the purchase or sale of transportation
services subject to FERC’s jurisdiction pursuant to the
Energy Policy Act of 2005 (“
EPAct
2005
”). Under the EPAct
2005, it is unlawful for “
any
entity,
” including
producers such as us, that are otherwise not subject to
FERC’s jurisdiction under the Natural Gas Act of 1938
(“
NGA
”) to use any deceptive or manipulative
device or contrivance in connection with the purchase or sale of
gas or the purchase or sale of transportation services subject to
regulation by FERC, in contravention of rules prescribed by FERC.
FERC’s rules implementing this provision make it unlawful, in
connection with the purchase or sale of gas subject to the
jurisdiction of FERC, or the purchase or sale of transportation
services subject to the jurisdiction of FERC, for any entity,
directly or indirectly, to use or employ any device, scheme or
artifice to defraud; to make any untrue statement of material fact
or omit to make any such statement necessary to make the statements
made not misleading; or to engage in any act or practice that
operates as a fraud or deceit upon any person. EPAct 2005 also
gives FERC authority to impose civil penalties for violations of
the NGA and the Natural Gas Policy Act of 1978 up to
$1.2 million per day, per violation. The anti-manipulation
rule applies to activities of otherwise non-jurisdictional entities
to the extent the activities are conducted
“
in connection
with
” gas sales,
purchases or transportation subject to FERC jurisdiction, which
includes the annual reporting requirements under FERC Order
No. 704 (defined below).
In December 2007, FERC issued a final rule on the
annual natural gas transaction reporting requirements, as amended
by subsequent orders on rehearing (“
Order
No. 704
”). Under
Order No. 704, any market participant, including a producer
that engages in certain wholesale sales or purchases of gas that
equal or exceed 2.2 million MMBtus of physical natural gas in
the previous calendar year, must annually report such sales and
purchases to FERC on Form No. 552 on May 1 of each year.
Form No. 552 contains aggregate volumes of natural gas
purchased or sold at wholesale in the prior calendar year to the
extent such transactions utilize, contribute to the formation of
price indices. Not all types of natural gas sales are required to
be reported on Form No. 552. It is the responsibility of the
reporting entity to determine which individual transactions should
be reported based on the guidance of Order No. 704. Order
No. 704 is intended to increase the transparency of
the wholesale gas markets and to assist FERC in monitoring
those markets and in detecting market
manipulation.
The FERC also regulates rates and
terms and conditions of service on interstate transportation of
liquids, including oil and NGL, under the Interstate Commerce Act,
as it existed on October 1, 1977 (“
ICA
”).
Prices received from the sale of liquids may be affected by the
cost of transporting those products to market. The ICA requires
that certain interstate liquids pipelines maintain a tariff on file
with FERC. The tariff sets forth the established rates as well as
the rules and regulations governing the service. The ICA requires,
among other things, that rates and terms and conditions of service
on interstate common carrier pipelines be
“
just
and reasonable.
” Such pipelines must also
provide jurisdictional service in a manner that is not unduly
discriminatory or unduly preferential. Shippers have the power to
challenge new and existing rates and terms and conditions of
service before FERC.
20
The
rates charged by many interstate liquids pipelines are currently
adjusted pursuant to an annual indexing methodology established and
regulated by FERC, under which pipelines increase or decrease their
rates in accordance with an index adjustment specified by FERC. For
the five-year period beginning July 1, 2016, FERC established
an annual index adjustment equal to the change in the producer
price index for finished goods plus 1.23%. This adjustment is
subject to review every five years. Under FERC’s regulations,
a liquids pipeline can request a rate increase that exceeds the
rate obtained through application of the indexing methodology by
obtaining market-based rate authority (demonstrating the pipeline
lacks market power), establishing rates by settlement with all
existing shippers, or through a cost-of-service approach (if the
pipeline establishes that a substantial divergence exists between
the actual costs experienced by the pipeline and the rates
resulting from application of the indexing methodology). Increases
in liquids transportation rates may result in lower revenue and
cash flows for the Company.
In
addition, due to common carrier regulatory obligations of liquids
pipelines, capacity must be prorated among shippers in an equitable
manner in the event there are nominations in excess of capacity or
for new shippers. Therefore, new shippers or increased volume by
existing shippers may reduce the capacity available to us. Any
prolonged interruption in the operation or curtailment of available
capacity of the pipelines that we rely upon for liquids
transportation could have a material adverse effect on our
business, financial condition, results of operations and cash
flows. However, we believe that access to liquids pipeline
transportation services generally will be available to us to the
same extent as to our similarly situated competitors.
Rates
for intrastate pipeline transportation of liquids are subject to
regulation by state regulatory commissions. The basis for
intrastate liquids pipeline regulation, and the degree of
regulatory oversight and scrutiny given to intrastate liquids
pipeline rates, varies from state to state. We believe that the
regulation of liquids pipeline transportation rates will not affect
our operations in any way that is materially different from the
effects on our similarly situated competitors.
In addition to FERC’s regulations, we are
required to observe anti-market manipulation laws with regard to
our physical sales of energy commodities. In November 2009, the
Federal Trade Commission (“
FTC
”) issued regulations pursuant to the Energy
Independence and Security Act of 2007, intended to prohibit market
manipulation in the petroleum industry. Violators of the
regulations face civil penalties of up to $1 million per
violation per day. In July 2010, Congress passed the Dodd-Frank
Act, which incorporated an expansion of the authority of the
Commodity Futures Trading Commission (“
CFTC
”)
to prohibit market manipulation in the markets regulated by the
CFTC. This authority, with respect to oil swaps and futures
contracts, is similar to the anti-manipulation authority granted to
the FTC with respect to oil purchases and sales. In July 2011, the
CFTC issued final rules to implement their new anti-manipulation
authority. The rules subject violators to a civil penalty of up to
the greater of $1.1 million or triple the monetary gain to the
person for each violation.
Regulation of Environmental and Occupational Safety and Health
Matters
Our operations are subject to stringent federal,
state and local laws and regulations governing occupational safety
and health aspects of our operations, the discharge of materials
into the environment and environmental protection. Numerous
governmental entities, including the U.S. Environmental Protection
Agency (“
EPA
”) and analogous state agencies have the
power to enforce compliance with these laws and regulations and the
permits issued under them, often requiring difficult and costly
actions. These laws and regulations may, among other things
(i) require the acquisition of permits to conduct drilling and
other regulated activities; (ii) restrict the types,
quantities and concentration of various substances that can be
released into the environment or injected into formations in
connection with oil and natural gas drilling and production
activities; (iii) limit or prohibit drilling activities on
certain lands lying within wilderness, wetlands and other protected
areas; (iv) require remedial measures to mitigate pollution
from former and ongoing operations, such as requirements to close
pits and plug abandoned wells; (v) apply specific health and
safety criteria addressing worker protection; and (vi) impose
substantial liabilities for pollution resulting from drilling and
production operations. Any failure to comply with these laws and
regulations may result in the assessment of administrative, civil
and criminal penalties, the imposition of corrective or remedial
obligations, the occurrence of delays or restrictions in permitting
or performance of projects, and the issuance of orders enjoining
performance of some or all of our operations.
21
These
laws and regulations may also restrict the rate of oil and natural
gas production below the rate that would otherwise be possible. The
regulatory burden on the oil and natural gas industry increases the
cost of doing business in the industry and consequently affects
profitability. The trend in environmental regulation is to place
more restrictions and limitations on activities that may affect the
environment, and thus any changes in environmental laws and
regulations or re-interpretation of enforcement policies that
result in more stringent and costly well drilling, construction,
completion or water management activities, or waste handling,
storage transport, disposal, or remediation requirements could have
a material adverse effect on our financial position and results of
operations. We may be unable to pass on such increased compliance
costs to our customers. Moreover, accidental releases or spills may
occur in the course of our operations, and we cannot assure you
that we will not incur significant costs and liabilities as a
result of such releases or spills, including any third-party claims
for damage to property, natural resources or persons. Continued
compliance with existing requirements is not expected to materially
affect us. However, there is no assurance that we will be able to
remain in compliance in the future with such existing or any new
laws and regulations or that such future compliance will not have a
material adverse effect on our business and operating
results.
Additionally, on January 29, 2018, in
Martinez v. Colorado Oil and Gas Conservation
Commission
, the Colorado Supreme Court agreed to review a
ruling by the Colorado Court of Appeals that held that the Colorado
Oil & Gas Conservation Commission (“
COGCC”
)
had incorrectly concluded that it lacked statutory authority to
undertake a proposed rulemaking “to suspend the issuance of
permits that allow hydraulic fracturing until it can be done
without adversely impacting human health and safety and without
impairing Colorado’s atmospheric resource and climate system,
water, soil, wildlife, or other biological resources.” The
Colorado Court of Appeals concluded that Colorado’s Oil and
Gas Conservation Act mandated that oil and gas development
“be regulated subject to the protection of public health,
safety, and welfare, including protection of the environment and
wildlife resources.” The Colorado Supreme Court said it would
consider whether the Colorado Court of Appeals erred in determining
that the COGCC misinterpreted the Oil and Gas Conservation Act as
“requiring a balance between oil and gas development and
public health, safety, and welfare.”
The
following is a summary of the more significant existing and
proposed environmental and occupational safety and health laws, as
amended from time to time, to which our business operations are or
may be subject and for which compliance may have a material adverse
impact on our capital expenditures, results of operations or
financial position.
Hazardous Substances and Wastes
The Resource
Conservation and Recovery Act (“
RCRA
”),
and comparable state statutes, regulate the generation,
transportation, treatment, storage, disposal and cleanup of
hazardous and non-hazardous wastes. Pursuant to rules issued by the
EPA, the individual states administer some or all of the provisions
of RCRA, sometimes in conjunction with their own, more stringent
requirements. Drilling fluids, produced waters, and most of the
other wastes associated with the exploration, development, and
production of oil or natural gas, if properly handled, are
currently exempt from regulation as hazardous waste under RCRA and,
instead, are regulated under RCRA’s less stringent
non-hazardous waste provisions, state laws or other federal laws.
However, it is possible that certain oil and natural gas drilling
and production wastes now classified as non-hazardous could be
classified as hazardous wastes in the future.
For example, in December 2016, environmental
groups and the EPA entered into a consent decree to address EPA's
alleged failure to timely assess its RCRA Subtitle D criteria
regulations exempting certain exploration and production related
oil and natural gas wastes, from regulation as hazardous wastes
under RCRA. Under this consent decree, the EPA is required to
propose no later than March 15, 2019, a rulemaking for revision of
certain Subtitle D criteria regulations pertaining to oil and
natural gas wastes or sign a determination that revision of the
regulations is not necessary. If the EPA proposes a rulemaking for
revised oil and natural gas regulations, the consent decree
requires that the EPA take final action following notice and
comment rulemaking no later than July 15, 2021. Stricter regulation
of wastes generated during our operations could result in an
increase in our, as well as the oil and natural gas exploration and
production industry’s, costs to manage and dispose of wastes,
which could have a material adverse effect on our results of
operations and financial position.
22
The Comprehensive Environmental Response,
Compensation and Liability Act (“
CERCLA
”),
also known as the Superfund law, and comparable state laws impose
joint and several liability, without regard to fault or legality of
conduct, on classes of persons who are considered to be responsible
for the release of a hazardous substance into the environment.
These persons include the current and former owners and operators
of the site where the release occurred and anyone who disposed or
arranged for the disposal of a hazardous substance released at the
site. Under CERCLA, such persons may be subject to joint and
several liability for the costs of cleaning up the hazardous
substances that have been released into the environment, for
damages to natural resources and for the costs of certain health
studies. CERCLA also authorizes the EPA and, in some instances,
third parties to act in response to threats to the public health or
the environment and to seek to recover from the responsible classes
of persons the costs they incur. In addition, it is not uncommon
for neighboring landowners and other third-parties to file claims
for personal injury and property damage allegedly caused by the
hazardous substances released into the environment. We generate
materials in the course of our operations that may be regulated as
hazardous substances.
We
currently lease or operate numerous properties that have been used
for oil and natural gas exploration, production and processing for
many years. Although we believe that we have utilized operating and
waste disposal practices that were standard in the industry at the
time, hazardous substances, wastes, or petroleum hydrocarbons may
have been released on, under or from the properties owned or leased
by us, or on, under or from other locations, including off-site
locations, where such substances have been taken for treatment or
disposal. In addition, some of our properties have been operated by
third parties or by previous owners or operators whose treatment
and disposal of hazardous substances, wastes, or petroleum
hydrocarbons was not under our control. These properties and the
substances disposed or released on, under or from them may be
subject to CERCLA, RCRA and analogous state laws. Under such laws,
we could be required to undertake response or corrective measures,
which could include removal of previously disposed substances and
wastes, cleanup of contaminated property or performance of remedial
plugging or pit closure operations to prevent future contamination,
the costs of which could be substantial.
Water Discharges
The Federal Water
Pollution Control Act, also known as the Clean Water Act
(“
CWA
”),
and analogous state laws, impose restrictions and strict controls
with respect to the discharge of pollutants, including spills and
leaks of oil and hazardous substances, into state waters and waters
of the United States. The discharge of pollutants into regulated
waters is prohibited, except in accordance with the terms of a
permit issued by the EPA or an analogous state agency. Spill
prevention, control and countermeasure plan requirements imposed
under the CWA require appropriate containment berms and similar
structures to help prevent the contamination of navigable waters in
the event of a petroleum hydrocarbon tank spill, rupture or leak.
In addition, the CWA and analogous state laws require individual
permits or coverage under general permits for discharges of storm
water runoff from certain types of facilities. The CWA also
prohibits the discharge of dredge and fill material in regulated
waters, including wetlands, unless authorized by permit.
In June 2015, the EPA and the U.S.
Army Corps of Engineers (“
Corps”
)
published a final rule to revise the definition of "waters of the
United States" (“
WOTUS”
)
for all Clean Water Act programs, but legal challenges to this rule
followed and the rule was stayed nationwide by the U.S. Sixth
Circuit Court of Appeals in October 2015. In response to this
decision, the EPA and the Corps resumed nationwide use of the
agencies' prior regulations defining the term "waters of the United
States." However, in January 2018, the U.S. Supreme Court ruled
that the rule revising the WOTUS definition must first be reviewed
in the federal district courts, which could result in a withdrawal
of the stay by the Sixth Circuit. In addition, the EPA has issued
proposals to repeal the rule revising the WOTUS definition and to
delay its implementation until 2020 to allow time for the EPA to
reconsider the definition of the term "waters of the United
States." To the extent this rule or a revised rule expands the
scope of the CWA's jurisdiction, we could face increased costs and
delays with respect to obtaining permits for dredge and fill
activities in wetland areas in connection with any expansion
activities. Federal and state regulatory agencies may impose
substantial administrative, civil and criminal penalties as well as
other enforcement mechanisms for non-compliance with discharge
permits or other requirements of the CWA and analogous state laws
and regulations, including spills and other non-authorized
discharges.
Federal and state
regulatory agencies can impose administrative, civil and criminal
penalties for non-compliance with discharge permits or other
requirements of the CWA and analogous state laws and
regulations.
23
The Oil Pollution Act of 1990
(“
OPA
”), amends the CWA and sets minimum
standards for prevention, containment and cleanup of oil spills.
The OPA applies to vessels, offshore facilities, and onshore
facilities, including exploration and production facilities that
may affect waters of the United States. Under OPA, responsible
parties including owners and operators of onshore facilities may be
held strictly liable for oil cleanup costs and natural resource
damages as well as a variety of public and private damages that may
result from oil spills. The OPA also requires owners or operators
of certain onshore facilities to prepare Facility Response Plans
for responding to a worst-case discharge of oil into waters of the
United States.
Subsurface Injections
In the course of our
operations, we produce water in addition to oil and natural gas.
Water that is not recycled may be disposed of in disposal wells,
which inject the produced water into non-producing subsurface
formations. Underground injection operations are regulated pursuant
to the Underground Injection Control (“
UIC
”)
program established under the federal Safe Drinking Water Act
(“
SDWA
”)
and analogous state laws. The UIC program requires permits from the
EPA or an analogous state agency for the construction and operation
of disposal wells, establishes minimum standards for disposal well
operations, and restricts the types and quantities of fluids that
may be disposed. A change in UIC disposal well regulations or the
inability to obtain permits for new disposal wells in the future
may affect our ability to dispose of produced water and ultimately
increase the cost of our operations.
For example, in response to recent seismic events
near belowground disposal wells used for the injection of oil and
natural gas-related wastewaters, regulators in some states,
including Colorado, have imposed more stringent permitting and
operating requirements for produced water disposal wells. In
Colorado, permit applications are reviewed specifically to evaluate
seismic activity and, as of 2011, the state has required operators
to identify potential faults near proposed wells, if earthquakes
historically occurred in the area, and to accept maximum injection
pressures and volumes based on fracture gradient as conditions to
permit approval. Additionally, legal disputes may arise based on
allegations that disposal well operations have caused damage to
neighboring properties or otherwise violated state or federal rules
regulating waste disposal. These developments could result in
additional regulation, restriction on the use of injection wells by
us or by commercial disposal well vendors whom we may use from time
to time to dispose of wastewater, and increased costs of
compliance, which could have a material adverse effect on our
capital expenditures and operating costs, financial condition, and
results of operations.
Air Emissions
The Clean Air Act (the “
CAA
”) and comparable state laws restrict the
emission of air pollutants from many sources, such as, for example,
tank batteries and compressor stations, through air emissions
standards, construction and operating permitting programs and the
imposition of other compliance standards. These laws and
regulations may require us to obtain pre-approval for the
construction or modification of certain projects or facilities
expected to produce or significantly increase air emissions, obtain
and strictly comply with stringent air permit requirements or
utilize specific equipment or technologies to control emissions of
certain pollutants. The need to obtain permits has the potential to
delay the development of oil and natural gas projects. Over the
next several years, we may be charged royalties on natural gas
losses or required to incur certain capital expenditures for air
pollution control equipment or other air emissions related issues.
For example, in October 2015, the EPA issued a final rule under the
CAA, lowering the National Ambient Air Quality Standard
(“
NAAQS
”)
for ground-level ozone from 75 parts per billion
(“
ppb
”) for the 8-hour primary and secondary
ozone standards to 70 ppb for both standards. On June 6, 2017, the
EPA extended the deadline for promulgating initial area
designations by one year. Reclassification of areas or imposition
of more stringent standards may make it more difficult to construct
new or modified sources of air pollution in newly designated
non-attainment areas. Also, states are expected to implement more
stringent requirements as a result of this new final rule, which
could apply to our operations. In addition, during the fall of
2016, the EPA also issued final Control Techniques Guidelines
(“
CTGs
”)
for reducing volatile organic compound emissions from existing oil
and natural gas equipment and processes in ozone non-attainment
areas, including the Denver Metro North Front Range Ozone 8-hour
Non-Attainment area. In 2017, as part of the federal CTG process
for oil and natural gas, Colorado began a stakeholder and
rulemaking effort to compare the CTGs to existing Colorado
requirements to ensure they meet applicable federal requirements.
This process could result in new or more stringent air quality
control requirements applicable to our operations. In another
example, in June 2016, the EPA finalized a revised rule regarding
criteria for aggregating multiple small surface sites into a single
source for air-quality permitting purposes applicable to the oil
and gas industry. This rule could cause small facilities, on an
aggregate basis, to be deemed a major source, thereby triggering
more stringent permitting requirements. Compliance with these or
other air pollution control and permitting requirements have the
potential to delay the development of oil and natural gas projects
and increase our costs of development and production, which costs
could have a material adverse impact on our business and results of
operations.
24
Regulation of GHG Emissions
In
response to findings that emissions of carbon dioxide, methane and
other greenhouse gases (“
GHGs
”) present an
endangerment to public health and the environment, the EPA has
adopted regulations under existing provisions of the Clean Air Act
that, among other things, establish Prevention of Significant
Deterioration (“
PSD
”) construction and
Title V operating permit reviews for certain large stationary
sources that are already potential major sources of certain
principal, or criteria, pollutant emissions. Facilities required to
obtain PSD permits for their GHG emissions also will be required to
meet “best available control technology” standards that
typically will be established by state agencies. In addition, the
EPA has adopted rules requiring the monitoring and annual reporting
of GHG emissions from specified large, GHG emission sources in the
United States, including certain onshore and offshore oil and
natural gas production sources, which include certain of our
operations.
Federal agencies also have begun directly
regulating emissions of methane, a GHG, from oil and natural gas
operations. In June 2016, the EPA published the New Source
Performance Standards (“
NSPS
”)
Subpart OOOOa standards that require certain new, modified or
reconstructed facilities in the oil and natural gas sector to
reduce these methane gas and volatile organic compound emissions.
These Subpart OOOOa standards will expand previously issued NSPS
published by the EPA in 2012 and known as Subpart OOOO, by using
certain equipment-specific emissions control practices. However, in
April 2017, the EPA announced that it would review this methane
rule for new, modified and reconstructed sources and initiated
reconsideration proceedings to potentially revise or rescind
portions of the rule. In June 2017, the EPA also proposed a
two-year stay of certain requirements of the methane rule pending
the reconsideration proceedings; however, the rule remains in
effect in the meantime. Similarly, in November 2016, the federal
Bureau of Land Management (“
BLM
”) issued a final rule to reduce methane
emissions by regulating venting, flaring, and leaks from oil and
gas operations on federal and American Indian lands. However, in
December 2017, BLM finalized a suspension of certain requirements
of the rule until 2019. That suspension is now being challenged in
court, and substantial uncertainty exists with respect to
implementation of the rule.
On
the international level, in December 2015, the United States joined
the international community at the 21st Conference of the Parties
of the United Nations Framework Convention on Climate Change in
Paris, France that prepared an agreement requiring member countries
to review and “represent a progression” in their
intended nationally determined contributions, which set GHG
emission reduction goals every five years beginning in 2020. This
“Paris Agreement” was signed by the United States in
April 2016 and entered into force in November 2016; however, this
agreement does not create any binding obligations for nations to
limit their GHG emissions, but rather includes pledges to
voluntarily limit or reduce future emissions. In follow-up to an
earlier announcement by President Trump, in August 2017, the U.S.
Department of State officially informed the United Nations of the
intent of the United States to withdraw from the Paris Agreement.
The Paris Agreement provides for a four-year exit process beginning
when it took effect in November 2016, which would result in an
effective exit date of November 2020. The United States’
adherence to the exit process and/or the terms on which the United
States may re-enter the Paris Agreement or a separately negotiated
agreement are unclear at this time.
The
adoption and implementation of any international, federal or state
legislation or regulations that require reporting of GHG or
otherwise limit emissions of GHG from our equipment and operations
could result in increased costs to reduce emissions of GHG
associated with our operations as well as delays or restrictions in
our ability to permit GHG emissions from new or modified sources.
In addition, substantial limitations on GHG emissions could
adversely affect demand for the oil, natural gas and NGL we produce
and lower the value of our reserves, which devaluation could be
significant. One or more of these developments could have a
materially adverse effect on our business, financial condition and
results of operations. Additionally, it should be noted that
increasing concentrations of GHG in the Earth’s atmosphere
may produce climate changes that have significant physical effects,
such as increased frequency and severity of storms, floods and
other climatic events; if any such effects were to occur, they
could have an adverse effect on our exploration and production
operations. At this time, we have not developed a comprehensive
plan to address the legal, economic, social or physical impacts of
climate change on our operations. Finally, notwithstanding
potential risks related to climate change, the International Energy
Agency, an autonomous intergovernmental organization involved in
international energy policy, estimates that global energy demand
will continue to rise and will not peak until after 2040 and oil
and gas will continue to represent a substantial percentage of
global energy use over that time. However, recent activism directed
at shifting funding away from companies with energy-related assets
could result in limitations or restrictions on certain sources of
funding for the energy sector.
25
Hydraulic Fracturing Activities
Hydraulic
fracturing is an important and common practice that is used to
stimulate production of natural gas and/or oil from dense
subsurface rock formations. We regularly use hydraulic fracturing
as part of our operations. Hydraulic fracturing involves the
injection of water, sand or alternative proppant and chemicals
under pressure into targeted geological formations to fracture the
surrounding rock and stimulate production. Hydraulic
fracturing is typically regulated by state oil and natural gas
commissions. However, several federal agencies have asserted
regulatory authority over certain aspects of the process.
For example, in December 2016, the EPA
released its final report on the potential impacts of hydraulic
fracturing on drinking water resources, concluding that
“water cycle” activities associated with hydraulic
fracturing may impact drinking water resources under certain
circumstances. Additionally, the EPA published in June 2016 an
effluent limitations guideline final rule pursuant to its authority
under the SDWA prohibiting the discharge of wastewater from onshore
unconventional oil and natural gas extraction facilities to
publicly owned wastewater treatment plants; asserted regulatory
authority in 2014 under the SDWA over hydraulic fracturing
activities involving the use of diesel and issued guidance covering
such activities; and issued in 2014 a prepublication of its Advance
Notice of Proposed Rulemaking regarding Toxic Substances Control
Act reporting of the chemical substances and mixtures used in
hydraulic fracturing. Also, the BLM published a final rule in March
2015 establishing new or more stringent standards for performing
hydraulic fracturing on federal and American Indian lands including
well casing and wastewater storage requirements and an obligation
for exploration and production operators to disclose what chemicals
they are using in fracturing activities. However, following years
of litigation, the BLM rescinded the rule in December 2017. Also,
from time to time, legislation has been introduced, but not
enacted, in Congress to provide for federal regulation of hydraulic
fracturing and to require disclosure of the chemicals used in the
fracturing process. In the event that a new, federal level of legal
restrictions relating to the hydraulic fracturing process is
adopted in areas where we operate, we may incur additional costs to
comply with such federal requirements that may be significant in
nature, and also could become subject to additional permitting
requirements and experience added delays or curtailment in the
pursuit of exploration, development, or production
activities.
At
the state level, Colorado, where we conduct operations, is among
the states that has adopted, and other states are considering
adopting, regulations that could impose new or more stringent
permitting, disclosure or well-construction requirements on
hydraulic fracturing operations. Moreover, states could elect to
prohibit high volume hydraulic fracturing altogether, following the
approach taken by the State of New York in 2015. Also, certain
interest groups in Colorado opposed to oil and natural gas
development generally, and hydraulic fracturing in particular, have
from time to time advanced various options for ballot initiatives
that, if approved, would allow revisions to the state constitution
in a manner that would make such exploration and production
activities in the state more difficult in the future. However,
during the November 2016 voting process, one proposed amendment
placed on the Colorado state ballot making it relatively more
difficult to place an initiative on the state ballot was passed by
the voters. As a result, there are more stringent procedures now in
place for placing an initiative on a state ballot. In addition to
state laws, local land use restrictions may restrict drilling or
the hydraulic fracturing process and cities may adopt local
ordinances allowing hydraulic fracturing activities within their
jurisdictions but regulating the time, place and manner of those
activities. If new or more stringent federal, state or local legal
restrictions relating to the hydraulic fracturing process are
adopted in areas where we operate, including, for example, on
federal and American Indian lands, we could incur potentially
significant added cost to comply with such requirements, experience
delays or curtailment in the pursuit of exploration, development or
production activities, and perhaps even be precluded from drilling
wells.
26
In
the event that local or state restrictions or prohibitions are
adopted in areas where we conduct operations, including the D-J
Basin in Colorado, that impose more stringent limitations on the
production and development of oil and natural gas, including, among
other things, the development of increased setback distances, we
and similarly situated oil and natural exploration and production
operators in the state may incur significant costs to comply with
such requirements or may experience delays or curtailment in the
pursuit of exploration, development, or production activities, and
possibly be limited or precluded in the drilling of wells or in the
amounts that we and similarly situated operates are ultimately able
to produce from our reserves. Any such increased costs, delays,
cessations, restrictions or prohibitions could have a material
adverse effect on our business, prospects, results of operations,
financial condition, and liquidity. If new or more stringent
federal, state or local legal restrictions relating to the
hydraulic fracturing process are adopted in areas where we operate,
including, for example, on federal and American Indian lands, we
could incur potentially significant added cost to comply with such
requirements, experience delays or curtailment in the pursuit of
exploration, development or production activities, and perhaps even
be precluded from drilling wells.
Moreover,
because most of our operations are conducted in a particular area,
the D-J Basin in Colorado, legal restrictions imposed in that area
will have a significantly greater adverse effect than if we had our
operations spread out amongst several diverse geographic areas.
Consequently, in the event that local or state restrictions or
prohibitions are adopted in the D-J Basin in Colorado that impose
more stringent limitations on the production and development of oil
and natural gas, we may incur significant costs to comply with such
requirements or may experience delays or curtailment in the pursuit
of exploration, development, or production activities, and possibly
be limited or precluded in the drilling of wells or in the amounts
that we are ultimately able to produce from our reserves. Any such
increased costs, delays, cessations, restrictions or prohibitions
could have a material adverse effect on our business, prospects,
results of operations, financial condition, and
liquidity.
Activities on Federal Lands
Oil and natural gas exploration, development and
production activities on federal lands, including American Indian
lands and lands administered by the BLM, are subject to the
National Environmental Policy Act (“
NEPA
”).
NEPA requires federal agencies, including the BLM, to evaluate
major agency actions having the potential to significantly impact
the environment. In the course of such evaluations, an agency will
prepare an Environmental Assessment that assesses the potential
direct, indirect and cumulative impacts of a proposed project and,
if necessary, will prepare a more detailed Environmental Impact
Statement that may be made available for public review and comment.
While we currently have no exploration, development and production
activities on federal lands, our future exploration, development
and production activities may include leasing of federal mineral
interests, which will require the acquisition of governmental
permits or authorizations that are subject to the requirements of
NEPA. This process has the potential to delay or limit, or increase
the cost of, the development of oil and natural gas projects.
Authorizations under NEPA are also subject to protest, appeal or
litigation, any or all of which may delay or halt projects.
Moreover, depending on the mitigation strategies recommended in
Environmental Assessments or Environmental Impact Statements, we
could incur added costs, which may be
substantial.
Endangered Species and Migratory Birds Considerations
The
federal Endangered Species Act (“
ESA
”), and comparable
state laws were established to protect endangered and threatened
species. Pursuant to the ESA, if a species is listed as threatened
or endangered, restrictions may be imposed on activities adversely
affecting that species or that species’ habitat. Similar
protections are offered to migrating birds under the Migratory Bird
Treaty Act. We may conduct operations on oil and natural gas leases
in areas where certain species that are listed as threatened or
endangered are known to exist and where other species, such as the
sage grouse, that potentially could be listed as threatened or
endangered under the ESA may exist. Moreover, as a result of one or
more agreements entered into by the U.S. Fish and Wildlife Service,
the agency is required to make a determination on listing of
numerous species as endangered or threatened under the ESA pursuant
to specific timelines. The identification or designation of
previously unprotected species as threatened or endangered in areas
where underlying property operations are conducted could cause us
to incur increased costs arising from species protection measures,
time delays or limitations on our exploration and production
activities that could have an adverse impact on our ability to
develop and produce reserves. If we were to have a portion of our
leases designated as critical or suitable habitat, it could
adversely impact the value of our leases.
27
OSHA
We are subject to the requirements of the
Occupational Safety and Health Administration
(“
OSHA
”)
and comparable state statutes whose purpose is to protect the
health and safety of workers. In addition, the OSHA hazard
communication standard, the Emergency Planning and Community
Right-to-Know Act and comparable state statutes and any
implementing regulations require that we organize and/or disclose
information about hazardous materials used or produced in our
operations and that this information be provided to employees,
state and local governmental authorities and
citizens.
Related Permits and Authorizations
Many
environmental laws require us to obtain permits or other
authorizations from state and/or federal agencies before initiating
certain drilling, construction, production, operation, or other oil
and natural gas activities, and to maintain these permits and
compliance with their requirements for on-going operations. These
permits are generally subject to protest, appeal, or litigation,
which can in certain cases delay or halt projects and cease
production or operation of wells, pipelines, and other
operations.
We are
not able to predict the timing, scope and effect of any currently
proposed or future laws or regulations regarding hydraulic
fracturing, but the direct and indirect costs of such laws and
regulations (if enacted) could materially and adversely affect our
business, financial conditions and results of operations. See
further discussion in “
Part I
” –
“
Item 1A. Risk
Factors
.”
Insurance
Our oil
and gas properties are subject to hazards inherent in the oil and
gas industry, such as accidents, blowouts, explosions, implosions,
fires and oil spills. These conditions can cause:
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damage
to or destruction of property, equipment and the
environment;
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personal
injury or loss of life; and
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suspension
of operations.
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We
maintain insurance coverage that we believe to be customary in the
industry against these types of hazards. However, we may not be
able to maintain adequate insurance in the future at rates we
consider reasonable. In addition, our insurance is subject to
coverage limits and some policies exclude coverage for damages
resulting from environmental contamination. The occurrence of a
significant event or adverse claim in excess of the insurance
coverage that we maintain or that is not covered by insurance could
have a material adverse effect on our financial condition and
results of operations.
Employees
At
December 31, 2017, we employed 6 people and also utilize the
services of independent contractors to perform various field and
other services. Our future success will depend partially on our
ability to attract, retain and motivate qualified personnel. We are
not a party to any collective bargaining agreements and have not
experienced any strikes or work stoppages. We consider our
relations with our employees to be satisfactory.
GLOSSARY OF OIL AND NATURAL GAS TERMS
The
following is a description of the meanings of some of the oil and
natural gas terms used in this Annual Report.
AFE
or
Authorization for Expenditures
.
A document that lays out proposed expenses for a particular project
and authorizes an individual or group to spend a certain amount of
money for that project.
28
Bbl
. One stock tank barrel, or
42 U.S. gallons liquid volume, used in this Annual Report in
reference to crude oil or other liquid hydrocarbons.
Bcf.
An abbreviation for
billion cubic feet. Unit used to measure large quantities of gas,
approximately equal to 1 trillion Btu.
Boe
. 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.
Boepd
. Barrels of oil
equivalent per day.
Bopd
. Barrels of oil per
day.
Btu or British thermal unit
.
The quantity of heat required to raise the temperature of one pound
of water by one degree Fahrenheit.
Completion
. The operations
required to establish production of oil or natural gas from a
wellbore, usually involving perforations, stimulation and/or
installation of permanent equipment in the well or, in the case of
a dry hole, the reporting of abandonment to the appropriate
agency.
Condensate
. Liquid hydrocarbons
associated with the production of a primarily natural gas
reserve.
Conventional resources
. Natural
gas or oil that is produced by a well drilled into a geologic
formation in which the reservoir and fluid characteristics permit
the natural gas or oil to readily flow to the
wellbore.
Developed acreage
. The number
of acres that are allocated or assignable to productive
wells.
Development well
. A well
drilled into a proved oil or natural gas reservoir to the depth of
a stratigraphic horizon known to be productive.
Estimated ultimate recovery or
EUR
. Estimated ultimate recovery is the sum of reserves
remaining as of a given date and cumulative production as of that
date.
Exploratory well
. A well
drilled to find and produce oil or natural gas reserves not
classified as proved, to find a new reservoir in a field previously
found to be productive of oil or natural gas in another reservoir
or to extend a known reservoir.
Farmin or farmout
. An agreement
under which the owner of a working interest in an oil or natural
gas lease assigns the working interest or a portion of the working
interest to another party who desires to drill on the leased
acreage. Generally, the assignee is required to drill one or more
wells in order to earn its interest in the acreage. The assignor
usually retains a royalty or reversionary interest in the lease.
The interest received by an assignee is a “
farmin
” while the
interest transferred by the assignor is a “
farmout.
”
FERC
. Federal Energy Regulatory
Commission.
Field
. An area consisting of a
single reservoir or multiple reservoirs all grouped on or related
to the same individual geological structural feature and/or
stratigraphic condition.
Gross acres or gross wells
. The
total acres or wells in which a working interest is
owned.
Henry Hub
. A natural gas
pipeline located in Erath, Louisiana that serves as the official
delivery location for futures contracts on the NYMEX. The
settlement prices at the Henry Hub are used as benchmarks for the
entire North American natural gas market.
29
Held by production
. An oil and
natural gas property under lease in which the lease continues to be
in force after the primary term of the lease in accordance with its
terms as a result of production from the property.
Horizontal drilling or well
. A
drilling operation in which a portion of the well is drilled
horizontally within a productive or potentially productive
formation. This operation typically yields a horizontal well that
has the ability to produce higher volumes than a vertical well
drilled in the same formation. A horizontal well is designed to
replace multiple vertical wells, resulting in lower capital
expenditures for draining like acreage and limiting surface
disruption.
Liquids
. Liquids, or natural
gas liquids, are marketable liquid products including ethane,
propane, butane and pentane resulting from the further processing
of liquefiable hydrocarbons separated from raw natural gas by a
natural gas processing facility.
LOE
or
Lease operating expenses
. The
costs of maintaining and operating property and equipment on a
producing oil and gas lease.
MBbl
. One thousand barrels of
crude oil or other liquid hydrocarbons.
MMBbl/d
. One thousand barrels
of crude oil or other liquid hydrocarbons per day.
Mcf
. One thousand cubic feet of
natural gas.
Mcfgpd
. Thousands of cubic feet
of natural gas per day.
MMcf
. One million cubic feet of
natural gas.
MMBtu
. One million British
thermal units.
Net acres or net wells
. The sum
of the fractional working interest owned in gross acres or
wells.
Net revenue interest
. The
interest that defines the percentage of revenue that an owner of a
well receives from the sale of oil, natural gas and/or natural gas
liquids that are produced from the well.
NGL
. Natural gas
liquids.
NYMEX
. New York Mercantile
Exchange.
Permeability
. A reference to
the ability of oil and/or natural gas to flow through a
reservoir.
Petrophysical analysis
. The
interpretation of well log measurements, obtained from a string of
electronic tools inserted into the borehole, and from core
measurements, in which rock samples are retrieved from the
subsurface, then combining these measurements with other relevant
geological and geophysical information to describe the reservoir
rock properties.
Play
. A set of known or
postulated oil and/or natural gas accumulations sharing similar
geologic, geographic and temporal properties, such as source rock,
migration pathways, timing, trapping mechanism and hydrocarbon
type.
Possible reserves
. Additional
reserves that are less certain to be recognized than probable
reserves.
Probable reserves
. Additional
reserves that are less certain to be recognized than proved
reserves but which, in sum with proved reserves, are as likely as
not to be recovered.
Producing well, production well or
productive well
. A well that is found to be capable of
producing hydrocarbons in sufficient quantities such that proceeds
from the sale of the well’s production exceed
production-related expenses and taxes.
30
Properties
. Natural gas and oil
wells, production and related equipment and facilities and natural
gas, oil or other mineral fee, leasehold and related
interests.
Prospect
. A specific geographic
area which, based on supporting geological, geophysical or other
data and also preliminary economic analysis using reasonably
anticipated prices and costs, is considered to have potential for
the discovery of commercial hydrocarbons.
Proved developed reserves
.
Proved reserves that can be expected to be recovered through
existing wells and facilities and by existing operating
methods.
Proved reserves
. Reserves of
oil and natural gas that have been proved to a high degree of
certainty by analysis of the producing history of a reservoir
and/or by volumetric analysis of adequate geological and
engineering data.
Proved undeveloped reserves or
PUDs
. Proved reserves that are expected to be recovered from
new wells on undrilled acreage or from existing wells where a
relatively major expenditure is required for
recompletion.
Repeatability
. The potential
ability to drill multiple wells within a prospect or
trend.
Reservoir
. A porous and
permeable underground formation containing a natural accumulation
of producible oil and/or natural gas that is confined by
impermeable rock or water barriers and is individual and separate
from other reservoirs.
Royalty interest
. An interest
in an oil and natural gas lease that gives the owner of the
interest the right to receive a portion of the production from the
leased acreage (or of the proceeds of the sale thereof), but
generally does not require the owner to pay any portion of the
costs of drilling or operating the wells on the leased acreage.
Royalties may be either landowner’s royalties, which are
reserved by the owner of the leased acreage at the time the lease
is granted, or overriding royalties, which are usually reserved by
an owner of the leasehold in connection with a transfer to a
subsequent owner.
2-D seismic
. The method by
which a cross-section of the earth’s subsurface is created
through the interpretation of reflecting seismic data collected
along a single source profile.
3-D seismic
. The method by
which a three-dimensional image of the earth’s subsurface is
created through the interpretation of reflection seismic data
collected over a surface grid. 3-D seismic surveys allow for a more
detailed understanding of the subsurface than do 2-D seismic
surveys and contribute significantly to field appraisal,
exploitation and production.
Trend
. A region of oil and/or
natural gas production, the geographic limits of which have not
been fully defined, having geological characteristics that have
been ascertained through supporting geological, geophysical or
other data to contain the potential for oil and/or natural gas
reserves in a particular formation or series of
formations.
Unconventional resource play
. A
set of known or postulated oil and or natural gas resources or
reserves warranting further exploration which are extracted from
(a) low-permeability sandstone and shale formations and (b) coalbed
methane. These plays require the application of advanced technology
to extract the oil and natural gas resources.
Undeveloped acreage
. Lease
acreage on which wells have not been drilled or completed to a
point that would permit the production of commercial quantities of
oil and natural gas, regardless of whether such acreage contains
proved reserves. Undeveloped acreage is usually considered to be
all acreage that is not allocated or assignable to productive
wells.
31
Unproved and unevaluated
properties
. Refers to properties where no drilling or other
actions have been undertaken that permit such property to be
classified as proved.
Vertical well
. A hole drilled
vertically into the earth from which oil, natural gas or water
flows is pumped.
Volumetric reserve analysis
. A
technique used to estimate the amount of recoverable oil and
natural gas. It involves calculating the volume of reservoir rock
and adjusting that volume for the rock porosity, hydrocarbon
saturation, formation volume factor and recovery
factor.
Wellbore
. The hole made by a
well.
WTI
or
West Texas Intermediate
. A
grade of crude oil used as a benchmark in oil pricing. This grade
is described as light because of its relatively low density, and
sweet because of its low sulfur content.
Working interest
. The operating
interest that gives the owner the right to drill, produce and
conduct operating activities on the property and receive a share of
production.
ITEM 1A. RISK FACTORS.
An investment in our common stock involves a high degree of risk.
You should carefully consider the risks described below as well as
the other information in this filing before deciding to invest in
our company. Any of the risk factors described below could
significantly and adversely affect our business, prospects,
financial condition and results of operations. Additional risks and
uncertainties not currently known or that are currently considered
to be immaterial may also materially and adversely affect our
business, prospects, financial condition and results of operations.
As a result, the trading price or value of our common stock could
be materially adversely affected and you may lose all or part of
your investment.
Risks Related to the Oil, NGL and Natural Gas Industry and Our
Business
Continuation of the recent declines, or further declines, in oil
and, to a lesser extent, NGL and natural gas prices, will 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 53% of our estimated proved reserves as of
December 31, 2017 were oil, our financial results are more
sensitive to movements in oil prices. Since mid-2014, the price of
crude oil has significantly declined. As a result, we experienced
significant decreases in crude oil revenues and recorded asset
impairment charges driven by commodity price declines. A prolonged
period of low market prices for oil and natural gas, like the
current commodity price environment, 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. Additionally, lower oil and natural gas prices may
cause further decline in our stock price. During the year ended
December 31, 2017, the daily NYMEX WTI oil spot price ranged
from a high of $60.46 per Bbl to a low of $42.48 per Bbl and the
NYMEX natural gas Henry Hub spot price ranged from a high of $3.30
per MMBtu to a low of $2.82 per MMBtu.
32
We have a limited operating history and expect to continue to incur
losses for an indeterminable period of time.
We have
a limited operating history and are engaged in the initial stages
of exploration, development and exploitation of our leasehold
acreage and will continue to be so until commencement of
substantial production from our oil and natural gas properties,
which will depend upon successful drilling results, additional and
timely capital funding, and access to suitable infrastructure.
Companies in their initial stages of development face substantial
business risks and may suffer significant losses. We have generated
substantial net losses and negative cash flows from operating
activities in the past and expect to continue to incur substantial
net losses as we continue our drilling program. In considering an
investment in our common stock, you should consider that there is
only limited historical and financial operating information
available upon which to base your evaluation of our performance. We
have incurred net losses of $138,101,000 from the
date of inception (February 9, 2011) through December 31, 2017.
Additionally, we are dependent on obtaining additional debt and/or
equity financing to roll-out and scale our planned principal
business operations. Management’s plans in regard to these
matters consist principally of seeking additional debt and/or
equity financing combined with expected cash flows from current oil
and gas assets held and additional oil and gas assets that we may
acquire. Our efforts may not be successful and funds may not be
available on favorable terms, if at all.
We face
challenges and uncertainties in financial planning as a result of
the unavailability of historical data and uncertainties regarding
the nature, scope and results of our future activities. New
companies must develop successful business relationships, establish
operating procedures, hire staff, install management information
and other systems, establish facilities and obtain licenses, as
well as take other measures necessary to conduct their intended
business activities. We may not be successful in implementing our
business strategies or in completing the development of the
infrastructure necessary to conduct our business as planned. In the
event that one or more of our drilling programs is not completed or
is delayed or terminated, our operating results will be adversely
affected and our operations will differ materially from the
activities described in this Annual Report. As a result of industry
factors or factors relating specifically to us, we may have to
change our methods of conducting business, which may cause a
material adverse effect on our results of operations and financial
condition. The uncertainty and risks described in this Annual
Report may impede our ability to economically find, develop,
exploit and acquire oil and natural gas reserves. As a result, we
may not be able to achieve or sustain profitability or positive
cash flows provided by our operating activities in the
future.
We will need additional capital to complete future acquisitions,
conduct our operations and fund our business and our ability to
obtain the necessary funding is uncertain.
We will
need to raise additional funding to complete future potential
acquisitions and will be required to raise additional funds through
public or private debt or equity financing or other various means
to fund our operations, acquire assets and complete exploration and
drilling operations. In such a case, adequate funds may not be
available when needed or may not be available on favorable terms.
If we need to raise additional funds in the future by issuing
equity securities, dilution to existing stockholders will result,
and such securities may have rights, preferences and privileges
senior to those of our common stock. If funding is insufficient at
any time in the future and we are unable to generate sufficient
revenue from new business arrangements, to complete planned
acquisitions or operations, our results of operations and the value
of our securities could be adversely affected.
We require significant additional financing to pay our outstanding
liabilities and in the event we cannot raise additional funding or
undertake a business combination transaction prior to the due date
of such liabilities, we may be forced to sell assets, our debtors
may foreclose on our assets or we may be forced to seek bankruptcy
protection.
We
currently have significant indebtedness and our debt agreements
require us to use a significant portion of our revenues to pay down
our outstanding debt. Due to the nature of oil and gas interests,
i.e., that rates of production generally decline over time as oil
and gas reserves are depleted, if we are unable to drill additional
wells and develop our reserves, either because we are unable to
raise sufficient funding for such development activities, or
otherwise, or in the event we are unable to acquire additional
operating properties, we believe that our revenues will continue to
decline over time. Furthermore, in the event we are unable to raise
additional funding in the future, we will not be able to
participate in the drilling of additional wells, will not be able
to complete other drilling and/or workover activities, and may not
be able to make required payments on our outstanding liabilities.
In the event we are unable to raise necessary funding in the future
or complete a business combination or similar transaction in the
near term, we may not be able to pay our debts (or make required
amortization and principal payments on such debts) as they come due
or continue to drill wells and/or participate in their
drilling.
33
If this
were to happen, we may be forced to scale back our business plan,
sell or liquidate assets to satisfy outstanding debts (or our
creditors may undertake a foreclosure of such assets in order to
satisfy amounts we owe to such creditors, with or without our
assistance) and/or take other steps which may include seeking
bankruptcy protection, all of which could result in the value of
our outstanding securities declining in value or becoming
worthless.
We may not be able to generate sufficient cash flow to meet our
debt service and other obligations due to events beyond our
control.
Our
ability to generate cash flows from operations, to make scheduled
payments on or refinance our indebtedness and to fund working
capital needs and planned capital expenditures will depend on our
future financial performance and our ability to generate cash in
the future. Our future financial performance will be affected by a
range of economic, financial, competitive, business and other
factors that we cannot control, such as general economic,
legislative, regulatory and financial conditions in our industry,
the economy generally, the price of oil and other risks described
below. A significant reduction in operating cash flows resulting
from changes in economic, legislative or regulatory conditions,
increased competition or other events beyond our control could
increase the need for additional or alternative sources of
liquidity and could have a material adverse effect on our business,
financial condition, results of operations, prospects and our
ability to service our debt and other obligations. If we are unable
to service our indebtedness or to fund our other liquidity needs,
we may be forced to adopt an alternative strategy that may include
actions such as reducing or delaying capital expenditures, selling
assets, restructuring or refinancing our indebtedness, seeking
additional capital, or any combination of the foregoing. If we
raise additional debt, it would increase our interest expense,
leverage and our operating and financial costs. We cannot assure
you that any of these alternative strategies could be affected on
satisfactory terms, if at all, or that they would yield sufficient
funds to make required payments on our indebtedness or to fund our
other liquidity needs. Reducing or delaying capital expenditures or
selling assets could delay future cash flows. In addition, the
terms of existing or future debt agreements may restrict us from
adopting any of these alternatives. We cannot assure you that our
business will generate sufficient cash flows from operations or
that future borrowings will be available in an amount sufficient to
enable us to pay our indebtedness or to fund our other liquidity
needs.
If for
any reason we are unable to meet our debt service and repayment
obligations, we would be in default under the terms of the
agreements governing our indebtedness, which would allow our
creditors at that time to declare all of our outstanding
indebtedness to be due and payable. This would likely in turn
trigger cross-acceleration or cross-default rights between our
applicable debt agreements. Under these circumstances, our lenders
could compel us to apply all of our available cash to repay our
borrowings. In addition, the lenders under our credit facilities or
other secured indebtedness could seek to foreclose on our assets
that are their collateral. If the amounts outstanding under our
indebtedness were to be accelerated, or were the subject of
foreclosure actions, our assets may not be sufficient to repay in
full the money owed to the lenders or to our other debt
holders.
Our Tranche A Notes and Tranche B Notes include various covenants,
reduces our financial flexibility, increases our interest expense
and may adversely impact our operations and our costs.
In
connection with our acquisition of certain assets from Continental
on March 7, 2014, we entered into a senior debt facility pursuant
to which we borrowed $34.5 million initially and have subsequently
borrowed an additional $2.0 million (our “
Tranche B Notes
”) which
amounts represent a significant amount of indebtedness. In
addition, in connection with our Senior Debt Restructuring in May
2016, we borrowed an additional $6.4 million (our
“
Tranche A
Notes
,” and together with our Tranche B Notes, our
“
senior debt
facility
”), leaving approximately $18.0 million
available for future drilling operations thereunder, subject to the
terms and conditions of such facility which amounts also represent
a significant amount of indebtedness.
34
This
senior debt facility includes various covenants (positive and
negative) binding us, including:
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requiring
that we maintain the registration of our common stock under Section
12 of the Securities Exchange Act of 1934, as amended;
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requiring
that we maintain the listing of our common stock on the NYSE
American;
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requiring
that we timely file periodic reports under the Exchange
Act;
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requiring
that we provide the lenders yearly and quarterly budgets and
certain reserve reports;
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requiring
that we provide capital expenditure plans to the lenders prior to
making certain expenditures;
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prohibiting
us and our subsidiaries from creating or becoming subject to any
indebtedness, except pursuant to certain limited exceptions;
and
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prohibiting
us or our subsidiaries from merging, selling assets (except in the
usual course of business), altering our organizational structure,
winding up or liquidating, except in certain limited
circumstances.
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Our
senior debt facility affects our operations in several ways,
including the following:
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a
significant portion of our cash flows must be used to service the
debt facility, with the Company required to pay all of its oil and
gas revenues on a monthly basis to the lenders, subject to a
monthly general and administrative expense (“
G&A
”) cap of $150,000
which is permitted to be applied against Company general and
administrative expenses. See “Part I, Item 1.
Business” — “Material 2016-2017
Transactions” — “Senior Debt
Restructuring”);
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the
high level of debt could increase our vulnerability to general
adverse economic and industry conditions;
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limiting
our ability to borrow additional funds, dispose of assets, pay
dividends and make certain investments; and
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the
debt covenants may affect our flexibility in planning for, and
reacting to, changes in the economy and in our
industry.
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The
high level of indebtedness under our senior debt facility increases
the risk that we may default on our debt obligations. We may not be
able to generate sufficient cash flows to pay the principal or
interest on our debt, all revenues we do generate above $150,000
per month will be required to be used to repay the debt, and future
working capital, borrowings or equity financing may not be
available to pay or refinance such debt. If we do not have
sufficient funds and are otherwise unable to arrange financing to
pay the interest or principal due on the debt, fund our business
plan and satisfy our other obligations and liabilities, we may have
to sell significant assets or have a portion of our assets
foreclosed upon which could have a material adverse effect on our
business, financial condition and results of
operations.
We do
not currently have any commitments of additional capital except
pursuant to the terms of these debt facilities. We can provide no
assurance that additional financing will be available on favorable
terms, if at all. If we choose to raise additional capital through
the sale of other debt or equity securities, such sales may cause
substantial dilution to our existing shareholders.
35
A portion of our Tranche B Notes, our junior debt held by RJC, and
all of our Series A Convertible Preferred stock are held by
entities whose parent company is in liquidation, which may have a
negative impact on the Company and its business.
Each of
GOM, RJC and GGE are owned by Partners Value Arbitrage Fund, LP, a
New York based investment firm (“
PPVAF
”), and were
formerly advised by Platinum Management (NY), LLC
(“
PM
LLC
”). PPVAF, and, by virtue of being owned by PPVAF,
GGE, RJC, and GOM, are currently in the process of winding down and
liquidating their assets through the oversight and control of a
court-appointed liquidator in the Cayman Islands and are no longer
advised by PM LLC or any of its affiliates. Additionally, the
Company is aware that the former manager of PPVAF, PM LLC, is
currently under investigation by the U.S. Securities and Exchange
Commission and the Justice Department and that certain former
executives have been indicted by the Justice Department, however,
PM LLC and those certain executives no longer have any control over
PPVAF, RJC or GGE, which entities are currently solely under the
control of the Cayman Islands court-appointed liquidators. While
the Company does not foresee that the confluence of these events or
control of these entities by the court-appointed liquidator will
disrupt or have a negative impact on the Company or its business,
these extraordinary events may have a negative impact on the
Company and its business, including, but not limited to, potential
inability or delays in the Company’s efforts to restructure
Company debt and equity controlled by the liquidator.
The repayment of our senior debt facility is secured by a security
interest in all of our assets.
The
repayment of our senior debt facility (which had an outstanding
principal balance of approximately $54.86 million as of March 1,
2018 and provides us the option, pursuant to the terms of the debt
facility, to borrow an additional approximately $18.0 million) is
secured by a first priority security interest in all of our assets,
property, real property and the securities of our subsidiaries and
the repayment of such debt is further guaranteed by certain of our
subsidiaries. If we default in the repayment of the senior
debt facility and/or any of the terms and conditions thereof,
the lenders may enforce their security interest over our assets
which secure the repayment of such debt, and we could be forced to
curtail or abandon our current business plans and operations. If
that were to happen, any investment in the Company could become
worthless.
The occurrence of an event of default under the notes sold in
connection with our senior debt facility could have a material
adverse effect on us and our financial condition.
The
notes issued in connection with our senior debt facility include
standard and customary events of default, including, among other
things, our or any subsidiary’s default in the payment of any
indebtedness under any agreement, or failure to comply with the
terms and conditions of any other agreement related to indebtedness
or otherwise, if the effect of such failure or default, is to
cause, or permit the holder or holders thereof, or any counterparty
to an agreement relating to indebtedness, to cause indebtedness, or
amounts due thereunder, in an aggregate amount of $250,000 or more
to become due prior to its stated date of maturity or the date such
amount would otherwise have been due notwithstanding such default,
subject to certain exclusions; the loss, suspension or revocation
of, or failure to renew, any license or permit, if such license or
permit is not obtained or reinstated within thirty (30) days,
unless such loss, suspension, revocation or failure to renew could
not reasonably be expected to have a material adverse effect on us;
or there is filed against us or any of our subsidiaries or any of
our officers, members or managers any civil or criminal action,
suit or proceeding under any federal or state racketeering statute
(including, without limitation, the Racketeer Influenced and
Corrupt Organization Act of 1970), or any civil or criminal action,
suit or proceeding under any other applicable law is filed by any
governmental entity, that could result in the confiscation or
forfeiture of any material portion of any collateral subject to any
security interest held by the investors or their agent or other
assets of such entity or person, and such action, suit or
proceeding is not dismissed within one hundred twenty (120)
days.
Upon an
event of default under the notes, the holder of such note may
declare the entire unpaid balance (as well as any interest, fees
and expenses) immediately due and payable. Funding to repay such
notes may not be available timely, on favorable terms, if at all,
and any default by us of the terms and conditions of the notes
would likely have a material adverse effect on our results of
operations, financial condition and the value of our common
stock.
36
We owe certain obligations to MIEJ under the New MIEJ Note, which
is secured by a subordinated security interest in substantially all
of our assets and is convertible into shares of our common stock
subject to the terms of such New MIEJ Note, and may result in
substantial dilution to existing shareholders.
The New
MIEJ Note (defined and described below under “
Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of
Operations
” - “
Liquidity and Capital
Resources
” - “
Amendment to PEDCO-MIEJ Note and
Condor-MIEJ Note
”) is subordinated in every way to the
senior credit facility as well as to New Senior Lending (defined
below); however, MIEJ has no control over our cash flow, nor is
MIEJ’s consent required in connection with any disposition,
sale, or use of any of our assets, provided that the requirements
of the New MIEJ Note requiring the prepayment of interest, where
applicable, as described below are followed. We have the right
under the New MIEJ Note to enter into a loan, or a series of new
loans or any other new non-equity investment or assumption of
indebtedness (a “
New
Senior Lending
”) which will be senior to the New MIEJ
Note, without the prior consent of MIEJ, provided that, in addition
to the approximately $35.5 million principal balance of the
original PEDEVCO Senior Loan created in March 2014, the New Senior
Lending is subject to a cap of an additional $60 million in the
aggregate, such that the total lending, debt or similar investment
under such cap shall not exceed $95 million in the aggregate (the
“
Senior Debt
Cap
”), with any portion of New Senior Lending in
excess of the Senior Debt Cap advanced first to MIEJ until the New
MIEJ Note is paid in full. The New MIEJ Note shall automatically,
and without further consent from MIEJ, be subordinated in every way
to any such New Senior Lending. Should we enter into any new
financing transaction that results in raising New Senior Lending of
at least $20 million in excess of the balance of the PEDEVCO Senior
Loan, then MIEJ has a right to be paid all interest and fees that
have accrued on the New MIEJ Note each and every time that a new
financing transaction reaches or exceeds the $20 million
threshold.
The New
MIEJ Note was originally due and payable on March 8, 2017, but is
now due and payable on March 8, 2019, due to an automatic maturity
date extension as a result of the May 2016 Senior Debt
Restructuring, and with such date also subject to additional
automatic extensions upon the occurrence of a Long-Term Financing
or additional PEDEVCO Senior Lending Restructuring (each as defined
below) (the “
Maturity
”). On a one-time
basis, the PEDEVCO Senior Loan may be refinanced by a new loan
(“
Long-Term
Financing
”) by one or more third party replacement
lenders (“
Replacement Lenders
”),
and in such event we are required to undertake commercially
reasonable best efforts to cause the Replacement Lenders to
simultaneously refinance both the PEDEVCO Senior Loan and the New
MIEJ Note as part of such Long-Term Financing. Despite such
efforts, should the Replacement Lenders be unable or unwilling to
include the New MIEJ Note in such financing, then the Long-Term
Financing may proceed without including the New MIEJ Note, and the
New MIEJ Note shall remain in place and shall be automatically
subordinated, without further consent of MIEJ, to such Long-Term
Financing. Furthermore, upon the occurrence of a Long-Term
Financing, the Maturity of the New MIEJ Note is automatically
extended, without further consent of MIEJ, to the same maturity
date of the Long-Term Financing (the “
Extended Maturity Date
”),
provided that the Extended Maturity Date may not exceed March 8,
2020. Additionally, upon the closing of such Long-Term Financing:
(a) the Long-Term Financing is required to be subject to the Senior
Debt Cap, (b) we are required to make commercially reasonable best
efforts for the Long-Term Financing to include adequate reserves or
other payment provisions whereby MIEJ is paid all interest and fees
accrued on the New MIEJ Note commencing as of March 8, 2017 (and
annually thereafter, until such time as the New MIEJ Note is paid
in full), but in any event the Replacement Lenders are required to
agree to allow for quarterly interest payments (starting March 31,
2017) of not less than 5% per annum on the outstanding balance of
the New MIEJ Note, plus a one-time payment of accrued interest (not
to exceed $500,000) as of March 31, 2017 (the “
Subordinated Interest
Payments
”), and the remaining 5% interest shall
continue to accrue, and (c) MIEJ has the Right of Conversion
(defined below) commencing as of March 8, 2017, the original
maturity date of the New MIEJ Note. If the PEDEVCO Senior Loan
and/or New Senior Lending is not refinanced by Replacement Lenders,
but is instead refinanced, restructured or extended by the existing
Investors (a “
PEDEVCO Senior Lending
Restructuring
”), the maturity of both the New MIEJ
Note and the PEDEVCO Senior Loan may be extended to no later than
March 8, 2019, without requiring the consent of MIEJ, provided that
(i) any such extension of the maturity date of the New MIEJ Note
past March 8, 2017 shall give MIEJ the Right of Conversion
(described below) commencing on March 8, 2017, and (ii) such
extension agreement shall include payment provisions whereby MIEJ
shall be paid all interest and fees accrued on the New MIEJ Note as
of March 8, 2018. The May 2016 Senior Debt Restructuring qualified
as a PEDEVCO Senior Lending Restructuring and the issuance of the
Tranche A Notes qualified as a New Senior Lending, the result of
which the Maturity of the New MIEJ Note has been extended to March
8, 2019. The New MIEJ Note may be prepaid any time without
penalty.
37
The New
MIEJ Note has a conversion feature that provides that beginning
March 8, 2017, MIEJ has the right, at its discretion, to have the
outstanding balance of the New MIEJ Note plus any accrued and
unpaid interest thereon converted in whole or in part into our
common stock at a price (the “
Conversion Price
”) equal
to 80% of the average closing price per share of our common stock
over the then previous 60 days from the date MIEJ exercises its
conversion right (subject to adjustment for stock splits,
recapitalizations and the like)(such event, a “
Right of Conversion
”);
provided, however, that in no event shall the Conversion Price be
less than $3.00 per share (the “
Floor Price
”). The New
MIEJ Note originally included a conversion limitation subject to us
receiving shareholder approval under applicable NYSE American
rules, but at the 2016 Annual Meeting held on December 28, 2016,
the Company’s stockholders approved the full conversion of
the New MIEJ Note and the New MIEJ Note is now fully convertible
into our common stock in accordance with its terms.
If an
event of default occurs under the New MIEJ Note, MIEJ may enforce
their security interests over our assets (subject to the
subordination rights in such note) which secure the repayment of
such obligations, and we could be forced to curtail or abandon our
current business plans and operations. If that were to happen, any
investment in us could become worthless.
The
required interest and principal payments due under the New MIEJ
Note may make it harder for us to refinance the New MIEJ Note or
raise funding in the future, or could materially decrease the
amount of cash we receive for our operations upon any refinancing
or funding.
The
issuance of common stock pursuant to the terms of the New MIEJ Note
could result in immediate and substantial dilution to the interests
of other stockholders.
A substantial part of our crude oil, natural gas and NGLs
production is located in the D-J Basin, making us vulnerable to
risks associated with operating primarily in a single geographic
area. In addition, we have a large amount of proved reserves
attributable to a small number of producing
formations.
Our
operations are focused primarily in the D-J Basin of Weld County,
Colorado, which means our current producing properties and new
drilling opportunities are geographically concentrated in that
area. Because our operations are not as diversified geographically
as many of our competitors, the success of our operations and our
profitability may be disproportionately exposed to the effect of
any regional events, including:
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fluctuations
in prices of crude oil, natural gas and NGLs produced from the
wells in the area;
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natural
disasters such as the flooding that occurred in the area in
September 2013;
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restrictive
governmental regulations; and
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curtailment
of production or interruption in the availability of gathering,
processing or transportation infrastructure and services, and any
resulting delays or interruptions of production from existing or
planned new wells.
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For
example, bottlenecks in processing and transportation that have
occurred in some recent periods in the D-J Basin have negatively
affected our results of operations, and these adverse effects may
be disproportionately severe to us compared to our more
geographically diverse competitors. Similarly, the concentration of
our assets within a small number of producing formations exposes us
to risks, such as changes in field-wide rules that could adversely
affect development activities or production relating to those
formations. Such an event could have a material adverse effect on
our results of operations and financial condition. In addition, in
areas where exploration and production activities are increasing,
as has been the case in recent years in the D-J Basin, the demand
for, and cost of, drilling rigs, equipment, supplies, personnel and
oilfield services increase. Shortages or the high cost of drilling
rigs, equipment, supplies, personnel or oilfield services could
delay or adversely affect our development and exploration
operations or cause us to incur significant expenditures that are
not provided for in our capital forecast, which could have a
material adverse effect on our business, financial condition or
results of operations.
38
Drilling for and producing oil and natural gas are highly
speculative and involve a high degree of risk, with many
uncertainties that could adversely affect our business. We have not
recorded significant proved reserves, and areas that we decide to
drill may not yield oil or natural gas in commercial quantities or
at all.
Exploring for and
developing hydrocarbon reserves involves a high degree of
operational and financial risk, which precludes us from
definitively predicting the costs involved and time required to
reach certain objectives. Our potential drilling locations are in
various stages of evaluation, ranging from locations that are ready
to drill to locations that will require substantial additional
interpretation before they can be drilled. The budgeted costs of
planning, drilling, completing and operating wells are often
exceeded and such costs can increase significantly due to various
complications that may arise during the drilling and operating
processes. Before a well is spud, we may incur significant
geological and geophysical (seismic) costs, which are incurred
whether a well eventually produces commercial quantities of
hydrocarbons or is drilled at all. Exploration wells bear a much
greater risk of loss than development wells. The analogies we draw
from available data from other wells, more fully explored locations
or producing fields may not be applicable to our drilling
locations. If our actual drilling and development costs are
significantly more than our estimated costs, we may not be able to
continue our operations as proposed and could be forced to modify
our drilling plans accordingly.
If we
decide to drill a certain location, there is a risk that no
commercially productive oil or natural gas reservoirs will be found
or produced. We may drill or participate in new wells that are not
productive. We may drill wells that are productive, but that do not
produce sufficient net revenues to return a profit after drilling,
operating and other costs. There is no way to predict in advance of
drilling and testing whether any particular location will yield oil
or natural gas in sufficient quantities to recover exploration,
drilling or completion costs or to be economically viable. Even if
sufficient amounts of oil or natural gas exist, we may damage the
potentially productive hydrocarbon-bearing formation or experience
mechanical difficulties while drilling or completing the well,
resulting in a reduction in production and reserves from the well
or abandonment of the well. Whether a well is ultimately productive
and profitable depends on a number of additional factors, including
the following:
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general
economic and industry conditions, including the prices received for
oil and natural gas;
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shortages
of, or delays in, obtaining equipment, including hydraulic
fracturing equipment, and qualified personnel;
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potential
drainage by operators on adjacent properties;
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loss of
or damage to oilfield development and service tools;
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problems
with title to the underlying properties;
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increases
in severance taxes;
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adverse
weather conditions that delay drilling activities or cause
producing wells to be shut down;
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domestic
and foreign governmental regulations; and
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proximity
to and capacity of transportation facilities.
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If we
do not drill productive and profitable wells in the future, our
business, financial condition and results of operations could be
materially and adversely affected.
39
Our success is dependent on the prices of oil, NGLs and natural
gas. Low oil or natural gas prices and the substantial volatility
in these prices may adversely affect our business, financial
condition and results of operations and our ability to meet our
capital expenditure requirements and financial
obligations.
The
prices we receive for our oil, NGLs and natural gas heavily
influence our revenue, profitability, cash flow available for
capital expenditures, access to capital and future rate of growth.
Oil,
NGLs
and
natural gas are commodities and, therefore, their prices are
subject to wide fluctuations in response to relatively minor
changes in supply and demand. Historically, the commodities market
has been volatile. For example, the price of oil has fallen
dramatically since mid-2014, with a high over $100 per barrel in
June 2014 to lows below $30 per barrel in early 2016, in each case
based on WTI prices, due to a combination of factors including
increased U.S. supply, global economic concerns, the likely
resumption of oil exports from Iran and OPEC’s decision not
to reduce supply. Prices for natural gas and NGLs have experienced
declines of similar magnitude. An extended period of continued
lower oil prices, or additional price declines, will have further
adverse effects on us. The prices we receive for our production,
and the levels of our production, will continue to depend on
numerous factors, including the following:
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the
domestic and foreign supply of oil
, NGLs
and
natural gas;
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the
domestic and foreign demand for oil
, NGLs
and
natural gas;
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the
prices and availability of competitors’ supplies of
oil
,
NGLs
and natural gas;
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the
actions of the Organization of Petroleum Exporting Countries, or
OPEC, and state-controlled oil companies relating to oil price and
production controls;
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the
price and quantity of foreign imports of oil
, NGLs
and
natural gas;
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the
impact of U.S. dollar exchange rates on oil
, NGLs
and
natural gas prices;
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domestic
and foreign governmental regulations and taxes;
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speculative
trading of oil, NGL and natural gas futures contracts;
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localized
supply and demand fundamentals, including the availability,
proximity and capacity of gathering and transportation systems for
natural gas;
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the
availability of refining capacity;
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the
prices and availability of alternative fuel sources;
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weather
conditions and natural disasters;
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political
conditions in or affecting oil
, NGL
and
natural gas producing regions, including the Middle East and South
America;
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the
continued threat of terrorism and the impact of military action and
civil unrest;
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public
pressure on, and legislative and regulatory interest within,
federal, state and local governments to stop, significantly limit
or regulate hydraulic fracturing activities;
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the
level of global oil
, NGL
and
natural gas inventories and exploration and production
activity;
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authorization
of exports from the Unites States of liquefied natural
gas;
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the
impact of energy conservation efforts;
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technological
advances affecting energy consumption; and
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overall
worldwide economic conditions.
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40
Declines in
oil
,
NGL
or natural gas prices would not only reduce our revenue,
but could reduce the amount of oil
, NGL
and
natural gas that we can produce economically. Should natural
gas
,
NGL
or oil prices decrease from current levels and remain
there for an extended period of time, we may elect in the future to
delay some of our exploration and development plans for our
prospects, or to cease exploration or development activities on
certain prospects due to the anticipated unfavorable economics from
such activities, and, as a result, we may have to make substantial
downward adjustments to our estimated proved reserves, each of
which would have a material adverse effect on our business,
financial condition and results of operations.
Future conditions might require us to make write-downs in our
assets, which would adversely affect our balance sheet and results
of operations.
We
review our long-lived tangible and intangible assets for impairment
whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. We also test our
goodwill and indefinite-lived intangible assets for impairment at
least annually on December 31 of each year, or when events or
changes in the business environment indicate that the carrying
value of a reporting unit may exceed its fair value. If conditions
in any of the businesses in which we compete were to deteriorate,
we could determine that certain of our assets were impaired and we
would then be required to write-off all or a portion of our costs
for such assets. Any such significant write-offs would adversely
affect our balance sheet and results of operations.
The report of our independent registered public accounting firm
expressed substantial doubt about the Company’s ability to
continue as a going concern.
Our
auditors indicated in their report on the Company’s
consolidated audited financial statements for the year ended
December 31, 2017 that conditions existed that could raise
substantial doubt about our ability to continue as a going concern
due in part to the current crude oil price environment and the fact
that the Company had a working capital deficit and accumulated
deficit at December 31, 2017. Uncertainties related to our
continuation as a going concern may impair our ability to finance
our operations through the sale of equity, incurring debt, or other
financing alternatives and/or negatively affect our relationships
with partners and service providers. Our ability to continue as a
going concern will depend upon the availability and terms of future
funding, our ability to grow our operations and integrate newly
acquired assets and operations, our ability to acquire additional
assets and operations, and our ability to improve operating margins
and regain profitability. If we are unable to achieve these goals,
our business would be jeopardized and the Company may not be able
to continue. If we ceased operations, it is likely that all of our
investors would lose their investment.
The
Company will seek financing from other sources. Such financings may
not be available or, if available, may not be on terms acceptable
to the Company. Accordingly, the financial statements do not
include any adjustments related to the recoverability of assets or
classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The ability of
the Company to continue as a going concern is dependent upon its
ability to raise capital to meet its obligations and attain
profitable operations.
Declining general economic, business or industry conditions may
have a material adverse effect on our results of operations,
liquidity and financial condition.
Concerns over
global economic conditions, energy costs, geopolitical issues,
inflation, the availability and cost of credit, the United States
mortgage market and a declining real estate market in the United
States have contributed to increased economic uncertainty and
diminished expectations for the global economy. These factors,
combined with volatile prices of oil and natural gas, declining
business and consumer confidence and increased unemployment, have
precipitated an economic slowdown and a recession. Concerns about
global economic growth have had a significant adverse impact on
global financial markets and commodity prices. If the economic
climate in the United States or abroad continues to deteriorate,
demand for petroleum products could diminish, which could impact
the price at which we can sell our oil, natural gas and natural gas
liquids, affect the ability of our vendors, suppliers and customers
to continue operations and ultimately adversely impact our results
of operations, liquidity and financial condition.
41
Our exploration, development and exploitation projects require
substantial capital expenditures that may exceed cash on hand, cash
flows from operations and potential borrowings, and we may be
unable to obtain needed capital on satisfactory terms, which could
adversely affect our future growth.
Our
exploration and development activities are capital intensive. We
make and expect to continue to make substantial capital
expenditures in our business for the development, exploitation,
production and acquisition of oil and natural gas reserves. Our
cash on hand, our operating cash flows and future potential
borrowings may not be adequate to fund our future acquisitions or
future capital expenditure requirements. The rate of our future
growth may be dependent, at least in part, on our ability to access
capital at rates and on terms we determine to be
acceptable.
Our
cash flows from operations and access to capital are subject to a
number of variables, including:
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our
estimated proved oil and natural gas reserves;
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the
amount of oil and natural gas we produce from existing
wells;
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the
prices at which we sell our production;
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the
costs of developing and producing our oil and natural gas
reserves;
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our
ability to acquire, locate and produce new reserves;
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the
ability and willingness of banks to lend to us; and
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our
ability to access the equity and debt capital markets.
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In
addition, future events, such as terrorist attacks, wars or combat
peace-keeping missions, financial market disruptions, general
economic recessions, oil and natural gas industry recessions, large
company bankruptcies, accounting scandals, overstated reserves
estimates by major public oil companies and disruptions in the
financial and capital markets have caused financial institutions,
credit rating agencies and the public to more closely review the
financial statements, capital structures and earnings of public
companies, including energy companies. Such events have constrained
the capital available to the energy industry in the past, and such
events or similar events could adversely affect our access to
funding for our operations in the future.
If our
revenues decrease as a result of lower oil and natural gas prices,
operating difficulties, declines in reserves or for any other
reason, we may have limited ability to obtain the capital necessary
to sustain our operations at current levels, further develop and
exploit our current properties or invest in additional exploration
opportunities. Alternatively, a significant improvement in oil and
natural gas prices or other factors could result in an increase in
our capital expenditures and we may be required to alter or
increase our capitalization substantially through the issuance of
debt or equity securities, the sale of production payments, the
sale or farm out of interests in our assets, the borrowing of funds
or otherwise to meet any increase in capital needs. If we are
unable to raise additional capital from available sources at
acceptable terms, our business, financial condition and results of
operations could be adversely affected. Further, future debt
financings may require that a portion of our cash flows provided by
operating activities be used for the payment of principal and
interest on our debt, thereby reducing our ability to use cash
flows to fund working capital, capital expenditures and
acquisitions. Debt financing may involve covenants that restrict
our business activities. If we succeed in selling additional equity
securities to raise funds, at such time the ownership percentage of
our existing stockholders would be diluted, and new investors may
demand rights, preferences or privileges senior to those of
existing stockholders. If we choose to farm-out interests in our
prospects, we may lose operating control over such
prospects.
42
Our oil and natural gas reserves are estimated and may not reflect
the actual volumes of oil and natural gas we will receive, and
significant inaccuracies in these reserve estimates or underlying
assumptions will materially affect the quantities and present value
of our reserves.
The
process of estimating accumulations of oil and natural gas is
complex and is not exact, due to numerous inherent uncertainties.
The process relies on interpretations of available geological,
geophysical, engineering and production data. The extent, quality
and reliability of this technical data can vary. The process also
requires certain economic assumptions related to, among other
things, oil and natural gas prices, drilling and operating
expenses, capital expenditures, taxes and availability of funds.
The accuracy of a reserves estimate is a function of:
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the
quality and quantity of available data;
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the
interpretation of that data;
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the
judgment of the persons preparing the estimate; and
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the
accuracy of the assumptions.
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The
accuracy of any estimates of proved reserves generally increases
with the length of the production history. Due to the limited
production history of our properties, the estimates of future
production associated with these properties may be subject to
greater variance to actual production than would be the case with
properties having a longer production history. As our wells produce
over time and more data is available, the estimated proved reserves
will be re-determined on at least an annual basis and may be
adjusted to reflect new information based upon our actual
production history, results of exploration and development,
prevailing oil and natural gas prices and other
factors.
Actual
future production, oil and natural gas prices, revenues, taxes,
development expenditures, operating expenses and quantities of
recoverable oil and natural gas most likely will vary from our
estimates. It is possible that future production declines in our
wells may be greater than we have estimated. Any significant
variance to our estimates could materially affect the quantities
and present value of our reserves.
We may record impairments of oil and gas properties that would
reduce our shareholders’ equity.
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. We
review the carrying value of our long-lived assets annually or
whenever events or changes in circumstances indicate that the
historical cost-carrying value of an asset may no longer be
appropriate. We assess the recoverability of the carrying value of
the asset by estimating the future net undiscounted cash flows
expected to result from the asset, including eventual disposition.
If the future net undiscounted cash flows are less than the
carrying value of the asset, an impairment loss is recorded equal
to the difference between the asset’s carrying value and
estimated fair value. This impairment does not impact cash flows
from operating activities but does reduce earnings and our
shareholders’ equity. The risk that we will be required to
recognize impairments of our oil and gas properties increases
during periods of low oil or gas prices. Impairments would occur if
we were to experience sufficient downward adjustments to our
estimated proved reserves or the present value of estimated future
net revenues. An impairment recognized in one period may not be
reversed in a subsequent period even if higher oil and gas prices
increase the cost center ceiling applicable to the subsequent
period. We have in the past and could in the future incur
additional impairments of oil and gas properties.
43
We may have accidents, equipment failures or mechanical problems
while drilling or completing wells or in production activities,
which could adversely affect our business.
While
we are drilling and completing wells or involved in production
activities, we may have accidents or experience equipment failures
or mechanical problems in a well that cause us to be unable to
drill and complete the well or to continue to produce the well
according to our plans. We may also damage a potentially
hydrocarbon-bearing formation during drilling and completion
operations. Such incidents may result in a reduction of our
production and reserves from the well or in abandonment of the
well.
Our operations are subject to operational hazards and unforeseen
interruptions for which we may not be adequately
insured.
There
are numerous operational hazards inherent in oil and natural gas
exploration, development, production and gathering,
including:
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unusual
or unexpected geologic formations;
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natural
disasters;
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adverse
weather conditions;
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unanticipated
pressures;
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loss of
drilling fluid circulation;
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blowouts
where oil or natural gas flows uncontrolled at a
wellhead;
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cratering
or collapse of the formation;
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pipe or
cement leaks, failures or casing collapses;
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fires
or explosions;
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releases
of hazardous substances or other waste materials that cause
environmental damage;
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pressures
or irregularities in formations; and
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equipment
failures or accidents.
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In
addition, there is an inherent risk of incurring significant
environmental costs and liabilities in the performance of our
operations, some of which may be material, due to our handling of
petroleum hydrocarbons and wastes, our emissions to air and water,
the underground injection or other disposal of our wastes, the use
of hydraulic fracturing fluids and historical industry operations
and waste disposal practices.
Any of
these or other similar occurrences could result in the disruption
or impairment of our operations, substantial repair costs, personal
injury or loss of human life, significant damage to property,
environmental pollution and substantial revenue losses. The
location of our wells, gathering systems, pipelines and other
facilities near populated areas, including residential areas,
commercial business centers and industrial sites, could
significantly increase the level of damages resulting from these
risks. Insurance against all operational risks is not available to
us. We are not fully insured against all risks, including
development and completion risks that are generally not recoverable
from third parties or insurance. In addition, pollution and
environmental risks generally are not fully insurable. We maintain
$2 million general liability coverage and $10 million umbrella
coverage that covers our and our subsidiaries’ business and
operations. Our wholly-owned subsidiary, Red Hawk, which operates
our D-J Basin Asset, also maintains a $10 million control of well
insurance policy that covers its operations in Colorado. With
respect to our other non-operated assets, we may elect not to
obtain insurance if we believe that the cost of available insurance
is excessive relative to the perceived risks presented. Losses
could, therefore, occur for uninsurable or uninsured risks or in
amounts in excess of existing insurance coverage. Moreover,
insurance may not be available in the future at commercially
reasonable prices or on commercially reasonable terms. Changes in
the insurance markets due to various factors may make it more
difficult for us to obtain certain types of coverage in the future.
As a result, we may not be able to obtain the levels or types of
insurance we would otherwise have obtained prior to these market
changes, and the insurance coverage we do obtain may not cover
certain hazards or all potential losses that are currently covered,
and may be subject to large deductibles. Losses and liabilities
from uninsured and underinsured events and delay in the payment of
insurance proceeds could have a material adverse effect on our
business, financial condition and results of
operations.
44
The threat and impact of terrorist attacks, cyber-attacks or
similar hostilities may adversely impact our
operations.
We
cannot assess the extent of either the threat or the potential
impact of future terrorist attacks on the energy industry in
general, and on us in particular, either in the short-term or in
the long-term. Uncertainty surrounding such hostilities may affect
our operations in unpredictable ways, including the possibility
that infrastructure facilities, including pipelines and gathering
systems, production facilities, processing plants and refineries,
could be targets of, or indirect casualties of, an act of terror, a
cyber-attack or electronic security breach, or an act of
war.
Failure to adequately protect critical data and technology systems
could materially affect our operations.
Information
technology solution failures, network disruptions and breaches of
data security could disrupt our operations by causing delays or
cancellation of customer orders, impeding processing of
transactions and reporting financial results, resulting in the
unintentional disclosure of customer, employee or our information,
or damage to our reputation. There can be no assurance that a
system failure or data security breach will not have a material
adverse effect on our financial condition, results of operations or
cash flows.
Our strategy as an onshore unconventional resource player may
result in operations concentrated in certain geographic areas and
may increase our exposure to many of the risks described in this
Annual Report.
Our
current operations are concentrated in the state of Colorado.
This concentration may increase the potential impact of many of the
risks described in this Annual Report. For example, we may have
greater exposure to regulatory actions impacting Colorado, natural
disasters in Colorado, competition for equipment, services and
materials available in Colorado and access to infrastructure and
markets in Colorado.
Unless we replace our oil and natural gas reserves, our reserves
and production will decline, which would adversely affect our
business, financial condition and results of
operations.
The
rate of production from our oil and natural gas properties will
decline as our reserves are depleted. Our future oil and natural
gas reserves and production and, therefore, our income and cash
flow, are highly dependent on our success in (a) efficiently
developing and exploiting our current reserves on properties owned
by us or by other persons or entities and (b) economically finding
or acquiring additional oil and natural gas producing properties.
In the future, we may have difficulty acquiring new properties.
During periods of low oil and/or natural gas prices, it will become
more difficult to raise the capital necessary to finance expansion
activities. If we are unable to replace our production, our
reserves will decrease, and our business, financial condition and
results of operations would be adversely affected.
Our strategy includes acquisitions of oil and natural gas
properties, and our failure to identify or complete future
acquisitions successfully, or not produce projected revenues
associated with the future acquisitions could reduce our earnings
and hamper our growth.
We may
be unable to identify properties for acquisition or to make
acquisitions on terms that we consider economically acceptable.
There is intense competition for acquisition opportunities in our
industry. Competition for acquisitions may increase the cost of, or
cause us to refrain from, completing acquisitions. The completion
and pursuit of acquisitions may be dependent upon, among other
things, our ability to obtain debt and equity financing and, in
some cases, regulatory approvals. Our ability to grow through
acquisitions will require us to continue to invest in operations,
financial and management information systems and to attract,
retain, motivate and effectively manage our employees. The
inability to manage the integration of acquisitions effectively
could reduce our focus on subsequent acquisitions and current
operations, and could negatively impact our results of operations
and growth potential. Our financial position and results of
operations may fluctuate significantly from period to period as a
result of the completion of significant acquisitions during
particular periods. If we are not successful in identifying or
acquiring any material property interests, our earnings could be
reduced and our growth could be restricted.
45
We may
engage in bidding and negotiating to complete successful
acquisitions. We may be required to alter or increase substantially
our capitalization to finance these acquisitions through the use of
cash on hand, the issuance of debt or equity securities, the sale
of production payments, the sale of non-strategic assets, the
borrowing of funds or otherwise. If we were to proceed with one or
more acquisitions involving the issuance of our common stock, our
shareholders would suffer dilution of their interests. Furthermore,
our decision to acquire properties that are substantially different
in operating or geologic characteristics or geographic locations
from areas with which our staff is familiar may impact our
productivity in such areas.
We may
not be able to produce the projected revenues related to future
acquisitions. There are many assumptions related to the projection
of the revenues of future acquisitions including, but not limited
to, drilling success, oil and natural gas prices, production
decline curves and other data. If revenues from future acquisitions
do not meet projections, this could adversely affect our business
and financial condition.
We may purchase oil and natural gas properties with liabilities or
risks that we did not know about or that we did not assess
correctly, and, as a result, we could be subject to liabilities
that could adversely affect our results of operations.
Before
acquiring oil and natural gas properties, we estimate the reserves,
future oil and natural gas prices, operating costs, potential
environmental liabilities and other factors relating to the
properties. However, our review involves many assumptions and
estimates, and their accuracy is inherently uncertain. As a result,
we may not discover all existing or potential problems associated
with the properties we buy. We may not become sufficiently familiar
with the properties to assess fully their deficiencies and
capabilities. We do not generally perform inspections on every well
or property, and we may not be able to observe mechanical and
environmental problems even when we conduct an inspection. The
seller may not be willing or financially able to give us
contractual protection against any identified problems, and we may
decide to assume environmental and other liabilities in connection
with properties we acquire. If we acquire properties with risks or
liabilities we did not know about or that we did not assess
correctly, our business, financial condition and results of
operations could be adversely affected as we settle claims and
incur cleanup costs related to these liabilities.
We may incur losses or costs as a result of title deficiencies in
the properties in which we invest.
If an
examination of the title history of a property that we have
purchased reveals an oil and natural gas lease has been purchased
in error from a person who is not the owner of the property, our
interest would be worthless. In such an instance, the amount paid
for such oil and natural gas lease as well as any royalties paid
pursuant to the terms of the lease prior to the discovery of the
title defect would be lost.
Prior
to the drilling of an oil and natural gas well, it is the normal
practice in the oil and natural gas industry for the person or
company acting as the operator of the well to obtain a preliminary
title review of the spacing unit within which the proposed oil and
natural gas well is to be drilled to ensure there are no obvious
deficiencies in title to the well. Frequently, as a result of such
examinations, certain curative work must be done to correct
deficiencies in the marketability of the title, and such curative
work entails expense. Our failure to cure any title defects may
adversely impact our ability in the future to increase production
and reserves. In the future, we may suffer a monetary loss from
title defects or title failure. Additionally, unproved and
unevaluated acreage has greater risk of title defects than
developed acreage. If there are any title defects or defects in
assignment of leasehold rights in properties in which we hold an
interest, we will suffer a financial loss which could adversely
affect our business, financial condition and results of
operations.
46
Our identified drilling locations are scheduled over several years,
making them susceptible to uncertainties that could materially
alter the occurrence or timing of their drilling.
Our
management team has identified and scheduled drilling locations in
our operating areas over a multi-year period. Our ability to drill
and develop these locations depends on a number of factors,
including the availability of equipment and capital, approval by
regulators, seasonal conditions, oil and natural gas prices,
assessment of risks, costs and drilling results. The final
determination on whether to drill any of these locations will be
dependent upon the factors described elsewhere in this filing and
the documents incorporated by reference herein, as well as, to some
degree, the results of our drilling activities with respect to our
established drilling locations. Because of these uncertainties, we
do not know if the drilling locations we have identified will be
drilled within our expected timeframe or at all or if we will be
able to economically produce hydrocarbons from these or any other
potential drilling locations. Our actual drilling activities may be
materially different from our current expectations, which could
adversely affect our business, financial condition and results of
operations.
We currently license only a limited amount of seismic and other
geological data and may have difficulty obtaining additional data
at a reasonable cost, which could adversely affect our future
results of operations.
We
currently license only a limited amount of seismic and other
geological data to assist us in exploration and development
activities. We intend to obtain access to additional data in our
areas of interest through licensing arrangements with companies
that own or have access to that data or by paying to obtain that
data directly. Seismic and geological data can be expensive to
license or obtain. We may not be able to license or obtain such
data at an acceptable cost. In addition, even when properly
interpreted, seismic data and visualization techniques are not
conclusive in determining if hydrocarbons are present in
economically producible amounts and seismic indications of
hydrocarbon saturation are generally not reliable indicators of
productive reservoir rock.
The unavailability or high cost of drilling rigs, completion
equipment and services, supplies and personnel, including hydraulic
fracturing equipment and personnel, could adversely affect our
ability to establish and execute exploration and development plans
within budget and on a timely basis, which could have a material
adverse effect on our business, financial condition and results of
operations.
Shortages or the
high cost of drilling rigs, completion equipment and services,
supplies or personnel could delay or adversely affect our
operations. When drilling activity in the United States increases,
associated costs typically also increase, including those costs
related to drilling rigs, equipment, supplies and personnel and the
services and products of other vendors to the industry. These costs
may increase, and necessary equipment and services may become
unavailable to us at economical prices. Should this increase in
costs occur, we may delay drilling activities, which may limit our
ability to establish and replace reserves, or we may incur these
higher costs, which may negatively affect our business, financial
condition and results of operations.
In
addition, the demand for hydraulic fracturing services currently
exceeds the availability of fracturing equipment and crews across
the industry and in our operating areas in particular. The
accelerated wear and tear of hydraulic fracturing equipment due to
its deployment in unconventional oil and natural gas fields
characterized by longer lateral lengths and larger numbers of
fracturing stages has further amplified this equipment and crew
shortage. If demand for fracturing services increases or the supply
of fracturing equipment and crews decreases, then higher costs
could result and could adversely affect our business, financial
condition and results of operations.
We have limited control over activities on properties we do not
operate.
We are
not the operator on some of our properties and, as a result, our
ability to exercise influence over the operations of these
properties or their associated costs is limited. Our dependence on
the operators and other working interest owners of these projects
and our limited ability to influence operations and associated
costs or control the risks could materially and adversely affect
the realization of our targeted returns on capital in drilling or
acquisition activities. The success and timing of our drilling and
development activities on properties operated by others therefore
depends upon a number of factors, including:
47
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and amount of capital expenditures;
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the
operator’s expertise and financial resources;
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the
rate of production of reserves, if any;
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approval
of other participants in drilling wells; and
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selection
of technology.
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The marketability of our production is dependent upon oil and
natural gas gathering and transportation facilities owned and
operated by third parties, and the unavailability of satisfactory
oil and natural gas transportation arrangements would have a
material adverse effect on our revenue.
The
unavailability of satisfactory oil and natural gas transportation
arrangements may hinder our access to oil and natural gas markets
or delay production from our wells. The availability of a ready
market for our oil and natural gas production depends on a number
of factors, including the demand for, and supply of, oil and
natural gas and the proximity of reserves to pipelines and terminal
facilities. Our ability to market our production depends in
substantial part on the availability and capacity of gathering
systems, pipelines and processing facilities owned and operated by
third parties. Our failure to obtain these services on acceptable
terms could materially harm our business. We may be required to
shut-in wells for lack of a market or because of inadequacy or
unavailability of pipeline or gathering system capacity. If that
were to occur, we would be unable to realize revenue from those
wells until production arrangements were made to deliver our
production to market. Furthermore, if we were required to shut-in
wells we might also be obligated to pay shut-in royalties to
certain mineral interest owners in order to maintain our leases. We
do not expect to purchase firm transportation capacity on
third-party facilities. Therefore, we expect the transportation of
our production to be generally interruptible in nature and lower in
priority to those having firm transportation
arrangements.
The
disruption of third-party facilities due to maintenance and/or
weather could negatively impact our ability to market and deliver
our products. The third parties control when or if such facilities
are restored and what prices will be charged. Federal and state
regulation of oil and natural gas production and transportation,
tax and energy policies, changes in supply and demand, pipeline
pressures, damage to or destruction of pipelines and general
economic conditions could adversely affect our ability to produce,
gather and transport oil and natural gas.
Strategic relationships, including with Tenet Advisory Group, upon
which we may rely, are subject to risks and uncertainties which may
adversely affect our business, financial conditions and results of
operations.
Our
ability to explore, develop and produce oil and natural gas
resources successfully and acquire oil and natural gas interests
and acreage depends on our developing and maintaining close working
relationships with industry participants and on our ability to
select and evaluate suitable acquisition opportunities in a highly
competitive environment. These realities are subject to risks and
uncertainties that may adversely affect our business, financial
condition and results of operations.
To
develop our business, we will endeavor to use the business
relationships of our management and board to enter into strategic
relationships, which may take the form of contractual arrangements
with other oil and natural gas companies, including those that
supply equipment and other resources that we expect to use in our
business. For example, we have retained Tenet Advisory Group, LLC
as a key advisor for our operations, exploration and drilling
efforts. We may not be able to establish these strategic
relationships, or if established, we may not be able to maintain
them. In addition, the dynamics of our relationships with strategic
partners may require us to incur expenses or undertake activities
we would not otherwise be inclined to incur in order to fulfill our
obligations to these partners or maintain our relationships. If our
strategic relationships are not established or maintained, our
business, financial condition and results of operations may be
adversely affected.
48
An increase in the differential between the NYMEX or other
benchmark prices of oil and natural gas and the wellhead price we
receive for our production could adversely affect our business,
financial condition and results of operations.
The
prices that we will receive for our oil and natural gas production
sometimes may reflect a discount to the relevant benchmark prices,
such as NYMEX, that are used for calculating hedge positions. The
difference between the benchmark price and the prices we receive is
called a differential. Increases in the differential between the
benchmark prices for oil and natural gas and the wellhead price we
receive could adversely affect our business, financial condition
and results of operations. We do not have, and may not have in the
future, any derivative contracts covering the amount of the basis
differentials we experience in respect of our production. As such,
we will be exposed to any increase in such
differentials.
We may have difficulty managing growth in our business, which could
have a material adverse effect on our business, financial condition
and results of operations and our ability to execute our business
plan in a timely fashion.
Because
of our small size, growth in accordance with our business plans, if
achieved, will place a significant strain on our financial,
technical, operational and management resources. As we expand our
activities, including our planned increase in oil exploration,
development and production, and increase the number of projects we
are evaluating or in which we participate, there will be additional
demands on our financial, technical and management resources. The
failure to continue to upgrade our technical, administrative,
operating and financial control systems or the occurrence of
unexpected expansion difficulties, including the inability to
recruit and retain experienced managers, geoscientists, petroleum
engineers and landmen could have a material adverse effect on our
business, financial condition and results of operations and our
ability to execute our business plan in a timely
fashion.
Financial difficulties encountered by our oil and natural gas
purchasers, third-party operators or other third parties could
decrease our cash flow from operations and adversely affect the
exploration and development of our prospects and
assets.
We will
derive substantially all of our revenues from the sale of our oil
and natural gas to unaffiliated third-party purchasers, independent
marketing companies and mid-stream companies. Any delays in
payments from our purchasers caused by financial problems
encountered by them will have an immediate negative effect on our
results of operations.
Liquidity and cash
flow problems encountered by our working interest co-owners or the
third-party operators of our non-operated properties may prevent or
delay the drilling of a well or the development of a project. Our
working interest co-owners may be unwilling or unable to pay their
share of the costs of projects as they become due. In the case of a
farmout party, we would have to find a new farmout party or obtain
alternative funding in order to complete the exploration and
development of the prospects subject to a farmout agreement. In the
case of a working interest owner, we could be required to pay the
working interest owner’s share of the project costs. We
cannot assure you that we would be able to obtain the capital
necessary to fund either of these contingencies or that we would be
able to find a new farmout party.
The calculated present value of future net revenues from our proved
reserves will not necessarily be the same as the current market
value of our estimated oil and natural gas reserves.
You
should not assume that the present value of future net cash flows
as included in our public filings is the current market value of
our estimated proved oil and natural gas reserves. We generally
base the estimated discounted future net cash flows from proved
reserves on current costs held constant over time without
escalation and on commodity prices using an unweighted arithmetic
average of first-day-of-the-month index prices, appropriately
adjusted, for the 12-month period immediately preceding the date of
the estimate. Actual future prices and costs may be materially
higher or lower than the prices and costs used for these estimates
and will be affected by factors such as:
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actual
prices we receive for oil and natural gas;
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actual
cost and timing of development and production
expenditures;
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the
amount and timing of actual production; and
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changes
in governmental regulations or taxation.
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In
addition, the 10% discount factor that is required to be used to
calculate discounted future net revenues for reporting purposes
under GAAP is not necessarily the most appropriate discount factor
based on the cost of capital in effect from time to time and risks
associated with our business and the oil and natural gas industry
in general.
We may incur additional indebtedness which could reduce our
financial flexibility, increase interest expense and adversely
impact our operations and our unit costs.
In the
future, we may incur significant amounts of additional indebtedness
in order to make acquisitions or to develop our properties. Our
level of indebtedness could affect our operations in several ways,
including the following:
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a
significant portion of our cash flows could be used to service our
indebtedness;
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a high
level of debt would increase our vulnerability to general adverse
economic and industry conditions;
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any
covenants contained in the agreements governing our outstanding
indebtedness could limit our ability to borrow additional funds,
dispose of assets, pay dividends and make certain
investments;
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a high
level of debt may place us at a competitive disadvantage compared
to our competitors that are less leveraged and, therefore, may be
able to take advantage of opportunities that our indebtedness may
prevent us from pursuing; and
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debt
covenants to which we may agree may affect our flexibility in
planning for, and reacting to, changes in the economy and in our
industry.
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A high
level of indebtedness increases the risk that we may default on our
debt obligations. We may not be able to generate sufficient cash
flows to pay the principal or interest on our debt, and future
working capital, borrowings or equity financing may not be
available to pay or refinance such debt. If we do not have
sufficient funds and are otherwise unable to arrange financing, we
may have to sell significant assets or have a portion of our assets
foreclosed upon which could have a material adverse effect on our
business, financial condition and results of
operations.
Competition in the oil and natural gas industry is intense, making
it difficult for us to acquire properties, market oil and natural
gas and secure trained personnel.
Our
ability to acquire additional prospects and to find and develop
reserves in the future will depend on our ability to evaluate and
select suitable properties and to consummate transactions in a
highly competitive environment for acquiring properties, marketing
oil and natural gas and securing trained personnel. Also, there is
substantial competition for capital available for investment in the
oil and natural gas industry. Many of our competitors possess and
employ financial, technical and personnel resources substantially
greater than ours, and many of our competitors have more
established presences in the United States than we have. Those
companies may be able to pay more for productive oil and natural
gas properties and exploratory prospects and to evaluate, bid for
and purchase a greater number of properties and prospects than our
financial or personnel resources permit. In addition, other
companies may be able to offer better compensation packages to
attract and retain qualified personnel than we are able to offer.
The cost to attract and retain qualified personnel has increased in
recent years due to competition and may increase substantially in
the future. We may not be able to compete successfully in the
future in acquiring prospective reserves, developing reserves,
marketing hydrocarbons, attracting and retaining quality personnel
and raising additional capital, which could have a material adverse
effect on our business, financial condition and results of
operations.
50
Our competitors may use superior technology and data resources that
we may be unable to afford or that would require a costly
investment by us in order to compete with them more
effectively.
Our
industry is subject to rapid and significant advancements in
technology, including the introduction of new products and services
using new technologies and databases. As our competitors use or
develop new technologies, we may be placed at a competitive
disadvantage, and competitive pressures may force us to implement
new technologies at a substantial cost. In addition, many of our
competitors will have greater financial, technical and personnel
resources that allow them to enjoy technological advantages and may
in the future allow them to implement new technologies before we
can. We cannot be certain that we will be able to implement
technologies on a timely basis or at a cost that is acceptable to
us. One or more of the technologies that we will use or that we may
implement in the future may become obsolete, and we may be
adversely affected.
If we do not hedge our exposure to reductions in oil and natural
gas prices, we may be subject to significant reductions in prices.
Alternatively, we may use oil and natural gas price hedging
contracts, which involve credit risk and may limit future revenues
from price increases and result in significant fluctuations in our
profitability.
In the
event that we choose not to hedge our exposure to reductions in oil
and natural gas prices by purchasing futures and by using other
hedging strategies, we may be subject to significant reduction in
prices which could have a material negative impact on our
profitability. Alternatively, we may elect to use hedging
transactions with respect to a portion of our oil and natural gas
production to achieve more predictable cash flow and to reduce our
exposure to price fluctuations. While the use of hedging
transactions limits the downside risk of price declines, their use
also may limit future revenues from price increases. Hedging
transactions also involve the risk that the counterparty may be
unable to satisfy its obligations.
Changes in the legal and regulatory environment governing the oil
and natural gas industry, particularly changes in the current
Colorado forced pooling system, could have a material adverse
effect on our business.
Our business is subject to various forms of
government regulation, including laws and regulations concerning
the location, spacing and permitting of the oil and natural gas
wells we drill, among other matters. In particular, our business
utilizes a methodology available in Colorado known as
“
forced
pooling,
” which refers to
the ability of a holder of an oil and natural gas interest in a
particular prospective drilling spacing unit to apply to the COGCC
for an order forcing all other holders of oil and natural gas
interests in such area into a common pool for purposes of
developing that drilling spacing unit. This methodology is
especially important for our operations in the Greeley area, where
there are many interest holders. Changes in the legal and
regulatory environment governing our industry, particularly any
changes to Colorado forced pooling procedures that make forced
pooling more difficult to accomplish, could result in increased
compliance costs and adversely affect our business, financial
condition and results of operations.
SEC rules could limit our ability to
book additional proved undeveloped reserves
(“
PUDs
”)
in the future.
SEC
rules require that, subject to limited exceptions, PUDs may only be
booked if they relate to wells scheduled to be drilled within five
years after the date of booking. This requirement has limited and
may continue to limit our ability to book additional PUDs as we
pursue our drilling program. Moreover, we may be required to write
down our PUDs if we do not drill or plan on delaying those wells
within the required five-year timeframe.
51
New or amended environmental legislation or regulatory initiatives
could result in increased costs, additional operating restrictions,
or delays or have other adverse effects on us.
The environmental laws and regulations to which we are subject
change frequently, often to become more burdensome and/or to
increase the risk that we will be subject to significant
liabilities. New or amended federal, state, or local laws or
implementing regulations or orders imposing new environmental
obligations on, or otherwise limiting, our operations could make it
more difficult and more expensive to complete oil and natural gas
wells, increase our costs of compliance and doing business, delay
or prevent the development of resources (especially from shale
formations that are not commercial without the use of hydraulic
fracturing), or alter the demand for and consumption of our
products. Any such outcome could have a material and adverse impact
on our cash flows and results of operations.
For example, in 2014 and 2016, opponents of
hydraulic fracturing sought statewide ballot initiatives in
Colorado that would have restricted oil and gas development in
Colorado and could have had materially adverse impacts on us. One
of the proposed initiatives would have made the vast majority of
the surface area of the state ineligible for drilling, including
substantially all of our planned future drilling locations.
Although none of the proposed initiatives were implemented, future
initiatives are likely, including in 2018. Similarly, proposals are
made from time to time to adopt new, or amend existing, laws and
regulations to address hydraulic fracturing or climate change
concerns through further regulation of exploration and development
activities.
Please read
“
Part
I
” –
“
Item 1.
Business
” —
“
Regulation of the Oil
and Gas Industry
” and
“
Regulation of
Environmental and Occupational Safety and Health
Matters
” for a further
description of the laws and regulations that affect
us
.
We cannot predict the nature, outcome, or effect on us of future
regulatory initiatives, but such initiatives could materially
impact our results of operations, production, reserves, and other
aspects of our business.
Proposed changes to U.S. tax laws, if adopted, could have an
adverse effect on our business, financial condition, results of
operations, and cash flows.
From time to time, legislative proposals are made that would, if
enacted, result in the elimination of the immediate deduction for
intangible drilling and development costs, the elimination of the
deduction from income for domestic production activities relating
to oil and gas exploration and development, the repeal of the
percentage depletion allowance for oil and gas properties, and an
extension of the amortization period for certain geological and
geophysical expenditures. Such changes, if adopted, or other
similar changes that reduce or eliminate deductions currently
available with respect to oil and gas exploration and development,
could adversely affect our business, financial condition, results
of operations, and cash flows.
We may incur substantial costs to comply with the various federal,
state, and local laws and regulations that affect our oil and
natural gas operations, including as a result of the actions of
third parties.
We are affected
significantly by a substantial number of governmental regulations
relating to, among other things, the release or disposal of
materials into the environment, health and safety, land use, and
other matters. A summary of the principal environmental rules and
regulations to which we are currently subject is set forth
in
“
Part
I
” –
“
Item 1.
Business
” —
“
Regulation of the Oil
and Gas Industry
” and
“
Regulation of
Environmental and Occupational Safety and Health
Matters
.” Compliance
with such laws and regulations often increases our cost of doing
business and thereby decreases our profitability. Failure to comply
with these laws and regulations may result in the assessment of
administrative, civil, and criminal penalties, the incurrence of
investigatory or remedial obligations, or the issuance of cease and
desist orders.
52
The environmental laws and regulations to which we are subject may,
among other things:
●
require us to apply for and receive a permit before drilling
commences or certain associated facilities are
developed;
●
restrict the types, quantities, and concentrations of substances
that can be released into the environment in connection with
drilling, hydraulic fracturing, and production
activities;
●
limit or prohibit drilling activities on certain lands lying within
wilderness, wetlands and other "waters of the United States,"
threatened and endangered species habitat, and other protected
areas;
●
require remedial measures to mitigate pollution from former
operations, such as plugging abandoned wells;
●
require us to add procedures and/or staff in order to comply with
applicable laws and regulations; and
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impose substantial liabilities for pollution resulting from our
operations.
In addition, we could face liability under applicable environmental
laws and regulations as a result of the activities of previous
owners of our properties or other third parties. For example, over
the years, we have owned or leased numerous properties for oil and
natural gas activities upon which petroleum hydrocarbons or other
materials may have been released by us or by predecessor property
owners or lessees who were not under our control. Under applicable
environmental laws and regulations, including CERCLA, RCRA, and
state laws, we could be held liable for the removal or remediation
of previously released materials or property contamination at such
locations, or at third-party locations to which we have sent waste,
regardless of our fault, whether we were responsible for the
release or whether the operations at the time of the release were
lawful.
Compliance with, or liabilities associated with violations of or
remediation obligations under, environmental laws and regulations
could have a material adverse effect on our results of operations
and financial condition.
Part of our strategy involves drilling in existing or emerging
shale plays using some of the latest available horizontal drilling
and completion techniques. The results of our planned exploratory
drilling in these plays are subject to drilling and completion
technique risks, and drilling results may not meet our expectations
for reserves or production. As a result, we may incur material
write-downs and the value of our undeveloped acreage could decline
if drilling results are unsuccessful.
Our
operations in the D-J Basin in Weld County, Colorado, involve
utilizing the latest drilling and completion techniques in order to
maximize cumulative recoveries and therefore generate the highest
possible returns. Risks that we may face while drilling include,
but are not limited to, landing our well bore in the desired
drilling zone, staying in the desired drilling zone while drilling
horizontally through the formation, running our casing the entire
length of the well bore and being able to run tools and other
equipment consistently through the horizontal well bore. Risks that
we may face while completing our wells include, but are not limited
to, being able to fracture stimulate the planned number of stages,
being able to run tools the entire length of the well bore during
completion operations and successfully cleaning out the well bore
after completion of the final fracture stimulation
stage.
53
The
results of our drilling in new or emerging formations will be more
uncertain initially than drilling results in areas that are more
developed and have a longer history of established production.
Newer or emerging formations and areas have limited or no
production history and consequently we are less able to predict
future drilling results in these areas.
Ultimately, the
success of these drilling and completion techniques can only be
evaluated over time as more wells are drilled and production
profiles are established over a sufficiently long time period. If
our drilling results are less than anticipated or we are unable to
execute our drilling program because of capital constraints, lease
expirations, access to gathering systems and limited takeaway
capacity or otherwise, and/or natural gas and oil prices decline,
the return on our investment in these areas may not be as
attractive as we anticipate. Further, as a result of any of these
developments we could incur material write-downs of our oil and
natural gas properties and the value of our undeveloped acreage
could decline in the future.
Our acreage must be drilled before lease expiration, generally
within three to five years, in order to hold the acreage by
production. In the highly competitive market for acreage, failure
to drill sufficient wells in order to hold acreage will result in a
substantial lease renewal cost, or if renewal is not feasible, loss
of our lease and prospective drilling opportunities.
Our
leases on oil and natural gas properties typically have a primary
term of three to five years, after which they expire unless, prior
to expiration, production is established within the spacing units
covering the undeveloped acres. The loss of substantial leases
could have a material adverse effect on our assets, operations,
revenues and cash flow and could cause the value of our securities
to decline in value.
Competition for hydraulic fracturing services and water
disposal could impede our ability to develop our shale
plays.
The
unavailability or high cost of high pressure pumping services (or
hydraulic fracturing services), chemicals, proppant, water and
water disposal and related services and equipment could limit our
ability to execute our exploration and development plans on a
timely basis and within our budget. The oil and natural gas
industry is experiencing a growing emphasis on the exploitation and
development of shale natural gas and shale oil resource plays,
which are dependent on hydraulic fracturing for economically
successful development. Hydraulic fracturing in shale plays
requires high pressure pumping service crews. A shortage of service
crews or proppant, chemical, water or water disposal options,
especially if this shortage occurred in eastern Colorado, could
materially and adversely affect our operations and the timeliness
of executing our development plans within our budget.
The derivatives legislation adopted by Congress, and implementation
of that legislation by federal agencies, could have an adverse
impact on our ability to hedge risks associated with our
business.
On July
21, 2010, President Obama signed into law the Dodd-Frank Wall
Street Reform and Consumer Protection Act, the Dodd-Frank Act,
which, among other things, sets forth the new framework for
regulating certain derivative products including the commodity
hedges of the type that we may elect to use, but many aspects of
this law are subject to further rulemaking and will take effect
over several years. As a result, it is difficult to anticipate the
overall impact of the Dodd-Frank Act on our ability or willingness
to enter into and maintain such commodity hedges and the terms of
such hedges. There is a possibility that the Dodd-Frank Act could
have a substantial and adverse impact on our ability to enter into
and maintain these commodity hedges. In particular, the Dodd-Frank
Act could result in the implementation of position limits and
additional regulatory requirements on derivative arrangements,
which could include new margin, reporting and clearing
requirements. In addition, this legislation could have a
substantial impact on our counterparties and may increase the cost
of our derivative arrangements in the future.
54
If
these types of commodity hedges become unavailable or uneconomic,
our commodity price risk could increase, which would increase the
volatility of revenues and may decrease the amount of credit
available to us. Any limitations or changes in our use of
derivative arrangements could also materially affect our future
ability to conduct acquisitions.
Our operations are substantially dependent on the availability of
water. Restrictions on our ability to obtain water may have an
adverse effect on our financial condition, results of operations
and cash flows.
Water is an essential
component of shale oil and natural gas production during both the
drilling and hydraulic fracturing processes. Historically, we have
been able to purchase water from local land owners for use in our
operations. When drought conditions occur, governmental authorities
may restrict the use of water subject to their jurisdiction for
hydraulic fracturing to protect local water supplies. Colorado has
a relatively arid climate and experiences drought conditions from
time to time. If we are unable to obtain water to use in our
operations from local sources or dispose of or recycle water used
in operations, or if the price of water or water disposal increases
significantly, we may be unable to produce oil and natural gas
economically, which could have a material adverse effect on our
financial condition, results of operations, and cash
flows.
Potential conflicts of interest could arise for certain members of
our management team that hold management positions with other
entities.
Michael
L. Peterson, our President and Chief Executive Officer, and Clark
R. Moore, our Executive Vice President, General Counsel and
Secretary, hold various other management positions with
privately-held companies not involved in the oil and gas industry.
We believe these positions require only an immaterial amount of
each officers’ time and will not conflict with their roles or
responsibilities with our company. If any of these companies
enter into one or more transactions with our company, or if
the officers’ position with any such company requires
significantly more time than currently anticipated, potential
conflicts of interests could arise from the officers performing
services for us and these other entities.
Downturns and volatility in global economies and commodity and
credit markets could materially adversely affect our business,
results of operations and financial condition.
Our
results of operations are materially affected by the conditions of
the global economies and the credit, commodities and stock markets.
Among other things, we may be adversely impacted if consumers of
oil and gas are not able to access sufficient capital to continue
to operate their businesses or to operate them at prior levels. A
decline in consumer confidence or changing patterns in the
availability and use of disposable income by consumers can
negatively affect the demand for oil and gas and as a result our
results of operations.
Improvements in or new discoveries of alternative energy
technologies could have a material adverse effect on our financial
condition and results of operations.
Because
our operations depend on the demand for oil and used oil, any
improvement in or new discoveries of alternative energy
technologies (such as wind, solar, geothermal, fuel cells and
biofuels) that increase the use of alternative forms of energy and
reduce the demand for oil, gas and oil and gas related products
could have a material adverse impact on our business, financial
condition and results of operations.
Competition due to advances in renewable fuels may lessen the
demand for our products and negatively impact our
profitability.
Alternatives to
petroleum-based products and production methods are continually
under development. For example, a number of automotive, industrial
and power generation manufacturers are developing alternative clean
power systems using fuel cells or clean-burning gaseous fuels that
may address increasing worldwide energy costs, the long-term
availability of petroleum reserves and environmental concerns,
which if successful could lower the demand for oil and gas. If
these non-petroleum based products and oil alternatives continue to
expand and gain broad acceptance such that the overall demand for
oil and gas is decreased it could have an adverse effect on our
operations and the value of our assets.
55
Currently pending or future litigation or governmental proceedings
could result in material adverse consequences, including judgments
or settlements.
From
time to time, we are involved in lawsuits, regulatory inquiries and
may be involved in governmental and other legal proceedings arising
out of the ordinary course of our business. Many of these matters
raise difficult and complicated factual and legal issues and are
subject to uncertainties and complexities. The timing of the final
resolutions to these types of matters is often uncertain.
Additionally, the possible outcomes or resolutions to these matters
could include adverse judgments or settlements, either of which
could require substantial payments, adversely affecting our results
of operations and liquidity.
We may be subject in the normal course of business to judicial,
administrative or other third-party proceedings that could
interrupt or limit our operations, require expensive remediation,
result in adverse judgments, settlements or fines and create
negative publicity.
Governmental
agencies may, among other things, impose fines or penalties on us
relating to the conduct of our business, attempt to revoke or deny
renewal of our operating permits, franchises or licenses for
violations or alleged violations of environmental laws or
regulations or as a result of third-party challenges, require us to
install additional pollution control equipment or require us to
remediate potential environmental problems relating to any real
property that we or our predecessors ever owned, leased or operated
or any waste that we or our predecessors ever collected,
transported, disposed of or stored. Individuals, citizens groups,
trade associations or environmental activists may also bring
actions against us in connection with our operations that could
interrupt or limit the scope of our business. Any adverse outcome
in such proceedings could harm our operations and financial results
and create negative publicity, which could damage our reputation,
competitive position and stock price. We may also be required to
take corrective actions, including, but not limited to, installing
additional equipment, which could require us to make substantial
capital expenditures. We could also be required to indemnify our
employees in connection with any expenses or liabilities that they
may incur individually in connection with regulatory action against
us. These could result in a material adverse effect on our
prospects, business, financial condition and our results of
operations.
Risks Related to Our Common Stock
We currently have an illiquid and volatile market for our common
stock, and the market for our common stock is and may remain
illiquid and volatile in the future.
We currently have a highly sporadic,
illiquid and volatile market for our common stock, which market is
anticipated to remain sporadic, illiquid and volatile in the
future.
Factors that could affect our stock price or
result in fluctuations in the market price or trading volume of our
common stock include:
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actual or anticipated operating and financial performance and
drilling locations, including reserves estimates;
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quarterly
variations in the rate of growth of our financial indicators, such
as net income per share, net income and cash flows, or those of
companies that are perceived to be similar to us;
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in revenue, cash flows or earnings estimates or publication of
reports by equity research analysts;
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speculation
in the press or investment community;
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public
reaction to our press releases, announcements and filings with the
SEC;
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sales
of our common stock by us or other shareholders, or the perception
that such sales may occur;
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the
limited amount of our freely tradable common stock available in the
public marketplace;
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general
financial market conditions and oil and natural gas industry market
conditions, including fluctuations in commodity
prices;
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the
realization of any of the risk factors presented in this Annual
Report;
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the
recruitment or departure of key personnel;
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commencement
of, or involvement in, litigation;
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the
prices of oil and natural gas;
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the
success of our exploration and development operations, and the
marketing of any oil and natural gas we produce;
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changes
in market valuations of companies similar to ours; and
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domestic
and international economic, legal and regulatory factors unrelated
to our performance.
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56
Our common stock is listed on the NYSE
American under the symbol “
PED.
”
Our stock price may be impacted by factors that are unrelated or
disproportionate to our operating performance.
The
stock markets in general have experienced extreme volatility that
has often been unrelated to the operating performance of particular
companies. These broad market fluctuations may adversely affect the
trading price of our common stock. Additionally,
general economic, political and market
conditions, such as recessions, interest rates or international
currency fluctuations may adversely affect the market price of our
common stock. Due to the limited volume of our shares which trade,
we believe that our stock prices (bid, ask and closing prices) may
not be related to our actual value, and not reflect the actual
value of our common stock. Shareholders and potential investors in
our common stock should exercise caution before making an
investment in us.
Additionally, as a
result of the illiquidity of our common stock, investors may not be
interested in owning our common stock because of the inability to
acquire or sell a substantial block of our common stock at one
time. Such illiquidity could have an adverse effect on the market
price of our common stock. In addition, a shareholder may not be
able to borrow funds using our common stock as collateral because
lenders may be unwilling to accept the pledge of securities having
such a limited market. We cannot assure you that an active trading
market for our common stock will develop or, if one develops, be
sustained.
An active liquid trading market for our common stock may not
develop in the future.
Our common stock currently trades on the NYSE
American, although our common stock’s trading volume is very
low. Liquid and active trading markets usually result in less price
volatility and more efficiency in carrying out investors’
purchase and sale orders. However, our common stock may continue to
have limited trading volume, and many investors may not be
interested in owning our common stock because of the inability to
acquire or sell a substantial block of our common stock at one
time. Such illiquidity could have an adverse effect on the market
price of our common stock. In addition, a shareholder may not be
able to borrow funds using our common stock as collateral because
lenders may be unwilling to accept the pledge of securities having
such a limited market. We cannot assure you that an active trading
market for our common stock will develop or, if one develops, be
sustain
ed.
We do not presently intend to pay any cash dividends on or
repurchase any shares of our common stock.
We do not presently intend to pay any cash
dividends on our common stock or to repurchase any shares of our
common stock. Any payment of future dividends will be at the
discretion of the board of directors and will depend on, among
other things, our earnings, financial condition, capital
requirements, level of indebtedness, statutory and contractual
restrictions applying to the payment of dividends and other
considerations that our board of directors deems relevant. Cash
dividend payments in the future may only be made out of legally
available funds and, if we experience substantial losses, such
funds may not be available. Accordingly, you may have to sell some
or all of your common stock in order to generate cash flow from
your investment, and there is no guarantee that the price of our
common stock that will prevail in the market will ever exceed the
price paid by you
.
The issuance of common stock upon conversion of our convertible
notes will cause immediate dilution.
The
issuance of common stock upon conversion of our outstanding
convertible bridge notes in the aggregate amount of $475,000 in
principal and $48,000 of payment in kind, along with interest on
the principal amount of such notes, which allow the holders thereof
the right to convert such amounts from time to time, subject to
certain limitations, into common stock of the Company, as is
determined by dividing the amount converted by a conversion price
by the greater of (i) 80% of the average of the closing price per
share of our publicly traded common stock for the five (5) trading
days immediately preceding the date of the conversion notice
provide by the holder; and (ii) $5.00 per share, will result in
immediate dilution to the interests of other
stockholders.
57
In
addition, that certain Amended and Restated Secured Subordinated
Promissory Note, in the principal amount $4.925 million, dated
February 19, 2015, issued by the Company to MIE Jurassic Energy
Corporation (“
MIEJ
”), provides MIEJ the
right, beginning March 8, 2017, to convert the outstanding balance
plus accrued and unpaid interest thereon, into common stock of the
Company at a price equal to 80% of the average closing price per
share of common stock over the then previous 60 days from the date
MIEJ exercises its conversion right, subject to a floor price of
$3.00 per share of common stock. Any such issuances of common stock
will result in immediate dilution to the interests of other
stockholders.
The continuously adjustable conversion price feature of our
convertible notes could require us to issue a substantially greater
number of shares, which may adversely affect the market price of
our common stock and cause dilution to our existing
stockholders.
Our
existing stockholders may experience substantial dilution of their
investment upon conversion of the convertible bridge notes and New
MIEJ Note. The convertible bridge notes are convertible into shares
of common stock as described in the risk factor above entitled
“
The issuance of
common stock upon conversion of our convertible notes will cause
immediate and substantial dilution
”, at a discount to
the trading price of our common stock, subject to a floor of $5.00
per share, and the New MIEJ Note is convertible into shares of
common stock as described in the same risk factor after March 8,
2017 at a discount to the trading price of our common stock,
subject to a floor of $3.00 per share and other restrictions. As a
result, the number of shares issuable could prove to be
significantly greater in the event of a decrease in the trading
price of our common stock, which decrease could cause substantial
dilution to our existing stockholders. As sequential conversions
and sales take place, the price of our common stock may decline,
and if so, the holders of the convertible bridge notes and New MIEJ
Note would be entitled to receive an increasing number of shares,
which could then be sold, triggering further price declines and
conversions for even larger numbers of shares, which would cause
additional dilution to our existing stockholders and could cause
the value of our common stock to decline.
Because we are a small company, the requirements of being a public
company, including compliance with the reporting requirements of
the Exchange Act and the requirements of the Sarbanes-Oxley
Act and the Dodd-Frank Act, may strain our resources, increase our
costs and distract management, and we may be unable to comply with
these requirements in a timely or cost-effective
manner.
As a
public company with listed equity securities, we must comply with
the federal securities laws, rules and regulations, including
certain corporate governance provisions of the Sarbanes-Oxley Act
of 2002 (the “
Sarbanes-Oxley Act
”) and
the Dodd-Frank Act, related rules and regulations of the SEC and
the NYSE American, with which a private company is not required to
comply. Complying with these laws, rules and regulations will
occupy a significant amount of time of our board of directors and
management and will significantly increase our costs and expenses,
which we cannot estimate accurately at this time. Among other
things, we must:
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establish
and maintain a system of internal control over financial reporting
in compliance with the requirements of Section 404 of the
Sarbanes-Oxley Act and the related rules and regulations of the SEC
and the Public Company Accounting Oversight Board;
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comply
with rules and regulations promulgated by the NYSE
American;
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prepare
and distribute periodic public reports in compliance with our
obligations under the federal securities laws;
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maintain
various internal compliance and disclosures policies, such as those
relating to disclosure controls and procedures and insider trading
in our common stock;
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involve
and retain to a greater degree outside counsel and accountants in
the above activities;
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maintain
a comprehensive internal audit function; and
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maintain
an investor relations function.
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58
In
addition, being a public company subject to these rules and
regulations may require us to accept less director and officer
liability insurance coverage than we desire or to incur substantial
costs to obtain coverage. These factors could also make it more
difficult for us to attract and retain qualified members of our
board of directors, particularly to serve on our audit committee,
and qualified executive officers.
Future sales of our common stock could cause our stock price to
decline.
If our
shareholders sell substantial amounts of our common stock in the
public market, the market price of our common stock could decrease
significantly. The perception in the public market that our
shareholders might sell shares of our common stock could also
depress the market price of our common stock. Up to $100,000,000 in
total aggregate value of securities have been registered by us on a
“
shelf
”
registration statement on Form S-3 (File No. 333-214415) that we
filed with the Securities and Exchange Commission on December 20,
2016, and which was declared effective on January 17, 2017. To
date, an aggregate of approximately $18.1 million in securities
have been sold by us under the prior Form S-3 which the December
2016 Form S-3 replaced, leaving approximately $81.9 million in
securities which will be eligible for sale in the public markets
from time to time, when sold and issued by us, subject to the
requirements of Form S-3, which limits us, until such time, if
ever, as our public float exceeds $75 million, from selling
securities in a public primary offering under Form S-3 with a value
exceeding more than one-third of the aggregate market value of the
common stock held by non-affiliates of the Company every twelve
months. We have also entered into an At Market Issuance Sales
Agreement, or sales agreement, with National Securities
Corporation, or NSC, relating to up to $2.0 million of shares of
our common stock which may be offered from time to time in
“
at the market
offerings
” and filed a final prospectus in connection
with such offering with the SEC, pursuant to which the Company has,
to date, sold an aggregate of 590,335 shares of common stock at
prices ranging from $0.90 to $1.12 per share for an aggregate
purchase price of $640,000, to which an underwriter’s fee of
3.0% was applied, leaving approximately $1.36 million remaining
available for issuance thereunder, subject to limitation under the
SEC’s “Baby Shelf Rules”. Additionally, if our
existing shareholders sell, or indicate an intention to sell,
substantial amounts of our common stock in the public market, the
trading price of our common stock could decline significantly. The
market price for shares of our common stock may drop significantly
when such securities are sold in the public markets. A decline in
the price of shares of our common stock might impede our ability to
raise capital through the issuance of additional shares of our
common stock or other equity securities.
Our outstanding options, warrants and convertible
securities may adversely affect the trading price of our
common stock.
As of
December 31, 2017, there were outstanding stock options to purchase
approximately 743,727 shares of our common stock and outstanding
warrants to purchase approximately 1,231,373 shares of common
stock. For the life of the options and warrants, the holders have
the opportunity to profit from a rise in the market price of our
common stock without assuming the risk of ownership. The issuance
of shares upon the exercise of outstanding securities will also
dilute the ownership interests of our existing
stockholders.
The
availability of these shares for public resale, as well as any
actual resales of these shares, could adversely affect the trading
price of our common stock. We previously filed registration
statements with the SEC on Form S-8 providing for the registration
of an aggregate of approximately 3,134,945 shares of our common
stock, issued, issuable or reserved for issuance under our equity
incentive plans. Subject to the satisfaction of vesting conditions,
the expiration of lockup agreements, any management 10b5-1 plans
and certain restrictions on sales by affiliates, shares registered
under registration statements on Form S-8 will be available for
resale immediately in the public market without
restriction.
We
cannot predict the size of future issuances of our common stock
pursuant to the exercise of outstanding options or warrants or
conversion of other securities, or the effect, if any, that future
issuances and sales of shares of our common stock may have on the
market price of our common stock. Sales or distributions of
substantial amounts of our common stock (including shares
issued in connection with an acquisition), or the perception that
such sales could occur, may cause the market price of our common
stock to decline.
59
Seven of our directors and executive officers own
approximately 24.4% of our common stock, and three of our
major shareholders own approximately 12.8% of our common stock,
which may give them influence over important corporate matters in
which their interests are different from your
interests.
Seven
of our directors and executive officers beneficially own
approximately 24.4% of our outstanding shares of common stock,
and our largest three non-director or officer shareholders own
approximately 12.8% of our outstanding voting shares of common
stock and Series A Preferred Stock (excluding exercise of warrants
and options and other convertible securities held thereby) based on
a total of 7,345,379 shares of common stock and Series A Preferred
Stock outstanding as of March 27, 2018. These directors, executive
officers and major shareholders will be positioned to influence or
control to some degree the outcome of matters requiring a
shareholder vote, including the election of directors, the adoption
of amendments to our certificate of formation or bylaws and the
approval of mergers and other significant corporate transactions.
These directors, executive officers and major shareholders, subject
to any fiduciary duties owed to the shareholders generally, may
have interests different than the rest of our shareholders. Their
influence or control of our company may have the effect of
delaying or preventing a change of control of our company and
may adversely affect the voting and other rights of other
shareholders. In addition, due to the ownership interest of these
directors and officers in our common stock, they may be able to
remain entrenched in their positions.
Provisions of Texas law may have anti-takeover effects that could
prevent a change in control even if it might be beneficial to our
shareholders.
Provisions of Texas
law may discourage, delay or prevent someone from acquiring or
merging with us, which may cause the market price of our common
stock to decline. Under Texas law, a shareholder who beneficially
owns more than 20% of our voting stock, or any “
affiliated shareholder,
”
cannot acquire us for a period of three years from the date this
person became an affiliated shareholder, unless various conditions
are met, such as approval of the transaction by our board of
directors before this person became an affiliated shareholder or
approval of the holders of at least two-thirds of our outstanding
voting shares not beneficially owned by the affiliated
shareholder.
Our board of directors can authorize the issuance of preferred
stock, which could diminish the rights of holders of our common
stock and make a change of control of our company more
difficult even if it might benefit our shareholders.
Our
board of directors is authorized to issue shares of preferred stock
in one or more series and to fix the voting powers, preferences and
other rights and limitations of the preferred stock. Shares of
preferred stock may be issued by our board of directors without
shareholder approval, with voting powers and such preferences and
relative, participating, optional or other special rights and
powers as determined by our board of directors, which may be
greater than the shares of common stock currently outstanding. As a
result, shares of preferred stock may be issued by our board of
directors which cause the holders to have majority voting power
over our shares, provide the holders of the preferred stock the
right to convert the shares of preferred stock they hold into
shares of our common stock, which may cause substantial dilution to
our then common stock shareholders and/or have other rights and
preferences greater than those of our common stock shareholders
including having a preference over our common stock with respect to
dividends or distributions on liquidation or dissolution. To date
our board of directors has authorized Series A Convertible
Preferred Stock, the rights and preferences associated therewith,
and risks related to such preferred stock, is described in greater
detail under “
Risks
Related to Our Series A Convertible Preferred
Stock
”.
60
Investors should
keep in mind that the board of directors has the authority to issue
additional shares of common stock and preferred stock, which could
cause substantial dilution to our existing shareholders.
Additionally, the dilutive effect of any preferred stock which we
may issue may be exacerbated given the fact that such preferred
stock may have voting rights and/or other rights or preferences
which could provide the preferred shareholders with substantial
voting control over us subsequent to the date of this filing and/or
give those holders the power to prevent or cause a change in
control, even if that change in control might benefit our
shareholders. As a result, the issuance of shares of common stock
and/or preferred stock may cause the value of our securities to
decrease.
Securities analysts may not cover, or continue to cover, our common
stock and this may have a negative impact on our common
stock’s market price.
The trading market for our common stock will depend, in part, on
the research and reports that securities or industry analysts
publish about us or our business. We do not have any control over
independent analysts (provided that we have engaged various
non-independent analysts). We currently only have a few independent
analysts that cover our common stock, and these analysts may
discontinue coverage of our common stock at any time. Further, we
may not be able to obtain additional research coverage by
independent securities and industry analysts. If no independent
securities or industry analysts continue coverage of us, the
trading price for our common stock could be negatively impacted. If
one or more of the analysts who covers us downgrades our common
stock, changes their opinion of our shares or publishes inaccurate
or unfavorable research about our business, our stock price could
decline. If one or more of these analysts ceases coverage of us or
fails to publish reports on us regularly, demand for our common
stock could decrease and we could lose visibility in the financial
markets, which could cause our stock price and trading volume to
decline.
Shareholders may be diluted significantly through our efforts to
obtain financing and satisfy obligations through the issuance of
securities.
Wherever possible, our board of
directors will attempt to use non-cash consideration to satisfy
obligations. In many instances, we believe that the non-cash
consideration will consist of shares of our common stock, preferred
stock or warrants to purchase shares of our common stock. Our board
of directors has authority, without action or vote of the
shareholders,
subject to the requirements of the NYSE
American (which generally require shareholder approval for any
transactions which would result in the issuance of more than 20% of
our then outstanding shares of common stock or voting rights
representing over 20% of our then outstanding shares of
stock),
to issue all
or part of the authorized but unissued shares of common stock,
preferred stock or warrants to purchase such shares of common
stock. In addition, we may attempt to raise capital by selling
shares of our common stock, possibly at a discount to market in the
future. These actions will result in dilution of the ownership
interests of existing shareholders and may further dilute common
stock book value, and that dilution may be material. Such issuances
may also serve to enhance existing management’s ability to
maintain control of us, because the shares may be issued to parties
or entities committed to supporting existing
management.
We are subject to the Continued Listing Criteria of the NYSE
American and our failure to satisfy these criteria may result in
delisting of our common stock.
Our common stock is currently listed on the NYSE
American. In order to maintain this listing, we must maintain
certain share prices, financial and share distribution targets,
including maintaining a minimum amount of shareholders’
equity and a minimum number of public shareholders. In addition to
these objective standards, the NYSE American may delist the
securities of any issuer if, in its opinion, the issuer’s
financial condition and/or operating results appear unsatisfactory;
if it appears that the extent of public distribution or the
aggregate market value of the security has become so reduced as to
make continued listing on the NYSE American inadvisable; if the
issuer sells or disposes of principal operating assets or ceases to
be an operating company; if an issuer fails to comply with the NYSE
American’s listing requirements; if an issuer’s common
stock sells at what the NYSE American considers a
“
low selling
price
” (generally trading
below $0.20 per share for an extended period of time) and the
issuer fails to correct this via a reverse split of shares after
notification by the NYSE American (provided that issuers can also
be delisted if any shares of the issuer trade below $0.06 per
share); or if any other event occurs or any condition exists which
makes continued listing on the NYSE American, in its opinion,
inadvisable.
61
If
the NYSE American delists our common stock, investors may face
material adverse consequences, including, but not limited to, a
lack of trading market for our securities, reduced liquidity,
decreased analyst coverage of our securities, and an inability for
us to obtain additional financing to fund our
operations.
We are currently below compliance with certain continued listing
requirements of the NYSE American. If we are delisted from the NYSE
American, your ability to sell your shares of our common stock may
be limited by the penny stock restrictions, which could further
limit the marketability of your shares.
On December 27, 2016,
we received notice from the NYSE American LLC (the
“
Exchange
”)
that we were not in compliance with Section 1003(a)(iii) of the
NYSE American Company Guide (“
Company
Guide
”) since we
reported stockholders’ equity of less than $6,000,000 at
September 30, 2016 and had incurred net losses in our five most
recent fiscal years ended December 31, 2015. Receipt of
the letter does not have any immediate effect upon the listing of
our common stock, provided that in order to maintain our listing on
the Exchange, the Exchange requested that we submit a plan of
compliance (the “
Plan
”)
by January 27, 2017 addressing how we intend to regain compliance
with Section 1003(a)(iii) of the Company Guide
by
June 27,
2018
. We
submitted our Plan to the Exchange by the requested deadline, and
such plan was accepted by the Exchange on February 13,
2017. In connection with such acceptance, we have been
provided until
June 27,
2018
to regain compliance
with Section 1003(a)(iii) of the Company Guide, which requires our
stockholders’ equity to be at least $6 million. If
we do not make progress consistent with the Plan during the Plan
period or regain compliance with the applicable continued listing
standards of the Exchange by
June 27, 2018
, the Exchange will
initiate delisting proceedings as appropriate. We are
confident that we will be able to regain compliance with applicable
listing standards by
June
27, 2018
, provided that if we
are unable to regain compliance, our common stock will be delisted
from the Exchange.
On May
3, 2017, the Company received notice from the Exchange that the
Company was not in compliance with Sections 1003(a)(i) and (ii) (as
well as Section (iii) as described above) of the Company Guide
since it reported stockholders’ equity of less than
$2,000,000 at December 31, 2016 and had incurred net losses in its
five most recent fiscal years ended December 31, 2016. No new or
revised Plan was required to be submitted by the Exchange, and the
Company believes it is making progress consistent with the
Exchange-approved Plan.
If our common stock is delisted, it could come
within the definition of “
penny
stock
” as defined in the
Exchange Act and could be covered by Rule 15g-9 of the
Exchange Act. That Rule imposes additional sales practice
requirements on broker-dealers who sell securities to persons other
than established customers and accredited investors. For
transactions covered by Rule 15g-9, the broker-dealer must
make a special suitability determination for the purchaser and
receive the purchaser’s written agreement to the transaction
prior to the sale. Consequently, Rule 15g-9, if it were to
become applicable, would affect the ability or willingness of
broker-dealers to sell our securities, and accordingly would affect
the ability of stockholders to sell their securities in the public
market. These additional procedures could also limit our ability to
raise additional capital in the future.
Due to the fact that our common stock is listed on the NYSE
American, we are subject to financial and other reporting and
corporate governance requirements which increase our costs and
expenses.
We are currently required to file annual and quarterly information
and other reports with the Securities and Exchange Commission that
are specified in Sections 13 and 15(d) of the Exchange Act.
Additionally, due to the fact that our common stock is listed on
the NYSE American, we are also subject to the requirements to
maintain independent directors, comply with other corporate
governance requirements and are required to pay annual listing and
stock issuance fees. These obligations require a commitment of
additional resources including, but not limited, to additional
expenses, and may result in the diversion of our senior
management’s time and attention from our day-to-day
operations. These obligations increase our expenses and may make it
more complicated or time consuming for us to undertake certain
corporate actions due to the fact that we may require NYSE approval
for such transactions and/or NYSE rules may require us to obtain
shareholder approval for such transactions.
62
Risks Related to Our Series A Convertible Preferred
Stock
The issuance of common stock upon conversion of the Series A
Convertible Preferred stock will cause immediate and substantial
dilution to existing shareholders.
Our 66,625 outstanding shares of Series A Convertible Preferred
stock are convertible into common stock on a 100:1 basis (subject
to certain limitations on conversions described in the Series A
Preferred designation), provided that no conversion of the Series A
Convertible Preferred stock is allowed in the event the holder
thereof would beneficially own more than 9.9% of our common stock
or voting stock.
The issuance of common stock upon conversion of the Series A
Convertible Preferred stock will result in immediate and
substantial dilution to the interests of other stockholders since
the holder of the Series A Convertible Preferred stock may
ultimately receive and sell the full amount of shares issuable in
connection with the conversion of such Series A Convertible
Preferred stock. Although the Series A Convertible Preferred stock
may not be converted if such conversion would cause the holder
thereof to own more than 9.9% of our outstanding common stock, this
restriction does not prevent the holder from converting some of its
holdings, selling those shares, and then converting the rest of its
holdings, while still staying below the 9.9% limit. In this way,
the holder of the Series A Convertible Preferred stock could sell
more than this limit while never actually holding more shares than
this limit allows. If the holder of the Series A Convertible
Preferred stock chooses to do this, it will cause substantial
dilution to the then holders of our common stock.
The issuance and sale of common stock upon conversion of the Series
A Convertible Preferred stock may depress the market price of our
common stock.
All of
our Series A Convertible Preferred Stock is held by GGE, the parent
company of which is controlled by a court-appointed liquidator that
is currently taking steps to liquidate GGE’s parent
company’s assets. If GGE were to distribute our Series A
Convertible Preferred Stock in connection with such liquidation,
and/or these shares are converted in sequential conversions and
sales of such converted shares take place, the price of our common
stock may decline.
In addition, the common stock issuable upon conversion of the
Series A Convertible Preferred stock may represent overhang that
may also adversely affect the market price of our common stock.
Overhang occurs when there is a greater supply of a company’s
stock in the market than there is demand for that stock. When this
happens the price of the company’s stock will decrease, and
any additional shares which shareholders attempt to sell in the
market will only further decrease the share price. If the share
volume of our common stock cannot absorb converted shares sold by
the Series A Convertible Preferred stock holder, then the value of
our common stock will likely decrease.
The holder of our Series A Convertible Preferred stock has the
right to appoint two members to our board of
directors.
In
February 2015, by resolution of the board of directors, we formally
increased the size of our board of directors from three (3) members
to five (5) members. Pursuant to the designation of the Series A
Convertible Preferred stock, we provided the holder thereof the
right, upon notice to us, to appoint designees to fill the two (2)
vacant seats, one of which must be an independent director as
defined by applicable rules. In July 2015, David Z. Steinberg
joined our board of directors as one of the holder’s
independent director designees. The holder’s second designee
has not been appointed to date. Mr. Steinberg was formerly employed
by PM LLC, the former advisor and former affiliate of PPVAF, GOM,
RJC and GGE, from May 2009 to November 2016. The board appointment
rights continue until the holder no longer holds any of the first
tranche of shares issued to the holder. The board appointment
rights mean that assuming such rights are exercised; the common
stock shareholders may only have the right to appoint 60% (three of
five members) of our board of directors.
63
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
Office Lease
Our
corporate headquarters are located in approximately 2,100 square
feet of office space at 4125 Blackhawk Plaza Circle, Suite 201,
Danville, California 94506. We lease that space pursuant to a lease
that expires on July 31, 2018 and that has a base monthly rent of
approximately $4,800.
Oil and Gas Properties
The
Company’s oil and gas properties are described under
“
Item 1. Business -
Oil and Gas Properties
” - “
Our Core Areas
” —
“
Our Non-Core
Assets
”, “
Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of
Operations
” – “
D-J Basin Asset Reserves
Estimates
”, and “
Note 5 – Oil and Gas
Properties
” to the consolidated audited financial
statements attached hereto and “
Production Volumes
” and
“
Supplemental
Information on Oil and Gas Producing Activities
” at
the end of the consolidated audited financial statements attached
hereto.
ITEM 3. LEGAL PROCEEDINGS
The
Company is currently not a party to any material legal proceedings
and has no current legal proceedings outstanding.
On December
18, 2015, a complaint was filed against Red Hawk Petroleum, LLC
(“
Red
Hawk
”), our wholly-owned subsidiary, in the District
Court, County of Weld, State of Colorado (Case Number: 2015CV31079)
(the “
Court
”), pursuant to
which Liberty Oilfield Services, LLC (“
Liberty
”) made various
claims against Red Hawk in connection with certain completion
services provided by Liberty to Red Hawk in November and December
2014. The complaint alleged causes of action for foreclosure of
lien, breach of contract, quantum meruit and account stated, and
sought payment of amounts allegedly owed, pre- and post-judgment
interest, attorneys’ fees and court costs in connection with
Red Hawk’s alleged failure to pay Liberty approximately $2.9
million in fees due for completion services provided by
Liberty.
On May 12, 2016, the
Company and Liberty entered into a settlement agreement, pursuant
to which the Company paid Liberty $750,000 and issued 245,000
fully-vested shares of restricted Company common stock, valued at
$588,000, based on the market price on the grant date, as full
settlement of all amounts due for the services previously rendered,
for which the Company owed approximately $2.6
million.
Although we may,
from time to time, be involved in litigation and claims arising out
of our operations in the normal course of business, other than the
Liberty matter described above, we are not currently a party to any
material legal proceeding. In addition, other than the Liberty
matter, we are not aware of any material legal or governmental
proceedings against us, or contemplated to be brought against
us.
ITEM 4. MINE SAFETY DISCLOSURES.
Not
applicable
64
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
Market Information
Our
common stock traded on the OTC Bulletin Board over-the-counter
market from January 13, 2003 to September 9, 2013. On September 10,
2013, the Company’s shares of common stock commenced trading
on the NYSE American under the ticker symbol “
PED.
”
The
following high and low sales prices of our common stock, reflects
inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
|
Quarter
Ended
|
High
|
Low
|
|
March 31,
2017
|
$
1.34
|
$
0.84
|
|
June 30,
2017
|
1.69
|
0.51
|
|
September 30,
2017
|
0.91
|
0.55
|
|
December 31,
2017
|
0.67
|
0.27
|
|
|
|
|
|
March 31,
2016
|
$
3.20
|
$
1.50
|
|
June 30,
2016
|
4.08
|
1.60
|
|
September 30,
2016
|
3.20
|
1.20
|
|
December 31,
2016
|
2.10
|
0.90
|
|
|
|
|
Shareholders
As of
March 27, 2018, there were approximately 748 holders of record of
our common stock, not including any persons who hold their stock in
“
street
name,
” and one holder of our preferred
stock.
Common Stock
The
Company is authorized to issue 200,000,000 shares of common stock
with $0.001 par value per share. Holders of shares of common stock
are entitled to one vote per share on each matter submitted to a
vote of shareholders. In the event of liquidation, holders of
common stock are entitled to share pro rata in the distribution of
assets remaining after payment of liabilities, if any. Holders of
common stock have no cumulative voting rights, and, accordingly,
the holders of a majority of the outstanding shares have the
ability to elect all of the directors of the Company. Holders of
common stock have no preemptive or other rights to subscribe for
shares. Holders of common stock are entitled to such dividends as
may be declared by the Board out of funds legally available
therefore. The outstanding shares of common stock are validly
issued, fully paid and non-assessable.
Preferred Stock
The
Company is authorized to issue 100,000,000 shares of preferred
stock, $0.001 par value per share, of which 66,625 shares have been
designated “
Series A
Convertible Preferred Stock
” (the “
Series A Preferred
”). On
February 23, 2015 (the “
Original Issuance Date
”),
the Company issued all 66,625 shares of Series A Preferred to
Golden Globe Energy (US), LLC (“
GGE
”) in connection with
the GGE Acquisition, all of which shares remain issued and
outstanding as of the date of this filing.
65
The
66,625 shares of Series A Preferred issued to GGE (i) had a
liquidation preference senior to all of the Company’s common
stock equal to $400 per share (the “
Liquidation Preference
”)
prior to the date the Shareholder Approval (defined below) was
received, (ii) accrued an annual dividend equal to 10% of their
Liquidation Preference, payable annually from the date of issuance
(the “
Dividend
”) prior to the
date the Shareholder Approval (defined below) was received, (iii)
vote together with the common stock on all matters, with each share
having one (1) vote, and (iv) since the date of the Shareholder
Approval are convertible into common stock of the Company on a
100:1 basis. On October 7, 2015, the Company obtained
shareholder approval of the issuance of the Company’s common
stock upon conversion of the Series A Preferred, and other related
matters (the “
Shareholder Approval
”).
Notwithstanding the above, no conversion is allowed in the event
the holder thereof would beneficially own more than 9.9% of the
Company’s common stock or voting stock (see
“
Part
I
” – “
Item 1A. Risk Factors
”,
including “
The
issuance and sale of common stock upon conversion of the Series A
Convertible Preferred stock may depress the market price of our
common stock
”, and other risk factors related to our
Series A Convertible Preferred stock).
Additionally, Golden Globe Energy (US), LLC, which
we refer to as GGE, the sole holder of our Series A Preferred
stock, has the right pursuant to the purchase agreement with GGE
and the certificate of designation designating the Series A
Preferred, upon notice to us, voting separately as a single class,
to appoint designees to fill two (2) seats on our board of
directors, one of which must be an independent director as defined
by applicable rules and the exclusive right, voting the Series A
Preferred Stock as sole stockholder thereof, separately as a single
class, to elect such two (2) nominees to the board of directors. On
July 15, 2015, at the request of GGE the board of directors
appointed David Z. Steinberg as a member of the board of directors.
At the time of appointment, the board of directors made the
affirmative determination that Mr. Steinberg was independent
pursuant to applicable NYSE American and Securities and Exchange
Commission rules and regulations. Mr. Steinberg serves as one of
GGE’s representatives on the Company’s board of
directors. The board of directors appointment rights continue until
GGE no longer holds any of the Tranche One Shares (defined and
described in greater detail under “
Item 13. Certain
Relationships and Related Transactions, and Director
Independence
” —
“
Agreements with
Related Persons
” —
“
Golden Globe Energy
(US), LLC
”). To date, GGE
has not provided notice to PEDEVCO regarding the appointment of the
second member to the board of directors, other than Mr.
Steinberg.
All Series A Preferred Stock nominee members on
our board of directors are required to immediately resign at the
option of the other members of our board of directors upon such
time as the rights of the Series A Preferred Stock holder to
appoint members to our board of directors expires. For so long as
the board appointment rights remain in effect, if for any reason a
Series A Preferred Stock nominee on our board of directors resigns
or is otherwise removed from the board of directors, then his or
her replacement shall be a person elected by the remaining Series A
Preferred Stock nominee or the holder of the Series A Preferred
Stock.
The board appointment rights continue until the
holder no longer holds any of the first tranche of shares issued to
the holder. The board appointment rights continue until the holder
no longer holds any of the first tranche of shares issued to the
holder.
Dividend Policy
We have never
declared or paid any dividends on our common stock and do not
anticipate that we will pay dividends in the foreseeable future.
Any payment of cash dividends on our common stock in the future
will be dependent upon the amount of funds legally available, our
earnings, if any, our financial condition, our anticipated capital
requirements and other factors that the board of directors may
think are relevant. However, we currently intend for the
foreseeable future to follow a policy of retaining all of our
earnings, if any, to finance the development and expansion of our
business and, therefore, do not expect to pay any dividends on our
common stock in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation
Plans
The
following table sets forth information, as of December 31, 2017,
with respect to our compensation plans under which common stock is
authorized for issuance.
66
EQUITY COMPENSATION PLAN INFORMATION
|
Plan
Category
|
Number of securities to be issued upon
exercise of outstanding options, warrants and
rights
(A)
|
Weighted-average exercise price of outstanding
options, warrants and rights
(B)
|
Number of securities remaining available for
future issuance under equity compensation plans (excluding
securities reflected in Column A)
(C)
|
|
|
|
|
|
|
Equity compensation
plans approved by shareholders (1)
|
653,059
|
$
3.37
|
82,170
(2)
|
|
Equity compensation
plans not approved by shareholders (3)
|
1,322,042
|
$
7.26
|
-
|
|
Total
|
1,975,101
|
$
5.97
|
82,170
|
|
(1)
|
Consists
of (i) options to purchase 31,016 shares of common stock issued and
outstanding under the Pacific Energy Development Corp. 2012 Amended
and Restated Equity Incentive Plan, (ii) options to purchase 343
shares of common stock issued and outstanding under the Blast
Energy Services, Inc. 2009 Incentive Plan, and (iii) options to
purchase 621,700 shares of common stock issued and outstanding
under the PEDEVCO Corp. 2012 Amended and Restated Equity Incentive
Plan.
|
|
(2)
|
Consists
of 82,170 shares of common stock reserved and available for
issuance under the PEDEVCO Corp. 2012 Amended and Restated Equity
Incentive Plan.
|
|
(3)
|
Consists
of (i) options to purchase 90,668 shares of common stock granted by
Pacific Energy Development Corp. to employees and consultants of
the company in October 2011 and June 2012, and (ii) warrants to
purchase 1,231,374 shares of common stock granted by PEDEVCO Corp.
to placement agents, lenders, investors and consultants between
March 2013 and May 2016.
|
Stock Transfer Agent
Our
stock transfer agent is First American Stock Transfer, located at
4747 N. 7th Street, Suite 170, Phoenix, AZ 85014.
Recent Sales of Unregistered Securities
None.
Recent Sales of Registered Securities
None.
Use of Proceeds From Sale of Registered Securities
Our
Registration Statement on Form S-3 (Reg. No. 333-214415) in
connection with the sale by us of up to $100 million in securities
(common stock, preferred stock, warrants and units) was declared
effective by the Securities and Exchange Commission on January 17,
2017.
67
On
September 29, 2016, we entered into an At Market Issuance Sales
Agreement (the “
Sales Agreement
”) with
National Securities Corporation (“
NSC
”), a wholly owned
subsidiary of National Holdings Corporation (NasdaqCM:NHLD),
pursuant to which the Company may issue and sell shares of its
common stock, having an aggregate offering price of up to
$2,000,000 (the “
Shares
”) from time to
time, as the Company deems prudent, through NSC (the
“
Offering
”)
(of which $1.359 million remains available for
issuance, subject to limitation under the SEC’s “Baby
Shelf Rules”)
. Upon delivery of a placement notice and
subject to the terms and conditions of the Sales Agreement, NSC may
sell the Shares by methods deemed to be an “at the market
offering” as defined in Rule 415 promulgated under the
Securities Act.
With
the Company’s prior written approval, NSC may also sell the
Shares by any other method permitted by law, including in
negotiated transactions. The Company may elect not to issue and
sell any Shares in the Offering and the Company or NSC may suspend
or terminate the offering of Shares upon notice to the other party
and subject to other conditions. NSC will act as sales agent on a
commercially reasonable efforts basis consistent with its normal
trading and sales practices and applicable state and federal law,
rules and regulations and the rules of the NYSE
American.
The
Company has agreed to pay NSC commissions for its services in
acting as agent in the sale of the Shares in the amount equal to
3.0% of the gross sales price of all Shares sold pursuant to the
Agreement.
The Company also paid
various expenses in connection with the offering, including
reimbursing $30,000 of NSC’s legal fees, which has been paid
to date. The Company has also agreed to provide NSC with customary
indemnification and contribution rights
.
The
Company has used, and intends to use, the net proceeds from the
offering to fund development and for working capital and general
corporate purposes, including general and administrative purposes.
The Company is not obligated to make any sales of common stock
under the Sales Agreement, and no assurance can be given that the
Company will sell any additional shares under the Sales Agreement
(other than as described below), or, if it does, as to the price or
amount of Shares that it will sell, or the dates on which any such
sales will take place.
The
Company has filed a final prospectus in connection with such
offering with the SEC (as part of the Form S-3 registration
statement). To date, we have sold an aggregate of 590,335 shares of
common stock under the At Market Issuance Sales Agreement and the
associated prospectus at prices ranging from $0.90 to $1.12 per
share for an aggregate purchase price of $640,000, to which an
underwriter’s fee of 3.0% was applied, leaving approximately
$1.36 million remaining available for issuance thereunder, subject
to limitation under the SEC’s “Baby Shelf
Rules”.
No
payments for our expenses will be made in connection with the
offering described above directly or indirectly to (i) any of our
directors, officers or their associates, (ii) any person(s) owning
10% or more of any class of our equity securities or (iii) any of
our affiliates. We plan to use the net proceeds from the offering
as described in our final prospectus filed with the SEC pursuant to
Rule 424(b).
There
has been no material change in the planned use of proceeds from our
offering as described in our final prospectuses filed with the SEC
pursuant to Rule 424(b).
Issuer Purchases of Equity Securities
None.
ITEM 6. SELECTED FINANCIAL DATA
Not
required under Regulation S-K for “
smaller reporting
companies
.”
68
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with the
consolidated financial statements and related notes appearing
elsewhere in this Annual Report. The following discussion contains
“
forward-looking
statements
” that reflect our future plans, estimates,
beliefs and expected performance. We caution you that assumptions,
expectations, projections, intentions or beliefs about future
events may, and often do, vary from actual results and the
differences can be material. See “
Risk Factors
” and
“
Forward Looking
Statements.
”
Overview
We are
an energy company engaged primarily in the acquisition,
exploration, development and production of oil and natural gas
shale plays in the Denver-Julesberg Basin (“
D-J Basin
”) in Colorado,
which contains hydrocarbon bearing deposits in several formations,
including the Niobrara, Codell, Greenhorn, Shannon, J-Sand, and
D-Sand. As of December 31, 2017, we held approximately 10,961 net
D-J Basin acres located in Weld County, Colorado through our
wholly-owned subsidiary Red Hawk Petroleum, LLC
(“
Red
Hawk
”), which acreage is located in the Wattenberg and
Wattenberg Extension areas of the D-J Basin, which we refer to as
our “
D-J Basin
Asset.
” As of December 31, 2017, we held interests in
61 gross (17.4 net) wells in our D-J Basin Asset, of which 14 gross
(12.5 net) wells are operated by Red Hawk and are currently
producing, 25 gross (4.9 net) wells are non-operated, and 22 wells
have an after-payout interest. During the quarter-ended
December 31, 2017, the Company produced an average of approximately
189 net barrels of oil equivalent per day (“
BOEPD
”) from its D-J
Basin Asset.
We
believe that the D-J Basin shale play represents among the most
promising unconventional oil and natural gas plays in the U.S. We
plan to continue to seek additional acreage proximate to our
currently held core acreage located in the Wattenberg and
Wattenberg Extension areas of Weld County, Colorado. 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.
We have
listed below the total production volumes and total
revenue net to the Company for the years ended December 31,
2017, 2016, and 2015 attributable to our D-J Basin Asset that would
be net to our interest if reported on a consolidated basis,
including the calculated production volumes and revenue numbers for
our D-J Basin Asset held indirectly through Condor Energy
Technology LLC (“
Condor
”), an entity we
had a 20% interest in which we divested in February
2015.
|
|
For the Years Ended December 31,
|
||
|
|
2017
|
2016
|
2015
|
|
Oil
|
|
|
|
|
Total Production
(Bbls)
|
52,260
|
92,966
|
117,365
|
|
Average sales price
(per Bbl)
|
$
47.15
|
$
36.98
|
$
41.13
|
|
Natural
Gas:
|
|
|
|
|
Total Production
(Mcf)
|
100,254
|
168,555
|
224,222
|
|
Average sales price
(per Mcf)
|
$
2.97
|
$
2.04
|
$
2.16
|
|
NGL:
|
|
|
|
|
Total Production
(Mcf)
|
73,254
|
66,033
|
24,815
|
|
Average sales price
(per Mcf)
|
$
3.46
|
$
2.82
|
$
1.81
|
|
Oil
Equivalents:
|
|
|
|
|
Total Production
(Boe) (1)
|
81,178
|
132,064
|
158,870
|
|
Average Daily
Production (Boe/d)
|
222
|
362
|
435
|
|
Average Production Costs (per
Boe)
(2)
|
$
13.62
|
$
9.55
|
$
7.29
|
_________________________
|
(1)
|
Assumes
6 Mcf of natural gas and NGL equivalents to 1 barrel of
oil.
|
|
(2)
|
Excludes
workover costs, marketing, ad valorem and severance
taxes.
|
69
Detailed
information about our business plans and operations, including our
core D-J Basin Asset is contained under “
Part 1
” —
“
Item 1.
Business
” beginning on page
5
of this Annual
Report.
The reserve estimates, including PV-10, set forth
above were prepared on February 6, 2018 by Tenet Advisory Group,
LLC (“
TAG
”). TAG is an independent professional
engineering firm certified by the Texas Board of Professional
Engineers (Registration number F-18903), under the direction of Joe
C. Bullard of TAG. TAG, and its employees, have no material
interest in our Company. TAG also performs oilfield operational and
engineering services for the Company pursuant to a Contract
Operating Services Agreement, dated January 16, 2017, entered into
by and between TAG and Red Hawk, the Company’s wholly-owned
operating subsidiary . The reserve estimates were prepared by TAG
using reserve definitions and pricing requirements prescribed by
the SEC. TAG estimated the proved reserves for our properties by
performance methods and analogy. All of the proved producing
reserves attributable to producing wells and/or reservoirs were
estimated by performance methods. These performance methods, such
as decline curve analysis, utilized extrapolations of historical
production and pressure data available through December 2017 in
those cases where such data were considered to be definitive. The
data utilized were furnished to TAG by the Company or obtained from
public data sources. All of the proved developed nonproducing and
undeveloped reserves were estimated by analogy.
A
copy of the report issued by TAG is filed with this report as
Exhibit 99.1.
The
preliminary appraisal reports and changes in our reserves are
reviewed by Michael Peterson, our President and Chief Executive
Officer, for completeness of the data presented and reasonableness
of the results obtained. Mr. Peterson has over 15 years’
experience in the oil and gas industry. Once any questions have
been addressed, TAG issues the final appraisal reports, reflecting
their conclusions.
For more information regarding our oil and gas
reserves, please refer to “
Supplemental Oil and
Gas Disclosures (Unaudited)
” beginning on page
F-31
of
this Annual Report, which information is incorporated by reference
in this “
Item 2.
Properties
”, by
reference.
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.
Production Volumes
Production volumes
will directly impact our results of operations. As of December 31,
2017, we hold interests in 61 gross (17.4 net) wells in our D-J
Basin Asset, of which 14 gross (12.5 net) wells are operated by Red
Hawk and are currently producing, 25 gross (4.9 net) wells are
non-operated, and 22 wells have an after-payout
interest. During the quarter-ended December 31, 2017, the
Company produced an average of approximately 189 net barrels of oil
equivalent per day (“
BOEPD
”) from its D-J
Basin Asset. Additionally, we expect to increase production
assuming drilling success in the future as we expand operations in
our D-J Basin Asset.
70
Liquidity and Capital Resources
Liquidity
Outlook
We
expect to incur substantial expenses and generate significant
operating losses as we continue to explore for and develop our oil
and natural gas prospects, and as we opportunistically invest in
additional oil and natural gas properties, develop our discoveries
which we determine to be commercially viable and incur expenses
related to operating as a public company and compliance with
regulatory requirements.
Our
future financial condition and liquidity will be impacted by, among
other factors, the success of our exploration and appraisal
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.
Our
current liquidity uses and debt service requirements are managed
under the terms of our senior debt facility whereby we are subject
to a cash sweep of our net revenues after operating costs. The debt
service arrangement provides for budgeted general and
administrative cost allowance of $150,000 each month which we
believe is sufficient to meet our foreseeable recurring
costs. Such financing arrangement is sufficient to manage
recurring cash requirements but provides no additional funds for
extraordinary items, execution of our capital expenditure program
or the repayment of outstanding debt obligations other than our
senior debt facility. Any equity funds we are able to raise
through offerings is not subject to the cash sweep and is not
subject to payment to or approval by the senior
lenders.
Subject
to the availability of the additional funding, which is not
currently in place and requires approval of our senior lenders in
the event of a debt offering, we plan to make capital expenditures,
excluding capitalized interest and general and administrative
expense, of up to approximately $8.37 million during the period
from January 1, 2018 to December 31, 2018 in order to achieve
our plans
(with an additional 6.4 net wells to be drilled
and completed in 2019 for a combined total 2018-2019 drilling
capital budget of $34.85 million)
. We
expect our projected cash flow from operations combined with our
existing cash on hand, up to $2.0 million of gross proceeds
available from the issuance of our common shares through NSC under
our current “at the market offering”
(of which $1.359 million remains available for
issuance, subject to limitation under the SEC’s “Baby
Shelf Rules”)
, and the approximately
$18.0 million available under our current senior debt facility
will be sufficient to fund our drilling plans and our operations
through 2019, noting that
the
advancement of all or any portion of the approximately $18.0
million gross available under our current senior debt facility is
in the sole and absolute discretion of the senior lenders and no
senior lender is obligated to fund all or any part of the requested
funding
.
See
“
Part I, Item 1.
Business
” — “
Material 2016-2017
Transactions
” — “
Senior Debt
Restructuring
” and “
Part I
” –
“
Item 1A. Risk
Factors
”, including “
Our Tranche A Notes and Tranche B
Notes include various covenants, reduces our flexibility, increases
our interest expense and may adversely impact our operations and
our costs.
” 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 2018-2019 capital expenditures and/or repay or refinance
a portion or all of our outstanding debt.
Our
capital budget may be adjusted as business conditions warrant. The
amount, timing and allocation of capital expenditures are largely
discretionary and within our control. If oil and natural gas prices
continue to decline or fail to improve or costs increase
significantly, we could defer a significant portion of our budgeted
capital expenditures until later periods to prioritize capital
projects that we believe have the highest expected returns and
potential to generate near-term cash flows. We routinely monitor
and adjust our capital expenditures in response to changes in
prices, availability of financing, drilling and acquisition costs,
industry conditions, timing of regulatory approvals, availability
of rigs, success or lack of success in drilling activities,
contractual obligations, internally generated cash flows and other
factors both within and outside our control.
71
At The Market Offering
On
September 29, 2016, we entered into an At Market Issuance Sales
Agreement (the “
Sales Agreement
”) with
National Securities Corporation (“
NSC
”), a wholly owned
subsidiary of National Holdings Corporation (NasdaqCM:NHLD),
pursuant to which the Company may issue and sell shares of its
common stock, having an aggregate offering price of up to
$2,000,000 (the “
Shares
”) from time to
time, as the Company deems prudent, through NSC (the
“
Offering
”). Upon delivery
of a placement notice and subject to the terms and conditions of
the Sales Agreement, NSC may sell the Shares by methods deemed to
be an “at the market offering” as defined in Rule 415
promulgated under the Securities Act.
With
the Company’s prior written approval, NSC may also sell the
Shares by any other method permitted by law, including in
negotiated transactions. The Company may elect not to issue and
sell any Shares in the Offering and the Company or NSC may suspend
or terminate the offering of Shares upon notice to the other party
and subject to other conditions. NSC will act as sales agent on a
commercially reasonable efforts basis consistent with its normal
trading and sales practices and applicable state and federal law,
rules and regulations and the rules of the NYSE
American.
The
Company has agreed to pay NSC commissions for its services in
acting as agent in the sale of the Shares in the amount equal to
3.0% of the gross sales price of all Shares sold pursuant to the
Agreement.
The Company also paid
various expenses in connection with the offering, including
reimbursing $30,000 of NSC’s legal fees, which has been paid
to date. The Company has also agreed to provide NSC with customary
indemnification and contribution rights
.
The
Company has used, and intends to use, the net proceeds from the
offering to fund development and for working capital and general
corporate purposes, including general and administrative purposes.
The Company is not obligated to make any sales of common stock
under the Sales Agreement, and no assurance can be given that the
Company will sell any additional shares under the Sales Agreement
(other than as described below), or, if it does, as to the price or
amount of Shares that it will sell, or the dates on which any such
sales will take place.
The
Company has filed a final prospectus in connection with such
offering with the SEC (as part of the Form S-3 registration
statement). To date, we have sold an aggregate of 590,335 shares of
common stock under the At Market Issuance Sales Agreement and the
associated prospectus at prices ranging from $0.90 to $1.12 per
share for an aggregate purchase price of $641,000, to which an
underwriter’s fee of 3.0% was applied, leaving approximately
$1.36 million remaining available for issuance thereunder, subject
to limitation under the SEC’s “Baby Shelf
Rules”.
Secured Debt Funding
During
March 2014, we entered into the transactions contemplated by a Note
Purchase Agreement (the “
Note Purchase
”), between
the Company, BRe BCLIC Primary, BRe BCLIC Sub, BRe WNIC 2013 LTC
Primary, BRe WNIC 2013 LTC Sub, and RJ Credit LLC
(“
RJC
”), as investors
(collectively, the “
Investors
”), and BAM
Administrative Services LLC, as agent for the Lenders (the
“
Agent
”)
(upon notice received from the Agent on October
10, 2017, the Agent resigned as agent for the Lenders effective
December 31, 2017, and no replacement agent has been designated by
the Lenders subsequent to such date)
. Pursuant to the Note
Purchase, we sold the Investors Secured Promissory Notes in the
aggregate amount of $34.5 million (the “
Initial
Notes
”).
We
received $29,325,000 before expenses in connection with the sale of
the Initial Notes after paying the Investors an original issue
discount in connection with the sale of the Initial Notes of
$1,725,000 (5% of the balance of the Initial Notes); and an
underwriting fee of $3,450,000 (10% of the balance of the Initial
Notes). In connection with the Note Purchase, we also reimbursed
approximately $190,000 of the legal fees and expenses of the
Investors’ counsel, and paid Casimir Capital LP
(“
Casimir
”), our investment
banker in the transaction, a fee of $1,742,000, resulting in net
proceeds of approximately $27,393,000 which was received by us on
March 7, 2014.
72
From
time to time, subject to the terms and conditions of the Note
Purchase (including the requirement that we have deposited funds in
an aggregate amount of any additional requested loan into a
segregated bank account (the “
Company Deposits
”)), and
prior to the Maturity Date (defined below), we had the right to
request additional loans (to be evidenced by notes with
substantially similar terms as the Initial Notes, the
“
Subsequent
Notes
”, and together with the Initial Notes, the
“
Senior
Notes
”) from RJC, originally up to an additional $13.5
million in total or an aggregate of $50 million together with the
Initial Notes and approximately $2 million of Subsequent Notes
issued in 2014. We were required to pay original issue discounts in
the amount of 5% of the funds borrowed, underwriting fees in the
amount of 10% of the amount of the funds borrowed, reimburse
certain of the legal fees of RJC’s counsel, and pay
applicable fees to Casimir representing 5% of any funds borrowed,
in connection with funds borrowed under any Subsequent Notes. Funds
borrowed under any Subsequent Notes were only eligible to be used
by us, together with Company Deposits, for approved AFEs issued for
a well or wells to be drilled and completed on any properties
acquired in connection with the Continental Acquisition. The total
aggregate amount of any Subsequent Notes could not exceed $15.5
million and in the event we drill a dry hole, we are prohibited
from using the proceeds from the sale of any Subsequent Notes,
without the consent of RJC.
In
addition, during the year ended December 31, 2014, the Company
borrowed $1,967,000 for drilling activities (net proceeds of
$1,593,000, which was reduced from the $1,967,000 by debt discounts
of $276,000 related to underwriting fees and a 5%
original issue discount of $98,000). There were no borrowings made
under the Senior Notes during the year ended December 31, 2015. As
of December 31, 2015, there was approximately $13.5 million
gross ($11.0 million net, after origination-related fees and
expenses) available to draw down under Subsequent Notes from
RJC. The Notes are due and payable on March 7, 2017 (the
“
Maturity
Date
”), and may be repaid in full without premium or
penalty at any time. As a result of the
May 12, 2016 restructuring of the Notes and Note
Purchase as described below, effective May 12, 2016, the Company
may no longer borrow additional funds from RJC under Subsequent
Notes, and the Maturity Date of the Notes have been revised as
described below.
As
additional consideration for the initial Note Purchase transaction
and for GGE agreeing to purchase the Subsequent Notes, GGE acquired
ownership of 50% of all of our oil and gas assets and properties
acquired in connection with the Continental Acquisition, and 50% of
our interests in our Kazakhstan non-core asset.
The
Notes initially bore interest at the rate of 15% per annum (subject
to the letter agreements described below), payable monthly in
arrears, on the first business day of each month beginning April 1,
2014 (in connection with the Initial Notes), provided that upon the
occurrence of an event of default, the Notes bear interest at the
lesser of 30% per annum and the maximum legal rate of interest
allowable by law. We can prepay all or any portion of the principal
amount of Notes, without premium or penalty. The Notes include
standard and customary events of default.
Additionally, we
are required on the third business day of each month, commencing on
April 1, 2014, to prepay the Notes in an amount equal to the lesser
of (a) the outstanding principal amount of the Notes or (b)
twenty-five percent (25%) of the aggregate of all net revenues
actually received by us and our subsidiaries (other than net
revenues received by Asia Sixth, unless and to the extent received
by us in the United States) or for the immediately preceding
calendar month (or such pro rata portion of the first month the
payment is required). The Notes also provide that RJC is to be
repaid (i) accrued interest, only after all of the other Investors
are repaid any accrued interest due and (ii) principal, only after
all of the other Investors are repaid the full amount of principal
due under their Notes, and (iii) that any funding in connection
with Subsequent Notes will be made solely by RJC.
The net
proceeds from the Initial Funding were used by us (along with funds
raised through the February 2014 sale of assets which were formerly
owned by White Hawk), to purchase assets located in Weld and Morgan
Counties, Colorado, from Continental.
73
On
April 24, 2015, certain of our Investors agreed to allow us to
defer the mandatory principal repayments and interest payments due
under the Notes for the months of May and June 2015, with such
deferred amounts to be used to renew, extend, re-lease or otherwise
acquire leases, which then became additional collateral under the
Notes. The aggregate principal and interest that was deferred was
approximately $524,000, which amount has been capitalized and added
to the principal due under the Notes and is due upon maturity. The
Company was also charged a one-time deferral fee of $354,000, the
amount of the principal and interest deferred under this agreement,
of which $320,000 was expensed as additional interest and the
balance was added to the principal and due upon maturity. As
additional consideration for the deferral, on September 10,
2015, we issued warrants exercisable for an aggregate of 34,911
shares of our common stock to the Investors participating in the
deferral. Each warrant had a 3 year term and was exercisable
on a cashless basis at an exercise price of $15.00 per
share.
On
August 28, 2015, we entered into agreements with the Investors to
(i) defer until the maturity date of the Notes the mandatory
principal payments that would otherwise be due and payable by us on
payment dates occurring during the six month period of August 1,
2015 through January 31, 2016, (ii) HEARTLAND Bank agreed to change
the frequency of payment of accrued interest and mandatory
principal repayments from monthly to semi-annually, with the next
interest payment due February 1, 2016 and the next mandatory
principal repayment due August 3, 2016, and with us agreeing to
place an amount equal to 1/6th of the semi-annual principal
and interest payments due into a sinking fund starting in February
2016 which we shall pay to HEARTLAND Bank every six months when due
and owing, (iii) RJC agreed to defer all interest payments
otherwise due and payable by us to RJC during the period commencing
on August 1, 2015 through January 31, 2016 (the “
Waiver Period
”), which
deferred interest is added to principal each month during the
Waiver Period, (iv) certain other holders agreed to (a) defer until
the maturity date of their Notes 12/17ths of the interest
payments that would otherwise be due and payable by us to them on
payment dates occurring during the six month period of August 1,
2015 through January 31, 2016, and (b) have us pay in cash
5/17ths of such interest payments per month, with all deferred
interest being added to principal each month until the maturity
date of the Notes, and (v) SHIP, BRe BCLIC Sub, BRe WINIC 2013 LTC
Primary, BRe WNIC 2013 LTC Sub and RJC agreed to increase the
interest rate under their Senior Notes from 15% to 17% per annum on
all outstanding principal under their Notes during the Waiver
Period. These deferrals agreed upon with our Investors (the
“
August-January
Deferrals
”) reduced our monthly cash interest payments
and mandatory principal repayments from approximately $600,000 per
month prior to these agreements, to approximately $100,000 per
month during the Waiver Period after giving effect to the changes
agreed upon under these agreements, thereby providing us with an
estimated $500,000 per month in reduced cash flow requirements
during the Waiver Period.
As
additional consideration for these agreements and related note
amendments and deferrals, on September 10, 2015, we issued warrants
exercisable on a cash-only basis for an aggregate of 120,101 shares
to the lenders, proportionately based on their individual
principal, which grants were subject to NYSE American additional
listing approval, which has been received. The warrants had a three
year term and were exercisable on a cash-only basis at a price of
$7.50 per share. In addition, in the event the aggregate total of
principal and interest deferred in connection with the
August-January deferrals exceeded $900,000 over the Waiver Period,
within thirty days of February 1, 2016, and subject to NYSE
American additional listing approval, we were required to
proportionately grant additional warrants such that the total
aggregate number of shares of our common stock exercisable under
all warrants granted will equal the total principal and interest
deferred by such Investors divided by $7.50.
In
addition, we agreed to prepare and deliver to RJC a monthly budget
in form and substance reasonably satisfactory to RJC, and such
financial statements as RJC may reasonably request. The monthly
budget is required to include a cash flow forecast and detail of
all anticipated non-recurring expenses and non-cash budget items,
and we are required to comply with the budgeted expenses set forth
therein in all material respects, provided, however, that a
variance of less than 10% with respect to the expenses, on an
aggregate basis, is permitted.
74
On
January 29, 2016, we entered into a Letter Agreement (the
“
Letter
Agreement
”) with the Investors and the Agent. The
Letter Agreement extended by one (1) month, through February 29,
2016, the deferral of the payment of interest and principal due
under the Notes (the “
Deferral Extension
”). The
purpose of the Deferral Extension was to provide the Company with
the financial resources and runaway it believed it needed to
fully-focus upon and consummate the merger with GOM, which has now
been terminated. Specifically, pursuant to the Letter Agreement,
(i) all Investors agreed to further defer until the maturity date
of their Notes the mandatory principal payments that would
otherwise be due and payable by the Company to them on payment
dates occurring through February 29, 2016, (ii) HEARTLAND Bank
agreed to change the next scheduled semi-annual interest payment
due from February 1, 2016 to March 1, 2016 (with interest due and
payable thereafter on a semi-annual basis) and to change the next
mandatory principal repayment due date to September 3, 2016, and
the Company agreed to place an amount equal to 1/6th of the
semi-annual principal and interest payments due into a sinking fund
which the Company shall pay to HEARTLAND Bank every six months when
due and owing, and (iii) Senior Health Insurance Company of
Pennsylvania (“
SHIP
”) (as
successor-in-interest to BRe BCLIC Primary), BRe BCLIC Sub, BRe
WINIC 2013 LTC Primary, BRe WNIC 2013 LTC Sub, and RJC agreed to
(a) defer until the maturity date of their Notes and the junior
note held by RJC (the “
RJC Junior Note
”) all of
the interest payments that would otherwise be due and payable by
the Company to them in February 2016; (b) return the interest rate
under each of their Notes to 15% per annum, and the interest rate
under the RJC Junior Note to 12% cash pay per annum, effective
January 31, 2016; and (c) delay the issuance of any
“
Subsequent
Warrants
” issuable pursuant thereto to within 30 days
of March 1, 2016, subject to NYSE American additional listing
approval.
On
March 7, 2016, the Company entered into a Letter Agreement, dated
March 1, 2016 (the “
March Letter Agreement
”),
with SHIP, BRe BCLIC Sub, BRe WINIC 2013 LTC Primary, BRe WNIC 2013
LTC Sub, and RJC (collectively, the “
Original Lenders
”), and
the Agent, which extended the Deferral Extension by one (1) month,
through March 31, 2016. Pursuant to the March Letter Agreement, the
Original Lenders agreed to (i) further defer until the maturity
date of their Senior Notes the mandatory principal payments that
would otherwise be due and payable by the Company to them on
payment dates occurring through March 31, 2016, (ii) defer until
the maturity date of their Senior Notes and the RJC Junior Note all
of the interest payments that would otherwise be due and payable by
the Company to them in March 2016, with all interest amounts
deferred being added to principal on the first business day of the
month following the month in which such deferred interest is
accrued; and (iii) delay the issuance of any “
Subsequent Warrants
”
issuable pursuant thereto to within 30 days of April 1, 2016,
subject to NYSE American additional listing approval.
On April 7, 2016, we entered into a Letter
Agreement, dated April 1, 2016 (the “
Letter
Agreement
”), with the
Investors. The Letter Agreement extended by one (1) month, through
April 30, 2016, the deferral of the payment of interest and
principal due under the Senior Notes and the Note and Security
Agreement, dated April 10, 2014, as amended on February 23, 2015,
issued by the Company to RJ Credit LLC (the
“
RJC Junior
Note,
” and together with
the Senior Notes, the “
Notes
”)(the
“
Deferral
Extension
”), entered into
with the Lenders on August 28, 2015, as amended on January 29, 2016
and March 7, 2016 (the “
Original Deferral
Agreements
”).
Specifically, pursuant to the Letter Agreement, all the Lenders
agreed to: (i) further defer until the maturity date of their
Senior Notes the mandatory principal payments that would otherwise
be due and payable by the Company to them on payment dates
occurring through April 30, 2016; (ii) defer until the maturity
date of their Senior Notes and the RJC Junior Note all of the
interest payments that would otherwise be due and payable by the
Company to them in April 2016, with all interest amounts deferred
being added to principal on the first business day of the month
following the month in which such deferred interest is accrued; and
(iii) delay the issuance of any “
Subsequent
Warrants
” (as defined in
the Original Deferral Agreements) issuable pursuant thereto to
within 30 days of May 1, 2016, subject to NYSE American additional
listing approval.
On May 12, 2016, the Company entered into
Amendment No. 2 to Note and Security Agreement with RJC (the
“
Second
Amendment
”), pursuant to
which the Company and RJC agreed to amend the RJC Junior Note to
(i) capitalize all accrued and unpaid interest under the RJC Junior
Note as of the date of the parties entry into the Second Amendment,
and add it to note principal, making the current outstanding
principal amount of the RJC Junior Note $9,379,000, (ii) extend the
“
Termination
Date
” thereunder (i.e.,
the maturity date) from December 31, 2017 to July 11, 2019, (iii)
provide that all future interest accruing under the RJC Junior Note
is deferred, due and payable on the Termination Date, with all
future interest amounts deferred being added to principal on the
first business day of the month following the month in which such
deferred interest is accrued, and (iv) subordinate the RJC Junior
Note to the Senior Notes.
75
Also on
May 12, 2016, the Company entered into the Amended NPA and
undertook the transactions contemplated therein, including selling
the New Senior Notes to the Lenders as described above under
“
Part
I
” –“
Item 1. Business-Business
Operations-Material 2016-2017 Transactions
” —
“
Senior Debt
Restructuring
”. Pursuant to the Amended NPA, the
Company created new “
Tranche A Notes,
” in
substantially the same form and with similar terms as the Tranche B
Notes, with certain exceptions as described above, consisting of a
term loan issuable in tranches with a maximum aggregate principal
amount of $25,960,000, with borrowed funds accruing interest at 15%
per annum, and maturing on May 11, 2019, under which Tranche A
Notes the Company may draw up to approximately $18.0 million
additional principal in accordance with their terms, including that
the lenders thereof approve such loans at their sole
discretion (see “
Part I
” –
“
Item 1A. Risk
Factors
”, including “
Our Tranche A Notes and Tranche B
Notes include various covenants, reduces our flexibility, increases
our interest expense and may adversely impact our operations and
our costs.
”).
Amendment to PEDCO-MIEJ Note and Condor-MIEJ Note
On
February 19, 2015 (the “
MIEJ Closing Date
”), the
Company and PEDCO entered into a Settlement Agreement (the
“
MIEJ Settlement
Agreement
”) with MIEJ. MIEJ was PEDCO’s 80%
partner in Condor, and was the lender to PEDCO under that certain
Amended and Restated Secured Subordinated Promissory Note, dated
March 25, 2013, in the principal amount of $6,170,065, entered into
by PEDCO and MIEJ (the “
MIEJ Note
”). Pursuant to
the MIEJ Settlement Agreement, among other things, (i) MIEJ and
PEDCO agreed to restructure the MIEJ Note through the entry into a
new Amended and Restated Secured Subordinated Promissory Note,
dated February 19, 2015 and with an effective date of January 1,
2015 (the “
New MIEJ
Note
”), (ii) PEDCO sold its (x) full 20% interest in
Condor to MIEJ (the “
Condor Interests
”), and
(y) interests in approximately 945 net acres and interests in three
(3) wells located in PEDCO’s legacy non-core Niobrara acreage
located in Weld County, Colorado, that were directly held by PEDCO
to Condor (the “
PEDCO Direct Interests
”),
effective January 1, 2015, and (iii) Condor forgave approximately
$1.8 million in previous working interest expenses related to the
drilling and completion of certain wells operated by Condor that
was due from PEDCO, which, in summary, had the net effect of
reducing approximately $9.4 million in aggregate liabilities due
from PEDCO to MIEJ and Condor to $4.925 million, which is the new
principal amount of the New MIEJ Note. In addition, pursuant to the
MIEJ Settlement Agreement, (a) in consideration for the PEDEVCO
Senior Loan Investors releasing their security interest on the
Condor Interests and PEDCO Direct Interests, MIEJ paid $500,000 to
the PEDEVCO Senior Loan Investors as a principal reduction on the
PEDEVCO Senior Loan, which directly benefits PEDEVCO, (b) PEDCO
paid $100,000 as a principal reduction under the MIEJ Note, (c)
each of MIEJ, Condor and the Company fully released each other, and
their respective predecessors and successors in interest, parents,
subsidiaries, affiliates and assigns, and their respective
officers, directors, managers, members, agents, representatives,
servants, employees and attorneys, from every claim, demand or
cause of action arising on or before the MIEJ Closing Date, and (d)
MIEJ confirmed that the MIEJ Note was paid in full and that PEDCO
owed no amounts to MIEJ or Condor other than the principal amount
due as reflected in the New MIEJ Note.
The New
MIEJ Note was effective January 1, 2015, bears an interest rate of
10.0% per annum with no interest due until Maturity (defined below)
or except as detailed below, is secured by all of our current and
after-acquired assets, and is subordinated in every way to the
Senior Notes as well as to New Senior Lending (defined below);
however, MIEJ has no control over the cash flow of the Company, nor
is MIEJ’s consent required in connection with any
disposition, sale, or use of any assets of the Company or any of
its subsidiaries at any time in the future, provided that the
requirements of the New MIEJ Note requiring the prepayment of
interest, where applicable, as described below are followed. After
the MIEJ Closing Date, the Company may enter into a loan, or a
series of new loans or any other new non-equity investment or
assumption of indebtedness (a “
New Senior Lending
”)
which will be senior to the New MIEJ Note, without the prior
consent of MIEJ, provided that, in addition to the approximately
$35 million principal balance of the Notes, the New Senior Lending
is subject to a cap of an additional $60 million in the aggregate,
such that the total lending, debt or similar investment under such
cap shall not exceed $95 million in the aggregate (the
“
Senior Debt
Cap
”), with any portion of New Senior Lending in
excess of the Senior Debt Cap advanced first to MIEJ until the New
MIEJ Note is paid in full. The New MIEJ Note shall automatically,
and without further consent from MIEJ, be subordinated in every way
to any such New Senior Lending. Should the Company enter into any
new financing transaction that results in raising New Senior
Lending of at least $20 million in excess of the balance of the
Notes, then MIEJ has a right to be paid all interest and fees that
have accrued on the New MIEJ Note each and every time that a new
financing transaction reaches or exceeds the $20 million
threshold.
76
The New MIEJ
Note was originally due and payable on March 8, 2017, but is now
due and payable on March 8, 2019 due to an automatic maturity date
extension as a result of the May 2016 Senior Debt Restructuring,
and with such date also subject to additional automatic extensions
upon the occurrence of a Long-Term Financing or additional PEDEVCO
Senior Lending Restructuring (each as defined below) (the
“
Maturity
”). On a one-time
basis, the PEDEVCO Senior Loan may be refinanced by a new loan
(“
Long-Term
Financing
”) by one or more third party replacement
lenders (“
Replacement Lenders
”),
and in such event we are required to undertake commercially
reasonable best efforts to cause the Replacement Lenders to
simultaneously refinance both the PEDEVCO Senior Loan and the New
MIEJ Note as part of such Long-Term Financing. Despite such
efforts, should the Replacement Lenders be unable or unwilling to
include the New MIEJ Note in such financing, then the Long-Term
Financing may proceed without including the New MIEJ Note, and the
New MIEJ Note shall remain in place and shall be automatically
subordinated, without further consent of MIEJ, to such Long-Term
Financing. Furthermore, upon the occurrence of a Long-Term
Financing, the Maturity of the New MIEJ Note is automatically
extended, without further consent of MIEJ, to the same maturity
date of the Long-Term Financing (the “
Extended Maturity Date
”),
provided that the Extended Maturity Date may not exceed March 8,
2020. Additionally, upon the closing of such Long-Term Financing:
(a) the Long-Term Financing is required to be subject to the Senior
Debt Cap, (b) we are required to make commercially reasonable best
efforts for the Long-Term Financing to include adequate reserves or
other payment provisions whereby MIEJ is paid all interest and fees
accrued on the New MIEJ Note commencing as of March 8, 2017 (and
annually thereafter, until such time as the New MIEJ Note is paid
in full), but in any event the Replacement Lenders are required to
agree to allow for quarterly interest payments (starting March 31,
2017) of not less than 5% per annum on the outstanding balance of
the New MIEJ Note, plus a one-time payment of accrued interest (not
to exceed $500,000) as of March 31, 2017 (the “
Subordinated Interest
Payments
”), and the remaining 5% interest shall
continue to accrue, and (c) MIEJ has the Right of Conversion
(defined below) commencing as of March 8, 2017, the original
maturity date of the New MIEJ Note. If the PEDEVCO Senior Loan
and/or New Senior Lending is not refinanced by Replacement Lenders,
but is instead refinanced, restructured or extended by the existing
PEDEVCO Senior Loan Investors (a “
PEDEVCO Senior Lending
Restructuring
”), the maturity of both the New MIEJ
Note and the PEDEVCO Senior Loan may be extended to no later than
March 8, 2019, without requiring the consent of MIEJ, provided that
(i) any such extension of the maturity date of the New MIEJ Note
past March 8, 2017 shall give MIEJ the Right of Conversion
(described below) commencing on March 8, 2017, and (ii) such
extension agreement shall include payment provisions whereby MIEJ
shall be paid all interest and fees accrued on the New MIEJ Note as
of March 8, 2018. The May 2016 Senior Debt Restructuring qualified
as a PEDEVCO Senior Lending Restructuring and the issuance of the
Tranche A Notes qualified as a New Senior Lending, the result of
which the Maturity of the New MIEJ Note has been extended to March
8, 2019. The New MIEJ Note may be prepaid any time without
penalty.
The New
MIEJ Note has a conversion feature that provides, in the event that
the final maturity of the New MIEJ Note is extended beyond March 8,
2017 for whatever reason, MIEJ has the right, at its discretion, to
have the outstanding balance of the New MIEJ Note plus any accrued
and unpaid interest thereon converted in whole or in part into our
common stock at a price (the “
Conversion Price
”) equal
to 80% of the average closing price per share of our common stock
over the then previous 60 days from the date MIEJ exercises its
conversion right (subject to adjustment for stock splits,
recapitalizations and the like)(such event, a “
Right of Conversion
”);
provided, however, that in no event shall the Conversion Price be
less than $3.00 per share (the “
Floor Price
”).
Additionally, the New MIEJ Note contains a provision preventing the
conversion of the MIEJ Note to the extent that such conversion
would result in more than 19.9% of our outstanding common stock or
voting stock being issued in aggregate upon the conversion of such
note, or otherwise require shareholder approval under the NYSE
American rules. Notwithstanding that, we agreed to include a
proposal in our proxy statement for our 2016 annual meeting of our
shareholders (the “
2016 Annual Meeting
”) for
the approval of the issuance of the maximum number of shares of
common stock issuable in connection with conversion of the New MIEJ
Note, assuming conversion at the Floor Price (the
“
Maximum Conversion
Shares
”). At the 2016 Annual Meeting held on December
28, 2016, the Company’s stockholders approved the full
conversion of the New MIEJ Note and the New MIEJ Note is now fully
convertible into our common stock in accordance with its
terms.
77
Bridge Notes
On
March 7, 2014, we entered into the Second Amendment to Secured
Promissory Notes (each, an “
Amended Note,
” and
collectively, the “
Amended Notes
”) with all
but one of the investors holding our secured subordinated
promissory notes, originally issued on March 22, 2013, referred to
herein as the “
Bridge
Notes
”.
The
Amended Notes amended the bridge notes to allow the holders thereof
the right to convert up to 100% of the outstanding and unpaid
principal amount (but in increments of not less than 25% of the
principal amount of each bridge note outstanding as of the entry
into the Amended Notes and only up to four (4) total conversions of
not less than 25% each); the additional payment-in-kind cash amount
equal to 10% of the principal amount of each holder’s bridge
note which was deferred pursuant to the first amendment to such
notes; and all accrued and unpaid interest under each bridge note
(collectively, the “
Conversion Amount
”) into
our common stock, subject to an additional listing application
regarding such common stock being approved by the NYSE American.
Upon a conversion, the applicable holder shall receive that number
of shares of common stock as is determined by dividing the
Conversion Amount by a conversion price (the “
Conversion Price
”) as
follows:
(A)
prior to June 1,
2014, the Conversion Price was $21.50 per share; and
(B)
following June 1,
2014, the denominator used in the calculation described above is
the greater of (i) 80% of the average of the closing price per
share of our publicly-traded common stock for the five (5) trading
days immediately preceding the date of the conversion notice
provided by the holder; and (ii) $5.00 per share.
Additionally, each
bridge investor who entered into the Second Amendment to Secured
Promissory Note also entered into a Subordination and Intercreditor
Agreement in favor of the Agent, subordinating and deferring the
repayment of the bridge notes, and actions in connection with the
security interests provided under the bridge notes, until full
repayment of the Notes sold pursuant to the Note Purchase in March
2014, as described in greater detail above. The Subordination and
Intercreditor Agreements also prohibit us from repaying the bridge
notes until the Notes have been paid in full, except that we are
allowed to repay the bridge notes from net proceeds received from
the sale of common or preferred stock (i) in calendar year 2014 if
such net proceeds received in such calendar year exceeds
$35,000,000, (ii) in calendar year 2015 if such net proceeds
received in such calendar year exceeds $50,000,000, and (iii) in
calendar year 2016 if such net proceeds actually received in such
calendar year exceeds $50,000,000.
Through
the date hereof, holders of $1,900,000 of the original principal
amount of the Amended Notes have exercised their option to convert
a portion or all of their Amended Notes into common stock of the
Company. We issued an aggregate of 161,803 shares of common stock
of the Company to holders of the Amended Notes upon conversion of
an aggregate of $2,221,000 in principal, accrued interest, and
payment-in-kind outstanding under their Amended Notes (the
“
Note
Conversions
”), according to the terms of the Amended
Notes. Following the Note Conversions, an aggregate principal
amount of $475,000 of the original $4 million principal amount of
the bridge notes remain issued and outstanding, plus accrued and
unpaid interest and payment-in-kind, is convertible into common
stock of the Company pursuant to the terms of the Amended
Notes.
Financial Summary
We had
total current assets of $1.4 million as of December 31, 2017,
including cash of $0.9 million, compared to total current assets of
$1.3 million as of December 31, 2016, including a cash balance
of $0.7 million.
We had
total assets of $36.4 million as of December 31, 2017 and
$58.8 million as of December 31, 2016. Included in total assets as
of December 31, 2017 and December 31, 2016 were $34.9 million and
$57.4 million, respectively, of proved oil and gas properties
subject to amortization and $-0- and $-0- million, respectively, in
unproved oil and gas properties not subject to
amortization,
78
We had
total liabilities of $73.5 million as of December 31, 2017,
including current liabilities of $3.4 million, compared to total
liabilities of $60.7 million as of December 31, 2016, including
current liabilities of $3.3 million.
We had
negative working capital of $2.0 million, total shareholders’
deficit of $37.1 million and a total accumulated deficit of $138.1
million as of December 31, 2017, compared to negative working
capital of $2.0 million, total shareholders’ deficit of $2.0
million and a total accumulated deficit of $101.7 million as of
December 31, 2016.
Results of Operations
Comparison of the Year Ended December 31, 2017 with the Year Ended
December 31, 2016
Oil and Gas Revenue.
For the year
ended December 31, 2017, we generated a total of $3,015,000 in
revenues, compared to $3,968,000 for the year ended December 31,
2016. The decrease of $953,000 was primarily due to a decline in
production from our oil and gas assets. This volume decline was a
result of a natural decline in well production and periodic wells
being shut-in.
Lease Operating Expenses.
For the
year ended December 31, 2017, lease operating expenses associated
with the oil and gas properties were $1,348,000, compared to
$1,687,000 for the year ended December 31, 2016. The decrease of
$339,000 was primarily due to lower variable lease operating
expenses associated with the lower volume resulting from the
natural decline in well production and periodic wells being
shut-in.
Exploration Expense.
For the year
ended December 31, 2017, exploration expense was $2,000
compared to $231,000 for the year ended December 31, 2016. The
decrease of $229,000 was primarily due to minimal exploration
activity undertaken by the Company in the current year due to
capital constraints.
Selling, General and Administrative
Expenses
. For the year ended December 31, 2017, selling,
general and administrative (“
SG&A
”) expenses were
$2,529,000, compared to $3,912,000 for the year ended December 31,
2016. The decrease of $1,383,000 was primarily due to austerity
measures taken by management, including (i) a reduction in payroll
costs related to a work force reduction, and (ii) the reduction of
professional and other fees and expenses, including a significant
decrease in stock compensation expense that resulted from the grant
of fewer stock awards at lower stock prices during the current
year. The components of SG&A expense are summarized below
(amounts in thousands):
|
|
For the Year
Ended
|
|
|
|
|
December
31,
|
Increase/
|
|
|
|
2017
|
2016
|
(Decrease)
|
|
Payroll and related
costs
|
$
1,099
|
$
1,331
|
$
(232
)
|
|
Stock-based
compensation expense
|
655
|
1,476
|
(821
)
|
|
Legal
fees
|
126
|
113
|
13
|
|
Accounting and
other professional fees
|
317
|
460
|
(143
)
|
|
Insurance
|
108
|
105
|
3
|
|
Travel and
entertainment
|
16
|
25
|
(9
)
|
|
Office rent,
communications and other
|
208
|
402
|
(194
)
|
|
|
$
2,529
|
$
3,912
|
$
(1,383
)
|
Depreciation, Depletion and Amortization and
Accretion (“DD&A”)
. For the year ended
December 31, 2017, DD&A costs were $3,754,000, compared to
$5,080,000 for the year ended December 31, 2016. The $1,326,000
decrease was primarily the result of lower production volumes due
to a natural decline in well production.
Impairment of Oil and Gas Properties
.
For the year ended December 31, 2017, impairment of oil and gas
properties was $18,950,000, compared to $-0- for the year ended
December 31, 2016. The $18,950,000 increase was primarily the
result of an impairment taken for 2017 resulting from a delay in
the funding necessary to support the capital expenditures used in
the reserve report for development of the proven undeveloped
acreage.
79
Gain on Settlement of Payables.
For
the year ended December 31, 2017, the gain on settlement of
payables was $-0- compared to a gain of $1,282,000 for the year
ended December 31, 2016. The gain in 2016 was related to a
Settlement Agreement entered into with Liberty for vendor
obligations that was recorded during the year ended December 31,
2016.
Loss on Write-off of Cost Method
Investment.
For the year ended December 31, 2017, loss
on write-off of cost method investment was $4,000, compared to a
loss on
write-off of cost method
investment of $-0- for the year
ended December 31, 2016. The
loss on write-off
of cost method
investment for the year ended December 31,
2017 was related to the write-off of a minor
investment.
Total Other Income (Expense).
For
the year ended December 31, 2017, other expense was $12,798,000,
compared to $13,959,000 for the year ended December 31, 2016. The
decrease in total other expense of $1,161,000 was primarily due to
lower interest expense related to the amortization of debt
discount.
Net Loss.
For the year ended
December 31, 2017, net loss was $36,370,000, compared to a net loss
of $19,619,000 for the year ended December 31, 2016. The increase
in net loss of $16,751,000 was primarily due to impairment of our
oil and gas properties partially offset by lower operating expenses
and interest expense for the reasons described above.
Cash Flows used in Operating
Activities.
We had net cash used in operating
activities of $236,000 for the year ended December 31, 2017, which
was a decrease of $5,738,000 as compared to the prior year period
of $5,974,000. This decrease was primarily due to increases in
accounts payable and accrued expenses during the current
year.
Cash Flows used in Investing
Activities.
We had net cash used in investing
activities of $-0- for the year ended December 31, 2017, which was
a decrease of $75,000 as compared to the prior year net cash used
of $75,000, due to no drilling costs in the current
year.
Cash Flows from Financing
Activities.
We
had net cash provided by financing
activities of $494,000 for the year ended December 31, 2017, which
was a decrease of $5,076,000 as compared to the prior year cash
provided of $5,570,000. This decrease was primarily a result of the
proceeds from notes payable in the prior year.
Recently Issued Accounting Pronouncements
In May 2014,
the Financial Accounting Standards Board (“
FASB
”) issued a
comprehensive new revenue recognition standard that will supersede
nearly all existing revenue recognition guidance under U.S. GAAP.
The standard’s core principle (issued as Accounting Standards
Update (“
ASU
”) 2014-09 by the
FASB), is that a company will recognize revenue when it transfers
promised goods or services to customers in an amount that reflects
the consideration to which the company expects to be entitled in
exchange for those goods or services. These may include identifying
performance obligations in the contract, estimating the amount of
variable consideration to include in the transaction price and
allocating the transaction price to each separate performance
obligation. The new guidance must be adopted using either a full
retrospective approach for all periods presented in the period of
adoption or a modified retrospective approach. In August 2015, the
FASB issued ASU No. 2015-14, which defers the effective date of ASU
2014-09 by one year, and would allow entities the option to early
adopt the new revenue standard as of the original effective date.
This ASU is effective for public reporting companies for interim
and annual periods beginning after December 15, 2017. The Company
has evaluated the adoption of the standard and due to the nature of
the Company’s oil and gas revenue agreements method there
will be no impact of the standard on its consolidated financial
statements.
80
In
April 2016, the FASB issued ASU No. 2016-10, “
Revenue from Contracts with Customers:
Identifying Performance Obligations and Licensing
”
(Topic 606). In March 2016, the FASB issued ASU No. 2016-08,
“Revenue from Contracts with Customers: Principal versus
Agent Considerations (Reporting Revenue Gross verses Net)”
(Topic 606). These amendments provide additional clarification and
implementation guidance on the previously issued ASU 2014-09,
“Revenue from Contracts with Customers”. The amendments
in ASU 2016-10 provide clarifying guidance on materiality of
performance obligations; evaluating distinct performance
obligations; treatment of shipping and handling costs; and
determining whether an entity's promise to grant a license provides
a customer with either a right to use an entity's intellectual
property or a right to access an entity's intellectual property.
The amendments in ASU 2016-08 clarify how an entity should identify
the specified good or service for the principal versus agent
evaluation and how it should apply the control principle to certain
types of arrangements. The adoption of ASU 2016-10 and ASU 2016-08
is to coincide with an entity's adoption of ASU 2014-09, which
would be adopted for interim and annual reporting periods beginning
after December 15, 2017. The Company has evaluated the
adoption of the standard and due to the nature of the
Company’s oil and gas revenue agreements method there will be
no impact of the standard on its consolidated financial
statements.
In
February 2016, the FASB issued ASU 2016-02, a new lease standard
requiring lessees to recognize lease assets and lease liabilities
for most leases classified as operating leases under previous U.S.
GAAP. The guidance is effective for fiscal years beginning after
December 15, 2018, with early adoption permitted. The Company will
be required to use a modified retrospective approach for leases
that exist or are entered into after the beginning of the earliest
comparative period in the financial statements. The Company has
evaluated the adoption of the standard and, due to only one
operating lease currently in place, there will be minimal impact of
the standard on its consolidated financial statements.
In
April 2016, the FASB issued ASU No. 2016-09, “
Compensation – Stock
Compensation
” (Topic 718). The FASB issued this update
to improve the accounting for employee share-based payments and
affect all organizations that issue share-based payment awards to
their employees. Several aspects of the accounting for share-based
payment award transactions are simplified, including: (a) income
tax consequences; (b) classification of awards as either equity or
liabilities; and (c) classification on the statement of cash flows.
The updated guidance is effective for annual periods beginning
after December 15, 2016, including interim periods within those
fiscal years. Early adoption of the update is permitted.
The Company adopted the standard as of January 1, 2017.
There was no impact of the standard on its consolidated financial
statements.
In
August 2016, the FASB issued ASU 2016-15,
“Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash
Payments”
(“
ASU 2016-15
”). ASU
2016-15 will make eight targeted changes to how cash receipts and
cash payments are presented and classified in the statement of cash
flows. ASU 2016-15 is effective for fiscal years beginning after
December 15, 2017. The new standard will require adoption on a
retrospective basis unless it is impracticable to apply, in which
case it would be required to apply the amendments prospectively as
of the earliest date practicable. The Company is currently in the
process of evaluating the impact of ASU 2016-15 on its consolidated
financial statements.
In
November 2016, the FASB issued ASU 2016-18,
“Statement of Cash Flows (Topic
230)”
, requiring that the statement of cash flows
explain the change in the total cash, cash equivalents, and amounts
generally described as restricted cash or restricted cash
equivalents. This guidance is effective for fiscal years, and
interim reporting periods therein, beginning after December 15,
2017 with early adoption permitted. The provisions of this guidance
are to be applied using a retrospective approach which requires
application of the guidance for all periods presented. The Company
is currently evaluating the impact of the new
standard.
The
Company does not expect the adoption of any recently issued
accounting pronouncements to have a significant impact on its
financial position, results of operations, or cash
flows.
81
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.
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.
Revenue Recognition.
All revenue is
recognized when persuasive evidence of an arrangement exists, the
service or sale is complete, the price is fixed or determinable and
collectability is reasonably assured. Revenue is derived from the
sale of crude oil. Revenue from crude oil sales is recognized
when the crude oil is delivered to the purchaser and collectability
is reasonably assured. We follow the “
sales method
” of
accounting for oil and natural gas revenue, which means we
recognize revenue on all natural gas or crude oil sold to
purchasers, regardless of whether the sales are proportionate to
our ownership in the property. A receivable or liability is
recognized only to the extent that we have an imbalance on a
specific property greater than our share of the expected remaining
proved reserves. If collection is uncertain, revenue is recognized
when cash is collected. We recognize reimbursements received from
third parties for out-of-pocket expenses incurred as service
revenues and account for out-of-pocket expenses as direct
costs.
Stock-Based Compensation.
Pursuant
to the provisions of FASB 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.
82
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK.
Not
required under Regulation S-K for “
smaller reporting
companies.
”
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The
audited consolidated financial statements and supplementary data
required by this Item are presented beginning on page F-1 of this
Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. 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 Securities
Exchange Act of 1934, as amended (the “
Exchange Act
”) is
recorded, processed, summarized and reported, within the time
period specified in the SEC’s rules and forms and is
accumulated and communicated to the Company’s management, as
appropriate, in order to allow timely decisions in connection with
required disclosure.
Evaluation of Disclosure Controls and Procedures
Under
the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in
Rules 13a-15I and 15d-15(e) under the Exchange Act as of the end of
the period covered by this Annual Report. Based on this evaluation,
our Chief Executive Officer and Chief Financial Officer concluded
that as of December 31, 2017, that our disclosure controls and
procedures were not effective.
Management’s Report on Internal Control Over Financial
Reporting
Management of the
Company is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s
internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with GAAP, but because of its inherent
limitations, internal control over financial reporting may not
prevent or detect misstatements. The Company’s internal
control over financial reporting includes those policies and
procedures that are designed to:
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pertain
to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
the assets of the Company;
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●
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provide
reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP,
and that receipts and expenditures of the Company are being made
only in accordance with authorizations of management and directors
of the Company; and
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●
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provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s
assets that could have a material effect on the financial
statements.
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83
Management assessed
the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2017. In making this
assessment, management used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission in Internal
Control — Integrated Framework issued in 1992. Based on our
assessment, management believes that the Company’s internal
controls over financial reporting were effective as of December 31,
2017. While there has been no positive or adverse change in the
previously effective controls in place during previous years, there
was no independent testing performed for the controls in place at
year-end and therefore the Company’s internal controls over
financial reporting cannot be confirmed to be
effective.
In
addition, the Company recognizes that the most current criteria set
forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control — Integrated Framework was
issued in 2013. The Company plans to take the following steps to
become compliant in future years to the most current
criteria:
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Perform
an assessment of the current inventory of internal controls over
financial reporting against the most current
Framework;
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Identify
any control enhancements or changes which would more effectively
address the most current Framework;
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Implement
any control enhancements; and
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Report
the effectiveness of the controls under the Integrated Framework
that was issued in 2013.
|
Changes in Internal Control Over Financial Reporting
There
were no changes in our internal controls over financial reporting
during the fourth quarter of the year ended December 31, 2017
that have materially affected or are reasonably likely to
materially affect, our internal controls over financial reporting,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Limitations on the Effectiveness of Controls
The
Company’s disclosure controls and procedures are designed to
provide the Company’s Chief Executive Officer and Chief
Financial Officer with reasonable assurances that the
Company’s disclosure controls and procedures will achieve
their objectives. However, the Company’s management does not
expect that the Company’s disclosure controls and procedures
or the Company’s internal control over financial reporting
can or will prevent all human error. A control system, no matter
how well designed and implemented, can provide only reasonable, not
absolute, assurance that the objectives of the control system are
met. Furthermore, the design of a control system must reflect the
fact that there are internal resource constraints, and the benefit
of controls must be weighed relative to their corresponding costs.
Because of the limitations in all control systems, no evaluation of
controls can provide complete assurance that all control issues and
instances of error, if any, within the Company’s company are
detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can
occur due to human error or mistake. Additionally, controls, no
matter how well designed, could be circumvented by the individual
acts of specific persons within the organization. The design of any
system of controls is also based in part upon certain assumptions
about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated
objectives under all potential future conditions.
Attestation Report of the Registered Public Accounting
Firm
This
report does not include an attestation report of our registered
public accounting firm regarding our internal controls over
financial reporting. Under SEC rules, such attestation is not
required for smaller reporting companies such as
ourselves.
ITEM 9B. OTHER INFORMATION.
None.
84
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
Executive Officers, Directors and Director Nominees
The
following table sets forth the name, age and position held by each
of our executive officers and directors. Directors are elected for
a period of one year and thereafter serve until the next annual
meeting at which their successors are duly elected by the
shareholders.
|
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
|
|
Frank
C. Ingriselli
|
|
63
|
|
Chairman
of the Board
|
|
Michael
L. Peterson
|
|
56
|
|
President
and Chief Executive Officer
|
|
Gregory
Overholtzer
|
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61
|
|
Chief
Financial Officer
|
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Clark
R. Moore
|
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45
|
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Executive
Vice President, General Counsel and Secretary
|
|
Elizabeth
P. Smith
|
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68
|
|
Director
|
|
Adam
McAfee
|
|
54
|
|
Director
|
|
David
Z. Steinberg
|
|
35
|
|
Director
|
There
is no arrangement or understanding between our directors and
executive officers and any other person pursuant to which any
director or officer was or is to be selected as a director or
officer, and there is no arrangement, plan or understanding as to
whether non-management shareholders will exercise their voting
rights to continue to elect the current board of directors (the
“
Board
”). There are also
no arrangements, agreements or understandings to our knowledge
between non-management shareholders that may directly or indirectly
participate in or influence the management of our
affairs.
GGE has
the right, pursuant to the Purchase Agreement and the certificate
of designation designating the Series A Preferred, upon notice to
the Company, to appoint designees to fill two (2) seats on our
Board of Directors, one of which must be an independent director as
defined by applicable rules. Mr. Steinberg is one of the Series A
Preferred shareholder designees to the board of directors and the
Series A Preferred stockholder has not yet designated any further
members of the board of directors at this time. The Board
appointment rights continue until GGE no longer holds any of the
Tranche One Shares (as defined in the Series A
Designation).
Business
Experience
The
following is a brief description of the business experience and
background of our current directors and executive officers. There
are no family relationships among any of the directors or executive
officers.
Frank C. Ingriselli, Chairman of the Board (Director since July
2012)
Mr. Ingriselli has served as the Chairman of the
board of directors since our acquisition of Pacific Energy
Development in July 2012, served as our Chief Executive Officer
from July 2012 to May 2016 and served as our President from July
2012 to October 2014. Mr. Ingriselli also served as the President,
Chief Executive Officer, and Director of Pacific Energy Development
since its inception in February 2011 through its July 2012
acquisition by the Company. Mr. Ingriselli began his career at
Texaco, Inc. in 1979 and held management positions in
Texaco’s Producing-Eastern Hemisphere Department, Middle
East/Far East Division, and Texaco’s International
Exploration Company. While at Texaco, Mr. Ingriselli negotiated a
successful foreign oil development investment contract in China in
1983. In 1992, Mr. Ingriselli was named President of Texaco
International Operations Inc. and over the next several years
directed Texaco’s global initiatives in exploration and
development. In 1996, he was appointed President and CEO of the
Timan Pechora Company, a Houston, Texas headquartered company owned
by affiliates of Texaco, Exxon, Amoco and Norsk Hydro, which was
developing an investment in Russia. In 1998, Mr. Ingriselli
returned to Texaco’s Executive Department with
responsibilities for Texaco’s power and natural gas
operations, merger and acquisition activities, pipeline operations
and corporate development. In August 2000, Mr. Ingriselli was
appointed President of Texaco Technology Ventures, which was
responsible for all of Texaco’s global technology initiatives
and investments. In 2001, Mr. Ingriselli retired from Texaco after
its merger with Chevron, and founded Global Venture Investments
LLC, which we refer to as GVEST, an energy consulting firm, for
which Mr. Ingriselli continues to serve as the President and Chief
Executive Officer. In February 2016, Mr. Ingriselli founded
Blackhawk Energy Ventures Inc., which we refer to as BEV, an energy
consulting firm wholly-owned by him for which Mr. Ingriselli
currently serves as President and Chief Executive Officer. We
believe Mr. Ingriselli’s positions with GVEST and
BEV require only an immaterial amount of Mr.
Ingriselli’s time and do not conflict with his roles or
responsibilities with our company. In 2005, Mr. Ingriselli
co-founded Erin Energy Corporation (NYSE: ERN) (formerly CAMAC
Energy, Inc.) an independent energy company headquartered in
Houston, Texas, and served as its President, Chief Executive
Officer and a member of its board of directors from 2005 to July
2010
and currently serves as Chairman of Erin Energy
Corporation after being re-appointed in May 2017
.
85
From 2000 to 2006, Mr. Ingriselli sat on the board
of directors of the Electric Drive Transportation Association
(where he was also Treasurer) and the Angelino Group, and was an
officer of several subsidiaries of Energy Conversion Devices Inc.,
a U.S. public corporation engaged in the development and
commercialization of environmental energy technologies. From 2001
to 2006, he was a Director and Officer of General Energy
Technologies Inc., a “
technology
facilitator
” to Chinese
industry serving the need for advanced energy technology and the
demand for low-cost high quality components, and Eletra Ltd, a
Brazilian hybrid electric bus developer. Mr. Ingriselli currently
sits on the Advisory Board of Directors of the Eurasia Foundation,
a Washington D.C.-based non-profit that funds programs that build
democratic and free market institutions in the new independent
states of the former Soviet Union, and since May 2015, as a
non-executive director and Chairman of the Board of Caspian Energy
Inc., an oil and gas exploration company operating in
Kazakhstan.
Mr.
Ingriselli graduated from Boston University in 1975 with a Bachelor
of Science degree in Business Administration. He also earned a
Master of Business Administration degree from New York University
in both Finance and International Finance in 1977 and a Juris
Doctor degree from Fordham University School of Law in
1979.
Mr.
Ingriselli brings to the board of directors nearly 40 years of
experience in the energy industry. The board of directors believes
that Mr. Ingriselli’s experience with our acquired subsidiary
Pacific Energy Development and the insights he has gained from
these experiences will benefit our future plans to evaluate and
acquire additional oil producing properties and that they qualify
him to serve as our director.
Michael L. Peterson, President and Chief Executive
Officer
Mr.
Peterson has served as our Chief Executive Officer since May 2016,
served as our Chief Financial Officer from our acquisition of
Pacific Energy Development in July 2012 to May 2016, served as our
Executive Vice President from our acquisition of Pacific Energy
Development in July 2012 to October 2014, and has served as our
President since October 2014. Mr. Peterson joined Pacific Energy
Development as its Executive Vice President in September 2011,
assumed the additional office of Chief Financial Officer in June
2012, and served as a member of our board of directors from July
2012 to September 2013. Mr. Peterson formerly served as Interim
President and CEO (from June 2009 to December 2011) and as director
(from May 2008 to December 2011) of us, as a director (from May
2006 to July 2012) of Aemetis, Inc. (formerly AE Biofuels Inc.), a
Cupertino, California-based global advanced biofuels and renewable
commodity chemicals company (AMTX), and as Chairman and Chief
Executive Officer of Nevo Energy, Inc. (NEVE) (formerly Solargen
Energy, Inc.), a Cupertino, California-based developer of
utility-scale solar farms which he helped form in December 2008
(from December 2008 to July 2012). In addition, since February
2006, Mr. Peterson has served as founder and managing partner of
California-based Pascal Management, a manager of hedge and private
equity investments, since August 2016, Mr. Peterson has served as
an independent director on the board of TrxAde Group, Inc. (OTCQB:
TRXD), a web-based pharmaceutical market platform headquartered in
Florida, and since April 2017, Mr. Peterson has served as sole
officer and director of Goodland Advanced Fuels, Inc., which is a
privately-held holding company whose sole asset is a dormant
biofuels plant located in Goodland, Kansas, each of which we
believe requires only an immaterial amount of Mr. Peterson’s
time and does not conflict with his roles or responsibilities
with us. From 2005 to 2006, Mr. Peterson co-founded and became
a managing partner of American Institutional Partners, a venture
investment fund based in Salt Lake City. From 2000 to 2004, he
served as a First Vice President at Merrill Lynch, where he helped
establish a new private client services division to work
exclusively with high net worth investors. From September 1989 to
January 2000, Mr. Peterson was employed by Goldman Sachs & Co.
in a variety of positions and roles, including as a Vice President
with the responsibility for a team of professionals that advised
and managed over $7 billion in assets. Mr. Peterson speaks Mandarin
Chinese.
Mr.
Peterson received his MBA at the Marriott School of Management and
a BS in statistics/computer science from Brigham Young
University.
86
Gregory Overholtzer, Chief Financial Officer
Mr.
Overholtzer has served as the Chief Financial Officer of the
Company since May 2016, as the Company’s Corporate Controller
from January 2012 to May 2016, and served as the Company’s
Vice President, Finance and Corporate Controller from June 2012 to
May 2016. Mr. Overholtzer began his career in 1982 as a senior
financial analyst at British Oxygen Corporation located in
Fairfield, California. In 1994, Mr. Overholtzer joined Giga-tronics
as their Chief Financial Officer. Between 1997 and 2011, Mr.
Overholtzer served as the Chief Financial Officer, Corporate
Controller or Senior Director for six different companies engaged
in various hi-tech and bio-tech industries, including Accretive
Solutions, Omni ID and Genitope Corp., all located in the San
Francisco Bay Area.
Mr.
Overholtzer received his MBA in Finance from the University of
California at Berkeley and his B.A. from UC Berkeley.
Clark R. Moore, Executive Vice President, General Counsel and
Secretary
Mr.
Moore has served as our Executive Vice President, General Counsel,
and Secretary since our acquisition of Pacific Energy Development
in July 2012 and has served as the Executive Vice President,
General Counsel, and Secretary of Pacific Energy Development since
its inception in February 2011. Mr. Moore began his career in 2000
as a corporate attorney at the law firm of Venture Law Group
located in Menlo Park, California, which later merged into Heller
Ehrman LLP in 2003. In 2004, Mr. Moore left Heller Ehrman LLP and
launched a legal consulting practice focused on representation of
private and public company clients in the energy and high-tech
industries. In September 2006, Mr. Moore joined Erin Energy
Corporation (NYSE: ERN) (formerly CAMAC Energy, Inc.), an
independent energy company headquartered in Houston, Texas, as its
acting General Counsel and continued to serve in that role through
June 2011.
Mr.
Moore received his J.D. with Distinction from Stanford Law School
and his B.A. with Honors from the University of
Washington.
Elizabeth P. Smith, Director (Director since September
2013)
Ms. Smith joined our board of directors on
September 10, 2013, immediately prior to the listing of our common
stock on the NYSE
American
. Ms.
Smith retired from Texaco Inc. as Vice President-Investor Relations
and Shareholder Services in late 2001 following its merger with
Chevron Corp. Ms. Smith was also the Corporate Compliance Officer
for Texaco and was a member of the Board of Directors of The Texaco
Foundation. Ms. Smith joined Texaco’s Legal Department in
1976. As an attorney in the Legal Department, Ms. Smith handled
administrative law matters and litigation. She served as Chairman
of the American Petroleum Institute’s Subcommittee on
Department of Energy Law for the 1983-1985 term. Ms. Smith was
appointed Director of Investor Relations for Texaco, Inc. in 1984,
and was named Vice President of the Corporate Communications
division in 1989. In 1992, Ms. Smith was elected a Vice President
of Texaco Inc. and assumed additional responsibilities as head of
that company’s Shareholder Services Group. In 1999, Ms. Smith
was named Corporate Compliance Officer for Texaco. Ms. Smith served
as a Director of Pacific Asia Petroleum, Inc. until its merger with
Erin Energy Corporation (formerly CAMAC Energy, Inc.) in April of
2010.
Ms. Smith was elected to the Board of
Finance of the Town of Darien, Connecticut, in November 2007, and
from November 2010, until November 2015 when she elected not to
seek reelection, served as the Chairman. In June of 2012, Ms. Smith
was elected a Trustee of St. Luke’s School in New Canaan,
Connecticut, and
served until June, 2017. In
2013, Ms. Smith was elected as Treasurer of the
Board of Directors of Trustees. Ms. Smith also
served
on the Financial Affairs Committee and
the Investment Committee
until June 2017
. From 2007 through 2010, Ms. Smith has also
served as a Board of Directors Member of the Community Fund of
Darien, Connecticut, and from 1996 through 2006, Ms. Smith served
on the Board of directors of INROADS/Fairfield Westchester
Counties, Inc. From 2002 through 2005, Ms. Smith served as a member
of the Board of Directors of Families With Children From
China-Greater New York, and from 2004 through 2005, she served as a
member of the Board of Directors of The Chinese Language School of
Connecticut. While at Texaco, Ms. Smith was an active member in
NIRI (National Investor Relations Institute) and the NIRI Senior
Roundtable. She has been a member and past President of both the
Investor Relations Association and the Petroleum Investor Relations
Association. Ms. Smith was a member of the Board of Directors of
Trustees of Marymount College Tarrytown from 1993 until 2001. She
was also a member of the Board of Directors of The Education and
Learning Foundation of Westchester and Putnam Counties from 1993 to
2002.
87
Ms.
Smith graduated from Bucknell University in 1971 with a Bachelor of
Arts degree, cum laude, and received a Doctor of Jurisprudence
degree from Georgetown University Law Center in 1976.
The
board of directors believes that Ms. Smith’s over 30
years’ experience in corporate compliance, investor
relations, and law in the energy industry working at a major U.S.
oil and gas company, and the insights she has gained from these
experiences, will provide crucial guidance for our future
operations and compliance efforts.
Adam McAfee, Director (Director since December 2016)
Mr. McAfee joined our board of directors on
December 28, 2016. Mr. McAfee has over 30 years of experience as an
entrepreneur, financial analyst, controller and executive with
leadership roles in mergers and acquisitions, financial planning
and analysis, project finance, operations, audit and enterprise
system implementations. Since August 2012, Mr. McAfee has served as
Chief Executive Officer of Nevo Energy, Inc., and Chief Financial
Officer between December 2008 and July 2012, a solar utility and
development company. Since October 2013, Mr. McAfee has served as
the Vice President of Finance of Aemetis, Inc. (NASDAQ: AMTX), and
between August 2011 and October 2013 served as Controller of, a
renewable fuels company. From September 2005 until July 2008, he
served as Chief Executive Officer and Director of Navitas
Corporation, an energy company, which merged with publicly traded
Pacific Asia Petroleum (PAP) in July 2008 and then as Managing
Director of Navitas Capital LLC, a spin-off company from Navitas
Corporation, managing debt and equity investments in public and
private companies. In 2003 Mr. McAfee founded Park Capital
Management, LLC, a fund that manages assets acquired through PIPE
and private equity investments in technology and renewable energy
companies, where he has served as Managing Director since November
2003. Since March 2016 Mr. McAfee has served as the General Partner
of Orchard Yield Funds LLC portfolio companies, which
manage
investments in organic almond orchards
in the Central Valley of California, and as the Managing Member of
Organic Pastures Dairy Company LLC, an organic raw milk dairy and
creamery since 2002 and various other Central Valley California
family-related farming entities since June
1983.
Mr.
McAfee spent more than eleven years in significant corporate
finance roles at Apple Computer in the Worldwide Financial Planning
and Analysis, Sales, Research and Development and Operations
divisions. Mr. McAfee currently serves as the President and
Chairman of McAfee Charitable Ventures, a private non-profit
charitable foundation, a position he has held since August 2006.
Mr. McAfee is also the Managing Member of a California Registered
Investment Advisory Firm, Tilted Funds Group LLC, a position he has
held since 2007.
Mr.
McAfee is a Certified Management Accountant. He graduated with
honors from California State University, Fresno with a
Bachelor’s of Science in business administration and finance,
and earned a Masters of Business Administration from the University
of California, Irvine. He also completed the Harvard Business
School Private Equity and Venture Capital Program. Mr. McAfee has
been a Registered Investment Advisor in California since May 2007
and passed his Series 7 exam in March 1989, Series 63 exam in May
1991, and his Series 65 exam in May 2007.
David Z. Steinberg, Director (Director since July
2015)
Mr. Steinberg joined our board of directors on
July 15, 2015.
Mr. Steinberg has been employed by
Platinum Credit Management, LLC as an investment professional since
November 2016, and was previously employed by Platinum Management
(NY) LLC, a New York based investment management firm, from May
2009 to November 2016, where he served as a portfolio manager and
headed its structured products credit group.
Mr. Steinberg received his Masters of Business
Administration degree, with a concentration in finance, cum laude,
from The New York Institute of Technology in
2009.
Mr.
Steinberg serves on the board of directors as a designee appointed
by GGE. The board of directors believes that Mr. Steinberg’s
extensive knowledge and experience in corporate debt finance and
banking in the energy industry, and the insights he has gained from
these experiences, will provide crucial guidance for our future
corporate finance efforts.
88
Director Qualifications
The
Board believes that each of our directors is highly qualified to
serve as a member of the Board. Each of the directors has
contributed to the mix of skills, core competencies and
qualifications of the Board. When evaluating candidates for
election to the Board, the Board seeks candidates with certain
qualities that it believes are important, including integrity, an
objective perspective, good judgment, and leadership skills. Our
directors are highly educated and have diverse backgrounds and
talents and extensive track records of success in what we believe
are highly relevant positions.
Family Relationships
None of
our directors are related by blood, marriage, or adoption to any
other director, executive officer, or other key
employees.
Arrangements between Officers and Directors
There
is no arrangement or understanding between our directors and
executive officers and any other person pursuant to which any
director or officer was or is to be selected as a director or
officer, except as described under “
Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters
” – “
Series A Preferred Stock Appointment
Rights
”, and there is no arrangement, plan or
understanding as to whether non-management stockholders will
exercise their voting rights to continue to elect the current board
of directors. There are also no arrangements, agreements or
understandings to our knowledge between non-management stockholders
that may directly or indirectly participate in or influence the
management of our affairs.
Other
Directorships
No
directors of the Company are also directors of issuers with a class
of securities registered under Section 12 of the Exchange Act (or
which otherwise are required to file periodic reports under the
Exchange Act).
Involvement in Certain Legal Proceedings
To the best of our knowledge, during the past ten
years, none of our directors or executive officers were involved in
any of the following:
(1)
any bankruptcy petition filed by or against any business of which
such person was a general partner or executive officer either at
the time of the bankruptcy or within two years prior to that time;
(2) any conviction in a criminal proceeding or being a named
subject to a pending criminal proceeding (excluding traffic
violations and other minor offenses); (3) being subject to any
order, judgment, or decree, not subsequently reversed, suspended or
vacated, of any court of competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting
his involvement in any type of business, securities or banking
activities; (4) being found by a court of competent jurisdiction
(in a civil action), the SEC or the Commodities Futures Trading
Commission to have violated a federal or state securities or
commodities law; (5) being the subject of, or a party to, any
Federal or State judicial or administrative order, judgment,
decree, or finding, not subsequently reversed, suspended or
vacated, relating to an alleged violation of (i) any Federal or
State securities or commodities law or regulation; (ii) any law or
regulation respecting financial institutions or insurance companies
including, but not limited to, a temporary or permanent injunction,
order of disgorgement or restitution, civil money penalty or
temporary or permanent cease-and-desist order, or removal or
prohibition order; or (iii) any law or regulation prohibiting mail
or wire fraud or fraud in connection with any business entity; or
(6) being the subject of, or a party to, any sanction or order, not
subsequently reversed, suspended or vacated, of any self-regulatory
organization (as defined in Section 3(a)(26) of the Exchange Act),
any registered entity (as defined in Section 1(a)(29) of the
Commodity Exchange Act), or any equivalent exchange, association,
entity or organization that has disciplinary authority over its
members or persons associated with a member.
89
Board Leadership Structure
Our
board of directors has the responsibility for selecting our
appropriate leadership structure. In making leadership structure
determinations, the board of directors considers many factors,
including the specific needs of our business and what is in the
best interests of our stockholders. Our current leadership
structure is comprised of a separate Chairman of the board of
directors and Chief Executive Officer ("CEO"). Mr. Frank C.
Ingriselli serves as Chairman and Mr. Michael L. Peterson serves as
Chief Executive Officer. The board of directors does not have a
policy as to whether the Chairman should be an independent
director, an affiliated director, or a member of management. Our
board of directors believes that the Company’s current
leadership structure is appropriate because it effectively
allocates authority, responsibility, and oversight between
management (the Company’s Chief Executive Officer, Mr.
Peterson) and the members of our board of directors. It does this
by giving primary responsibility for the operational leadership and
strategic direction of the Company to its Chief Executive Officer,
while enabling our Chairman to facilitate our board of
directors’ oversight of management, promote communication
between management and our board of directors, and support our
board of directors’ consideration of key governance matters.
The board of directors believes that its programs for overseeing
risk, as described below, would be effective under a variety of
leadership frameworks and therefore do not materially affect its
choice of structure.
Risk Oversight
Effective risk
oversight is an important priority of the board of directors.
Because risks are considered in virtually every business decision,
the board of directors discusses risk throughout the year generally
or in connection with specific proposed actions. The board of
directors’ approach to risk oversight includes understanding
the critical risks in our business and strategy, evaluating our
risk management processes, allocating responsibilities for risk
oversight among the full board of directors, and fostering an
appropriate culture of integrity and compliance with legal
responsibilities.
The
board of directors exercises direct oversight of strategic risks to
us. Our Audit Committee reviews and assesses our processes to
manage business and financial risk and financial reporting risk. It
also reviews our policies for risk assessment and assesses steps
management has taken to control significant risks. Our Compensation
Committee oversees risks relating to compensation programs and
policies. In each case management periodically reports to our board
of directors or the relevant committee, which provides the relevant
oversight on risk assessment and mitigation.
Director Independence
Our
board of directors has determined that each of Ms. Smith, Mr.
McAfee and Mr. Steinberg is an independent director as defined in
the NYSE American rules governing members of boards of directors or
as defined under Rule 10A-3 of the Exchange Act. Accordingly, a
majority of the members of our board of directors are independent
as defined in the NYSE American rules governing members of boards
of directors and as defined under Rule 10A-3 of the Exchange
Act.
90
Committees of our Board of Directors
On
September 5, 2013, and effective September 10, 2013, the board of
directors adopted charters for the Nominating and Corporate
Governance Committee, Compensation Committee and Audit Committee.
We currently maintain a Nominating and Corporate Governance
Committee, Compensation Committee and Audit Committee which have
the following committee members:
|
Director
|
Audit
Committee
|
Compensation
Committee
|
Nominating and
Corporate Governance Committee
|
Independent
|
|
Frank C. Ingriselli
(1)
|
|
|
|
|
|
Adam
McAfee
|
C
|
M
|
M
|
X
|
|
Elizabeth P.
Smith
|
M
|
C
|
C
|
X
|
|
David Z. Steinberg
(2)
|
|
|
|
X
|
C - Chairman of Committee.
M – Member.
(1) – Chairman of the board of directors.
(2) – Series A Preferred Stock holder nominee.
Each of
these committees has the duties described below and operates under
a charter that has been approved by our board of directors and is
posted on our website. Our website address is
http://www.pacificenergydevelopment.com. Information contained on
our website is expressly not incorporated by reference into this
Annual Report.
Audit
Committee
The audit committee selects, on behalf of our
board of directors, an independent public accounting firm to audit
our financial statements, discusses with the independent auditors
their independence, reviews and discusses the audited financial
statements with the independent auditors and management, and
recommends to the board of directors whether the audited financial
statements should be included in our annual reports to be filed
with the SEC. Mr. McAfee serves as Chair of the Audit Committee and
our board of directors has determined that Mr. McAfee is an
“
audit committee
financial expert
” as
defined under Item 407(d)(5) of Regulation S-K of the Exchange
Act.
During
the year ended December 31, 2017 the audit committee held five
meetings.
Compensation
Committee
The
compensation committee reviews and approves (a) the annual salaries
and other compensation of our executive officers, and (b)
individual stock and stock option grants. The compensation
committee also provides assistance and recommendations with respect
to our compensation policies and practices and assists with the
administration of our compensation plans. Ms. Smith serves as Chair
of the compensation committee.
During
the year ended December 31, 2017, the compensation committee held
one meeting.
91
Nominating
and Corporate Governance Committee
The
nominating and corporate governance committee assists our board of
directors in fulfilling its responsibilities by: identifying and
approving individuals qualified to serve as members of our board of
directors, selecting director nominees for our annual meetings of
stockholders, evaluating the performance of our board of directors,
and developing and recommending to our board of directors corporate
governance guidelines and oversight procedures with respect to
corporate governance and ethical conduct. Ms. Smith serves as Chair
of the nominating and corporate governance committee.
The
nominating and governance committee of the board of directors
considers nominees for director based upon a number of
qualifications, including their personal and professional
integrity, ability, judgment, and effectiveness in serving the
long-term interests of our stockholders. There are no specific,
minimum or absolute criteria for membership on the board of
directors. The committee makes every effort to ensure that the
board of directors and its committees include at least the required
number of independent directors, as that term is defined by
applicable standards promulgated by the NYSE
American
and/or the SEC.
The
nominating and governance committee may use its network of contacts
to compile a list of potential candidates. The nominating and
governance committee has not in the past relied upon professional
search firms to identify director nominees, but may engage such
firms if so desired. The nominating and governance committee may
meet to discuss and consider candidates’ qualifications and
then choose a candidate by majority vote.
The
nominating and governance committee will consider qualified
director candidates recommended in good faith by stockholders,
provided those nominees meet the requirements of NYSE
American
and applicable federal securities
law. The nominating and governance committee’s evaluation of
candidates recommended by stockholders does not differ materially
from its evaluation of candidates recommended from other
sources. The Committee will consider candidates recommended by
stockholders if the information relating to such candidates are
properly submitted in writing to the Secretary of the Company in
accordance with the manner described for stockholder proposals
under “
Stockholder
Proposals for 2018 Annual Meeting of Stockholders and 2018 Proxy
Materials
” on page 60 of our definitive proxy
statement for the 2017 Annual Meeting of stockholders. Individuals
recommended by stockholders in accordance with these procedures
will receive the same consideration received by individuals
identified to the Committee through other means.
During
the year ended December 31, 2017 the nominating and corporate
governance committee held one meeting.
Meetings of the Board of Directors and Annual Meeting
During the fiscal year that ended on December 31, 2017, the Board
held five meetings and took various other actions via the unanimous
written consent of the board of directors and the various
committees described above. All directors attended all of the board
of directors meetings and committee meetings relating to the
committees on which each director served during fiscal year 2017,
except for one meeting of the board of directors which Mr.
Steinberg was unable to attend. The Company held annual
shareholders meetings on June 26, 2014, October 7, 2015, December
28, 2016, and December 28, 2017, at which meetings all directors
were present in person or via teleconference. Each director of the
Company is expected to be present at annual meetings of
shareholders, absent exigent circumstances that prevent their
attendance. Where a director is unable to attend an annual meeting
in person but is able to do so by electronic conferencing, the
Company will arrange for the director’s participation by
means where the director can hear, and be heard, by those present
at the meeting.
92
Executive Sessions of the Board of Directors
The
independent members of our board of directors meet in executive
session (with no management directors or management present) from
time to time. The executive sessions include whatever topics the
independent directors deem appropriate.
Code of Ethics
In
2012, in accordance with SEC rules, our board of directors adopted
a Code of Business Conduct and Ethics for our directors, officers
and employees. Our board of directors believes that these
individuals must set an exemplary standard of conduct. This code
sets forth ethical standards to which these persons must adhere and
other aspects of accounting, auditing and financial compliance, as
applicable. The Code of Business Conduct and Ethics is available on
our website at www.pacificenergydevelopment.com. Please note that
the information contained on our website is not incorporated by
reference in, or considered to be a part of, this Annual
Report.
We
intend to disclose any amendments to our Code of Business Conduct
and Ethics and any waivers with respect to our Code of Business
Conduct and Ethics granted to our principal executive officer, our
principal financial officer, or any of our other employees
performing similar functions on our website
at www.pacificenergydevelopment.com, within four business days
after the amendment or waiver. In such case, the disclosure
regarding the amendment or waiver will remain available on our
website for at least 12 months after the initial disclosure.
There have been no waivers granted with respect to our Code of
Business Conduct and Ethics to any such officers or employees to
date.
Shareholder Communications
Our
stockholders and other interested parties may communicate with
members of the board of directors by submitting such communications
in writing to our Corporate Secretary, 4125 Blackhawk Plaza Circle,
Suite 201, Danville, California 94506, who, upon receipt of any
communication other than one that is clearly marked
“
Confidential,
” will note
the date the communication was received, open the communication,
make a copy of it for our files and promptly forward the
communication to the director(s) to whom it is addressed. Upon
receipt of any communication that is clearly marked
“
Confidential,
” our
Corporate Secretary will not open the communication, but will note
the date the communication was received and promptly forward the
communication to the director(s) to whom it is addressed. If the
correspondence is not addressed to any particular board member or
members, the communication will be forwarded to a board member to
bring to the attention of the board of directors.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section
16(a) of the Exchange Act requires our executive officers and
directors and persons who own more than 10% of a registered class
of our equity securities to file with the SEC initial statements of
beneficial ownership, reports of changes in ownership and annual
reports concerning their ownership in our common stock and other
equity securities, on Form 3, 4 and 5 respectively. Executive
officers, directors and greater than 10% shareholders are required
by the SEC regulations to furnish our company with copies of all
Section 16(a) reports they file.
Based
solely on our review of the copies of such reports received by us
and on written representation by our officers and directors
regarding their compliance with the applicable reporting
requirements under Section 16(a) of the Exchange Act, we believe
that with respect to the fiscal year ended December 31, 2017, our
directors, executive officers and 10% stockholders complied with
all Section 16(a) filing requirements.
93
ITEM 11. EXECUTIVE COMPENSATION
Current Executive Employment Agreements
Michael L.
Peterson.
On September 1,
2011, Pacific Energy Development, our wholly-owned subsidiary,
entered into a Consulting Agreement engaging Michael L. Peterson to
serve as Executive Vice President of Pacific Energy Development.
This Consulting Agreement was superseded by an employment offer
letter dated February 1, 2012, which employment offer letter was
later amended and restated in full on June 16, 2012 and further
amended on April 25, 2016 in connection with his promotion to the
office of Chief Executive Officer of the Company. Pursuant to Mr.
Peterson’s current employment offer letter, Mr. Peterson
serves as our company’s Chief Executive Officer and President
at a current annual base salary of $300,000, and a target
annual cash bonus of between 20% and 40% of his base salary,
awardable by the board of directors in its discretion. Mr. Peterson
previously served as a member of the board of directors and as the
Interim President and Chief Executive Officer of Blast, and
formerly as the Executive Vice President of the Company until his
promotion to the office of President in October 2014. Prior to
April 30, 2016, Mr. Peterson served as the Chief Financial Officer
of the Company.
In addition, on January 11, 2013, Mr.
Peterson’s employment offer letter was amended to revise the
termination and severance provisions to parallel those of Mr. Clark
Moore, our Executive Vice President, Secretary and General Counsel,
as described below. Mr. Peterson’s employment offer letter
amendment provides for, among other things, severance payment
provisions that would require the Company to make lump sum payments
equal to 18 months’ salary and target bonus to Mr. Peterson
in the event his employment is terminated due to his death or
disability, terminated without “
Cause
”
or if he voluntarily resigns for “
Good
Reason
” (36 months in
connection with a “
Change of
Control
”), and
continuation of benefits for up to 36 months (48 months in
connection with a “
Change of
Control
”), as such terms
are defined in the employment offer letter
amendment.
For purposes of Mr. Peterson’s employment
agreement, the term “
Cause
”
means his (1) conviction of, or plea of nolo contendere to, a
felony or any other crime involving moral turpitude; (2) fraud on
or misappropriation of any funds or property of our company or any
of its affiliates, customers or vendors; (3) act of material
dishonesty, willful misconduct, willful violation of any law, rule
or regulation, or breach of fiduciary duty involving personal
profit, in each case made in connection with his responsibilities
as an employee, officer or director of our company and which has,
or could reasonably be deemed to result in, a Material Adverse
Effect upon our company; (4) illegal use or distribution of drugs;
(5) material violation of any policy or code of conduct of our
company; or (6) material breach of any provision of the employment
agreement or any other employment, non-disclosure, non-competition,
non-solicitation or other similar agreement executed by him for the
benefit of our company or any of its affiliates, all as reasonably
determined in good faith by the board of directors of our company.
However, an event that is or would constitute
“
Cause
”
shall cease to be “
Cause
”
if he reverses the action or cures the default that constitutes
“
Cause
”
within 10 days after our company notifies him in writing that Cause
exists. No act or failure to act on Mr. Peterson’s part will
be considered “
willful
”
unless it is done, or omitted to be done, by him in bad faith or
without reasonable belief that such action or omission was in the
best interests of our company. Any act or failure to act that is
based on authority given pursuant to a resolution duly passed by
the board of directors, or the advice of counsel to our company,
shall be conclusively presumed to be done, or omitted to be done,
in good faith and in the best interests of our
company.
For purposes of the employment agreement,
“
Material Adverse
Effect
” means any event,
change or effect that is materially adverse to the condition
(financial or otherwise), properties, assets, liabilities,
business, operations or results of operations of our company or its
subsidiaries, taken as a whole.
For purposes of Mr. Peterson’s employment
agreement, “
Good
Reason
” means the
occurrence of any of the following without his written consent: (a)
the assignment to him of duties substantially inconsistent with
this employment agreement or a material adverse change in his
titles or authority; (b) any failure by our company to comply with
the compensation provisions of the agreement in any material way;
(c) any material breach of the employment agreement by our company;
or (d) the relocation of him by more than fifty (50) miles from the
location of our company’s principal office located in
Danville, California. However, an event that is or would constitute
“
Good
Reason
” shall cease to be
“
Good
Reason
” if: (i) he does
not terminate employment within 45 days after the event occurs;
(ii) before he terminates employment, we reverse the action or cure
the default that constitutes “
Good
Reason
” within 10 days
after he notifies us in writing that Good Reason exists; or (iii)
he was a primary instigator of the “
Good
Reason
” event and the
circumstances make it inappropriate for him to receive
“
Good
Reason
” termination
benefits under the employment agreement (e.g., he agrees
temporarily to relinquish his position on the occurrence of a
merger transaction he assists in negotiating).
94
For purposes of Mr. Peterson’s employment
agreement, “
Change of
Control
” means: (i) a
merger, consolidation or sale of capital stock by existing holders
of capital stock of our company that results in more than 50% of
the combined voting power of the then outstanding capital stock of
our company or its successor changing ownership; (ii) the sale, or
exclusive license, of all or substantially all of our
company’s assets; or (iii) the individuals constituting our
company’s board of directors as of the date of the employment
agreement (the “
Incumbent Board of
Directors
”) cease for any
reason to constitute at least 1/2 of the members of the board of
directors; provided, however, that if the election, or nomination
for election by our stockholders, of any new director was approved
by a vote of the Incumbent Board of Directors, such new director
shall be considered a member of the Incumbent Board of Directors.
Notwithstanding the foregoing and for purposes of clarity, a
transaction shall not constitute a Change in Control if: (w) its
sole purpose is to change the state of our company’s
incorporation; (x) its sole purpose is to create a holding company
that will be owned in substantially the same proportions by the
persons who held our company’s securities immediately before
such transaction; or (y) it is a transaction effected primarily for
the purpose of financing our company with cash (as determined by
the board of directors in its discretion and without regard to
whether such transaction is effectuated by a merger, equity
financing or otherwise).
Gregory
Overholtzer.
Effective May
1, 2016, in connection with Mr. Overholtzer’s appointment as
Chief Financial Officer of the Company, the Company entered into an
Amendment No. 1 to Employment Agreement on April 25, 2016 with Mr.
Overholtzer (the “
Amended Overholtzer
Employment Agreement
”),
which amended that certain Employment Letter Agreement dated June
16, 2012, entered into by and between the Company as
successor-in-interest to Pacific Energy Development Corp. and Mr.
Overholtzer in connection with his original employment with the
Company, and provided that the Company may terminate Mr.
Overholtzer’ s employment for any reason with thirty (30)
days prior written notice (the “
Overholtzer Employment
Agreement
”). Mr.
Overholtzer has a current annual base salary of $190,000, and is
eligible for a discretionary cash performance bonus each year of up
to 30% of his then-current annual base salary.
Clark
Moore.
Pacific Energy
Development, our wholly-owned subsidiary, has entered into an
employment agreement, dated June 10, 2011, as amended January 11,
2013, with Clark Moore, its Executive Vice President, Secretary and
General Counsel, pursuant to which, effective June 1, 2011, Mr.
Moore has been employed by Pacific Energy Development, with a
current annual base salary of $250,000, and a target
annual cash bonus of between 20% and 40% of his base salary,
awardable by the board of directors in its discretion. In addition,
Mr. Moore’s employment agreement includes, among other
things, severance payment provisions that would require the Company
to make lump sum payments equal to 18 months’ salary and
target bonus to Mr. Moore in the event his employment is terminated
due to his death or disability, terminated without
“
Cause
”
or if he voluntarily resigns for “
Good
Reason
” (36 months in
connection with a “
Change of
Control
”), and
continuation of benefits for up to 36 months (48 months in
connection with a “
Change of
Control
”), as such terms
are defined in the employment agreement. The employment agreement
also prohibits Mr. Moore from engaging in competitive activities
during and following termination of his employment that would
result in disclosure of our confidential information, but does not
contain a general restriction on engaging in competitive
activities.
The definitions of “
Cause
”
(including the applicable cure provisions associated therewith),
“
Material Adverse
Effect
”,
“
Good
Reason
” and
“
Change of
Control
” in Mr.
Moore’s employment agreement are substantially the same as in
Mr. Peterson’s employment agreement as discussed
above.
95
Equity Incentive Plans
2012 Plan
General.
On June 26, 2012, our
board of directors adopted the Blast Energy Services, Inc. 2012
Equity Incentive Plan, which was approved by our stockholders on
July 30, 2012 and subsequently renamed to the PEDEVCO Corp. 2012
Equity Incentive Plan in connection with our name change from Blast
Energy Services, Inc. to PEDEVCO Corp. The 2012 Equity Incentive
Plan provides for awards of incentive stock options, non-statutory
stock options, rights to acquire restricted stock, stock
appreciation rights, or SARs, and performance units and performance
shares. Subject to the provisions of the 2012 Equity Incentive Plan
relating to adjustments upon changes in our common stock, an
aggregate of
200,000
shares of
common stock were reserved for issuance under the 2012 Equity
Incentive Plan. On April 23, 2014, the board of directors adopted
an amended and restated 2012 Equity Incentive Plan, to increase by
500,000
shares, the number of
awards available for issuance under the plan, which was approved by
stockholders on June 27, 2014. On July 27, 2015, the board of
directors adopted an amended and restated 2012 Equity Incentive
Plan, to increase by
300,000
shares, the number of awards available for issuance under the plan,
which was approved by stockholders on October 7, 2015. On October
21, 2016, the board of directors adopted an amended and restated
2012 Equity Incentive Plan, to increase by
500,000
shares, the number of awards
available for issuance under the plan, which was approved by
stockholders on December 28, 2016. On November 6, 2017, the board
of directors adopted an amended and restated 2012 Equity Incentive
Plan, to increase by 1,500,000 shares, the number of awards
available for issuance under the plan, which was approved by
stockholders on December 28, 2017.
We
refer to the 2012 Amended and Restated Incentive Plan as the 2012
Plan.
Purpose.
Our board of directors adopted the
2012 Plan to provide a means by which our employees, directors and
consultants may be given an opportunity to benefit from increases
in the value of our common stock, to assist in attracting and
retaining the services of such persons, to bind the interests of
eligible recipients more closely to our interests by offering them
opportunities to acquire shares of our common stock and to afford
such persons stock-based compensation opportunities that are
competitive with those afforded by similar businesses.
Administration.
Unless it
delegates administration to a committee, our board of directors
administers the 2012 Plan. Subject to the provisions of the 2012
Plan, our board of directors has the power to construe and
interpret the 2012 Plan, and to determine: (a) the fair value of
common stock subject to awards issued under the 2012 Plan; (b) the
persons to whom and the dates on which awards will be granted; (c)
what types or combinations of types of awards will be granted; (d)
the number of shares of common stock to be subject to each award;
(e) the time or times during the term of each award within which
all or a portion of such award may be exercised; (f) the exercise
price or purchase price of each award; and (g) the types of
consideration permitted to exercise or purchase each award and
other terms of the awards.
Eligibility.
Incentive stock options may be
granted under the 2012 Plan only to employees of us and our
affiliates. Employees, directors and consultants of us and our
affiliates are eligible to receive all other types of awards under
the 2012 Plan.
Terms of Options and SARs.
The
exercise price of incentive stock options may not be less than the
fair market value of the common stock subject to the option on the
date of the grant and, in some cases, may not be less than 110% of
such fair market value. The exercise price of nonstatutory options
also may not be less than the fair market value of the common stock
on the date of grant.
Options
granted under the 2012 Plan may be exercisable in cumulative
increments, or “
vest,
” as determined by
our board of directors. Our board of directors has the power to
accelerate the time as of which an option may vest or be exercised.
The maximum term of options, SARs and performance shares and units
under the 2012 Plan is ten years, except that in certain
cases, the maximum term is five years. Options, SARs and
performance shares and units awarded under the 2012 Plan generally
will terminate three months after termination of the
participant’s service, subject to certain
exceptions.
96
A
recipient may not transfer an incentive stock option otherwise than
by will or by the laws of descent and distribution. During the
lifetime of the recipient, only the recipient may exercise an
option, SAR or performance share or unit. Our board of directors
may grant nonstatutory stock options, SARs and performance shares
and units that are transferable to the extent provided in the
applicable written agreement.
Terms of Restricted Stock
Awards.
Our board of directors may issue shares of
restricted stock under the 2012 Plan as a grant or for such
consideration, including services, and, subject to the
Sarbanes-Oxley Act of 2002, promissory notes, as determined in its
sole discretion.
Shares
of restricted stock acquired under a restricted stock purchase or
grant agreement may, but need not, be subject to forfeiture to us
or other restrictions that will lapse in accordance with a vesting
schedule to be determined by our board of directors. In the event a
recipient’s employment or service with us terminates, any or
all of the shares of common stock held by such recipient that have
not vested as of the date of termination under the terms of the
restricted stock agreement may be forfeited to us in accordance
with such restricted stock agreement.
Rights
to acquire shares of common stock under the restricted stock
purchase or grant agreement shall be transferable by the recipient
only upon such terms and conditions as are set forth in the
restricted stock agreement, as our board of directors shall
determine in its discretion, so long as shares of common stock
awarded under the restricted stock agreement remain subject to the
terms of such agreement.
Adjustment Provisions.
If any change is made to our
outstanding shares of common stock without our receipt of
consideration (whether through reorganization, stock dividend or
stock split, or other specified change in our capital structure),
appropriate adjustments may be made in the class and maximum number
of shares of common stock subject to the 2012 Plan and outstanding
awards. In that event, the 2012 Plan will be appropriately adjusted
in the class and maximum number of shares of common stock subject
to the 2012 Plan, and outstanding awards may be adjusted in the
class, number of shares and price per share of common stock subject
to such awards.
Effect of Certain Corporate
Events.
In the
event of (a) a liquidation or dissolution of the Company; (b) a
merger or consolidation of the Company with or into another
corporation or entity (other than a merger with a wholly-owned
subsidiary); (c) a sale of all or substantially all of the assets
of the Company; or (d) a purchase or other acquisition of more than
50% of the outstanding stock of the Company by one person or by
more than one person acting in concert, any surviving or acquiring
corporation may assume awards outstanding under the 2012 Plan or
may substitute similar awards. Unless the stock award agreement
otherwise provides, in the event any surviving or acquiring
corporation does not assume such awards or substitute similar
awards, then the awards will terminate if not exercised at or prior
to such event.
Duration, Amendment and
Termination.
Our board of directors may suspend or
terminate the 2012 Plan without stockholder approval or
ratification at any time or from time to time. Unless sooner
terminated, the 2012 Plan will terminate ten years from the date of
its adoption by our board of directors, i.e., in
June
2022.
Our
board of directors may also amend the 2012 Plan at any time, and
from time to time. However, except as it relates to adjustments
upon changes in common stock, no amendment will be effective unless
approved by our stockholders to the extent stockholder approval is
necessary to preserve incentive stock option treatment for federal
income tax purposes. Our board of directors may submit any other
amendment to the 2012 Plan for stockholder approval if it concludes
that stockholder approval is otherwise advisable.
As of
the date of this Annual Report, options to purchase
621,700
shares of common stock and
2,296,130
shares of restricted
stock have been issued under the 2012 Plan, with
82,170
shares of common stock remaining
available for issuance under the 2012 Plan. The options have a
weighted average exercise price of $
3.10
per share, and have expiration dates
ranging from 2018 to
2022
.
97
2012 Pacific Energy Development (Pre-Merger) Plan
On
February 9, 2012, prior to the Pacific Energy Development merger,
Pacific Energy Development adopted the Pacific Energy Development
2012 Equity Incentive Plan, which we refer to as the 2012
Pre-Merger Plan. We assumed the obligations of the 2012 Pre-Merger
Plan pursuant to the Pacific Energy Development merger, though the
2012 Pre-Merger Plan has been superseded by the 2012 Plan
(described above).
The
2012 Pre-Merger Plan provides for awards of incentive stock
options, non-statutory stock options, rights to acquire restricted
stock, stock appreciation rights, or SARs, and performance units
and performance shares. Subject to the provisions of the 2012
Pre-Merger Plan relating to adjustments upon changes in our common
stock, an aggregate of
100
,000
shares of common stock have been reserved for issuance under the
2012 Pre-Merger Plan.
The
board of directors of Pacific Energy Development adopted the 2012
Pre-Merger Plan to provide a means by which its employees,
directors and consultants may be given an opportunity to benefit
from increases in the value of its common stock, to assist in
attracting and retaining the services of such persons, to bind the
interests of eligible recipients more closely to our interests by
offering them opportunities to acquire shares of our common stock
and to afford such persons stock-based compensation opportunities
that are competitive with those afforded by similar
businesses.
The
exercise price of incentive stock options may not be less than the
fair market value of the common stock subject to the option on the
date of the grant and, in some cases, may not be less than 110% of
such fair market value. The exercise price of nonstatutory options
also may not be less than the fair market value of the common stock
on the date of grant. Options granted under the 2012 Pre-Merger
Plan may be exercisable in cumulative increments, or
“
vest,
”
as determined by the board of directors of Pacific Energy
Development at the time of grant.
Shares
of restricted stock could be issued under the 2012 Pre-Merger
Plan as a grant or for such consideration, including services, and,
subject to the Sarbanes-Oxley Act of 2002, promissory notes, as
determined in the sole discretion of the Pacific Energy Development
board of directors. Shares of restricted stock acquired under a
restricted stock purchase or grant agreement could, but need not,
be subject to forfeiture or other restrictions that will lapse in
accordance with a vesting schedule determined by the board of
directors of Pacific Energy Development at the time of grant. In
the event a recipient’s employment or service with the
Company terminates, any or all of the shares of common stock held
by such recipient that have not vested as of the date of
termination under the terms of the restricted stock agreement may
be forfeited to the Company in accordance with such restricted
stock agreement.
Appropriate
adjustments may be made to outstanding awards in the event of
changes in our outstanding shares of common stock, whether through
reorganization, stock dividend or stock split, or other specified
change in capital structure of the Company. In the event of
liquidation, merger or consolidation, sale of all or substantially
all of the assets of the Company, or other change in control, any
surviving or acquiring corporation may assume awards outstanding
under the 2012 Pre-Merger Plan or may substitute similar awards.
Unless the stock award agreement otherwise provides, in the event
any surviving or acquiring corporation does not assume such awards
or substitute similar awards, then the awards will terminate if not
exercised at or prior to such event.
As of
the date of this Annual Report,
31,016
options and
66,585
shares of restricted stock remain
outstanding under the 2012 Pre-Merger Plan. These options have a
weighted average exercise price of $
4.92
per share, and have expiration dates
ranging from
February 8, 2022
to June 18, 2022.
98
2009 Stock Incentive Plan
Effective July 30,
2012, our 2009 Stock Incentive Plan, which we refer to as the
2009 Plan was replaced by the 2012 Plan. The 2009 Plan was intended
to secure for us the benefits arising from ownership of our common
stock by the employees, officers, directors and consultants
of the Company. The 2009 Plan was designed to help attract and
retain for the Company and its affiliates personnel of
superior ability for positions of exceptional responsibility, to
reward employees, officers, directors and consultants for their
services and to motivate such individuals through added incentives
to further contribute to the success of the Company and its
affiliates.
Pursuant to the
2009 Plan, our board of directors (or a committee thereof) had the
ability to award grants of incentive or non-qualified options,
restricted stock awards, performance shares and other securities as
described in greater detail in the 2009 Plan to our employees,
officers, directors and consultants. The number of securities
issuable pursuant to the 2009 Plan was initially
1,482
, provided that the number of shares
available for issuance under the 2009 Plan would be increased on
the first day of each fiscal year beginning with our 2011 fiscal
year, in an amount equal to the greater of (a)
596
shares; or (b) three percent (3%) of
the number of issued and outstanding shares of the Company on the
first day of such fiscal year. The 2009 Plan was to expire in April
2019.
As of
the date of this Annual Report, 343 options remain outstanding
under the 2009 Plan. These options have a weighted average exercise
price of $
350.89
per share, and
have an expiration date ranging from May 28, 2018 to February 2,
2021.
2003 Stock Option Plan
Effective April 1,
2009, our 2003 Stock Option Plan was replaced by the 2009 Plan. The
number of securities originally grantable pursuant to the 2003
Stock Option Plan were
2,381
.
Any options granted pursuant to the 2003 Stock Option Plan remain
in effect until they otherwise expire or are terminated according
to their terms. As of the date of this Annual Report, no options
remain outstanding under the 2003 Plan.
Compensation of Executive Officers
The
following table sets forth the compensation for services paid in
all capacities for the two fiscal years ended December 31, 2017 and
2016 to (a) Frank C. Ingriselli, our Chairman and former Chief
Executive Officer, (b) Michael L. Peterson and Clark R. Moore, who
were the next two most highly compensated executive officers at
fiscal year-end 2017 and 2016, and (c) Gregory Overholtzer, who was
appointed as our Chief Financial Officer effective May 1, 2016
(collectively, the “
Named Executive
Officers
”). There were no other executive officers who
received compensation in excess of $100,000 in either 2017 or
2016.
99
Summary Compensation Table
|
Name and Principal Position
|
|
Fiscal Year Ended 31-Dec
|
Salary ($)
|
Bonus ($)
|
Option Awards ($)(1)
|
Stock Awards ($)
|
All
Other Compensation
($)
|
Total($)
|
|
|
|
|
|
|
|
|
|
|
|
Frank
C. Ingriselli (2)
|
|
2017
|
-
|
-
|
-
|
46,320
(3)
|
25,000
(4)
|
71,320
|
|
Chairman
of the Board
|
|
2016
|
111,000
|
-
|
30,862
(5)
|
60,000
(6)
|
151,667
(7)
|
353,529
|
|
|
|
|
|
|
|
|
|
|
|
Michael
L. Peterson
|
|
2017
|
300,000
|
14,000
|
-
|
126,608
(8)
|
-
|
440,608
|
|
Chief
Executive Officer and President
|
|
2016
|
300,000
|
10,000
|
33,066
(9)
|
313,500
(10)
|
-
|
656,566
|
|
|
|
|
|
|
|
|
|
|
|
Clark
R. Moore
|
|
2017
|
250,000
|
10,000
|
-
|
80,288
(11)
|
-
|
340,288
|
|
Executive
Vice President, General Counsel and Secretary
|
|
2016
|
250,000
|
8,000
|
30,862
(12)
|
236,500
(13)
|
-
|
525,362
|
|
|
|
|
|
|
|
|
|
|
|
Gregory
Overholtzer (14)
|
|
2017
|
190,000
|
6,000
|
29,141
(15)
|
-
|
-
|
225,141
|
|
Chief
Financial Officer
|
|
2016
|
190,000
|
6,000
|
56,663
(16)
|
-
|
-
|
252,663
|
Does not include perquisites and other personal benefits or
property, unless the aggregate amount of such compensation is more
than $10,000. No executive officer earned any non-equity
incentive plan compensation or nonqualified deferred compensation
during the periods reported above.
(1)
Amounts in this column represent the aggregate grant date fair
value of awards computed in accordance with Financial Accounting
Standards Board Accounting Standard Codification Topic 718. For
additional information on the valuation assumptions with respect to
the option grants, refer to [Note 13] of our financial
statements for the year ended December 31, 2017. These
amounts do not correspond to the actual value that will be
recognized by the named individuals from these awards.
(2)
Mr. Ingriselli served as Chief Executive Officer of the Company
until his retirement effective May 1, 2016, after which date he
continued to serve as Chairman of the Company’s Board of
Directors.
(3)
Consists of the value of 150,000 shares of restricted common stock
granted in December 2017 at $0.3088 per share received pursuant to
the Company's board compensation plan.
(4)
Consists of amount paid to Mr. Ingriselli pursuant to the Company's
board compensation plan.
(5)
Consists of the fair value of options to purchase 28,000 shares of
common stock granted in January 2016 at an exercise price of $2.20
per share.
(6)
Consists of the value of 54,546 shares of restricted common stock
granted in December 2016 at $1.10 per share received pursuant to
the Company's board compensation plan.
(7)
Consists of (i) $1,667 paid to Mr. Ingriselli pursuant to the
Company's board compensation plan, and (ii) $150,000 paid to Global
Venture Investments Inc. ("GVEST"), an entity owned and controlled
by Mr. Ingriselli, pursuant to a transitional consulting agreement
entered into in connection with Mr. Ingriselli's retirement from
the Company that expired on July 31, 2016.
(8)
Consists of the value of 410,000 shares of restricted common stock
granted in December 2017 at $0.3088 per share.
(9)
Consists of the fair value of options to purchase 30,000 shares of
common stock granted in January 2016 at an exercise price of $2.20
per share.
(10)
Consists of the value of (i) 60,000 shares of restricted common
stock granted in January 2016 at $2.20 per share, and (ii) 165,000
shares of restricted common stock granted in December 2016 at $1.10
per share.
(11)
Consists of the value of 260,000 shares of restricted common stock
granted in December 2017 at $0.3088 per share.
(12)
Consists of the fair value of options to purchase 28,000 shares of
common stock granted in January 2016 at an exercise price of $2.20
per share.
(13)
Consists of the value of (i) 55,000 shares of restricted common
stock granted in January 2016 at $2.20 per share, and (ii) 105,000
shares of restricted common stock granted in December 2016 at $1.10
per share.
(14)
Mr. Overholtzer was appointed Chief Financial Officer of the
Company effective May 1, 2016.
(15)
Consists of the fair value of options to purchase 150,000 shares of
common stock granted in December 2017 at an exercise price of
$0.3088 per share.
(16)
Consists of the fair value of options to purchase (i) 15,000 shares
of common stock granted in January 2016 at an exercise price of
$2.20 per share, and (ii) 60,000 shares of common stock granted in
December 2016 at an exercise price of $1.10 per share.
100
Outstanding Equity Awards at Fiscal Year-End
Outstanding Equity Awards at Year Ended December 31,
2017
The
following table sets forth information as of December 31, 2017
concerning outstanding equity awards for the executive officers
named in the Summary Compensation Table.
Outstanding Equity Awards at Fiscal Year-End
|
|
Option
Awards
|
Stock
Awards
|
||||
|
Name
|
Number of
securities underlying unexercised options (#)
exercisable
|
Number of
securities underlying unexercised options (#)
unexercisable
|
Option
Exercise price ($)
|
Option
expiration date
|
Number of
shares or units of stock that have not vested (#)
|
Market value
of shares or units of stock that have not vested ($)
|
|
Frank C.
Ingriselli
|
34,827
|
-
|
$
5.10
|
5/30/2021
|
150,000
(1)
|
$
48,000
|
|
|
4,254
|
-
|
$
5.10
|
5/30/2021
|
-
|
|
|
|
37,000
|
-
|
$
3.70
|
5/30/2021
|
-
|
|
|
|
|
|
|
|
-
|
|
|
Michael L.
Peterson
|
45
|
-
|
$
672.00
|
5/28/2018
|
1,500
(2)
|
$
480
|
|
|
298
|
-
|
$
302.40
|
2/2/2021
|
33,000
(3)
|
$
10,560
|
|
|
10,000
|
-
|
$
2.40
|
10/7/2021
|
410,000
(4)
|
$
131,200
|
|
|
26,954
|
-
|
$
5.10
|
6/18/2022
|
-
|
-
|
|
|
6,380
|
-
|
$
5.10
|
6/18/2022
|
-
|
-
|
|
|
32,500
|
-
|
$
3.70
|
1/7/2020
|
-
|
-
|
|
|
30,000
|
-
|
$
2.20
|
1/7/2021
|
|
-
|
|
|
|
|
|
|
|
|
|
Gregory
Overholtzer
|
11,667
|
-
|
$
5.10
|
6/18/2022
|
|
-
|
|
|
5,000
|
-
|
$
3.70
|
1/7/2020
|
|
-
|
|
|
15,000
|
-
|
$
2.20
|
1/7/2021
|
|
-
|
|
|
1,100
|
-
|
$
3.00
|
2/8/2022
|
|
-
|
|
|
48,000
|
12,000
|
$
1.10
|
12/28/2021
|
|
-
|
|
|
-
|
150,000
|
$
0.3088
|
12/28/2022
|
|
-
|
|
|
|
|
|
|
|
|
|
Clark R.
Moore
|
18,887
|
-
|
$
5.10
|
6/18/2022
|
21,000
(3)
|
$
6,720
|
|
|
4,447
|
-
|
$
5.10
|
6/18/2022
|
260,000
(4)
|
$
83,200
|
|
|
27,000
|
-
|
$
3.70
|
1/7/2020
|
-
|
-
|
|
|
28,000
|
-
|
$
2.20
|
1/7/2021
|
-
|
-
|
|
(1)
|
Stock
award vests on May 1, 2018, subject to the holder remaining a
member of the Board of Directors of, or an employee of or
consultant to, the Company on such vesting date.
|
|
(2)
|
Stock
award vests on October 8, 2018, subject to the holder remaining an
employee of or consultant to the Company on such vesting
date.
|
|
(3)
|
Stock
award vests on June 28, 2018, subject to the holder remaining an
employee of or consultant to the Company on such vesting
date.
|
|
(4)
|
Stock
award vests 50% on June 28, 2018, 30% on December 28, 2018, and 20%
on June 28, 2019, subject to the holder remaining an employee of or
consultant to the Company on such vesting dates.
|
|
|
|
101
Issuances of Equity to Executive Officers
On
January 7, 2016, the Company granted options to purchase shares of
common stock to its executive officers at an exercise price of
$2.20 per share, pursuant to the Company’s 2012 Amended and
Restated Equity Incentive Plan and in connection with the
Company’s 2015 annual equity incentive compensation review
process, as follows: (i) an option to purchase 28,000 shares to
Chairman and then-Chief Executive Officer Frank C. Ingriselli; (ii)
an option to purchase 30,000 shares to President and Chief
Executive officer (then-Chief Financial Officer) Michael L.
Peterson; (iii) an option to purchase 28,000 shares to Executive
Vice President and General Counsel Clark R. Moore; and (iv) an
option to purchase 15,000 shares to Chief Financial Officer
(then-Vice President, Finance) Gregory Overholtzer. The options
have terms of five years and fully vest in July 2017. 50% vest six
months from the date of grant, 30% vest one year from the date of
grant, and 20% vest eighteen months from the date of
grant, all contingent upon the recipient’s continued
service with the Company.
On
January 7, 2016, the Company granted shares of its restricted
common stock to its executive officers pursuant to the
Company’s 2012 Amended and Restated Equity Incentive Plan and
in connection with the Company’s 2015 annual equity incentive
compensation review process as follows: (i) 60,000 shares to
Chairman and then-Chief Executive Officer Frank C. Ingriselli; (ii)
60,000 shares to President and Chief Executive Officer (then-Chief
Financial Officer) Michael L. Peterson; and (iii) 55,000 shares to
Executive Vice President and General Counsel Clark R. Moore. 50% of
the shares vest on the six-month anniversary of the grant date, 30%
vest on the twelve-month anniversary of the grant date, and 20%
vest on the eighteen-month anniversary of the grant date, all
contingent upon the recipient’s continued service with the
Company.
On July 5, 2016, the
Company issued 8,129 shares of common stock to Mr. Frank C.
Ingriselli, the Company’s former Chief Executive Officer and
President, and current Chairman and member of the Company’s
board of directors, in connection with the cashless net exercise of
options to purchase 28,000 shares of common stock issued under the
Company’s 2012 Equity Incentive Plan, as
amended.
On December 28, 2016, in connection with the
Company’s annual compensation review process, the Company
granted restricted stock awards to Messrs. Michael L. Peterson
(President and Chief Executive Officer) and Clark R. Moore
(Executive Vice President, General Counsel and Secretary), of
165,000 and 105,000 shares, respectively, and options to purchase
60,000 shares of common stock to Gregory Overholtzer (Chief
Financial Officer), which options have an exercise price of $1.10
per share and expire in five (5) years from the date of grant. The
restricted stock and option awards were granted under the
Company’s 2012 Equity Incentive Plan, as amended. The
restricted stock and option awards vest as follows: 50% of the
shares on the six (6) month anniversary of December 28, 2016 (the
“
Grant
Date
”); (ii) 30% on the
twelve (12) month anniversary of the Grant Date; and (iii) 20% on
the eighteen (18) month anniversary of the Grant Date, in each case
subject to the recipient of the shares or options being an employee
of or consultant to the Company on such vesting date, and subject
to the terms and conditions of a Restricted Shares Grant Agreement
or Stock Option Agreement, as applicable, entered into by and
between the Company and the recipient.
On
December 28, 2017, the Company granted 150,000 shares of restricted
Company common stock under the Company’s 2012 Amended and
Restated Equity Incentive Plan to each member of the
Company’s Board of Directors – Messrs. Ingriselli,
McAfee and Steinberg, and Ms. Smith – which shares vest on
the date in 2018 that corresponds with each director’s
original appointment date to the Company’s Board of Directors
as a non-employee director, in each case subject to the recipient
of the shares being a member of the Company’s Board of
Directors on such vesting date, and subject to the terms and
conditions of a Restricted Shares Grant Agreement entered into by
and between the Company and the recipient. These shares were
granted in accordance with the terms of the Company’s Board
Compensation Program.
102
In addition, on December 28, 2017, in connection
with the Company’s annual compensation review process, the
Company granted restricted stock awards to Messrs. Michael L.
Peterson (President and Chief Executive Officer) and Clark R. Moore
(Executive Vice President, General Counsel and Secretary), of
410,000 and 260,000 shares, respectively, and options to purchase
150,000 shares of common stock to Gregory Overholtzer (Chief
Financial Officer), which options have an exercise price of $0.3088
per share and expire in five (5) years from the date of grant. The
restricted stock and option awards were granted under the Plan, as
amended. The restricted stock and option awards vest as follows:
50% of the shares/options on the six (6) month anniversary of
December 28, 2017 (the “
Grant
Date
”); (ii) 30% on the
twelve (12) month anniversary of the Grant Date; and (iii) 20% on
the eighteen (18) month anniversary of the Grant Date, in each case
subject to the recipient of the shares or options being an employee
of or consultant to the Company on such vesting date, and subject
to the terms and conditions of a Restricted Shares Grant Agreement
or Stock Option Agreement, as applicable, entered into by and
between the Company and the recipient.
Compensation of Directors
The
following table sets forth compensation information with respect to
our non-executive directors during our fiscal year ended December
31, 2017.
|
Name
|
Fees Earned
or
Paid in
Cash
($)*
|
Stock
Awards ($)
(1)
|
All
Other
Compensation
($)
|
Total
($)
|
|
Elizabeth P.
Smith
|
$
25,000
|
$
34,909
|
$
-
|
$
59,909
|
|
David Z.
Steinberg
|
$
20,000
|
$
-
|
$
-
|
$
20,000
|
|
Frank C.
Ingriselli
|
$
25,000
|
$
38,728
|
$
-
|
$
63,728
|
|
Adam
McAfee
|
$
20,000
|
$
16,909
|
$
-
|
$
36,909
|
* The
table above does not include the amount of any expense
reimbursements paid to the above directors. No directors received
any Non-Equity Incentive Plan Compensation or Nonqualified Deferred
Compensation Earnings during the period presented. Includes
quarterly cash compensation paid in the amount of $5,000 each,
including $5,000 paid to Mr. Ingriselli and Ms. Smith with respect
to quarterly cash compensation earned for the fourth quarter of
2016 but not paid in 2017. Does not include perquisites and other
personal benefits, or property, unless the aggregate amount of such
compensation is more than $10,000.
(1)
Amounts in this
column represent the aggregate grant date fair value of awards
computed in accordance with Financial Accounting Standards Board
Accounting Standard Codification Topic 718. For additional
information on the valuation assumptions with respect to the
restricted stock grants, refer to Note 10 of our financial
statements for the year ended December 31, 2017. These amounts do
not correspond to the actual value that will be recognized by the
named individuals from these awards. Ms. Smith received a grant of
54,546 shares of restricted stock on December 28, 2016, which
vested in full on September 10, 2017 (at a fair market value of
$0.64 per share for total value of $34,909). Mr. Ingriselli also
received a grant of 54,546 shares of restricted stock on December
28, 2016, which vested in full on May 1, 2017 (at a fair market
value of $0.71 per share for total value of $38,728). Mr. McAfee
also received a grant of 54,546 shares of restricted stock on
December 28, 2016, which vested in full on December 28, 2017 (at a
fair market value of $0.31 per share for total value of $16,909).
Mr. Steinberg also received a grant of 54,546 shares of restricted
stock on December 28, 2016, but Mr. Steinberg and the Company
cancelled and rescinded the grant on December 28, 2017 so no
compensation was earned with respect thereto. Ms. Smith, Mr.
Steinberg, Mr. Ingriselli and Mr. McAfee also each received a grant
of 150,000 shares of restricted stock on December 28, 2017, each
with an aggregate grant date fair value as computed in accordance
with Financial Accounting Standards Board Accounting Standard
Codification Topic 718 of approximately $46,320, which will vest in
full on September 10, 2018, July 15, 2018, May 1, 2018, and
December 28, 2018, respectively. All shares vesting in 2018 have
not been included in the table above as there was no compensation
recognized in the year ended December 31, 2017.
103
Our
board has adopted a compensation program, as amended, that,
effective for periods after 2012, provides each of our directors in
good standing who are not employees or paid consultants of the
Company with compensation consisting of (a) a quarterly cash
payment of $5,000, and (b) an annual equity award consisting of
shares of restricted stock valued at $60,000, vesting on the date
that is one year following the director’s anniversary date on
the board; provided, however, for the year 2017, the board reduced
the annual equity award component of the board compensation program
from shares of restricted stock valued at $60,000 vesting on the
date that is one year following the director’s anniversary
date on the board, instead to an annual equity award consisting of
150,000 shares of restricted stock, vesting on the date that is one
year following the director’s anniversary date on the
board.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth, as of
March 27, 2018, the number and
percentage of outstanding shares of our common stock beneficially
owned by: (a) each person who is known by us to be the beneficial
owner of more than 5% of our outstanding shares of common stock;
(b) each of our directors; (c) our executive officers; and (d) all
current directors, our director nominee and executive officers, as
a group. As of March 27, 2018, there were 7,278,754 shares of
common stock and 66,625 shares of Series A Convertible
Preferred Stock issued and outstanding.
Beneficial
ownership has been determined in accordance with Rule 13d-3 under
the Exchange Act. Under this rule, certain shares may be deemed to
be beneficially owned by more than one person (if, for example,
persons share the power to vote or the power to dispose of the
shares). In addition, shares are deemed to be beneficially owned by
a person if the person has the right to acquire shares (for
example, upon exercise of an option or warrant or upon conversion
of a convertible security) within 60 days of the date as of which
the information is provided. In computing the percentage ownership
of any person, the amount of shares is deemed to include the amount
of shares beneficially owned by such person by reason of such
acquisition rights. As a result, the percentage of outstanding
shares of any person as shown in the following table does not
necessarily reflect the person’s actual voting power at any
particular date.
To
our knowledge, except as indicated in the footnotes to this table
and pursuant to applicable community property laws, the persons
named in the table have sole voting and investment power with
respect to all shares of common stock shown as beneficially owned
by them.
104
|
|
Number of Common
Stock Shares
(1)
|
Percent of Common
Stock
|
Number of Series
A Convertible Preferred Stock Shares
(2)
|
Percent of Series
A Convertible Preferred Stock
|
Total Voting
Shares
|
Percent of Total
Voting Shares (3)
|
|
|
|
|
|
|
|
|
|
Name and Address of Beneficial Owner
|
|
|
|
|
|
|
|
Current Named Executive Officers and Directors
|
|
|
|
|
|
|
|
Michael L.
Peterson
|
669,613
(4)
|
9.1
%
|
--
|
--
|
669,613
|
9.0
%
|
|
Clark R.
Moore
|
394,644
(5)
|
5.4
%
|
--
|
--
|
394,644
|
5.3
%
|
|
Frank C.
Ingriselli
|
380,541
(6)
|
5.2
%
|
--
|
--
|
380,541
|
5.1
%
|
|
Elizabeth P.
Smith
|
243,654
(7)
|
3.3
%
|
--
|
--
|
243,654
|
3.3
%
|
|
Adam
McAfee
|
204,578
(8)
|
2.8
%
|
--
|
--
|
204,578
|
2.8
%
|
|
David Z.
Steinberg
|
150,000
(9)
|
2.1
%
|
--
|
--
|
150,000
|
2.1
%
|
|
Gregory
Overholtzer
|
88,309
(10)
|
1.2
%
|
--
|
--
|
88,309
|
1.2
%
|
|
All Named Executive Officers and Directors as a group (seven
persons)
|
2,131,339
|
28.0
%
|
--
|
--
|
2,131,339
|
27.7
%
|
|
Greater than 5% Shareholders
|
|
|
|
|
|
|
|
MIE Holdings
Corporation (11)
|
2,308,542
(12)
|
24.2
%
|
--
|
--
|
2,308,542
|
24.2
%
|
|
Golden Globe
Energy (US), LLC (13)
|
705,945
(14)
|
9.2
%
|
66,625
(15)
|
100
%
|
768,920
(16)
|
9.9
%
|
|
B Asset Manager,
LP (17)
|
596,280
(18)
|
7.6
%
|
--
|
--
|
596,280
|
7.5
%
|
* Less
than 1%.
_____________________________
Unless otherwise stated, the address of each shareholder is c/o
PEDEVCO Corp., 4125 Blackhawk Plaza Circle, Suite 201, Danville, CA
94506.
(1)
Ownership
voting percentages are based on 7,278,754 total shares of common
stock which were outstanding as of March 27, 2018. Beneficial
ownership is determined in accordance with the rules of the SEC and
includes voting and/or investing power with respect to securities.
We believe that, except as otherwise noted and subject to
applicable community property laws, each person named in the
following table has sole investment and voting power with respect
to the securities shown as beneficially owned by such person.
Additionally, shares of common stock subject to options, warrants
or other convertible securities that are currently exercisable or
convertible, or exercisable or convertible within 60 days of the
applicable date below, are deemed to be outstanding and to be
beneficially owned by the person or group holding such options,
warrants or other convertible securities for the purpose of
computing the percentage ownership of such person or group, but are
not treated as outstanding for the purpose of computing the
percentage ownership of any other person or group.
(2)
Ownership
voting percentages are based on 66,625 total shares of Series A
preferred stock which were outstanding as of the record date.
Beneficial ownership is determined in accordance with the rules of
the SEC and includes voting and/or investing power with respect to
securities. The holders of our Series A preferred stock vote
together with the holders of our common stock, with one (1) vote
per share of Series A preferred stock.
(3)
Ownership
voting percentages are based on 7,345,379 total voting shares,
including (i) 7,278,754 total shares of common stock outstanding as
of March 27, 2018, and (ii) 66,625 total shares of Series A
preferred stock which vote on a one-for-one basis on all
stockholder matters, provided that shares of common stock subject
to options, warrants or other convertible securities (including the
Series A preferred stock) that are currently exercisable or
convertible, or exercisable or convertible within 60 days of the
applicable date of determination, are deemed to be outstanding and
to be beneficially owned by the person or group holding such
options, warrants or other convertible securities for the purpose
of computing the percentage ownership of such person or group, but
are not treated as outstanding for the purpose of computing the
percentage ownership of any other person or group.
105
(4)
Consisting
of the following: (a) 1,834 fully-vested shares of common stock
held by one of Mr. Peterson’s children, which he is deemed to
beneficially own; (b) 118,602 fully-vested shares of common stock
(including shares held by a family trust which Mr. Peterson is
deemed to beneficially own); (c) 33,000 unvested shares of common
stock held by Mr. Peterson, which vest on June 28, 2018, provided
that Mr. Peterson remains employed by us, or is a consultant to us,
on such vesting date; (d) 410,000 unvested shares of common stock
held by Mr. Peterson, which vest on various dates through June 28,
2019, provided that Mr. Peterson remains employed by us, or is a
consultant to us, on such vesting dates; (e) options to purchase
10,000 shares of common stock exercisable by Mr. Peterson at an
exercise price of $2.40 per share; (f) options to purchase 33,334
shares of common stock exercisable by Mr. Peterson at an exercise
price of $5.10 per share; (g) 343 shares of common stock underlying
currently exercisable options, of which options to purchase 298
shares are exercisable at $32.40 per share and options to purchase
45 shares are exercisable at $672.00 per share; (h) options to
purchase 32,500 shares of common stock exercisable by Mr. Peterson
at an exercise price of $3.70 per share; and (i) options to
purchase 30,000 shares of common stock at $2.20 per share. Mr.
Peterson has voting control over his unvested shares of common
stock.
(5)
Representing:
(a) 29,576 fully-vested shares of common stock; (b) 2,867
fully-vested shares of common stock held by each of Mr.
Moore’s two children, which he is deemed to beneficially own;
(c) 21,000 unvested shares of common stock held by Mr. Moore, which
vest on June 28, 2018, provided that Mr. Moore remains employed by
us, or is a consultant to us, on such vesting date; (d) 260,000
unvested shares of common stock held by Mr. Moore, which vest on
various dates through June 28, 2019, provided that Mr. Moore
remains employed by us, or is a consultant to us, on such vesting
dates; (e) options to purchase 23,334 shares of common stock
exercisable by Mr. Moore at an exercise price of $5.10 per share;
(f) options to purchase 27,000 shares of common stock exercisable
by Mr. Moore at an exercise price of $3.70 per share; and (g)
options to purchase 28,000 shares of common stock exercisable by
Mr. Moore at an exercise price of $2.20 per share. Mr. Moore has
voting control over his unvested shares of common
stock.
(6)
Representing: (a) 51,439 fully-vested shares of
common stock held by Mr. Ingriselli; (b) 13,371 fully-vested shares
of common stock held by Mr. Ingriselli’s spouse; (c) 89,650
fully-vested shares of common stock held by Global Venture
Investments Inc., a company owned and controlled by Mr. Ingriselli
(“
GVEST
”);
(d) 150,000 shares of restricted held by Mr. Ingriselli which vest
in full on May 1, 2018, provided that Mr. Ingriselli remains a
director, an employee of, or consultant to the Company on such
vesting date; (e) options to purchase 39,081 shares of common stock
exercisable by Mr. Ingriselli at an exercise price of $5.10 per
share; and (f) options to purchase 37,000 shares of common stock
exercisable by Mr. Ingriselli at an exercise price of $3.70 per
share. Mr. Ingriselli has voting control over his unvested shares
of common stock.
(7)
Representing:
(i) 6,667 shares of common stock held by Ms. Smith (issued upon the
January 27, 2013 automatic conversion of 6,667 shares of Series A
preferred stock held by Ms. Smith); (ii) 1,334 shares of restricted
stock held by Ms. Smith which vested in full on September 10, 2014;
(iii) 9,678 shares of restricted stock held by Ms. Smith which
vested in full on September 10, 2015; (iv) 21,429 shares of
restricted stock held by Ms. Smith which vested in full on
September 10, 2016; (v) 54,546 shares of restricted stock held by
Ms. Smith which vested in full on September 10, 2017; and (vi)
150,000 shares of restricted stock held by Ms. Smith which will
vest in full on September 10, 2018, provided that Ms. Smith remains
a director, an employee of, or consultant to the Company on such
vesting date. Ms. Smith has voting control over her unvested shares
of common stock.
(8)
Representing:
(i) 30 shares of common stock held jointly by Mr. McAfee and his
spouse; (ii) 2 shares of common stock held by Park Capital
Management LLC, an entity owned and controlled by Mr. McAfee; (iii)
54,546 shares of restricted stock held by Mr. McAfee which vested
in full on December 28, 2017; and (iv) 150,000 shares of restricted
stock held by Mr. McAfee which vest in full on December 28, 2018,
provided that Mr. McAfee remains a director, an employee of, or
consultant to the Company on such vesting date. Mr. McAfee has
voting control over his unvested shares of common
stock.
(9)
Representing
150,000 shares of restricted stock held by Mr. Steinberg which will
vest in full on July 15, 2018, provided that Mr. Steinberg remains
a director, an employee of, or consultant to the Company on such
vesting date.
(10)
Representing:
(a) 7,542 fully-vested shares of common stock; (b) options to
purchase 11,667 shares of common stock exercisable by Mr.
Overholtzer at an exercise price of $5.10 per share; (c) options to
purchase 5,000 shares of common stock exercisable by Mr.
Overholtzer at an exercise price of $3.70 per share; (d) options to
purchase 15,000 shares of common stock exercisable by Mr.
Overholtzer at an exercise price of $2.20 per share; (e) options to
purchase 1,100 shares of common stock exercisable by Mr.
Overholtzer at an exercise price of $3.00 per share; and (f)
options to purchase 48,000 shares of common stock exercisable by
Mr. Overholtzer at an exercise price of $1.10 per share. Does not
include options to purchase (i) 12,000 shares of common stock at an
exercise price of $1.10 per share, and (ii) 150,000 shares of
common stock at an exercise price of $0.3088 per share, which have
not vested as of the date of this filing and do not vest within 60
days of this filing.
(11)
Address:
c/o MIE Holdings Corporation, Suite 1501, Block C, Grand Palace, 5
Huizhong Road, Chaoyong District, Beijing, China 100101. To the
best of our knowledge, the beneficial owners of MIE Holdings
Corporation are Zhang Ruilin, its Executive Director, Chairman and
Chief Executive Officer, and Zhao Jiangwei, its Executive Director,
Vice Chairman and Senior Vice President.
(12)
Representing: (i) 133,334 shares of common stock
issued upon the January 27, 2013 automatic conversion of 133,334
shares of Series A Preferred Stock held by MIE Holdings
Corporation; and (ii) 2,175,208 shares of common stock issuable
upon conversion of the New MIEJ Note, assuming conversion of all
principal and accrued interest outstanding thereunder as of March
31, 2018 at the “
floor
price
” of $3.00/share.
The New MIEJ Note is convertible into common stock as described in
greater detail below under “
Certain Relationships
and Related Party Transactions
” – “
Amendment to
PEDCO-MIEJ Note and Condor-MIEJ Note
”.
(13)
Address: c/o Platinum Partners, 250 West 55th
Street, 14th Floor, New York, New York 10019. Includes beneficial
holdings of Golden Globe Energy (US), LLC, a Delaware limited
liability company (“
GGE
”), Platinum Partners Value Arbitrage Fund
L.P., a Cayman Islands exempted limited partnership
(“
PPVA
”),
Platinum Management (NY) LLC, a Delaware limited liability company
(“
Platinum
Management
”), Platinum
Partners Credit Opportunities Fund LLC, a Delaware limited
liability company (“
PPCO
”),
Platinum Credit Holdings LLC, a Delaware limited liability company
(“
Credit
Holdings
”), and Mark
Nordlicht (collectively, the “
GGE
Parties
”). GGE is a
wholly-owned subsidiary of PPVA. Platinum Management is the
investment manager and general partner of PPVA. Credit Holdings is
the managing member of PPCO. Mark Nordlicht is the Chief Investment
Officer of each of Platinum Management and Credit Holdings. By
virtue of these relationships, each of PPVA, Platinum Management
and Mark Nordlicht may be deemed to beneficially own the shares
owned directly and beneficially by GGE. By virtue of these
relationships, each of Credit Holdings and Mark Nordlicht may be
deemed to beneficially own the shares owned directly by PPCO. The
information set forth in this footnote and footnotes 15 and 16
below is based solely on information filed with the SEC on Schedule
13D by the GGE Parties on March 6, 2015. The GGE Parties reported
in the Schedule 13D that GGE, PPVA and Platinum Management, share
voting and dispositive power of 337,500 shares of common stock and
66,625 shares of Series A Preferred, and PPCO and Credit Holdings
share voting and dispositive power over 34,445 shares of common
stock, and Mr. Nordlicht shares voting power over 340,945 shares of
common stock and 66,625 shares of Series A
Preferred.
106
(14)
Representing:
(i) 337,500 shares of common stock held by GGE; (ii) 3,445 shares
of common stock held by Platinum Partners Credit Opportunities Fund
LLC; and (iii) 365,000 shares of common stock which could be
issuable upon conversion of 3,650 shares of Series A preferred
stock, conversion of which shares, together with GGE’s
current holdings of common stock, would give GGE ownership of 9.2%
of our outstanding common stock and, together with 62,975 shares of
unconverted Series A preferred stock which votes together with our
common stock, 9.9% of our voting stock on an as-converted to common
stock basis. See footnotes 13 and 16.
(15)
Representing
66,625 shares of Series A preferred stock held by GGE. See footnote
13 above. The Series A preferred stock is convertible into common
stock on a 100:1 basis.
(16)
Representing: (i) 337,500 shares of common stock
held by GGE; (ii) 3,445 shares of common stock held by Platinum
Partners Credit Opportunities Fund LLC; (iii) 365,000 shares of
common stock which could be issuable upon conversion of 3,650
shares of Series A preferred stock, conversion of which shares,
together with GGE’s current holdings of common stock and ,
would give GGE ownership of 9.2% of our outstanding common stock
and, together with 62,975 shares of unconverted Series A preferred
stock which votes together with our common stock, 9.9% of our
voting stock on an as-converted to common stock basis; and (iv)
62,975 shares of Series A preferred stock remaining outstanding
following conversion of 3,650 shares of Series A preferred stock
into 365,000 shares of common stock. See footnotes 13 and 15 above.
Each share of Series A preferred stock is currently convertible
into shares of common stock on a 100:1 basis, provided that no
conversion is allowed in the event the holder thereof would
beneficially own more than 9.9% of our outstanding common stock or
voting stock (the “
Beneficial Ownership
Limitation
”).
Accordingly, based on GGE’s current beneficial holdings of
common stock (excluding shares issuable upon conversion of Series A
preferred stock), GGE is deemed to beneficially own an additional
approximately 365,000 shares of common stock which could be
issuable upon conversion of 3,650 shares of Series A preferred
stock, subject to the Beneficial Ownership
Limitation.
(17)
Address: 1370 Avenue of the Americas,
32nd Floor, New York, New York 10019. Includes beneficial
holdings of BBLN-PEDCO Corp., BHLN-PEDCO Corp., and B Asset
Manager, LP (the “
BAM
Parties
”), 1370 Avenue of
the Americas, 32nd Floor, New York, New York 10019. B Asset
Manager, LP (“
BAM
”) is the investment manager, directly or
indirectly, of the securities owned by the BAM Parties. To the
Company’s knowledge, Mark Feuer and Dhruv Narain, through
other entities, are the controlling principals of BAM, and share
sole voting and investment power over such securities. Each of BAM,
Mark Feuer and Dhruv Narain disclaims beneficial ownership of the
securities held by the BAM Parties. The information set forth in
this footnote is based solely on information jointly filed with the
SEC on Schedule 13G/A by Senior Health Insurance Company of
Pennsylvania (“
SHIP
”)
and the BAM Parties on February 14, 2017. However, subsequent to
such filing, the Company has become aware that SHIP’s
holdings are no longer managed by BAM, with SHIP’s holdings
excluded from the BAM Parties’ holdings by the Company
herein. We make no representation as to the accuracy or
completeness of the information reported.
(18)
Representing shares of common stock issuable upon
the exercise of warrants to purchase common stock of the Company
held by the BAM Parties. The BAM Parties hold warrants exercisable
for an aggregate of 596,280 shares of common stock at $2.50 per
share, expiring on May 12, 2019. The warrants held by the BAM
Parties contain an issuance limitation prohibiting each holder from
exercising or converting those securities to the extent that such
exercise would result in beneficial ownership by such holder and
its affiliates of more than 9.99% of the Company’s shares
then issued and outstanding (the “
Issuance
Limitation
”). The
Issuance Limitation for the warrants may be revoked by the holder
upon at least 61 days prior written notice to the Company which
notice shall only be effective if delivered at a time when no
indebtedness of the Company is outstanding, of which the holder or
any of its affiliates was, at any time, the owner, directly or
indirectly. The “
Number of Voting
Shares Beneficially Owned
” figure presented assumes exercise of
approximately such number of warrants which would provide the BAM
Parties with shares of common stock under the Issuance
Limitation.
Changes in Control
The
Company is not currently aware of any arrangements which may at a
subsequent date result in a change of control of the
Company.
107
Series A Preferred Stock Appointment Rights
Golden Globe Energy (US), LLC, which we refer to
as GGE, the sole holder of our Series A Preferred stock, has the
right pursuant to the purchase agreement with GGE and the
certificate of designation designating the Series A Preferred, upon
notice to us, voting separately as a single class, to appoint
designees to fill two (2) seats on our board of directors, one of
which must be an independent director as defined by applicable
rules and the exclusive right, voting the Series A Preferred Stock
as sole stockholder thereof, separately as a single class, to elect
such two (2) nominees to the board of directors. On July 15, 2015,
at the request of GGE the board of directors appointed David Z.
Steinberg as a member of the board of directors. At the time of
appointment, the board of directors made the affirmative
determination that Mr. Steinberg was independent pursuant to
applicable NYSE American and Securities and Exchange Commission
rules and regulations. Mr. Steinberg serves as one of GGE’s
representatives on the Company’s board of directors. The
board of directors appointment rights continue until GGE no longer
holds any of the Tranche One Shares (defined and described in
greater detail below under “
Item 13. Certain
Relationships and Related Transactions, and Director
Independence
” —
“
Agreements with
Related Persons
” —
“
Golden Globe Energy
(US), LLC
”). To date, GGE
has not provided notice to PEDEVCO regarding the appointment of the
second member to the board of directors, other than Mr.
Steinberg.
All
Series A Preferred Stock nominee members on our board of directors
are required to immediately resign at the option of the other
members of our board of directors upon such time as the rights of
the Series A Preferred Stock holder to appoint members to our board
of directors expires. For so long as the board appointment rights
remain in effect, if for any reason a Series A Preferred Stock
nominee on our board of directors resigns or is otherwise removed
from the board of directors, then his or her replacement shall be a
person elected by the remaining Series A Preferred Stock nominee or
the holder of the Series A Preferred Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE.
Except as discussed below or otherwise disclosed
above under “
Item 11.
Executive
Compensation
”,
there have
been no transactions
during the Company’s last two
completed fiscal years
, and there is
not currently any proposed transaction, in which the Company was or
is to be a participant, where the amount involved exceeds
the lesser of $120,000 or one percent of the average of the
Company’s total assets at year-end for the last two completed
fiscal years
, and in which any
officer, director, or any stockholder owning greater than five
percent (5%) of our outstanding voting shares, nor any member of
the above referenced individual’s immediate family, had or
will have a direct or indirect material
interest.
Agreements with Related Persons
MIEJ Warrants
On June 30, 2014, we re-issued two warrants to MIE
Jurassic Energy Corporation (“
MIEJ
”),
which we refer to as MIEJ (a subsidiary of MIE Holdings), in order
to extend their exercise terms through June 30, 2015 (the
“
Warrants
”).
The Warrants were originally issued on May 23, 2012 to MIEJ and
expired unexercised pursuant to their terms on May 23, 2014. These
two re-issued Warrants had the same terms and conditions as the
originally issued warrants, including being exercisable on a
cash-only basis for 16,667 shares of common stock of the Company at
$37.50 per share and for 16,667 shares of common stock of the
Company at $45.00 per share. The Warrants were re-issued in
consideration of the Company’s continued relationship with,
and financial support from, MIEJ, and had no net effect on the
Company’s fully-diluted capital stock (after taking into
account the extension) as they simply extended the exercise term of
the previously issued warrants. These Warrants expired unexercised
on June 30, 2015.
108
Amendment to PEDCO-MIEJ Note and Condor-MIEJ Note
On February 19, 2015 (the
“
MIEJ Closing
Date
”), the Company
and Pacific Energy Development Corp., our wholly-owned
subsidiary (“
PEDCO
”) entered
into a Settlement Agreement (the “
MIEJ Settlement
Agreement
”) with MIE
Jurassic Energy Corporation (“
MIEJ
”),
which we refer to as MIEJ (a subsidiary of MIE Holdings). MIEJ was
PEDCO’s 80% partner in Condor, and was the lender to PEDCO
under that certain Amended and Restated Secured Subordinated
Promissory Note, dated March 25, 2013, in the principal amount of
$6,170,065, entered into by PEDCO and MIEJ (the
“
MIEJ
Note
”). Pursuant to the
MIEJ Settlement Agreement, among other things, (i) MIEJ and PEDCO
agreed to restructure the MIEJ Note through the entry into a new
Amended and Restated Secured Subordinated Promissory Note, dated
February 19, 2015 and with an effective date of January 1, 2015
(the “
New MIEJ
Note
”), (ii) PEDCO sold
its (x) full 20% interest in Condor to MIEJ (the
“
Condor
Interests
”), and (y)
interests in approximately 945 net acres and interests in three (3)
wells located in PEDCO’s legacy non-core Niobrara acreage
located in Weld County, Colorado, that were directly held by PEDCO
to Condor (the “
PEDCO Direct
Interests
”), effective
January 1, 2015, and (iii) Condor forgave approximately $1.8
million in previous working interest expenses related to the
drilling and completion of certain wells operated by Condor that
was due from PEDCO, which, in summary, had the net effect of
reducing approximately $9.4 million in aggregate liabilities due
from PEDCO to MIEJ and Condor to $4.925 million, which was the new
principal amount of the New MIEJ Note. In addition, pursuant to the
MIEJ Settlement Agreement, (a) in consideration for the Senior Loan
Investors (defined below under “
Golden Globe Energy
(US), LLC
”) releasing
their security interest on the Condor Interests and PEDCO Direct
Interests, MIEJ paid $500,000 to the Senior Loan Investors as a
principal reduction on the Senior Loan (defined below under
“
Golden Globe Energy
(US), LLC
”), which
directly benefits PEDEVCO, (b) PEDCO paid $100,000 as a principal
reduction under the MIEJ Note, (c) each of MIEJ, Condor and the
Company fully released each other, and their respective
predecessors and successors in interest, parents, subsidiaries,
affiliates and assigns, and their respective officers, directors,
managers, members, agents, representatives, servants, employees and
attorneys, from every claim, demand or cause of action arising on
or before the MIEJ Closing Date, and (d) MIEJ confirmed that the
MIEJ Note was paid in full and that PEDCO owed no amounts to MIEJ
or Condor other than the principal amount due as reflected in the
New MIEJ Note.
The New MIEJ Note is described in greater detail
above under
“
Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of
Operations
” – “
Liquidity and Capital
Resources
” – “
Liquidity Outlook
”
– “
Amendment
to PEDCO-MIEJ Note and Condor-MIEJ Note
”.
Golden Globe Energy (US), LLC
On
February 23, 2015, we entered into several transactions with Golden
Globe Energy (US), LLC, which we refer to as GGE, which
beneficially owns more than 5% of our outstanding voting stock due
to its beneficial ownership of 340,945 shares of our common stock
and 66,625 shares of our Series A Convertible Preferred Stock, as
described below.
On March 7, 2014, in connection with our
acquisition of certain oil and gas interests in the Wattenberg and
Wattenberg Extension in the Denver-Julesberg Basin
(“
D-J
Basin
”), which we
acquired from Continental Resources, Inc., which we refer to as
Continental and the Continental Acquisition, we entered into a
$50 million 3-year term debt facility with and issued those certain
promissory notes in favor of BRe BcLIC Primary, Bre BCLIC Sub, BRe
WINIC 2013 LTC Primary, BRe WNIC 2013 LTC Sub, and RJC, as
investors (the “
Senior Loan
Investors
”), and
BAM Administrative Services LLC, as agent for the Lenders (the
“
Agent
”)
(upon notice received from the Agent on October
10, 2017, the Agent resigned as agent for the Lenders effective
December 31, 2017, and no replacement agent has been designated by
the Lenders subsequent to such date), and any related collateral
documents (collectively, the “
Senior
Loan
”). On March 19,
2015, BRe WNIC 2013 LTC Primary transferred a portion of its Senior
Loan to HEARTLAND Bank, and effective April 1, 2015, BRe BCLIC
Primary transferred its Senior Loan to Senior Health Insurance
Company of Pennsylvania (“
SHIP
”),
with each of HEARTLAND Bank and SHIP becoming a
“
Senior Loan
Investor
” upon such
dates. As part of the transaction, GGE (formerly Golden Globe
Energy Corp.) (an affiliate of RJ Credit LLC) acquired an
equal 13,995 net acre position in the assets the Company acquired
from Continental (the “
GGE
Assets
”), thereby making
GGE an equal working interest partner with us in the development of
these newly acquired assets, and allowing us to undertake a more
aggressive drilling and development program. On February 23,
2015, we completed the acquisition of the GGE Assets from GGE
pursuant to the GGE Acquisition, thereby reunifying the assets we
originally acquired in the Continental Acquisition, and we assumed
approximately $8.35 million of junior subordinated debt from GGE
that GGE incurred to develop the GGE Assets subsequent to
GGE’s acquisition of them from us in March 2014 and owed to
RJ Credit LLC
.
109
On February 23, 2015, we entered into and
closed the transactions contemplated by a Purchase and Sale
Agreement (the “
Purchase
Agreement
”) with GGE,
pursuant to which the Company, through Red Hawk, acquired from GGE
all of its rights, title and interest in approximately 12,977 net
acres in the D-J Basin located almost entirely within
Weld County, Colorado, including acreage located in the prolific
Wattenberg core area, and interests in 53 gross (7.8 net) wells
with an estimated current net daily production of approximately 500
barrels of oil equivalent per day as of February 7, 2015, which we
refer to as the GGE Assets, and which acquisition we refer to as
the GGE Acquisition. All of GGE’s leases and related rights,
oil and gas and other wells, equipment, easements, contract rights,
and production are included in the purchase, the majority of which
assets were originally conveyed to GGE’s
predecessor-in-interest, RJ Resources Corp., by us in March 2014 in
connection with the Continental Acquisition.
As consideration for the acquisition of the GGE
Assets, the Company (i) issued to GGE 337,500 restricted shares of
common stock and 66,625 restricted shares of the Company’s
then newly-designated Amended and Restated Series A Convertible
Preferred Stock (the “
Series A
Preferred
”), (ii) assumed
approximately $8.35 million of junior subordinated debt from GGE
(the “
Junior
Debt
”) pursuant to an
Assumption and Consent Agreement and an Amendment to Note and
Security Agreement, and (iii) provided GGE with a one-year option
to acquire the Company’s interest in its Kazakhstan
opportunity for $100,000 pursuant to a Call Option Agreement, which
expired unexercised.
The Series A Preferred stock can be converted into
shares of the Company’s common stock on a 100:1 basis,
subject to a 9.9% ownership blocker. GGE, as the sole holder of the
Company’s Series A Preferred, has the right to appoint two
designees to the Company’s board of directors for as long as
GGE continues to hold 15,000 shares of Series A Preferred
designated as “
Tranche One
Shares
” under the
Company’s Amended and Restated Certificate of Designations of
PEDEVCO Corp. Establishing the Designations, Preferences,
Limitations, and Relative Rights of its Series A Convertible
Preferred Stock. Mr. Steinberg is one of the Series A Preferred
stockholder designees to the board of directors in connection with
such right, provided that GGE has not designated any further
members of the board of directors at this time.
The Assumption and Consent Agreement provides
that, as of the effective date of the acquisition, the Company
assumed all of GGE’s rights, obligations and liabilities
under that certain Note and Security Agreement, dated April 10,
2014 (the “
GGE
Note
”), as amended by
that certain Amendment to Note and Security Agreement, dated as of
the Effective Date (the GGE Note, as amended, the
“
Amended GGE
Note
”). The lender under
the Amended GGE Note is RJ Credit LLC (“
RJC
”), and the Amended GGE Note has an
aggregate principal balance of $8,353,000. The Amended GGE Note is
due and payable on December 31, 2017, and bears interest at the per
annum rate of twelve percent (12%) (24% upon an event of default),
which interest is payable monthly in cash by the Company. The
Amended GGE Note is subordinate and subject to the terms and
conditions of the Senior Loan, as well as any future secured
indebtedness of the Company from a lender with an aggregate
principal amount of at least $20,000,000
(“
Future
PEDEVCO Loan
”). Should
the Company repay the Senior Loan and replace such indebtedness
with a Future PEDEVCO Loan, then, upon the reasonable request of
such senior lender, RJC agreed to further amend the Amended GGE
Note to adjust the frequency of interest payments or to eliminate
such payments and replace the same with the accrued interest to be
paid at maturity.
The
GGE Note contains customary representations, warranties, covenants
and requirements for the Company to indemnify RJC and its
affiliates, related parties and assigns. The GGE Note also includes
various covenants (positive and negative) binding the Company,
including requiring that the Company provide RJC with quarterly
(unaudited) and annual (audited) financial statements, restricting
the Company’s creation of liens and encumbrances, or sell or
otherwise disposing, the Collateral (as defined therein). RJC is
one of the lenders under the Senior Loan, and is an affiliate of
GGE.
110
On
April 24, 2015, certain of our Senior Loan Investors (including
RJC) agreed to allow us to defer the mandatory principal repayments
and interest payments due under the Notes (defined below) for the
months of May and June 2015, with such deferred amounts to be used
to renew, extend, re-lease or otherwise acquire leases, which then
became additional collateral under the Notes. The aggregate
principal and interest that was deferred was approximately
$524,000, which amount has been capitalized and added to the
principal due under the Notes and is due upon maturity. The Company
was also charged a one-time deferral fee of $354,000, the amount of
the principal and interest deferred under this agreement, of which
$320,000 was expensed as additional interest and the balance was
added to the principal and due upon maturity. As additional
consideration for the deferral, on September 10, 2015, we
issued warrants exercisable for an aggregate of 34,912 shares of
our common stock to the Senior Loan Investors participating in the
deferral. Each warrant had a 3 year term and was exercisable
on a cashless basis at an exercise price of $15.00 per
share.
On August 28, 2015, we entered into agreements
with the Senior Loan Investors to (i) defer until the maturity date
of the Notes the mandatory principal payments that would otherwise
be due and payable by us on payment dates occurring during the six
month period of August 1, 2015 through January 31, 2016, (ii)
HEARTLAND Bank agreed to change the frequency of payment of accrued
interest and mandatory principal repayments from monthly to
semi-annually, with the next interest payment due February 1, 2016
and the next mandatory principal repayment due August 3, 2016, and
with us agreeing to place an amount equal to 1/6th of the
semi-annual principal and interest payments due into a sinking fund
starting in February 2016 which we shall pay to HEARTLAND Bank
every six months when due and owing, (iii) RJC agreed to defer all
interest payments otherwise due and payable by us to RJC during the
period commencing on August 1, 2015 through January 31, 2016 (the
“
Waiver
Period
”), which deferred
interest is added to principal each month during the Waiver Period,
(iv) certain other holders agreed to (a) defer until the maturity
date of their Notes 12/17ths of the interest payments that
would otherwise be due and payable by us to them on payment dates
occurring during the six month period of August 1, 2015 through
January 31, 2016, and (b) have us pay in cash 5/17ths of such
interest payments per month, with all deferred interest being added
to principal each month until the maturity date of the Notes, and
(v) SHIP, BRe BCLIC Sub, BRe WINIC 2013 LTC Primary, BRe WNIC 2013
LTC Sub and RJC agreed to increase the interest rate under their
Senior Notes from 15% to 17% per annum on all outstanding principal
under their Notes during the Waiver Period. These deferrals agreed
upon with our Senior Loan Investors (the “
August-January
Deferrals
”) reduced our
monthly cash interest payments and mandatory principal repayments
from approximately $600,000 per month prior to these agreements, to
approximately $100,000 per month during the Waiver Period after
giving effect to the changes agreed upon under these agreements,
thereby providing us with an estimated $500,000 per month in
reduced cash flow requirements during the Waiver
Period.
On January 29, 2016, we entered into a Letter
Agreement (the “
Letter
Agreement
”) with the
Senior Loan Investors and the Agent. The Letter Agreement extended
by one (1) month, through February 29, 2016, the deferral of the
payment of interest and principal due under the Notes (the
“
Deferral
Extension
”). The purpose
of the Deferral Extension was to provide the Company with the
financial resources and runway it believed it needed to fully-focus
upon and consummate the merger with GOM (defined below under
“
GOM Holdings
Reorganization Agreement
”). Specifically, pursuant to the Letter
Agreement, (i) all Senior Loan Investors agreed to further defer
until the maturity date of their Notes the mandatory principal
payments that would otherwise be due and payable by the Company to
them on payment dates occurring through February 29, 2016, (ii)
HEARTLAND Bank agreed to change the next scheduled semi-annual
interest payment due from February 1, 2016 to March 1, 2016 (with
interest due and payable thereafter on a semi-annual basis) and to
change the next mandatory principal repayment due date to September
3, 2016, and the Company agreed to place an amount equal to 1/6th
of the semi-annual principal and interest payments due into a
sinking fund which the Company shall pay to HEARTLAND Bank every
six months when due and owing, and (iii) Senior Health Insurance
Company of Pennsylvania (“
SHIP
”)
(as successor-in-interest to BRe BCLIC Primary), BRe BCLIC Sub, BRe
WINIC 2013 LTC Primary, BRe WNIC 2013 LTC Sub, and RJC agreed to
(a) defer until the maturity date of their Notes and the junior
note held by RJC (the “
RJC Junior
Note
”) all of the
interest payments that would otherwise be due and payable by the
Company to them in February 2016; (b) return the interest rate
under each of their Notes to 15% per annum, and the interest rate
under the RJC Junior Note to 12% cash pay per annum, effective
January 31, 2016; and (c) delay the issuance of any
“
Subsequent
Warrants
” issuable
pursuant thereto to within 30 days of March 1, 2016, subject to
NYSE American additional listing approval.
111
On March 7, 2016, the Company entered into a
Letter Agreement, dated March 1, 2016 (the
“
March Letter
Agreement
”), with SHIP,
BRe BCLIC Sub, BRe WINIC 2013 LTC Primary, BRe WNIC 2013 LTC Sub,
and RJC (collectively, the “
Original
Lenders
”), and the Agent,
which extended the Deferral Extension by one (1) month, through
March 31, 2016. Pursuant to the March Letter Agreement, the
Original Lenders agreed to (i) further defer until the maturity
date of their Senior Notes the mandatory principal payments that
would otherwise be due and payable by the Company to them on
payment dates occurring through March 31, 2016, (ii) defer until
the maturity date of their Senior Notes and the RJC Junior Note all
of the interest payments that would otherwise be due and payable by
the Company to them in March 2016, with all interest amounts
deferred being added to principal on the first business day of the
month following the month in which such deferred interest is
accrued; and (iii) delay the issuance of any
“
Subsequent
Warrants
” issuable
pursuant thereto to within 30 days of April 1, 2016, subject to
NYSE American additional listing approval.
On April 7, 2016, we entered into a Letter
Agreement, dated April 1, 2016 (the “
Letter
Agreement
”), with the
Senior Loan Investors. The Letter Agreement extended by one (1)
month, through April 30, 2016, the deferral of the payment of
interest and principal due under the Senior Notes and the Note and
Security Agreement, dated April 10, 2014, as amended on February
23, 2015, issued by the Company to RJ Credit LLC (the
“
RJC Junior
Note,
” and together with
the Senior Notes, the “
Notes
”)(the
“
Deferral
Extension
”), entered into
with the Lenders on August 28, 2015, as amended on January 29, 2016
and March 7, 2016 (the “
Original Deferral
Agreements
”).
Specifically, pursuant to the Letter Agreement, all the Lenders
agreed to: (i) further defer until the maturity date of their
Senior Notes the mandatory principal payments that would otherwise
be due and payable by the Company to them on payment dates
occurring through April 30, 2016; (ii) defer until the maturity
date of their Senior Notes and the RJC Junior Note all of the
interest payments that would otherwise be due and payable by the
Company to them in April 2016, with all interest amounts deferred
being added to principal on the first business day of the month
following the month in which such deferred interest is accrued; and
(iii) delay the issuance of any “
Subsequent
Warrants
” (as defined in
the Original Deferral Agreements) issuable pursuant thereto to
within 30 days of May 1, 2016, subject to NYSE American additional
listing approval.
On May 12, 2016, the Company entered into an
Amendment No. 2 to Note and Security Agreement with RJC (the
“
Second
Amendment
”), pursuant to
which the Company and RJC agreed to amend the RJC Junior Note to
(i) capitalize all accrued and unpaid interest under the RJC Junior
Note as of the date of the parties entry into the Second Amendment,
and add it to note principal, making the current outstanding
principal amount of the RJC Junior Note as of May 12, 2016 equal to
$9,379,000, (ii) extend the “
Termination
Date
” thereunder (i.e.,
the maturity date) from December 31, 2017 to July 11, 2019, (iii)
provide that all future interest accruing under the RJC Junior Note
is deferred, due and payable on the Termination Date, with all
future interest amounts deferred being added to principal on the
first business day of the month following the month in which such
deferred interest is accrued, and (iv) subordinate the RJC Junior
Note to the Senior Notes.
As additional consideration for RJC’s
agreement to enter into the Second Amendment, the Company entered
into a Call Option Agreement with GGE, an affiliate of RJC, dated
May 12, 2016 (the “
GGE Option
Agreement
”), pursuant to
which the Company provided GGE an option to purchase 23,182,880
common shares of Caspian Energy Inc., a British Columbia
corporation, held by the Company, upon payment of $100,000 by GGE
to the Company, which option expires on the
“
Termination
Date
” of the RJC Junior
Note, as amended, as described above, currently July 11, 2019. The
Company originally issued an option to GGE in February 2015 to
acquire the Company’s interest in these shares in connection
with the Company’s acquisition of certain producing oil and
gas assets from GGE, which option expired unexercised in February
2016.
112
Vesting Agreements with Management
In connection with our entry
into a reorganization agreement with Dome Energy AB
and a subsidiary thereto (together, “
Dome
Energy
”), which
reorganization agreement and related transaction were terminated on
December 29, 2015, each of Mr. Ingriselli, Mr. Peterson, and
Mr. Moore, our then executive officers, entered into
Vesting Agreements on May 21, 2015 (the “
2015 Vesting
Agreements
”) which
delayed the vesting of all of our restricted common stock
they held which was subject to vesting prior to the
Dome Energy reorganization being consummated (the
“
2015 Delayed
Vesting
”) until the
earlier of (A) the 2nd business day following either (x)
the closing of the transactions contemplated by
the reorganization agreement with Dome Energy, or
(y) our public disclosure of the termination of the reorganization,
or, (B) if the Dome Energy reorganization did not close
on or before December 29, 2015, then January 7, 2016. Because the
contemplated merger with Dome Energy did not close on or before
December 29, 2015, the vesting of shares of restricted common stock
held by Messrs. Ingriselli, Peterson and Moore subject to the 2015
Delayed Vesting was scheduled to occur on January 7, 2016 in
accordance with the terms of such 2015 Vesting Agreements. However,
in connection with our entry into the GOM Merger
Agreement (defined below), on December 29, 2015, as
amended on January 6, 2016, each of Messrs. Ingriselli, Peterson
and Moore entered into new Vesting Agreements with the Company (as
amended, the “
Vesting
Agreements
”), pursuant to
which they each individually agreed that the future vesting of
restricted common stock held by such officers from January 1, 2016
through June 1, 2016 (the “
Delay
Period
”), including all
restricted common stock that was subject to vesting on January 7,
2016 pursuant to the terms of Prior Vesting Agreements, shall be
delayed until the 2nd trading day following the Company’s
public announcement of the “
Vesting
Event,
” defined as the
later to occur of the receipt of (x) stockholder approval for the
issuance of the securities issuable to Dome Energy pursuant to the
Dome Energy reorganization and (y) the approval by the NYSE
American of the listing of our common stock on the NYSE American
following the closing of the Dome Energy reorganization, upon which
Vesting Event all vesting with respect to such shares shall be
accelerated and all such shares shall be fully vested (the
“
Acceleration
”)
(each as defined in the Vesting Agreements). The aggregate number
of shares of restricted common stock which were subject to the
Delay Period was 135,400 shares, 51,900 of which are held by Mr.
Ingriselli, 48,100 of which are held by Mr. Peterson, and 35,400 of
which are held by Mr. Moore (collectively, the
“
Subject
Shares
”). The
Acceleration would occur even if the executives were not then
employees or directors of the Company on such date. Notwithstanding
the above, in the event the GOM Merger Agreement was terminated or
the GOM Merger was not consummated by June 1, 2016 (unless
otherwise agreed upon in writing by the parties to the GOM Merger
Agreement), all the Subject Shares were to vest on the 2nd
trading day following the Company’s public disclosure of the
termination of the GOM Merger (in the event the GOM Merger
Agreement was terminated prior to June 1, 2016), or, in the event
the GOM Merger was not terminated by, or consummated by, June 1,
2016, on June 1, 2016, and the original vesting terms for all
future unvested stock were to be reinstated to the terms in effect
prior to the parties’ entry into the Vesting Agreements.
Notwithstanding the above, nothing in the Vesting Agreements
amended or waived any acceleration of vesting of unvested
restricted stock or options provided under any executive
officer’s current employment agreement with the Company,
which provide for acceleration upon termination of such
executive’s employment under certain circumstances detailed
therein.
On April 25, 2016, the
Company and each of Mr. Peterson and Mr. Moore, entered into
Amended and Restated Vesting Agreements (the
“
Amended
Vesting Agreements
”), which amend
and restated in their entirety those certain Vesting Agreements
entered into by the Company and each of Messrs. Peterson and Moore
on December 29, 2015, as amended January 6, 2016 (the
“
December
Vesting Agreements
”). Pursuant to
the Amended Vesting Agreements, the Company agreed, effective April
28, 2016, to fully accelerate the vesting of all unvested
restricted Company common stock which each of Messrs. Peterson and
Moore had delayed pursuant to the December Vesting Agreements,
which vesting had been voluntarily delayed for the benefit of the
Company by each executive since May 2015, and reinstate the
original remaining vesting schedules with respect to all other
stock grants received by the Company going forward. As a result of
the Amended Vesting Agreements, on April 28, 2016, Mr. Peterson
vested an aggregate of 48,100 shares of restricted Company common
stock, and Mr. Moore vested an aggregate of 35,400 shares of
restricted Company common stock, the vesting of which had
previously been voluntarily delayed pursuant to the December
Vesting Agreements.
113
On August 9, 2016, the Company entered into a Vesting Agreement
with David Z. Steinberg, a member of the Company’s board of
directors, pursuant to which, effective July 15, 2016, the Company
and Mr. Steinberg agreed to delay the vesting with respect to
21,429 shares of unvested Company restricted common stock held by
Mr. Steinberg for a period of one year, with the new vesting date
being July 15, 2017.
Consulting Agreement and Separation Agreement
In connection with the Company’s then
pending merger with GOM as described below under
“
GOM Holdings
Reorganization Agreement
”, and the Company’s efforts to reduce
its general and administrative expenses, the Company’s
Chairman and Chief Executive Officer, Frank C. Ingriselli, agreed
to retire from the Company and step down from the offices of Chief
Executive Officer and Executive Chairman of the Company and all of
its subsidiaries, effective April 30, 2016. Mr. Ingriselli
continued as the non-executive Chairman of the Company’s
board of directors, and continued to work with the Company in a
transitional consulting capacity for a period of three (3) months
commencing May 1, 2016 (the “
Transition
Period
”) through his
wholly-owned consulting firm, Global Ventures Investments Inc.
(“
GVEST
”),
pursuant to a Consulting Agreement dated April 25, 2016, entered
into by and between the Company and GVEST (the
“
GVEST Consulting
Agreement
”). Pursuant to
the Consulting Agreement, through GVEST Mr. Ingriselli provided the
Company with oil and gas development and strategic consulting
services through the Transition Period in exchange for a lump sum
payment of $150,000. In addition, the Company and Mr. Ingriselli
entered into an Employee Separation and Release dated April 25,
2016 (the “
Separation
Agreement
”), pursuant to
which Mr. Ingriselli agreed to (i) waive all severance benefits to
which he is entitled under his Executive Employment Agreement dated
June 10, 2011, as amended to date (the “
Ingriselli Employment
Agreement
”), including,
but not limited to, waiver of any payments by the Company to Mr.
Ingriselli of a lump sum payment equal to up to four (4)
years’ salary and 30% bonus, and continued medical benefits
for up to four (4) years, in the event of Mr. Ingriselli’s
termination under certain circumstances, (ii) waive any and all
accrued and unpaid vacation time, sick time and paid time off,
equal in value to approximately $58,000, and (iii) fully-release
the Company from all claims, in exchange for the Company agreeing
to (x) fully accelerate the vesting of all of Mr.
Ingriselli’s unvested options exercisable for 39,100 shares
of Company common stock, (y) allow Mr. Ingriselli to transfer all
149,650 shares of his unvested restricted Company common stock to
GVEST and then fully accelerate the vesting of the same, and (z)
extend the exercise period for all of Mr. Ingriselli’s
options to purchase Company common stock for a period of five (5)
years from the date of Mr. Ingriselli’s termination of
employment with the Company.
GOM Holdings Reorganization Agreement
On December 29, 2015, the Company entered into an
Agreement and Plan of Reorganization (as amended to date, the
“
GOM Merger
Agreement
”) with White
Hawk Energy, LLC (“
White
Hawk
”) and GOM Holdings,
LLC (“
GOM
”), a Delaware limited liability company.
The GOM Merger Agreement provided for the
Company’s
acquisition of GOM
through an exchange of certain of the shares of the Company’s
common and preferred stock (the “
Consideration
Shares
”), for 100% of
the limited liability company membership units of GOM (the
“
GOM
Units
”), with the GOM
Units being received by White Hawk and GOM receiving the
Consideration Shares from the Company (the
“
GOM
Merger
” or
“
Merger
”).
The Merger was subject
to various closing conditions. At the closing of the Merger, (i)
GOM was to transfer the GOM Units to White Hawk, solely in exchange
for the Consideration Shares, and (ii) White Hawk was to continue
as a wholly-owned subsidiary of the Company and to continue to
carry on the business of GOM. In exchange for the transfer of GOM
Units to White Hawk, the Company was to issue to the members of
GOM, the Consideration Shares as follows: (x) an aggregate of
155,156 shares of the Company’s restricted common stock (the
“
Common
Stock
”) and 698,448
restricted shares of the Company’s to-be-designated Series B
Convertible Preferred Stock (the “
Series
B Preferred
” (described in
greater detail below)), and (y) was to assume approximately $125
million of subordinated debt from GOM’s existing lenders and
a $30 million undrawn letter of credit backing certain offshore
asset retirement obligations (the “
GOM
Debt
”), which GOM
Debt was anticipated to be restructured on terms and conditions
mutually acceptable to the Company and GOM prior to the closing of
the Merger.
114
GOM is an investment owned by Platinum Partners
Value Arbitrage Fund, LP, a New York based investment firm
(“
PPVAF
”).
PPVAF also owns RJC, which entity originally loaned the Company
approximately $5.9 million in principal in connection with the
Company’s March 2014 senior note funding and $8.9 million in
principal in connection with the Company’s February 2015
acquisition of certain working interests from GGE, each as
restructured in May 2016, and PPVAF also owns GGE, which entity is
the holder of the Company’s Series A Preferred stock. Each of
GOM, RJC and GGE were formerly advised by Platinum Management (NY),
LLC (“
PM
LLC
”). PPVAF, and, by
virtue of being owned by PPVAF, GGE, RJC, and GOM, are currently in
the process of winding down and liquidating their assets through
the oversight and control of a court-appointed liquidator in the
Cayman Islands and are no longer advised by PM LLC or any of its
affiliates. Additionally, the Company is aware that the former
manager of PPVAF, PM LLC, is currently under investigation by the
SEC and the Justice Department and that certain former executives
have been indicted by the Justice Department, however, PM LLC and
those certain executives no longer have any control over PPVAF,
GOM, RJC or GGE, which entities are currently solely under the
control of the Cayman Islands court-appointed
liquidators.
PM LLC is also an advisor to the entity that
owns GGE, a greater than 5% stockholder of the Company, from
whom the Company acquired approximately 12,977 net acres of oil and
gas properties and interests in 53 gross wells located in the
Denver-Julesburg Basin, Colorado in February 2015, in connection
with which the Company assumed approximately $8.35 million of
subordinated notes payable owed by GGE to RJC, issued to GGE
337,500 restricted shares of the Company’s common stock
(representing approximately 9.9% of our then outstanding shares of
common stock), and issued to GGE 66,625 restricted shares of the
Company’s then newly-designated Amended and Restated Series A
Convertible Preferred Stock (the “
Series A
Preferred
”), which can be
converted into shares of the Company’s common stock on a
100:1 basis, subject to a 9.99% ownership blocker. GGE, as the sole
holder of the Company’s Series A Preferred, has the right to
appoint two designees to the Company’s board of directors for
as long as GGE continues to hold 15,000 shares of Series A
Preferred designated as “
Tranche One
Shares
” under the
Company’s Amended and Restated Certificate of Designations of
PEDEVCO Corp. Establishing the Designations, Preferences,
Limitations, and Relative Rights of its Series A Convertible
Preferred Stock. Mr. Steinberg is one of the Series A
Preferred’s designees to the board of directors in connection
with such right, provided that GGE has not designated any further
members of the board of directors at this time.
On
February 29, 2016, the parties entered into an amendment to the GOM
Merger Agreement, which amended the merger agreement in order to
provide GOM additional time to meet certain closing conditions
contemplated by the GOM Merger Agreement. The parties entered into
the Amendment to extend the deadline for closing the merger and the
date after which either party could terminate the GOM Merger
Agreement if the merger had not yet been consummated, from February
29, 2016 to no later than April 15, 2016. On April 25, 2016, the
parties further amended the GOM Merger Agreement to eliminate the
April 15, 2016, closing deadline.
On
June 22, 2017, the Company terminated its then pending merger with
GOM, in order to pursue an alternative transaction with a Hong
Kong-based investor group as contemplated pursuant to a non-binding
term sheet entered into by the Company and the investor group,
which transaction was similarly terminated on September 29,
2017.
Senior Debt Restructuring
On May 12, 2016, we entered into the Amended NPA
and related transactions as described in greater detail under
“
Part
I
” –
“
Item 1.
Business
” –
“
Material 2016-2017
Transactions
” –
“
Senior Debt
Restructuring
” of this
Annual Report on Form 10-K.
Rescission of Restricted Stock Awards
On
December 28, 2017, the Company and Mr. David Z. Steinberg, a member
of the Company’s Board of Directors, entered into a
Rescission Agreement (the “
Rescission Agreement
”)
pursuant to which the Company and Mr. Steinberg agreed to cancel
and rescind an aggregate of 75,975 shares of restricted Company
Common Stock originally granted to Mr. Steinberg pursuant to the
Board Compensation Program in 2015 and 2016.
115
Review and Approval of Related Party Transactions
We
have not adopted formal policies and procedures for the review,
approval or ratification of transactions, such as those described
above, with our executive officer(s), director(s) and significant
stockholders, provided that it is our policy that any and all such
transactions are presented and approved by the board and future
material transactions between us and members of management or their
affiliates shall be on terms no less favorable than those available
from unaffiliated third parties.
In addition, our Code of Ethics (described above
under “
Item
10. Directors, Executive Officers and Corporate
Governance
” – “
Code of
Ethics
”),
which is
applicable to all of our employees, officers and directors,
requires that all employees, officers and directors avoid any
conflict, or the appearance of a conflict, between an
individual’s personal interests and our
interests.
Director Independence
Our
board of directors has determined that each of Ms. Smith, Mr.
McAfee and Mr. Steinberg is an independent director as defined in
the NYSE American rules governing members of boards of directors or
as defined under Rule 10A-3 of the Exchange Act. Accordingly, a
majority of the members of our board of directors are independent
as defined in the NYSE American rules governing members of boards
of directors and as defined under Rule 10A-3 of the Exchange
Act
The
following table presents fees for professional audit services
performed by GBH CPAs, PC for the audit of our annual financial
statements for the years ended December 31, 2017 and 2016 (in
thousands).
|
|
2017
|
2016
|
|
GBH
CPAs, PC:
|
|
|
|
Audit
Fees(1)
|
$
124
|
$
185
|
|
Audit-Related
Fees(2)
|
-
|
-
|
|
Tax
Fees(3)
|
16
|
33
|
|
All Other
Fees(4)
|
17
|
36
|
|
Total
|
$
157
|
$
254
|
(1)
Audit fees include
professional services rendered for (1) the audit of our annual
financial statements for the fiscal years ended December 31, 2017
and 2016 and (ii) the reviews of the financial statements included
in our quarterly reports on Form 10-Q for such years.
(2)
Audit-related fees
consist of fees billed for professional services that are
reasonably related to the performance of the audit or review of our
consolidated financial statements, but are not reported under
“Audit fees.”
(3)
Tax fees include
professional services relating to preparation of the annual tax
return.
(4)
Other fees include
professional services for review of various filings and issuance of
consents.
Pre-Approval Policies
It is
the policy of our board of directors that all services to be
provided by our independent registered public accounting firm,
including audit services and permitted audit-related and non-audit
services, must be pre-approved by our board of directors. Our board
of directors pre-approved all services, audit and non-audit,
provided to us by GBH CPAs, PC for 2017 and 2016.
116
(1) Financial Statements
INDEX TO FINANCIAL STATEMENTS
|
Audited Financial Statements for Years Ended December 31, 2017 and
2016
|
|
|
|
|
|
PEDEVCO Corp.:
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Consolidated
Balance Sheets as of December 31, 2017 and 2016
|
F-2
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2017 and
2016
|
F-3
|
|
Consolidated
Statement of Shareholders’ Equity (Deficit) For the
Years Ended December 31, 2017 and 2016
|
F-4
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2017 and
2016
|
F-5
|
|
Notes
to Consolidated Financial Statements
|
F-7
|
|
(2)
Financial Statement
Schedules
|
All
financial statement schedules have been omitted, since the required
information is not applicable or is not present in amounts
sufficient to require submission of the schedule, or because the
information required is included in the consolidated financial
statements and notes thereto included in this Form
10-K.
|
(3)
Exhibits required
by Item 601 of Regulation S-K
|
117
EXHIBIT INDEX
|
|
|
|
|
|
|
Incorporated
By Reference
|
||||||
|
Exhibit
No.
|
|
Description
|
|
Filed With This Annual Report on Form
10-K
|
|
Form
|
|
Exhibit
|
|
Filing Date/Period End Date
|
|
File Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8-K
|
|
1.1
|
|
May 13, 2015
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
1.1
|
|
September 29, 2016
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
2.1
|
|
February 24, 2015
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
2.1
|
|
May 26, 2015
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
2.1
|
|
July 17, 2015
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
2.1
|
|
September 1, 2015
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
2.1
|
|
December 30, 2015
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
2.1
|
|
March 2, 2016
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
2.1
|
|
April 27, 2016
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
3.1
|
|
August 2, 2012
|
|
000-53725
|
||
|
|
|
|
|
8-K
|
|
3.1
|
|
April 23, 2013
|
|
000-53725
|
||
|
|
|
|
|
8-K
|
|
3.1
|
|
February 24, 2015
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
3.1
|
|
March 27, 2017
|
|
333-64122
|
||
|
|
|
|
|
8-K
|
|
3.3
|
|
March 6, 2008
|
|
333-64122
|
||
|
|
|
|
|
8-K
|
|
3.1
|
|
December 6, 2012
|
|
000-53725
|
||
|
|
|
|
|
8-K
|
|
3.1
|
|
October 21, 2016
|
|
001-35922
|
||
|
|
|
|
|
S-3
|
|
4.1
|
|
October 23, 2013
|
|
333-191869
|
||
|
|
|
|
|
10-K
|
|
4.2
|
|
March 31, 2014
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.18
|
|
March 10, 2014
|
|
001-35922
|
||
|
|
|
|
|
S-8
|
|
4.9
|
|
October 31, 2013
|
|
333-192002
|
||
118
|
|
|
|
|
S-8
|
|
4.11
|
|
October 31,
2013
|
|
333-192002
|
||
|
|
|
|
|
S-8
|
|
4.12
|
|
October 31,
2013
|
|
333-192002
|
||
|
|
|
|
|
S-8
|
|
4.13
|
|
October 31,
2013
|
|
333-192002
|
||
|
|
|
|
|
S-8
|
|
4.14
|
|
October 31,
2013
|
|
333-192002
|
||
|
|
|
|
|
10-QSB/A
|
|
10.12
|
|
November 20,
2003
|
|
333-64122
|
||
|
|
|
|
|
10-Q
|
|
4.1
|
|
August 14,
2009
|
|
000-53725
|
||
|
|
|
|
|
8-K
|
|
4.1
|
|
August 2,
2012
|
|
000-53725
|
||
|
|
|
|
|
S-8
|
|
4.2
|
|
October 31,
2013
|
|
333-192002
|
||
|
|
|
|
|
S-8
|
|
4.3
|
|
October 31,
2013
|
|
333-192002
|
||
|
|
|
|
|
S-8
|
|
4.4
|
|
October 31,
2013
|
|
333-192002
|
||
|
|
|
|
|
S-8
|
|
4.1
|
|
December 28,
2017
|
|
333-222335
|
||
|
|
|
|
|
S-8
|
|
4.5
|
|
October 31,
2013
|
|
333-192002
|
||
|
|
|
|
|
S-8
|
|
4.6
|
|
October 31,
2013
|
|
333-192002
|
||
|
|
|
|
|
S-8
|
|
4.7
|
|
October 31,
2013
|
|
333-192002
|
||
|
|
|
|
|
S-8
|
|
4.8
|
|
October 31,
2013
|
|
333-192002
|
||
|
|
|
|
|
10-K
|
|
10.11
|
|
March 31,
2014
|
|
001-35922
|
||
|
|
|
|
|
10-K
|
|
10.19
|
|
March 31,
2014
|
|
001-35922
|
||
|
|
|
|
|
10-K
|
|
10.20
|
|
March 31,
2014
|
|
001-35922
|
||
|
|
|
|
|
10-K
|
|
10.38
|
|
March 31,
2014
|
|
001-35922
|
||
|
|
|
|
|
10-K
|
|
10.43
|
|
March 31,
2014
|
|
001-35922
|
||
|
|
|
|
|
10-K
|
|
10.44
|
|
March 31,
2014
|
|
001-35922
|
||
|
|
|
|
|
10-K
|
|
10.45
|
|
March 31,
2014
|
|
001-35922
|
||
|
|
|
|
|
10-K
|
|
10.56
|
|
March 31,
2014
|
|
001-35922
|
||
|
|
|
|
|
10-K
|
|
10.57
|
|
March 31,
2014
|
|
001-35922
|
||
|
|
|
|
|
10-K
|
|
10.58
|
|
March 31,
2014
|
|
001-35922
|
||
|
|
|
|
|
10-K
|
|
10.61
|
|
March 31,
2014
|
|
001-35922
|
||
|
|
|
|
|
10-K
|
|
10.62
|
|
March 31,
2014
|
|
001-35922
|
||
|
|
|
|
|
10-K
|
|
10.63
|
|
March 31,
2014
|
|
001-35922
|
119
|
|
|
|
|
10-K
|
|
10.64
|
|
March 31,
2014
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.1
|
|
July
15, 2013
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.3
|
|
August 13,
2013
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.1
|
|
December 18,
2013
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.2
|
|
December 18,
2013
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.2
|
|
March 10,
2014
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.3
|
|
March 10,
2014
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.4
|
|
March 10,
2014
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.5
|
|
March 10,
2014
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.6
|
|
March 10,
2014
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.7
|
|
March 10,
2014
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.8
|
|
March 10,
2014
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.9
|
|
March 10,
2014
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.1
|
|
March 10,
2014
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.11
|
|
March 10,
2014
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.12
|
|
March 10,
2014
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.13
|
|
March 10,
2014
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.14
|
|
March 10,
2014
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.15
|
|
March 10,
2014
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.18
|
|
March 10,
2014
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.19
|
|
March 10,
2014
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.2
|
|
March 10,
2014
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.1
|
|
July
3, 2014
|
|
001-35922
|
||
|
|
|
|
|
S-3
|
|
10.2
|
|
December 19,
2014
|
|
333-201099
|
120
|
|
|
|
|
S-3
|
|
10.3
|
|
December 19,
2014
|
|
333-201099
|
||
|
|
|
|
|
8-K
|
|
10.2
|
|
February 24,
2015
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.3
|
|
February 24,
2015
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.4
|
|
February 24,
2015
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.6
|
|
February 24,
2015
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.7
|
|
February 24,
2015
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.8
|
|
February 24,
2015
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.9
|
|
February 24,
2015
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.4
|
|
May
26, 2015
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.1
|
|
December 30,
2015
|
|
001-35922
|
||
|
|
|
|
|
10-K
|
|
10.75
|
|
March 29,
2016
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.1
|
|
November 24,
2015
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.2
|
|
November 24,
2015
|
|
001-35922
|
||
|
|
|
|
|
10-Q
|
|
10.1
|
|
May
14, 2015
|
|
001-35922
|
||
|
|
|
|
|
10-Q
|
|
10.11
|
|
May
14, 2015
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.1
|
|
September 1,
2015
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.2
|
|
September 1,
2015
|
|
001-35922
|
||
|
|
|
|
|
10-Q
|
|
10.8
|
|
November 13,
2015
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.3
|
|
September 1,
2015
|
|
001-35922
|
||
|
|
|
|
|
10-Q
|
|
10.6
|
|
August 13,
2015
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.1
|
|
February 4,
2016
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.1
|
|
March 11,
2016
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.1
|
|
February 4,
2016
|
|
001-35922
|
121
|
|
|
|
|
8-K
|
|
10.1
|
|
March 11,
2016
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.1
|
|
March 31,
2016
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.1
|
|
April 13,
2016
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.1
|
|
April 27,
2016
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.2
|
|
April 27,
2016
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.3
|
|
April 27,
2016
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.4
|
|
April 27,
2016
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.5
|
|
April 27,
2016
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.6
|
|
April 27,
2016
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.1
|
|
May
17, 2016
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.2
|
|
May
17, 2016
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.3
|
|
May
17, 2016
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.4
|
|
May
17, 2016
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.5
|
|
May
17, 2016
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.6
|
|
May
17, 2016
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.7
|
|
May
17, 2016
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.8
|
|
May
17, 2016
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.9
|
|
May
17, 2016
|
|
001-35922
|
122
|
|
|
|
|
8-K
|
|
10.1
|
|
May
17, 2016
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.11
|
|
May
17, 2016
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
10.12
|
|
May
17, 2016
|
|
001-35922
|
||
|
|
|
|
|
10-Q
|
|
10.24
|
|
August 11,
2016
|
|
001-35922
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8-K
|
|
10.2
|
|
August 18,
2017
|
|
001-35922
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8-K
|
|
10.2
|
|
August 18,
2017
|
|
001-35922
|
||
|
|
|
|
|
8_K
|
|
10.1
|
|
December 29,
2017
|
|
001-35922
|
||
|
|
|
|
|
8-K/A
|
|
14.1
|
|
August 8,
2012
|
|
000-53725
|
||
|
21.1
|
|
List
of Subsidiaries of PEDEVCO CORP.
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
||
|
|
|
X
|
|
|
|
|
|
|
|
|
||
|
|
|
X
|
|
|
|
|
|
|
|
|
||
|
|
|
X
|
|
|
|
|
|
|
|
|
||
|
|
|
*
|
|
|
|
|
|
|
|
|
||
|
|
|
*
|
|
|
|
|
|
|
|
|
||
|
|
X
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
8-K
|
|
99.1
|
|
September 5,
2013
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
99.2
|
|
September 5,
2013
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
99.3
|
|
September 5,
2013
|
|
001-35922
|
||
|
|
|
|
|
8-K
|
|
3.1
|
|
December 30,
2015
|
|
001-35922
|
||
|
101.INS
|
|
XBRL
Instance Document
|
|
X
|
|
|
|
|
|
|
|
|
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema Document
|
|
X
|
|
|
|
|
|
|
|
|
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
|
X
|
|
|
|
|
|
|
|
|
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
|
X
|
|
|
|
|
|
|
|
|
|
101.LAB
|
|
XBRL
Taxonomy Extension Label Linkbase Document
|
|
X
|
|
|
|
|
|
|
|
|
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
|
X
|
|
|
|
|
|
|
|
|
*
Furnished
herein.
**
Indicates
management contract or compensatory plan or
arrangement.
#
Although the RJ
Credit LLC note has a total face value of $19,450,000, the Company
is not obligated to pay any amount more than is borrowed over the
$3,950,000 initially funded by RJ Credit LLC and the $1,967,000
funded in September 2014.
+
Schedules and
exhibits have been omitted pursuant to Item 601(b)(2) of Regulation
S-K. A copy of any omitted schedule or exhibit will be furnished
supplementally to the Securities and Exchange Commission upon
request; provided, however that PEDEVCO Corp. may request
confidential treatment pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934, as amended, for any schedule or exhibit so
furnished.
123
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) 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.
|
||
|
|
|
|
|
|
March
29, 2018
|
By:
|
/s/
Michael
L. Peterson
|
|
|
|
|
Michael
L. Peterson
|
|
|
|
|
Chief
Executive Officer
|
|
|
|
|
(Principal
Executive Officer)
|
|
|
March
29, 2018
|
By:
|
/s/
Gregory
L. Overholtzer
|
|
|
|
|
Gregory
Overholtzer
|
|
|
|
|
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
|
|
|
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates
indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
By: /s/ Michael L. Peterso
n
|
|
President
and Chief Executive Officer (Principal Executive
Officer)
|
|
March
29, 2018
|
|
Michael
L. Peterson
|
|
|
|
|
|
|
|
|
|
|
|
By: /s/ Gregory L. Overholtzer
|
|
Chief
Financial Officer
|
|
March
29, 2018
|
|
Gregory
L. Overholtzer
|
|
(Principal
Financial and Accounting Officer)
|
|
|
|
|
|
|
|
|
|
By: /s/ Frank C. Ingriselli
|
|
Chairman
of the Board of Directors
|
|
March
29, 2018
|
|
Frank
C. Ingriselli
|
|
|
|
|
|
|
|
|
|
|
|
By: /s/ David Z. Steinberg
|
|
Director
|
|
March
29, 2018
|
|
David
Z. Steinberg
|
|
|
|
|
|
|
|
|
|
|
|
By: /s/ Adam McAfee
|
|
Director
|
|
March
29, 2018
|
|
Adam
McAfee
|
|
|
|
|
|
|
|
|
|
|
|
By: /s/ Elizabeth P. Smith
|
|
Director
|
|
March
29, 2018
|
|
Elizabeth
P. Smith
|
|
|
|
|
124
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
stockholders and the board of directors of
PEDEVCO
Corp.
Danville,
California
Opinion on the
Financial Statements
We have
audited the accompanying consolidated balance sheets of PEDEVCO
Corp. (the "Company") as of December 31, 2017 and 2016, the related
consolidated statements of operations, stockholders’ equity
(deficit), and cash flows for the years then ended, and the related
notes (collectively referred to as the "financial statements"). In
our opinion, the financial statements present fairly, in all
material respects, the financial position of the Company as of
December 31, 2017 and 2016, and the results of its operations
and its cash flows for each of the years then ended, in conformity
with accounting principles generally accepted in the United States
of America.
Basis for
Opinion
These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting
Oversight Board (United States) ("PCAOB") and are required to be
independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express
no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
Other
matters
The
accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note
4 to the consolidated financial statements, the Company has
negative working capital, negative operating cash flows and has
suffered recurring loss from operations, which raise substantial
doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in
Note 4. The consolidated financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
/s/ GBH CPAs, PC
We have
served as the Company's auditor since 2008.
GBH
CPAs, PC
www.gbhcpas.com
Houston,
Texas
March
29, 2018
F-1
PEDEVCO CORP.
(amounts
in thousands, except share amounts)
|
|
December
31,
|
|
|
|
2017
|
2016
|
|
Assets
|
|
|
|
Current
assets:
|
|
|
|
Cash
|
$
917
|
$
659
|
|
Accounts
receivable
|
-
|
25
|
|
Accounts receivable
– oil and gas
|
301
|
439
|
|
Prepaid expenses
and other current assets
|
176
|
173
|
|
Total current
assets
|
1,394
|
1,296
|
|
|
|
|
|
Oil and gas
properties:
|
|
|
|
Oil and gas
properties, subject to amortization, net
|
34,922
|
57,395
|
|
Oil and gas
properties, not subject to amortization, net
|
-
|
-
|
|
Total oil and gas
properties, net
|
34,922
|
57,395
|
|
|
|
|
|
Other
assets
|
85
|
85
|
|
Investments –
cost method
|
-
|
4
|
|
Total
assets
|
$
36,401
|
$
58,780
|
|
|
|
|
|
Liabilities
and Shareholders' Deficit
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$
101
|
$
103
|
|
Accrued
expenses
|
2,126
|
1,802
|
|
Revenue
payable
|
557
|
517
|
|
Convertible –
notes payable – Bridge Notes, net of premiums of $113,000 and
$113,000, respectively
|
588
|
588
|
|
Notes payable
– Secured Promissory Notes, net of discounts of $0 and
$50,000, respectively
|
-
|
300
|
|
Total current
liabilities
|
3,372
|
3,310
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
Accrued
expenses
|
1,462
|
589
|
|
Accrued expenses
– related party
|
1,733
|
677
|
|
Notes payable
– Secured Promissory Notes, net of discounts of $2,603,000
and $4,600,000, respectively
|
34,159
|
27,497
|
|
Notes payable
– Secured Promissory Notes – related party, net of
discounts of $1,148,000 and $2,338,000, respectively
|
15,930
|
13,319
|
|
Notes payable
– Subordinated – related party
|
11,483
|
10,173
|
|
Notes payable
– other
|
4,925
|
4,925
|
|
Asset retirement
obligations
|
477
|
246
|
|
Total
liabilities
|
73,541
|
60,736
|
|
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
|
Shareholders'
deficit:
|
|
|
|
Series A
convertible preferred stock, $0.001 par value, 100,000,000 shares
authorized, 66,625 and 66,625 shares issued and outstanding at
December 31, 2017 and 2016, respectively
|
-
|
-
|
|
Common stock,
$0.001 par value, 200,000,000 shares authorized, 7,278,754 and
5,494,394 shares issued and outstanding at December 31, 2017 and
2016, respectively
|
7
|
5
|
|
Additional
paid-in-capital
|
100,954
|
99,770
|
|
Accumulated
deficit
|
(138,101
)
|
(101,731
)
|
|
Non-controlling
interests
|
-
|
-
|
|
Total shareholders'
deficit
|
(37,140
)
|
(1,956
)
|
|
|
|
|
|
Total liabilities
and shareholders' deficit
|
$
36,401
|
$
58,780
|
See
accompanying notes to consolidated financial
statements.
F-2
PEDEVCO CORP.
For the Years Ended December 31, 2017 and 2016
(amounts
in thousands, except share amounts)
|
|
For the Year
Ended
December
31,
|
|
|
|
2017
|
2016
|
|
Revenue:
|
|
|
|
Oil and gas
sales
|
$
3,015
|
$
3,968
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
Lease operating
costs
|
1,348
|
1,687
|
|
Exploration
expense
|
2
|
231
|
|
Selling, general
and administrative expense
|
2,529
|
3,912
|
|
Depreciation,
depletion, amortization and accretion
|
3,754
|
5,080
|
|
Impairment of oil
and gas properties
|
18,950
|
-
|
|
Gain on settlement
of payables
|
-
|
(1,282
)
|
|
Total operating
expenses
|
26,583
|
9,628
|
|
|
|
|
|
Loss on write-off
of cost method investment
|
(4
)
|
-
|
|
Operating
loss
|
(23,572
)
|
(5,660
)
|
|
|
|
|
|
Other income
(expense):
|
|
|
|
Interest
expense
|
(12,798
)
|
(13,959
)
|
|
Total other
expense
|
(12,798
)
|
(13,959
)
|
|
|
|
|
|
Net
loss
|
$
(36,370
)
|
$
(19,619
)
|
|
|
|
|
|
Net loss per common
share:
|
|
|
|
Basic and
diluted
|
$
(6.22
)
|
$
(4.02
)
|
|
|
|
|
|
Weighted average
number of common shares outstanding:
|
|
|
|
Basic and
diluted
|
5,847,387
|
4,886,026
|
See
accompanying notes to consolidated financial
statements.
F-3
PEDEVCO CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DEFICIT)
For the Years Ended December 31, 2017 and 2016
(amounts
in thousands, except share amounts)
|
|
Series A
Convertible Preferred Stock
|
Common
Stock
|
|
Accumulated
|
Non-controlling
|
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Interests
|
Totals
|
|
Balances at
December 31, 2015
|
66,625
|
$
-
|
4,524,932
|
$
5
|
97,203
|
$
(82,112
)
|
$
(59
)
|
$
15,037
|
|
Issuance of restricted stock for
services upon vesting maturity
|
-
|
-
|
663,182
|
-
|
-
|
-
|
-
|
-
|
|
Forfeiture of restricted common
stock
|
-
|
-
|
(4,500
)
|
-
|
-
|
-
|
-
|
-
|
|
Issuance of common stock for
settlement of payables
|
-
|
-
|
245,000
|
-
|
588
|
-
|
-
|
588
|
|
Stock-based
compensation
|
-
|
-
|
90,000
|
-
|
1,476
|
-
|
-
|
1,476
|
|
Stock repurchase and
retirement
|
-
|
-
|
(32,349
)
|
-
|
(74
)
|
-
|
-
|
(74
)
|
|
Cashless exercise of
options
|
-
|
-
|
8,129
|
-
|
-
|
-
|
-
|
-
|
|
Fair value of warrants issued as
debt discount
|
-
|
-
|
-
|
-
|
636
|
-
|
-
|
636
|
|
Minority interest capitalized
from PEDCO MSL
|
-
|
-
|
-
|
-
|
(59
)
|
-
|
59
|
-
|
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
(19,619
)
|
-
|
(19,619
)
|
|
|
|
|
|
|
|
|
|
|
|
Balances at
December 31, 2016
|
66,625
|
-
|
5,494,394
|
5
|
99,770
|
(101,731
)
|
-
|
(1,956
)
|
|
Issuance of common stock for
cash
|
-
|
-
|
590,335
|
1
|
530
|
-
|
-
|
531
|
|
Issuance of restricted stock for
services upon vesting maturity
|
-
|
-
|
1,270,000
|
1
|
(1
)
|
-
|
-
|
-
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
655
|
-
|
-
|
655
|
|
Rescinded
stock
|
-
|
-
|
(75,975
)
|
-
|
-
|
-
|
-
|
-
|
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
(36,370
)
|
-
|
(36,370
)
|
|
Balances at
December 31, 2017
|
66,625
|
$
-
|
7,278,754
|
$
7
|
$
100,954
|
$
(138,101
)
|
$
-
|
$
(37,140
)
|
See
accompanying notes to consolidated financial
statements.
F-4
PEDEVCO CORP.
For the Years Ended December 31, 2017 and 2016
(amounts
in thousands)
|
|
December
31,
|
|
|
|
2017
|
2016
|
|
Cash Flows From
Operating Activities:
|
|
|
|
Net
loss
|
$
(36,370
)
|
$
(19,619
)
|
|
Adjustments to
reconcile net loss to net cash used in operating
activities:
|
|
|
|
Stock-based
compensation
|
655
|
1,476
|
|
Depreciation,
depletion, amortization and accretion
|
3,754
|
5,080
|
|
Impairment of oil
and gas properties
|
18,950
|
-
|
|
Gain on settlement
of payables
|
-
|
(1,282
)
|
|
Loss on write-off
of cost method investment
|
4
|
-
|
|
Interest expense
deferred and capitalized in debt restructuring
|
7,083
|
6,887
|
|
Amortization of
debt discount
|
3,237
|
5,576
|
|
Changes in
operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
25
|
381
|
|
Accounts receivable
– oil and gas
|
138
|
562
|
|
Accounts receivable
– related party
|
-
|
19
|
|
Prepaid expenses
and other current assets
|
(3
)
|
(23
)
|
|
Accounts
payable
|
(2
)
|
(3,277
)
|
|
Accrued
expenses
|
1,197
|
(2,286
)
|
|
Accrued expenses
– related parties
|
1,056
|
490
|
|
Revenue
payable
|
40
|
42
|
|
Net cash used in
operating activities
|
(236
)
|
(5,974
)
|
|
|
|
|
|
Cash Flows From
Investing Activities:
|
|
|
|
Cash paid for
drilling costs
|
-
|
(75
)
|
|
Net cash provided
by (used in) investing activities
|
-
|
(75
)
|
|
|
|
|
|
Cash Flows From
Financing Activities:
|
|
|
|
Proceeds from notes
payable
|
-
|
6,295
|
|
Repayment of notes
payable
|
(37
)
|
(651
)
|
|
Proceeds from
issuance of common stock, net of offering costs
|
531
|
-
|
|
Cash paid for stock
repurchase and retirement
|
-
|
(74
)
|
|
Net cash provided
by financing activities
|
494
|
5,570
|
|
|
|
|
|
Net increase
(decrease) in cash
|
258
|
(479
)
|
|
Cash at beginning
of year
|
659
|
1,138
|
|
Cash at end of
year
|
$
917
|
$
659
|
F-5
|
Supplemental
Disclosure of Cash Flow Information
|
|
|
|
Cash paid
for:
|
|
|
|
Interest
|
$
-
|
$
553
|
|
Income
taxes
|
$
-
|
$
-
|
|
|
|
|
|
Noncash Investing
and Financing Activities:
|
|
|
|
Accrual of oil and
gas development costs
|
$
-
|
$
8
|
|
Acquisition of oil
and gas properties for assumption of accounts payable
|
$
-
|
$
3,587
|
|
Changes in
estimates of asset retirement obligations
|
$
97
|
$
(7
)
|
|
Issuance of
restricted common stock for services upon vesting
maturity
|
$
1
|
$
7
|
|
Issuance of common
stock for settlement of payables
|
$
-
|
$
588
|
|
Minority interest
capitalized from PEDCO MSL
|
$
-
|
$
(59
)
|
|
Fair value of
warrants issued as debt discount
|
$
-
|
$
636
|
See
accompanying notes to consolidated financial
statements.
F-6
PEDEVCO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
accompanying consolidated financial statements of PEDEVCO CORP.
(“PEDEVCO” or the “Company”), have been
prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) and
the rules of the Securities and Exchange Commission
(“SEC”).
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 completed a 1-for-10 reverse split of its outstanding
common stock, which took effect as of market close on April 7,
2017. All outstanding shares, options, warrants, preferred stock
and other securities convertible into the Company's common stock
have been retrospectively adjusted to reflect the reverse stock
split as required by the terms of such securities with a
proportional increase in the related share, conversion or exercise
price, as applicable.
PEDEVCO’s
primary business plan is engaging in the acquisition, exploration,
development and production of oil and natural gas shale plays in
the United States, with a secondary focus on conventional oil and
natural gas plays. The Company’s principal operating
properties are located in the Wattenberg, Wattenberg Extension, and
Niobrara formation in the Denver-Julesburg Basin (the “D-J
Basin” and the “D-J Basin Asset”) in Weld County,
Colorado, all of which properties are owned by the Company through
its wholly-owned subsidiary, Red Hawk Petroleum, LLC (“Red
Hawk”).
The
Company plans to focus on the development of shale oil and gas
assets held by the Company in its D-J Basin Asset.
The
Company plans to seek additional shale oil and gas and conventional
oil and gas asset acquisition opportunities in the U.S. utilizing
its strategic relationships and technologies that may provide the
Company a competitive advantage in accessing and exploring such
assets. Some or all of these assets may be acquired by existing
subsidiaries or other entities that may be formed at a future
date.
Basis of Presentation and Principles of Consolidation.
The
consolidated financial statements herein have been prepared in
accordance with GAAP and include the accounts of the Company and
those of its wholly and partially-owned subsidiaries as follows:
(i) Blast AFJ, Inc., a Delaware corporation; (ii) Pacific Energy
Development Corp. (“PEDCO”), a Nevada corporation;
(iii) Pacific Energy & Rare Earth Limited, a Hong Kong company
(dissolved on August 11, 2017); (iv) Blackhawk Energy Limited, a
British Virgin Islands company (which is currently in the process
of being dissolved); (v) White Hawk Petroleum, LLC, a Nevada
limited liability company (dissolved on November 30, 2016); (vi)
Red Hawk Petroleum, LLC, a Nevada limited liability company; (vii)
Pacific Energy Development MSL, LLC (owned 50% by the Company)
(dissolved in September 2016) and is included in our consolidated
results for the periods prior to its dissolution (“PEDCO
MSL”); (viii) PEDEVCO Acquisition Subsidiary, Inc., a Texas
corporation which was formed on May 21, 2015 in connection with the
planned reorganization transaction with Dome Energy, Inc.
(“Dome Energy”), which was subsequently terminated
(dissolved in April 2016); and (ix) White Hawk Energy, LLC, a
Delaware limited liability company, formed on January 4, 2016 in
connection with the contemplated reorganization transaction with
GOM Holdings, LLC (“GOM”), which reorganization
transaction has since been terminated (which is currently in the
process of being dissolved). All significant intercompany accounts
and transactions have been eliminated.
Use of Estimates in Financial Statement Preparation.
The
preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses,
as well as certain financial statement disclosures. While
management believes that the estimates and assumptions used in the
preparation of the financial statements are appropriate, actual
results could differ from these estimates. Significant estimates
generally include those with respect to the amount of recoverable
oil and gas reserves, the fair value of financial instruments, oil
and gas depletion, asset retirement obligations, and stock-based
compensation.
Reclassification
. Certain amounts for prior periods have
been reclassified to conform to the current
presentation.
F-7
Cash and Cash Equivalents.
The Company considers all highly
liquid investments with original maturities of three months or less
to be cash equivalents. As of December 31, 2017 and December 31,
2016, cash equivalents consisted of money market funds and cash on
deposit.
Concentrations of Credit Risk.
Financial instruments
which potentially subject the Company to concentrations of credit
risk include cash deposits placed with financial institutions. The
Company maintains its cash in bank accounts which, at times, may
exceed federally insured limits as guaranteed by the Federal
Deposit Insurance Corporation (“FDIC”). At December 31,
2017, approximately $646,000 of the Company’s cash balances
were uninsured. The Company has not experienced any losses on such
accounts.
Sales
to two customers comprised 38% and 51% of the
Company’s total oil and gas revenues for the year ended
December 31, 2017. Sales to two customers comprised 47%
and 42% of the Company’s total oil and gas revenues for
the year ended December 31, 2016. The Company believes that, in the
event that its primary customers are unable or unwilling to
continue to purchase the Company’s production, there are a
substantial number of alternative buyers for its production at
comparable prices.
Accounts Receivable.
Accounts receivable typically consist
of oil and gas receivables. The Company has classified these as
short-term assets in the balance sheet because the Company expects
repayment or recovery within the next 12 months. The Company
evaluates these accounts receivable for collectability considering
the results of operations of these related entities and, when
necessary, records allowances for expected unrecoverable amounts.
To date, no significant allowances have been recorded. Included in
accounts receivable - oil and gas is $21,000 related to receivables
from joint interest owners.
Bad Debt Expense.
The Company’s ability to collect
outstanding receivables is critical to its operating performance
and cash flows. Accounts receivable are stated at an amount
management expects to collect from outstanding balances. The
Company extends credit in the normal course of business. The
Company regularly reviews outstanding receivables and when the
Company determines that a party may not be able to make required
payments a charge to bad debt expense in the period of
determination is made. Though the Company’s bad debts have
not historically been significant, the Company could experience
increased bad debt expense should a financial downturn
occur.
Equipment.
Equipment is stated at cost less accumulated
depreciation and amortization. Maintenance and repairs are charged
to expense as incurred. Renewals and betterments which extend the
life or improve existing equipment are capitalized. Upon
disposition or retirement of equipment, the cost and related
accumulated depreciation are removed and any resulting gain or loss
is reflected in operations. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets,
which are 3 to 10 years.
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.
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.
F-8
Impairment of Long-Lived Assets.
The Company reviews the
carrying value of its long-lived assets annually or whenever events
or changes in circumstances indicate that the historical
cost-carrying value of an asset may no longer be appropriate. The
Company assesses recoverability of the carrying value of the asset
by estimating the future net undiscounted cash flows expected to
result from the asset, including eventual disposition. If the
future net undiscounted cash flows are less than the carrying value
of the asset, an impairment loss is recorded equal to the
difference between the asset’s carrying value and estimated
fair value. The Company recorded impairment of properties
subject to amortization for the years ended December 31, 2017 and
2016 of $18,950,000 and $-0-, respectively.
Asset Retirement Obligations.
If a reasonable estimate
of the fair value of an obligation to perform site reclamation,
dismantle facilities or plug and abandon wells can be made, the
Company will record a liability (an asset retirement obligation or
“ARO”) on its consolidated balance sheet and capitalize
the present value of the asset retirement cost in oil and gas
properties in the period in which the retirement obligation is
incurred. In general, the amount of an ARO and the costs
capitalized will be equal to the estimated future cost to satisfy
the abandonment obligation assuming the normal operation of the
asset, using current prices that are escalated by an assumed
inflation factor up to the estimated settlement date, which is then
discounted back to the date that the abandonment obligation was
incurred using an assumed cost of funds for the Company. After
recording these amounts, the ARO will be accreted to its future
estimated value using the same assumed cost of funds and the
capitalized costs are depreciated on a unit-of-production basis
over the estimated proved developed reserves. Both the accretion
and the depreciation will be included in depreciation, depletion
and amortization expense on our consolidated statements of
operations.
The
following table describes changes in our asset retirement
obligations during the years ended December 31, 2017 and 2016 (in
thousands):
|
|
2017
|
2016
|
|
Asset retirement
obligations at January 1,
|
$
246
|
$
189
|
|
Accretion
expense
|
134
|
31
|
|
Obligations
incurred for acquisition
|
-
|
19
|
|
Obligations settled
- assets sold
|
-
|
-
|
|
Changes in
estimates
|
97
|
7
|
|
Asset retirement
obligations at December 31,
|
$
477
|
$
246
|
Revenue Recognition.
All revenue is recognized when
persuasive evidence of an arrangement exists, the service or sale
is complete, the price is fixed or determinable and collectability
is reasonably assured. Revenue is derived from the sale of crude
oil and natural gas. Revenue from crude oil and natural gas sales
is recognized when the product is delivered to the purchaser and
collectability is reasonably assured. The Company follows the
“sales method” of accounting for oil and natural gas
revenue, so it recognizes revenue on all natural gas or crude oil
sold to purchasers, regardless of whether the sales are
proportionate to its ownership in the property. A receivable or
liability is recognized only to the extent that the Company has an
imbalance on a specific property greater than its share of the
expected remaining proved reserves. If collection is uncertain,
revenue is recognized when cash is collected.
Income Taxes.
The Company utilizes the asset and liability
method in accounting for income taxes. Under this method, deferred
tax assets and liabilities are recognized for operating loss and
tax credit carry-forwards and for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the year in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
the results of operations in the period that includes the enactment
date. A valuation allowance is recorded to reduce the carrying
amounts of deferred tax assets unless it is more likely than not
that the value of such assets will be realized.
Stock-Based Compensation.
The Company utilizes 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.
F-9
The
Company estimates volatility by considering the historical stock
volatility. The Company has opted to use the simplified method for
estimating expected term, which is generally equal to the midpoint
between the vesting period and the contractual term.
Loss per Common Share.
Basic loss per common share
equals net loss divided by weighted average common shares
outstanding during the period. Diluted income per share includes
the impact on dilution from all contingently issuable shares,
including options, warrants and convertible securities. The common
stock equivalents from contingent shares are determined by the
treasury stock method. The Company incurred net losses for the
years ended December 31, 2017 and 2016, and therefore, basic and
diluted loss per share for those periods are the same as all
potential common equivalent shares would be anti-dilutive. The
Company excluded 500,727 and 367,247 potentially issuable shares of
common stock related to options and 1,231,373 and 1,256,618
potentially issuable shares of common stock related to
warrants and 150,569 and 139,169 potentially issuable shares
of common stock related to the conversion of Bridge Notes, due
to their anti-dilutive effect for the years ended December 31, 2017
and 2016, respectively.
Fair Value of Financial Instruments.
The Company
follows FASB ASC 820,
Fair
Value Measurement
(“ASC 820”), which
clarifies fair value as an exit price, establishes a hierarchal
disclosure framework for measuring fair value, and requires
extended disclosures about fair value measurements. The provisions
of ASC 820 apply to all financial assets and liabilities measured
at fair value.
As
defined in ASC 820, fair value, clarified as an exit price,
represents the amount that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants. As a result, fair value is a market-based
approach that should be determined based on assumptions that market
participants would use in pricing an asset or a
liability.
As a
basis for considering these assumptions, ASC 820 defines a
three-tier value hierarchy that prioritizes the inputs used in the
valuation methodologies in measuring fair value.
Level 1
– Quoted prices in active markets for identical assets or
liabilities.
Level 2
– Inputs other than Level 1 that are observable, either
directly or indirectly, such as quoted prices for similar assets or
liabilities, quoted prices in markets that are not active, or other
inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or
liabilities.
Level 3
– Unobservable inputs that are supported by little or no
market activity and that are significant to the fair value of the
assets or liabilities.
The
fair value hierarchy also requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when
measuring fair value.
Recently Issued Accounting
Pronouncements.
In May
2014, the Financial Accounting Standards Board (“FASB”)
issued a comprehensive new revenue recognition standard that
supersedes nearly all existing revenue recognition guidance under
U.S. GAAP. The standard’s core principle (issued as
Accounting Standards Update (“ASU”) 2014-09 by the
FASB), is that a company will recognize revenue when it transfers
promised goods or services to customers in an amount that reflects
the consideration to which the company expects to be entitled in
exchange for those goods or services. These may include identifying
performance obligations in the contract, estimating the amount of
variable consideration to include in the transaction price and
allocating the transaction price to each separate performance
obligation. The new guidance must be adopted using either a full
retrospective approach for all periods presented in the period of
adoption or a modified retrospective approach. In August 2015, the
FASB issued ASU No. 2015-14, which defers the effective date of ASU
2014-09 by one year, and would allow entities the option to early
adopt the new revenue standard as of the original effective date.
This ASU is effective for public reporting companies for interim
and annual periods beginning after December 15, 2017. The Company
has evaluated the adoption of the standard and due to the nature of
the Company’s oil and gas revenue agreements method there
will be no impact of the standard on its consolidated financial
statements.
F-10
In
April 2016, the FASB issued ASU No. 2016-10, “
Revenue from Contracts with Customers:
Identifying Performance Obligations and Licensing
”
(Topic 606). In March 2016, the FASB issued ASU No. 2016-08,
“Revenue from Contracts with Customers: Principal versus
Agent Considerations (Reporting Revenue Gross versus Net)”
(Topic 606). These amendments provide additional clarification and
implementation guidance on the previously issued ASU 2014-09,
“Revenue from Contracts with Customers”. The amendments
in ASU 2016-10 provide clarifying guidance on materiality of
performance obligations; evaluating distinct performance
obligations; treatment of shipping and handling costs; and
determining whether an entity's promise to grant a license provides
a customer with either a right to use an entity's intellectual
property or a right to access an entity's intellectual property.
The amendments in ASU 2016-08 clarify how an entity should identify
the specified good or service for the principal versus agent
evaluation and how it should apply the control principle to certain
types of arrangements. The adoption of ASU 2016-10 and ASU 2016-08
is to coincide with an entity's adoption of ASU 2014-09, which
would be adopted for interim and annual reporting periods beginning
after December 15, 2017. The Company has evaluated the
adoption of the standard and due to the nature of the
Company’s oil and gas revenue agreements method there will be
no impact of the standard on its consolidated financial
statements.
In
February 2016, the FASB issued ASU 2016-02, a new lease standard
requiring lessees to recognize lease assets and lease liabilities
for most leases classified as operating leases under previous U.S.
GAAP. The guidance is effective for fiscal years beginning after
December 15, 2018, with early adoption permitted. The Company will
be required to use a modified retrospective approach for leases
that exist or are entered into after the beginning of the earliest
comparative period in the financial statements. The Company has
evaluated the adoption of the standard and, due to there being only
one operating lease currently in place, there will be minimal
impact of the standard on its consolidated financial
statements.
In
April 2016, the FASB issued ASU No. 2016-09, “
Compensation – Stock
Compensation
” (Topic 718). The FASB issued this update
to improve the accounting for employee share-based payments and
affect all organizations that issue share-based payment awards to
their employees. Several aspects of the accounting for share-based
payment award transactions are simplified, including: (a) income
tax consequences; (b) classification of awards as either equity or
liabilities; and (c) classification on the statement of cash flows.
The updated guidance is effective for annual periods beginning
after December 15, 2016, including interim periods within those
fiscal years. Early adoption of the update is permitted.
The Company adopted the standard as of January 1, 2017.
There was no impact of the standard on its consolidated financial
statements.
In
August 2016, the FASB issued ASU 2016-15,
“Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash
Payments”
(“ASU 2016-15”). ASU 2016-15
will make eight targeted changes to how cash receipts and cash
payments are presented and classified in the statement of cash
flows. ASU 2016-15 is effective for fiscal years beginning after
December 15, 2017. The new standard will require adoption on a
retrospective basis unless it is impracticable to apply, in which
case it would be required to apply the amendments prospectively as
of the earliest date practicable. The Company is currently in the
process of evaluating the impact of ASU 2016-15 on its consolidated
financial statements.
In
November 2016, the FASB issued ASU 2016-18,
“Statement of Cash Flows (Topic
230)”
, requiring that the statement of cash flows
explain the change in the total cash, cash equivalents, and amounts
generally described as restricted cash or restricted cash
equivalents. This guidance is effective for fiscal years, and
interim reporting periods therein, beginning after December 15,
2017, with early adoption permitted. The provisions of this
guidance are to be applied using a retrospective approach which
requires application of the guidance for all periods presented. The
Company is currently evaluating the impact of the new
standard.
The
Company does not expect the adoption of any 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.
F-11
Although
the Company’s senior Tranche A Notes (as defined and
discussed below under “Note 8– Notes Payable –
2016 Senior Note Financing”) do not mature until May 11,
2019, with all of the Company’s other debt expressly
subordinated thereto with no amounts due or owing under such
subordinated debt until June 11, 2019 at the earliest, with the
exception of the New MIEJ Note (as defined and discussed below
under “Note 8 – Notes Payable – MIE Jurassic
Energy Corporation”), which matures on March 8, 2019 and with
interest accruing thru March 8, 2018 being payable on such date,
the realization of the Company’s assets and satisfaction of
its liabilities remains contingent on the completion of a
financing. The Company anticipates that it will need approximately
$18 million in 2018 to execute its current business plan and is
currently actively negotiating the necessary
financing. In the event that the Company is unable to
complete the financing currently under consideration, and is
otherwise unable to replace such financing on a timely basis, it
would materially affect the Company’s ability to continue as
a going concern. If such financing is not completed,
among other things, the Company expects that it would incur
additional impairment of its oil and gas properties of up to $29
million and the Company’s ability to meet its obligations
from existing cash flows would be significantly affected. If the
Company would be required to seek financing from other sources,
such financings may not be available or, if available, may not be
on terms acceptable to the Company or its existing lenders.
Accordingly, the financial statements do not include any
adjustments related to the recoverability of assets or
classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The ability of
the Company to continue as a going concern is dependent upon its
ability to raise capital to meet its debt obligations, working
capital needs, and develop its oil and gas properties to attain
profitable operations. Management has concluded that there is
substantial doubt as to the Company’s ability to continue as
a going concern within one year after the issue date of these
financial statements.
The
following tables summarize the Company’s oil and gas
activities by classification for the years ended December 31, 2017
and 2016 (in thousands):
|
|
January 1,
2017
|
Additions
|
Disposals
|
Transfers
|
December 31,
2017
|
|
Oil and gas
properties subject to amortization
|
$
68,306
|
$
-
|
$
-
|
$
-
|
$
68,306
|
|
Oil and gas
properties not subject to amortization
|
-
|
-
|
-
|
-
|
-
|
|
Asset retirement
costs
|
163
|
97
|
-
|
-
|
260
|
|
Accumulated
depreciation, depletion and impairment
|
(11,074
)
|
(22,570
)
|
-
|
-
|
(33,644
)
|
|
Total oil and gas
properties, net
|
$
57,395
|
$
(22,473
)
|
$
-
|
$
-
|
$
34,922
|
|
|
January 1,
2016
|
Additions
|
Disposals
|
Transfers
|
December 31,
2016
|
|
Oil and gas
properties subject to amortization
|
$
64,655
|
$
3,651
|
$
-
|
$
-
|
$
68,306
|
|
Oil and gas
properties not subject to amortization
|
-
|
-
|
-
|
-
|
-
|
|
Asset retirement
costs
|
137
|
26
|
-
|
-
|
163
|
|
Accumulated
depreciation, depletion and impairment
|
(6,025
)
|
(5,049
)
|
-
|
-
|
(11,074
)
|
|
Total oil and gas
properties, net
|
$
58,767
|
$
(1,372
)
|
$
-
|
$
-
|
$
57,395
|
The
depletion recorded for production on properties subject to
amortization for the years ended December 31, 2017 and 2016
amounted to $3,620,000 and $5,049,000, respectively. The
Company recorded impairment of leases for the years ended
December 31, 2017 and 2016 of $-0- and $-0-, respectively, for
lease acreage that expired during the year due to non-renewals or
non-utilization of leases. The Company recorded
impairment of properties subject to amortization for the years
ended December 31, 2017 and 2016, of $18,950,000 and $-0-,
respectively. The impairment in 2017 was due to a delay in the
funding necessary to support the capital expenditures used in the
reserve report for development of the proven undeveloped
acreage.
In
November of 2017, Red Hawk Petroleum was made an offer by SRC
Energy to participate in the Bestway well. The drilling of the well
was started in 2015, but the exact completion date and start of
production is not yet known. The effective date of the statutory
pooling has also not yet been determined. The possible ownership
percentage of the well which could be assigned to Red Hawk is still
to be determined, but it could be between approximately 1% and 3% .
A decision on whether to participate in the well has not yet been
made, and thus no related amounts have been included on the
financial statements as of December 31, 2017.
F-12
During
the year ended December 31, 2016, net additions to oil and gas
properties subject to amortization were $3,651,000, comprised of
the development of the Company’s oil and gas properties of
$83,000 and drilling and completion costs related to the
acquisition of oil and gas properties of $3,568,000 with respect to
eight non-operated wells drilled and completed by a third party
operator.
Acquisition of Properties from Dome Energy, Inc.
On
November 19, 2015, the Company entered into a Letter Agreement with
certain parties including Dome Energy AB and its wholly-owned
subsidiary Dome Energy, Inc. (collectively “Dome
Energy”), pursuant to which Dome Energy agreed to acquire the
Company’s interests in eight wells and fully fund the
Company’s proportionate share of all the corresponding
working interest owner expenses with respect to these eight wells.
The Company assigned its interests in these wells to Dome Energy
effective November 18, 2015, and Dome Energy assumed all amounts
owed for the drilling and completion costs corresponding to these
interests acquired from the Company.
On
March 29, 2016, the Company entered into a Settlement Agreement
with Dome Energy, pursuant to which Dome Energy re-conveyed to the
Company the interests in these eight wells assigned to Dome Energy
by the Company on November 18, 2015, with the Company becoming
responsible for its proportionate share of all the working interest
owner expenses, and having the right to receive all corresponding
revenues with respect to these eight wells, from the initial
production date of the wells. As part of this transaction, the
Company also settled $659,000 of outstanding payables due from the
Company to Dome Energy that was accounted for as a purchase price
adjustment to the value of the oil and gas properties acquired. The
transaction was closed on May 12, 2016.
The
following table summarizes the purchase price and allocation of the
purchase price to the net assets acquired in May 2016 (in
thousands):
|
|
Assets
Acquired
|
|
Accounts receivable
– oil and gas
|
$
793
|
|
Oil and gas
properties, subject to amortization
|
3,587
|
|
Total
assets
|
$
4,380
|
|
Liabilities
Assumed:
|
|
|
Accounts
payable
|
$
(4,361
)
|
|
Asset retirement
obligation
|
(19
)
|
|
Total
liabilities
|
(4,380
)
|
|
Net purchase
price
|
$
-
|
On
November 18, 2015, when the Company assigned its interests in the
eight wells to Dome Energy (as described above in Note 5), Dome
Energy also agreed to pay an additional $250,000 to the Company in
the event the anticipated merger was not consummated. In connection
with the assignment of these well interests, Dome Energy issued a
contingent promissory note to the Company, dated November 19, 2015
(the “Dome Promissory Note”), with a principal amount
of $250,000, which was due to mature on December 29, 2015, upon the
termination of the anticipated merger with Dome Energy. To
guarantee payment of the Dome Promissory Note, Dome Energy
deposited $250,000 into an escrow account. During the year ended
December 31, 2016, the Company collected this receivable of
$250,000 in full satisfaction of the Dome Promissory
Note.
F-13
On
March 24, 2015, Red Hawk and Dome Energy entered into a Service
Agreement, pursuant to which Red Hawk agreed to provide certain
human resource and accounting services to Dome Energy, of which
$156,000 remained due and payable by Dome Energy to Red Hawk as of
December 31, 2015. On March 29, 2016, the Company entered into a
Settlement Agreement with Dome Energy and certain of its affiliated
entities, pursuant to which the Company and Dome Energy agreed to
terminate and cancel the Service Agreement and settle a number of
outstanding matters, with Dome Energy agreeing to pay to Red Hawk
$50,000 on May 2, 2016, in full satisfaction of the amounts due
under the Service Agreement, with all remaining amounts owed
forgiven by Red Hawk. As of December 31, 2015, the receivable due
from Dome Energy totaled $406,000. During the year ended December
31, 2016, the net receivable created by the Dome Promissory Note
was reduced to $25,000 by (i) the collection of the $250,000 as
described above, (ii) forgiveness by the Company of $106,000 due
from Dome Energy pursuant to the Settlement Agreement, and (iii)
the recording of an allowance of $25,000 as a doubtful account
(which was recognized as bad debt expense in selling, general and
administrative expense on the Company’s income statement). As
of December 31, 2016, the $50,000 was still due from Dome to
Red Hawk as a part of the Settlement Agreement. The Company
recorded an allowance for doubtful accounts as of December 31, 2016
of $25,000 related to this outstanding amount, as $25,000 of the
$50,000 was collected in early 2017. During the three months ended
March 31, 2017, the net receivable created by the Dome
Promissory Note was equal to $25,000 due to (i) the collection of
the $25,000 in January 2017, and (ii) the reversal of the allowance
of $25,000 as a doubtful account (and credited to bad debt expense
in selling, general and administrative expense on the
Company’s income statement) due to the collection in April
2017 of the final $25,000 that had been due (the Company had no
allowance for doubtful accounts as of March 31, 2017). As of
December 31, 2017, the net receivable created by the Dome
Promissory Note was $-0-.
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 would be converted into a 10.0% interest in Caspian Energy,
Inc. (“Caspian Energy”), an Ontario, Canada company
listed on the NEX board of the TSX Venture Exchange, upon the
consummation of the Aral Restructuring.
The
Company entered into an agreement with Golden Globe Energy (US),
LLC (“GGE”) to convey 50% of our interests in Asia
Sixth in connection with an acquisition transaction in March
2014.
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 addition, on the date of
conversion of the A6 Promissory Note, Mr. Frank Ingriselli, our
Chairman and then Chief Executive Officer, was appointed as a
non-executive director of Caspian Energy and currently serves as
the Chairman of its Board of Directors.
In
February 2015, we expanded our D-J Basin position through the
acquisition of acreage from GGE (the “GGE Acquisition”
and the “GGE Acquired Assets”). In connection with our
GGE Acquisition, on February 23, 2015, we provided GGE a one-year
option to acquire our interest in Caspian Energy for $100,000
payable upon exercise of the option 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 option provided to GGE was not exercised and
expired on February 23, 2016, resulting in the Company retaining
ownership of the 23,182,880 shares of Caspian Energy.
In
connection with the Company’s May 2016 debt restructuring as
more fully described below, the Company entered into a new Call
Option Agreement with GGE, dated May 12, 2016 (the “GGE
Option Agreement”), pursuant to which the Company provided
GGE an option to purchase the 23,182,880 common shares of Caspian
Energy upon payment of $100,000 by GGE to the Company and is
callable by GGE at any time. The option expires on May 12, 2019,
which is the maturity date of the debt evidenced by that certain
Note and Security Agreement, dated April 10, 2014, as amended on
February 23, 2015, and May 12, 2016, issued by the Company to RJ
Credit LLC (“RJC” and the “RJC Junior
Note”), as described below. The $100,000 option is classified
as part of other current assets as of December 31, 2017 and
2016.
F-14
Note Purchase Agreement and Sale of Secured Promissory
Notes
On
March 7, 2014, the Company entered into a $50 million financing
facility (the “Notes Purchase Agreement”) between the
Company, BRe BCLIC Primary, BRe BCLIC Sub, BRe WNIC 2013 LTC
Primary, BRe WNIC 2013 LTC Sub, and RJC, as investors
(collectively, the “Investors”), and BAM Administrative
Services LLC, as agent for the Investors (the “Agent”)
(upon notice received from the Agent on October 10, 2017, the Agent
resigned as agent for the Lenders effective December 31, 2017, and
no replacement agent has been designated by the Lenders subsequent
to such date). The Company issued the Investors Secured Promissory
Notes in the aggregate principal amount of $34.5 million (the
“Initial Notes”), which also provided for an additional
$15.5 million available under the financing agreement to fund the
Company’s future drilling costs to be evidenced by notes with
substantially similar terms as the Initial Notes (the
“Subsequent Notes,” and together with the Initial
Notes, the “Senior Notes”). On March 19, 2015, BRe WNIC
2013 LTC Primary transferred a portion of its Initial Note to
HEARTLAND Bank (subsequently assigned by HEARTLAND Bank to
CadleRock IV, LLC, effective March 8, 2018), and effective April 1,
2015, BRe BCLIC Primary transferred its Initial Note to Senior
Health Insurance Company of Pennsylvania (“SHIP”), with
each of HEARTLAND Bank and SHIP becoming an “Investor”
for purposes of the discussion below.
The
Initial Notes, as originally issued, accrued interest at the rate
of 15% per annum, payable monthly, required us to make certain
mandatory principal payments and was originally to mature on March
7, 2017.
On
August 28, 2015, January 29, 2016, March 7, 2016 and April 1, 2016,
the Company entered into several letter agreements and amendments
with certain of the holders to: (i) defer until the maturity date
of their Senior Notes the mandatory principal payments that would
otherwise be due and payable by the Company to them on payment
dates occurring from August 2015 through April 2016; and (ii) defer
until the maturity date of their Senior Notes and the RJC Junior
Note all of the interest payments that would otherwise be due and
payable by the Company to them from August 2015 to April 2016, with
all interest amounts deferred being added to principal on the first
business day of the month following the month in which such
deferred interest is accrued. The purpose of these deferrals was to
provide the Company with temporary relief from cash requirements to
focus and execute upon its contemplated business
combinations.
During
the year ended December 31, 2017, there were no payments made to
reduce the outstanding principal due under the Initial Notes,
however, such Notes were restructured as described
below.
2016 Senior Note Restructuring
Following
a series of temporary payment deferrals as described above, on May
12, 2016 (the “Closing Date”), the Company entered into
an Amended and Restated Note Purchase Agreement (the “Amended
NPA”), with existing lenders SHIP, BRe BCLIC Sub, BRe WINIC
2013 LTC Primary, BRe WNIC 2013 LTC Sub, HEARTLAND Bank
(subsequently assigned by HEARTLAND Bank to CadleRock IV, LLC,
effective March 8, 2018), and RJC, and new lenders BHLN-Pedco Corp.
(“BHLN”) and BBLN-Pedco Corp. (“BBLN,” and
together with BHLN and RJC, the “Tranche A Investors”)
(the investors in the Tranche B Notes (defined below) and the
Tranche A Investors, collectively, the “Lenders”), and
the Agent, as agent for the Lenders. The Amended NPA amended and
restated the Senior Notes held by the Tranche B Investors, and the
Company issued new Senior Secured Promissory Notes to each of the
Tranche B Investors (collectively, the “Tranche B
Notes”) in a transaction that qualified as a troubled debt
restructuring. RJC is also a party to the RJC Junior Note
(discussed below under Notes Payable - Related Party Financings -
The Subordinated Note Payable Assumed).
Subsequently,
certain of the Lenders transferred some or all of the principal
outstanding under the New Senior Notes (as defined below) held by
them and the term Lenders as used herein refers to the current
holders of the New Senior Notes, as applicable.
F-15
The
Amended NPA amended the Senior Notes as follows:
●
Created and
issued to the Tranche A Investors new “Tranche A
Notes,” in substantially the same form and with similar terms
as the Tranche B Notes, except as discussed below, consisting of a
term loan issuable in tranches with a maximum aggregate principal
amount of $25,960,000, with borrowed funds accruing interest at 15%
per annum, and maturing on May 11, 2019 (the “Tranche A
Maturity Date”) (the “Tranche A Notes,” and
together with the Tranche B Notes, the “New Senior
Notes”);
●
The
Company capitalized all accrued and unpaid interest under the
Tranche B Notes as a term loan with an aggregate outstanding
principal balance as of May 12, 2016 equal to $39,065,000 (as of
December 31, 2017 and 2016, the aggregate outstanding principal
balance is $48,106,000 and $42,333,000, respectively). The Tranche
B Notes mature on June 11, 2019 except for the Tranche B Note
issued to RJC, which matures on July 11, 2019;
●
Amended the
provisions of the Senior Notes which required mandatory prepayments
from our revenues, replacing them with a Net Revenue Sweep as
described below; and
●
Provides that
interest on the Tranche B Notes will continue to accrue at the rate
of 15% per annum, but all accrued interest through December 31,
2017 shall be deferred until due and payable on the maturity date,
with all interest amounts deferred being added to the principal of
the Tranche B Notes on a monthly basis and that following December
31, 2017, all interest will accrue and be paid monthly in arrears
in cash to the Tranche B Note holders, provided, however, no
payment may be made on the Tranche B Notes unless and until the
Tranche A Notes are repaid in full.
The
Tranche A Notes are substantially similar to the Tranche B Notes,
except that such notes are senior to the Tranche B Notes, accrue
interest until maturity and have priority to the payment of Monthly
Net Revenues as discussed below.
Amounts
paid to the Agent through the Net Revenue Sweep are applied first
to the repayment of principal and interest due under the Tranche A
Notes until such notes are paid in full and then to the repayment
of principal and interest amounts due under the Tranche B Notes. As
of December 31, 2017, the Company has paid $688,000 of principal
under the Net Revenue Sweep, of which $37,000 was paid during the
current year.
On the
Closing Date, Tranche A Investors BHLN and BBLN loaned the Company
their pro rata share of an aggregate of $6,422,000 (the
“Initial Tranche A Funding”). The Initial Tranche A
Funding net proceeds (amounting to $6,422,000 less legal fees of
$127,000) were used by the Company to (i) fund approximately $5.1
million due to a third party operator for drilling and completion
expenses related to the acquired working interests in eight wells
from Dome Energy, (ii) pay $750,000 of the Company’s past due
payables to Liberty (defined below under “Note 9 –
Commitments and Contingencies” – “Other
Commitments”), (iii) pay $445,000 of unpaid interest payments
due to Heartland Bank under its Tranche B Note through February 29,
2016, and (iv) pay fees and expenses of $127,000.
Subject
to the terms and conditions of the Amended NPA, the Company may
request each Tranche A Investor, from time to time, to advance to
the Company additional amounts of funding (each, a
“Subsequent Tranche A Funding”), provided that: (i) the
Company may not request a Subsequent Tranche A Funding more than
one time in any calendar month; (ii) Agent shall have received a
written request from the Company at least 15 business days prior to
the requested date of such advance (the “Advance
Request”); (iii) no Event of Default shall have occurred and
be continuing; and (iv) the Company shall provide to the Agent such
documents, instruments, certificates and other writings as the
Agent shall reasonably require in its sole and absolute discretion.
The advancement of all or any portion of the Subsequent Tranche A
Funding is in the sole and absolute discretion of the Agent and the
Investors and no Investor is obligated to fund all or any part of
the Subsequent Tranche A Funding. Each Subsequent Tranche A Funding
shall be in a minimum amount of $500,000 and multiples of $100,000
in excess thereof. The aggregate amount of Subsequent Tranche A
Fundings that may be made by the Investors under the Amended NPA
shall not exceed $18,577,876 and any Subsequent Tranche A Funding
repaid may not be re-borrowed.
In
addition, subject to the terms and conditions of the Amended NPA,
RJC agreed to loan to the Company $240,000, within 30 days of the
Closing Date and within 30 days of each of July 1, 2016, October 1,
2016 and January 1, 2017 (collectively, the “RJC
Fundings” and collectively with the Investor Tranche A
Fundings, the “Fundings”), provided that no Event of
Default or Default shall exist. The aggregate amount of the RJC
Fundings made by RJC under the Amended NPA shall not exceed
$960,000 and any Funding repaid may not be re-borrowed. As of
December 31, 2017 and 2016, the Company has received no loan
proceeds under this agreement, and RJC is in default of its funding
obligations thereunder.
F-16
To
guarantee RJC’s obligation in connection with the RJC
Fundings as required under the Amended NPA, GGE entered into a
Share Pledge Agreement with the Company, dated May 12, 2016 (the
“GGE Pledge Agreement”), pursuant to which GGE agreed
to pledge an aggregate of 10,000 shares of the Company’s
Series A Convertible Preferred Stock held by GGE (convertible into
1,000,000 shares of Company common stock), which pledged shares are
subject to automatic cancellation and forfeiture based on a
schedule set forth in the GGE Share Pledge Agreement, in the event
RJC fails to meet each of its RJC Funding obligations pursuant to
the Amended NPA. To date, RJC has not met its RJC Funding
obligations under the Amended NPA and the Company is entitled to
cancel and forfeit 10,000 shares of the Company’s Series A
Convertible Preferred Stock held by GGE pursuant to the terms of
the GGE Pledge Agreement, which determination to cancel shares has
not been made, and which shares have not been cancelled, as of the
date of this filing.
As
additional consideration for the entry into the Amended NPA, the
Company granted to BHLN and BBLN, warrants exercisable for an
aggregate of 596,280 shares of common stock of the Company (the
“Investor Warrants”). The warrants have a 3 year term,
are transferrable, and are exercisable on a cashless basis at any
time at $2.50 per share (as amended). The Investor Warrants include
a beneficial ownership limitation that prohibits the exercise of
the Investor Warrants to the extent such exercise would result in
the holder, together with its affiliates, holding more than 9.99%
of the Company’s outstanding voting stock (the “Blocker
Provision”). The fair value of the Investor Warrants issued
is approximately $707,000 based on the Black-Scholes option pricing
model. The relative fair value allocated to the Tranche A Notes and
recorded as debt discount was $636,000.
Other
than the Investor Warrants, no additional warrants exercisable for
common stock of the Company are due, owing, or shall be granted to
the Lenders pursuant to the Senior Notes, as amended. In addition,
warrants exercisable for an aggregate of 34,911 shares of the
Company’s common stock at an exercise price of $15.00 per
share and warrants exercisable for an aggregate of 120,000 shares
of the Company’s common stock at an exercise price of $7.50
per share previously granted by the Company to certain of the
Lenders on September 10, 2015 in connection with prior interest
payment deferrals have been amended and restated to provide that
all such warrants are exercisable on a cashless basis and to
include a Blocker Provision (the “Amended and Restated
Warrants”).
Additionally,
the Company also agreed to (a) provide to the Agent and the
Investors a monthly projected general and administrative expense
report (the “Projected G&A”) and a monthly
comparison report of the Projected G&A provided for the
preceding month, with an explanation of any variances, provided
that in no event shall such variances exceed $150,000, and (b) pay
to the Agent within 2 business days following the end of each
calendar month all of the Company’s oil and gas revenue
received by the Company during such month (the “Net Revenue
Sweep”), less (i) lease operating expenses, (ii) interest
payments due to Investors under the New Senior Notes, (iii) general
and administrative expenses not to exceed $150,000 per month unless
preapproved by the Agent (the “G&A Cap”), and (iv)
preapproved extraordinary expenses (together the “Monthly Net
Revenues”). Amounts paid to the Agent through the Net Revenue
Sweep are applied first to the repayment of principal and interest
due under the Tranche A Notes until such notes are paid in full and
then to the repayment of principal and interest amounts due under
the Tranche B Notes. During the years ended December 31, 2017 and
2016, the Company has paid $37,000 and $651,000, respectively, of
principal under the Net Revenue Sweep. The amount of interest
deferred under the Tranche A and Tranche B Notes as of December 31,
2017 and 2016 equaled $3,195,000 and $1,266,000, respectively, and
was accounted for on the balance sheet under long-term accrued
expenses and accrued expenses - related party.
The
amounts outstanding under the New Senior Notes are secured by a
first priority security interest in all of the Company’s and
its subsidiaries’ assets, property, real property,
intellectual property, securities and proceeds therefrom, granted
in favor of the Agent for the benefit of the Lenders, pursuant to a
Security Agreement and a Patent Security Agreement, each entered
into as of March 7, 2014, as amended on May 12, 2016 (the
“Amended Security Agreement” and “Amended Patent
Agreement,” respectively). Additionally, the Agent, for the
benefit of the Lenders, was granted a mortgage and security
interest in all of the Company’s and its subsidiaries real
property as located in the State of Colorado and the State of Texas
pursuant to (i) a Leasehold Deed of Trust, Fixture Filing,
Assignment of Rents and Leases, and Security Agreements, dated
March 7, 2014, as amended May 12, 2016, filed in Weld County and
Morgan County, Colorado; and (ii) a Mortgage, Deed of Trust,
Security Agreement, Financing Statement and Assignment of
Production filed in Matagorda County, Texas (collectively, the
“Amended Mortgages”).
Other
than as described above, the terms of the Amended NPA (including
the covenants and obligations thereunder) are substantially the
same as the Notes Purchase Agreement, and the terms of the Tranche
A Notes and Tranche B Notes (including the events of default,
interest rates and conditions associated therewith) are
substantially the same as the Senior Notes.
F-17
All
debt discount amounts are amortized using the effective interest
rate method. The total amount of the remaining debt discount
reflected on the accompanying balance sheet as of December 31, 2017
and 2016 was $3,751,000 and $6,988,000 respectively. Amortization
of debt discount and total interest expense for the notes (New
Senior Notes – Tranche B and Tranche A Notes and GGE Notes)
was $3,237,000 and $9,012,000, respectively, for the year ended
December 31, 2017 and was $5,576,000 and $7,832,000,
respectively, for the year ended December 31, 2016.
Junior Debt Restructuring
On May
12, 2016, the Company entered into an Amendment No. 2 to Note and
Security Agreement with RJC (the “Second Amendment”).
The Company and RJC agreed to amend the RJC Junior Note to (i)
capitalize all accrued and unpaid interest under the RJC Junior
Note as of May 12, 2016, and add it to the note principal, making
the outstanding principal amount of the RJC Junior Note as of May
12, 2016 equal to $9,379,000, (ii) extend the maturity date
(“Termination Date”) from December 31, 2017 to July 11,
2019, (iii) provide that all future interest accruing under the RJC
Junior Note is deferred until payable on the Termination Date, with
all future interest amounts deferred being added to the principal
on a monthly basis, and (iv) subordinate the RJC Junior Note to the
New Senior Notes.
Bridge Note Financing
As of
December 31, 2017, the Company had Bridge Notes with an aggregate
principal amount of $475,000 remaining outstanding, plus accrued
interest of $230,000 and additional payment-in-kind
(“PIK”) of $48,000. The aggregate principal and accrued
and unpaid interest and PIK amounts are available for conversion
into common stock pursuant to the terms of the Bridge Notes into
common stock of the Company, subject to no more than 19.99% of the
Company’s outstanding common stock on the date the Second
Amended Notes were entered into. Upon a conversion, the applicable
holder shall receive that number of shares of common stock as is
determined by dividing the Conversion Amount by a conversion price
(the “Conversion Price”) as follows:
(A)
prior to June 1,
2014, the Conversion Price was $21.50 per share; and
(B)
following June
1, 2014, the Conversion Price is the greater of (i) 80% of the
average of the closing price per share of the Company’s
publicly-traded common stock for the five (5) trading days
immediately preceding the date of the conversion notice provided by
the holder; and (ii) $5.00 per share.
Additionally,
each Bridge Note holder entered into a Subordination and
Intercreditor Agreement in favor of the Agent, subordinating and
deferring the repayment of the Bridge Notes until full repayment of
certain senior notes. The Subordination and Intercreditor
Agreements also prohibit the Company from repaying the Bridge Notes
until certain senior notes have been paid in full, except that we
are allowed to repay the Bridge Notes from net proceeds received
from the sale of common or preferred stock (i) in calendar year
2014 if such net proceeds received in such calendar year exceeds
$35,000,000, (ii) in calendar year 2015 if such net proceeds
received in such calendar year exceeds $50,000,000, and (iii) in
calendar year 2016 if such net proceeds actually received in such
calendar year exceeds $50,000,000, none of which has occurred to
date. The interest expense related to these notes for the year
ended December 31, 2017 was $57,000, compared to $57,000 for
2016.
The
unamortized debt premium as of December 31, 2017 and 2016 was
$113,000 and $113,000, respectively. No amortization was recorded
during 2017 or 2016 due to these notes being subordinated by the
Senior Notes.
MIE Jurassic Energy Corporation
On
February 14, 2013, PEDCO entered into a Secured Subordinated
Promissory Note, which was amended on March 25, 2013 and July 9,
2013 (the “MIEJ Note”, as amended through December 31,
2014) with MIEJ.
In
February 2015, the Company and PEDCO entered into a Settlement
Agreement with MIEJ and the New MIEJ Note in the amount of $4.925
million, as discussed in Note 8. As of December 31, 2017, the
amount outstanding under the New MIEJ Note was
$4,925,000.
F-18
The New
MIEJ Note has an interest rate of 10.0%, with no interest due until
maturity, is secured by all of the Company’s assets, and is
subordinated to the Senior Notes. MIEJ also agreed to subordinate
its note up to an additional $60 million of new senior lending,
with any portion of new senior lending in excess of this amount
requiring to be paid first to MIEJ until the New MIEJ Note is paid
in full. Further, for every $20 million in new senior lending the
Company raises, MIEJ is required to be paid all interest and fees
accrued on the New MIEJ Note through such date. The New MIEJ Note
was due and payable on March 8, 2017, subject to automatic
extensions upon the occurrence of a Long Term Financing (defined
below), which as described below has occurred to date.
On a
one-time basis, the Secured Promissory Notes may be refinanced by a
new loan (“Long-Term Financing”) by one or more third
party replacement lenders (“Replacement Lenders”), and
in such event the Company shall undertake commercially reasonable
best efforts to cause the Replacement Lenders to simultaneously
refinance both the Senior Notes and the New MIEJ Note as part of
such Long-Term Financing. If the Replacement Lenders are unable or
unwilling to include the New MIEJ Note in such financing, then the
Long-Term Financing may proceed without including the New MIEJ
Note, and the New MIEJ Note shall remain in place and shall be
automatically subordinated, without further consent of MIEJ, to
such Long-Term Financing. Furthermore, upon the occurrence of a
Long-Term Financing, the maturity of the New MIEJ Note is
automatically extended to the same maturity date of the Long-Term
Financing, but to no later than March 8, 2020. Additionally, in
connection with a contemplated Long-Term Financing:
●
The
Long-Term Financing must not exceed $95 million;
●
The
Company must make commercially reasonable best efforts to include
adequate reserves or other payment provisions whereby MIEJ is paid
all interest and fees accrued on the New MIEJ Note commencing as of
March 8, 2017 and annually thereafter, and to allow for quarterly
interest payments starting March 31, 2017 of not less than 5% per
annum on the outstanding balance of the New MIEJ Note, plus a
one-time payment of accrued interest (not to exceed $500,000) as of
March 31, 2017; and
●
Commencing on
March 8, 2017, MIEJ shall have the right to convert the balance of
the New MIEJ Note into the Company’s common stock at a price
equal to 80% of the average closing price per share of our stock
over the then previous 60 days, subject to a minimum conversion
price of $3.00 per share. MIEJ shall not be permitted to convert if
the conversion would result in MIEJ holding more than 19.9% of the
Company’s outstanding common stock without approval from the
Company’s shareholders, which approval the Company obtained
at its 2016 annual shareholder meeting held on December 28,
2016.
In the
event the Secured Promissory Notes are not refinanced, restructured
or extended by the existing Investors, the maturity of both the New
MIEJ Note and the Secured Promissory Notes may be extended to no
later than March 8, 2019, without requiring the consent of MIEJ.
However, (i) any such maturity extension of the New MIEJ Note will
give MIEJ the right to convert the note into our common stock as
described above, commencing on March 8, 2017, and (ii) such
extension agreement must provide that MIEJ is paid all interest and
fees accrued on the New MIEJ Note as of March 8, 2018. The New MIEJ
Note may be prepaid any time without penalty.
As a
result of the Company’s May 2016 senior debt restructuring
pursuant to the Amended NPA (as described above under “Note
Purchase Agreement and Sale of Secured Promissory Notes”
– “2016 Senior Note Restructuring”), the maturity
date of the New MIEJ Note has automatically been extended to March
8, 2019, and as a result of the Company’s shareholders
approving the conversion terms of the MIEJ Note at the
Company’s annual shareholder meeting held on December 28,
2016, MIEJ has the Right of Conversion (described above) beginning
on March 8, 2017.
The
interest expense related to this note for the year ended December
31, 2017 was $493,000, and for the year ended December 31, 2016 was
$494,000.
For
financial reporting purposes, MIEJ was considered a related party
for all periods presented prior to the MIEJ Settlement Agreement
signed in February 2015. After that date, MIEJ is no longer
considered a related party.
F-19
Related Party Financings
The Subordinated Note Payable Assumed
In
2015, the Company assumed approximately $8.35 million of
subordinated note payable from GGE in the acquisition of the GGE
Acquired Assets (the “RJC Junior Note”). The amount
outstanding on the RJC Junior Note as of December 31, 2017 and 2016
equaled $11,483,000 and $10,173,000 respectively. The lender under
the RJC Junior Note is RJC, which is one of the lenders under the
Senior Notes and is an affiliate of GGE. The note was originally
due and payable on December 31, 2017, but has been extended to
July 11, 2019 in connection with the May 2016 restructuring as
described above. The assumed note payable is subordinate to the
Senior Notes, as well as any future secured indebtedness from a
lender with an aggregate principal amount of at least $20,000,000.
Should the Company repay the Senior Notes or replace them with
secured indebtedness from a lender with an aggregate principal
amount of at least $20,000,000, RJC agreed to further amend the
subordinated note payable to adjust the frequency of interest
payments or to eliminate the payments and replace them with a
single payment of the accrued interest to be paid at
maturity.
The
interest expense related to the RJC Junior Note for the year
December 31, 2017 was $1,309,000, and for the year ended December
31, 2016 was $1,164,000.
2016 RJC Subordinated Note Deferrals
On
January 29, 2016 and March 7, 2016, the Company entered into
agreements with RJC to defer until maturity the payment of interest
and principal due under the RJC Junior Note through March 31, 2016,
and reduce the interest rate to 12% per annum effective January 31,
2016.
The
deferral period was further extended on May 12, 2016, on which date
the Company entered into an Amendment No. 2 to Note and Security
Agreement with RJC (the “Second Amendment”). The
Company and RJC agreed to amend the RJC Junior Note to (i)
capitalize all accrued and unpaid interest under the RJC Junior
Note as of May 12, 2016, and add it to the note principal, making
the outstanding principal amount of the RJC Junior Note as of June
12, 2016 equal to $9,379,000, (ii) extend the maturity date from
December 31, 2017 to July 11, 2019, (iii) provide that all future
interest accruing under the RJC Junior Note is deferred until
payable on the maturity date, with all future interest amounts
deferred being added to the principal on a monthly basis, and (iv)
subordinate the RJC Junior Note to the New Senior Notes. The
warrants previously granted to RJC on September 10, 2015 were also
amended to provide that such warrants are exercisable on a cashless
basis and to include a Blocker Provision (as defined
above).
For the
year ended December 31, 2017, interest deferred and capitalized
under Amendment No. 2 (effective May 12, 2016) to the Note amounted
to $1,309,000 and amounted to total deferred interest of $2,564,000
since January 1, 2016. The outstanding principal amount of the RJC
Junior Note as of December 31, 2017 was equal to $11,483,000.
For the
year ended December 31, 2016, interest deferred and capitalized
since May 12, 2016, under Amendment No. 2 to the Note amounted to
$794,000 and amounted to total deferred interest of $1,255,000
since January 1, 2016. The outstanding principal amount of the RJC
Junior Note as of December 31, 2016 was equal to $10,173,000.
Office Lease
In June
2017, the Company entered into a second lease addendum to the
original lease agreement signed in July 2012 and the first lease
addendum signed in May 2016, as amended, which extends the term of
the lease by an additional one year, now ending in July 2018, for
its corporate office space located in Danville, California. The
obligation under this one-year lease extension for the remainder of
the lease through July 2018 is $34,000.
In
September 2014, the Company entered into a lease agreement for
office space located in Houston, Texas, with a term of five years
ending on March 1, 2020, which location served as the
Company’s operations office. Effective April 1, 2016, the
Company terminated this lease agreement and issued the landlord
70,000 shares of common stock valued at $161,000, with no further
obligations due thereunder.
F-20
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, 58 net acres expire in 2018,
469 net acres expire in 2019, and 1,288 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. Where the Company is not
able to drill and complete a well before lease expiration, the
Company may seek to extend leases where able. As of December
31, 2017, the Company had fully impaired its unproved leasehold
costs based on management’s revised re-leasing
program.
Other Commitments
On
December 18, 2015, a complaint was filed against Red Hawk, our
wholly-owned subsidiary, in the District Court, County of Weld,
State of Colorado (Case Number: 2015CV31079) (the
“Court”), pursuant to which Liberty Oilfield Services,
LLC (“Liberty”) made various claims against Red Hawk in
connection with certain completion services provided by Liberty to
Red Hawk in November and December 2014, and accrued in accounts
payable as of December 31, 2014. The complaint alleges causes of
action for foreclosure of lien, breach of contract, quantum meruit
and account stated, and seeks payment of amounts allegedly owed,
pre- and post-judgment interest, attorneys’ fees and court
costs in connection with Red Hawk’s alleged failure to pay
Liberty approximately $2.9 million in fees due for completion
services provided by Liberty. On May 12, 2016, the Company and
Liberty entered into a settlement agreement, pursuant to which the
Company paid to Liberty $750,000 and issued 245,000 fully-vested
shares of the Company’s restricted common stock, valued at
$588,000, based on the market price on the grant date, as full
settlement of all amounts due for the services previously rendered,
for which the Company owed approximately $2.6 million. As a result
of the settlement, the Company recognized a gain on settlement of
payables of $1,282,000 during the year ended December 31,
2016.
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.
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.
PREFERRED STOCK
At
December 31, 2017, the Company was authorized to issue 100,000,000
shares of its preferred stock with a par value of $0.001 per share,
of which 25,000,000 shares have been designated “Series
A” preferred stock.
On
February 23, 2015, the Company issued 66,625 Series A Preferred
shares to GGE as part of the consideration paid for the GGE
Assets. The fair value of the Series A Preferred stock was
$28,402,000 based on a calculation using a binomial lattice option
pricing model. See Note 13 below.
The
66,625 shares of Series A Preferred stock issued to GGE were
originally contingently redeemable in 4 tranches as follows: (i)
15,000 shares in Tranche One; (ii) 15,000 shares in Tranche Two;
(iii) 11,625 shares in Tranche Three; and (iv) 25,000 shares in
Tranche Four.
F-21
In
addition, upon the original issuance of the 66,625 shares of Series
A Preferred stock issued to GGE, the Series A preferred stock had
the following features:
●
a
liquidation preference senior to all of the Company’s common
stock equal to $400 per share;
●
a
dividend, payable annually, of 10% of the liquidation
preference;
●
voting rights on
all matters, with each share having 1 vote; and
●
a
conversion feature at GGE’s option which would allow the
Series A Preferred stock to be converted into shares of the
Company’s common stock on a 100:1 basis.
However,
following the October 7, 2015 approval of the Company shareholders
of the issuance of shares of common stock upon the conversion of
the Series A Preferred stock, the Series A Preferred features have
been modified as follows:
●
the
Series A Preferred stock ceased accruing dividends and all accrued
and unpaid dividends have been automatically forfeited and
forgiven; and
●
the
liquidation preference of the Series A Preferred stock has been
reduced to $0.001 per share from $400 per share.
GGE was
also subject to a lock-up provision that prohibited it from selling
the shares of common stock through the public markets for less than
$10 per share (on an as-converted to common stock basis) until
February 23, 2016, and subject a provision which prohibits GGE from
converting shares of Series A Preferred stock if upon such
conversion it would beneficially own more than 9.99% of our
outstanding common stock or voting stock, subject to waiver by the
Company.
On
November 23, 2015, the Company lost the right to redeem any of the
Series A Preferred and the holder also lost the right to force any
redemption because, pursuant to the Series A Certificate of
Designations, the Company did not repurchase any shares within nine
months of the initial Series A issuance. Accordingly, the Series A
Preferred is no longer redeemable.
As of
December 31, 2017 and December 31, 2016, there were 66,625 shares
of the Company’s Series A Preferred outstanding, 10,000
shares of which are now subject to cancellation and forfeiture as
described further in Note 8 above due to RJC’s failure to
meet its RJC Funding obligations under the Amended
NPA.
COMMON STOCK
At
December 31, 2017, the Company was authorized to issue 200,000,000
shares of its common stock with a par value of $0.001 per
share.
During
the year ended December 31, 2016, the Company issued shares of
common stock or restricted common stock as follows:
●
On
January 7, 2016, the Company issued 175,000 shares of its
restricted common stock with a fair value of $385,000, based on the
market price on the date of issuance, to certain of its employees,
including 60,000 shares to its Chairman and then Chief Executive
Officer, Frank C. Ingriselli, 60,000 shares to its President and
then Chief Financial Officer, Michael L. Peterson, and 55,000
shares to its Executive Vice President and General Counsel, Clark
R. Moore, all pursuant to the Company’s 2012 Amended and
Restated Equity Incentive Plan and in connection with the
Company’s 2015 annual equity incentive compensation review
process. 50% of the shares vest on the six month anniversary of the
grant date, 30% vest on the twelve month anniversary of the grant
date and 20% vest on the eighteen month anniversary of the grant
date, all contingent upon the recipient’s continued service
with the Company.
●
On
April 5, 2016, the Company issued 70,000 shares of Company common
stock to the Company’s Houston office landlord in connection
with the termination of the Company’s Houston office lease,
valued at $161,000, based on the market price on the date of
grant.
F-22
●
On
April 15, 2016, there were 4,500 shares of unvested restricted
common stock forfeited in connection with the termination of an
employee.
●
On
April 28, 2016, there were 32,349 total shares of common stock
repurchased and retired by the Company from two employees at $2.30
per share.
●
On
May 12, 2016, the Company and Liberty entered into a settlement
agreement, pursuant to which the Company paid to Liberty $750,000
and issued 245,000 fully-vested shares of the Company’s
restricted common stock, valued at $588,000, based on the market
price on the grant date, as full settlement of all amounts due for
the services previously rendered, for which the Company owed
approximately $2.6 million. As of December 31, 2015 and March 31,
2016, the Company had accrued $2,620,000 in accounts payable. As a
result of the settlement, the Company recognized a gain on
settlement of payables of $1,282,000 during the year ended December
31, 2016.
●
On
July 5, 2016, the Company issued 8,129 shares of the
Company’s common stock to Mr. Frank C. Ingriselli, the
Company’s Chairman, member of the Board of Directors, and
then Chief Executive Officer, in connection with the cashless net
exercise of stock options by Mr. Ingriselli.
●
On
December 28, 2016, the Company issued 488,182 shares of its
restricted common stock with a fair value of $537,000, based on the
market price on the date of issuance, to certain of its employees
and four Directors, including 165,000 shares to its Chief Executive
Officer and President, Michael L. Peterson, and 105,000 shares to
its Executive Vice President and General Counsel, Clark R. Moore,
all pursuant to the Company’s 2012 Amended and Restated
Equity Incentive Plan and in connection with the Company’s
2015 annual equity incentive compensation review process. For the
employee shares, 50% of the shares vest on the six month
anniversary of the grant date, 30% vest on the twelve month
anniversary of the grant date and 20% vest on the eighteen month
anniversary of the grant date, all contingent upon the
recipient’s continued service with the Company.
●
On
December 28, 2016, the Company issued 20,000 shares of common stock
to a financial advisor valued at $1.10 per share, based on the fair
value of the stock on the date granted, for consulting
services.
The
Company completed a 1-for-10 reverse split of its outstanding
common stock, which took effect as of market close on April 7,
2017. Before the split, the Company had approximately 54.9 million
shares of common stock issued and outstanding, and following the
reverse split, the Company had approximately 5.49 million shares of
common stock issued and outstanding (subject to adjustment for
settlement of fractional shares which were rounded up to the
nearest whole share). All outstanding options, warrants, preferred
stock and other securities convertible into the Company's common
stock have been adjusted as a result of the reverse stock split as
required by the terms of such securities with a proportional
increase in the exercise and conversion prices, as
applicable.
During
the year ended December 31, 2017, the Company issued a total of
590,335 shares of common stock under the At Market Issuance Sales
Agreement with National Securities Corporation effective September
29, 2016 for gross proceeds of $641,000, and proceeds net of all
issuance costs equal to $531,000.
On
December 28, 2017, the Company issued 1,270,000 shares of its
restricted common stock with a fair value of $394,000, based on the
market price on the date of issuance, to certain of its employees
and four Directors (150,000 shares to each Director with a fair
value of $47,000 for each Director), including 410,000 shares to
its Chief Executive Officer and President, Michael L. Peterson, and
260,000 shares to its Executive Vice President and General Counsel,
Clark R. Moore, all pursuant to the Company’s 2012 Amended
and Restated Equity Incentive Plan and in connection with the
Company’s 2017 annual equity incentive compensation review
process. For the employee shares, 50% of the shares vest on the six
month anniversary of the grant date, 30% vest on the twelve month
anniversary of the grant date and 20% vest on the eighteen month
anniversary of the grant date, all contingent upon the
recipient’s continued service with the
Company.
On
December 28, 2017, the Company and Mr. David Z. Steinberg, a member
of the Company’s Board of Directors, entered into a
Rescission Agreement pursuant to which the Company and Mr.
Steinberg agreed to cancel and rescind an aggregate of 75,975
shares of restricted Company Common Stock originally granted to Mr.
Steinberg pursuant to the Board Compensation Program in 2015 and
2016.
As of
December 31, 2017, there were 7,278,754 shares of common stock
outstanding.
F-23
Stock-based
compensation expense recorded related to restricted stock during
the year ended December 31, 2017 and 2016 was $586,000 and $995,000
respectively. The remaining amount of unamortized
stock-based compensation expense related to restricted stock
at December 31, 2017 and 2016 was $408,000 and $600,000
respectively.
Blast 2003 Stock Option Plan and 2009 Stock Incentive
Plan
Under
Blast’s 2003 Stock Option Plan and 2009 Stock Incentive Plan,
options to acquire 3,424 shares of common stock were granted and
remained outstanding and exercisable as of December 31, 2017 and
2016. No new options were issued under these plans in 2016 or
2017.
2012 Incentive Plan
On July
27, 2012, the shareholders of the Company approved the 2012 Equity
Incentive Plan (the “2012 Incentive Plan”), which was
previously approved by the Board of Directors on June 27, 2012, and
authorizes the issuance of various forms of stock-based awards,
including incentive or non-qualified options, restricted stock
awards, performance shares and other securities as described in
greater detail in the 2012 Incentive Plan, to the Company’s
employees, officers, directors and consultants. The 2012 Incentive
Plan was amended on June 27, 2014, October 7, 2015, December 28,
2016 and December 28, 2017 to increase by 500,000, 300,000, 500,000
and 1,5000,000 (to 3,000,000 currently), respectively, the number
of shares of common stock reserved for issuance under the 2012
Incentive Plan.
A total
of 3,000,000 shares of common stock are eligible to be issued under
the 2012 Incentive Plan as of December 31, 2017, of which
2,296,130 shares have been issued as restricted stock, 621,700
shares are subject to issuance upon exercise of issued and
outstanding options, and 82,170 remain available for future
issuance as of December 31, 2017.
PEDCO 2012 Equity Incentive Plan
As a
result of the July 27, 2012 merger by and between the Company,
Blast Acquisition Corp., a wholly-owned Nevada subsidiary of the
Company (“MergerCo”), and Pacific Energy Development
Corp., a privately-held Nevada corporation (“PEDCO”)
pursuant to which MergerCo was merged with and into PEDCO, with
PEDCO continuing as the surviving entity and becoming a
wholly-owned subsidiary of the Company, in a transaction structured
to qualify as a tax-free reorganization (the “Merger”),
the Company assumed the PEDCO 2012 Equity Incentive Plan (the
“PEDCO Incentive Plan”), which was adopted by PEDCO on
February 9, 2012. The PEDCO Incentive Plan authorized PEDCO to
issue an aggregate of 100,000 shares of common stock in the form of
restricted shares, incentive stock options, non-qualified stock
options, share appreciation rights, performance shares, and
performance units under the PEDCO Incentive Plan. As of December
31, 2017, options to purchase an aggregate of 31,015 shares of the
Company’s common stock and 66,625 shares of the
Company’s restricted common stock have been granted under
this plan (all of which were granted by PEDCO prior to the closing
of the merger with the Company, with such grants being assumed by
the Company and remaining subject to the PEDCO Incentive Plan
following the consummation of the merger). The Company does not
plan to grant any additional awards under the PEDCO Incentive
Plan.
Options
On
January 7, 2016, the Company granted options to purchase an
aggregate of 166,000 shares of common stock to certain of its
consultants and employees at an exercise price of $2.20 per share,
including an option to purchase 28,000 shares to its Chairman and
then Chief Executive Officer (prior to his retirement) Frank C.
Ingriselli, an option to purchase 30,000 shares to its President
and then Chief Financial Officer Michael L. Peterson, and an option
to purchase 28,000 shares to its Executive Vice President and
General Counsel Clark R. Moore, all pursuant to the Company’s
2012 Amended and Restated Equity Incentive Plan and in connection
with the Company’s 2014 annual equity incentive compensation
review process. The options have terms of five years and fully
vested in July 2017. 50% vest six months from the date of grant,
30% vest one year from the date of grant and 20% vest eighteen
months from the date of grant, all 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 $183,000. Variables used in the
Black-Scholes option-pricing model for the options issued include:
(1) a discount rate of 1.61%, (2) expected term of 3.5 years, (3)
expected volatility of 69%, and (4) zero expected
dividends.
F-24
On
December 28, 2016, the Company granted options to purchase an
aggregate of 90,000 shares of common stock to certain of its
employees at an exercise price of $1.10 per share, including an
option to purchase 60,000 shares to its Chief Financial Officer
Gregory L. Overholtzer, all pursuant to the Company’s 2012
Amended and Restated Equity Incentive Plan and in connection with
the Company’s 2016 annual equity incentive compensation
review process. The options have terms of five years and fully vest
in June 2018. 50% vest six months from the date of grant, 30% vest
one year from the date of grant and 20% vest eighteen months from
the date of grant, all 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
$60,000. Variables used in the Black-Scholes option-pricing model
for the options issued include: (1) a discount rate of 2.02%, (2)
expected term of 3.5 years, (3) expected volatility of 89%, and (4)
zero expected dividends.
On
December 28, 2017, the Company granted options to purchase an
aggregate of 225,000 shares of common stock to certain of its
employees at an exercise price of $0.31 per share, including an
option to purchase 150,000 shares to its Chief Financial Officer
Gregory L. Overholtzer, all pursuant to the Company’s 2012
Amended and Restated Equity Incentive Plan and in connection with
the Company’s 2017 annual equity incentive compensation
review process. The options have terms of five years and expire in
December 2022. 50% vest six months from the date of grant, 30% vest
one year from the date of grant and 20% vest eighteen months from
the date of grant, all 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
$44,000.
Variables
used in the Black-Scholes option-pricing model for the options
issued in 2017 include: (1) a discount rate of 2.23%, (2) expected
term of 3.5 years, (3) expected volatility of 92%, and (4) zero
expected dividends.
During
the year ended December 31, 2017 and 2016, the Company recognized
option stock-based compensation expense related to options of
$69,000 and $298,000, respectively.
The
remaining amount of unamortized stock options expense at December
31, 2017 and 2016 was $47,000 and $73,000,
respectively.
The
intrinsic value of outstanding and exercisable options at December
31, 2017 and 2016 was $-0- and $-0-, respectively.
Option
activity during the year-ended December 31, 2017 and 2016
was:
|
|
Number of
Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contract Term (years)
|
|
Outstanding at
January 1, 2017
|
518,727
|
$
4.95
|
4.3
|
|
Granted
|
225,000
|
0.31
|
4.3
|
|
Exercised
|
-
|
|
|
|
Forfeited and
cancelled
|
-
|
|
|
|
|
|
|
|
|
Outstanding at
December 31, 2017
|
743,727
|
$
3.45
|
3.8
|
|
|
|
|
|
|
Exercisable at
December 31, 2017
|
500,727
|
$
5.09
|
3.2
|
F-25
|
|
Number of
Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contract Term (years)
|
|
Outstanding at
January 1, 2016
|
305,890
|
$
8.00
|
4.8
|
|
Granted
|
256,000
|
1.80
|
|
|
Exercised
|
(8,125
)
|
2.20
|
|
|
Forfeited and
cancelled
|
(35,038
)
|
8.90
|
|
|
|
|
|
|
|
Outstanding at
December 31, 2016
|
518,727
|
$
4.95
|
4.3
|
|
|
|
|
|
|
Exercisable at
December 31, 2016
|
367,247
|
$
6.10
|
4.2
|
Summary
of options outstanding and exercisable as of December 31, 2017 was
as follows:
|
Exercise
Price
|
Weighted
Average
Remaining Life
(years)
|
Options
Outstanding
|
Options
Exercisable
|
|
$
0.30
|
1.51
|
225,000
|
-
|
|
1.10
|
0.48
|
90,000
|
72,000
|
|
2.20
|
0.57
|
138,000
|
138,000
|
|
2.40
|
0.05
|
10,000
|
10,000
|
|
3.00
|
0.01
|
2.601
|
2,601
|
|
3.70
|
0.42
|
122,500
|
122,500
|
|
5.10
|
0.61
|
109,083
|
109,083
|
|
14.10
|
0.04
|
10,000
|
10,000
|
|
19.40
|
0.06
|
21,750
|
21,750
|
|
25.00
|
0.01
|
8,000
|
8,000
|
|
37.50
|
0.02
|
6,450
|
6,450
|
|
302.40
|
0.00
|
298
|
298
|
|
672.00
|
0.00
|
45
|
45
|
|
$
0.30 to $672.00
|
3.78
|
743,727
|
500,727
|
Summary
of options outstanding and exercisable as of December 31, 2016 was
as follows:
|
Exercise
Price
|
Weighted
Average
Remaining Life
(years)
|
Options
Outstanding
|
Options
Exercisable
|
|
$
1.10
|
0.90
|
90,000
|
-
|
|
2.20
|
1.10
|
138,000
|
89,000
|
|
2.40
|
0.10
|
10,000
|
10,000
|
|
3.00
|
0.10
|
2,601
|
2,601
|
|
3.70
|
0.80
|
122,500
|
115,050
|
|
5.10
|
1.10
|
109,083
|
109,083
|
|
14.10
|
0.10
|
10,000
|
10,000
|
|
19.40
|
0.10
|
21,750
|
16,720
|
|
25.00
|
0.07
|
8,000
|
8,000
|
|
37.50
|
0.03
|
6,450
|
6,450
|
|
302.40
|
0.00
|
298
|
298
|
|
672.00
|
0.00
|
45
|
45
|
|
$
1.10 to $672.00
|
4.3
|
518,727
|
367,247
|
F-26
Warrants
Issuance of Warrants
On May
12, 2016, as consideration for the entry into the Amended NPA, the
Company granted to BHLN and BBLN warrants exercisable for an
aggregate of 596,280 shares of common stock of the Company (the
“Investor Warrants”). The warrants have a 3-year term,
are transferrable, and are exercisable on a cashless basis at any
time at $2.50 per share, subject to receipt of additional listing
approval of such underlying shares of common stock from the NYSE
American (which additional listing approval was received from the
NYSE American on June 1, 2016). The Investor Warrants include a
beneficial ownership limitation that prohibits the exercise of the
Investor Warrants to the extent such exercise would result in the
holder, together with its affiliates, holding more than 9.99% of
the Company’s outstanding voting stock (the “Blocker
Provision”). The estimated fair value of the Investor
Warrants issued is approximately $707,000 based on the
Black-Scholes option pricing model. The relative fair value
allocated to the Tranche A Notes and recorded as debt discount was
$636,000.
Other
than the Investor Warrants, no additional warrants exercisable for
common stock of the Company are due, owing, or shall be granted to
the Lenders pursuant to the Senior Notes. In addition, warrants
exercisable for an aggregate of 34,911 shares of the
Company’s common stock at an exercise price of $15.00 per
share and warrants exercisable for an aggregate of 120,100 shares
of the Company’s common stock at an exercise price of $7.50
per share previously granted by the Company to certain of the
Lenders on September 10, 2015 in connection with prior interest
payment deferrals have been amended and restated to provide that
all of such warrants are exercisable on a cashless basis and
include a Blocker Provision.
During
the years ended December 31, 2017 and 2016, the Company recognized
warrant stock-based compensation expense of $-0- and $-0-,
respectively.
The
intrinsic value of outstanding and exercisable warrants at December
31, 2017 and December 31, 2016 was $-0- and $-0-,
respectively.
Warrant
activity during the years-ended December 31, 2017 and 2016
was:
|
|
Number of
Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contract Term
(#
years)
|
|
Outstanding at
January 1, 2017
|
1,256,618
|
$
8.00
|
2.39
|
|
Granted
|
-
|
-
|
|
|
Forfeited and
cancelled
|
(25,245
)
|
33.29
|
|
|
Outstanding at
December 31, 2017
|
1,231,373
|
$
7.44
|
1.43
|
|
|
|
|
|
|
Exercisable at
December 31, 2017
|
1,231,373
|
$
7.44
|
1.43
|
|
|
Number of
Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contract Term
(#
years)
|
|
Outstanding at
January 1, 2016
|
780,338
|
$
17.80
|
3.0
|
|
Granted
|
596,280
|
2.50
|
|
|
Forfeited and
cancelled
|
(120,000
)
|
45.00
|
|
|
Outstanding at
December 31, 2016
|
1,256,618
|
$
8.00
|
2.4
|
|
|
|
|
|
|
Exercisable at
December 31, 2016
|
1,256,618
|
$
8.00
|
2.4
|
F-27
Summary
of warrants outstanding and exercisable as of December 31, 2017 was
as follows:
|
Exercise
Price
|
Weighted
Average Remaining Life (years)
|
Warrants
Outstanding
|
Warrants
Exercisable
|
|
$
2.50
|
0.66
|
596,280
|
596,280
|
|
4.40
|
0.00
|
10,000
|
10,000
|
|
7.50
|
0.07
|
120,104
|
120,104
|
|
10.00
|
0.57
|
370,076
|
370,076
|
|
15.00
|
0.02
|
34,913
|
34,913
|
|
25.00
|
0.10
|
100,000
|
100,000
|
|
|
|
|
|
|
$
2.50 to 25.00
|
1.42
|
1,231,373
|
1,231,373
|
Summary
of warrants outstanding and exercisable as of December 31, 2016 was
as follows:
|
Exercise
Price
|
Weighted
Average Remaining Life (years)
|
Warrants
Outstanding
|
Warrants
Exercisable
|
|
$
2.50
|
1.12
|
596,280
|
596,280
|
|
4.40
|
0.01
|
10,000
|
10,000
|
|
7.50
|
0.17
|
120,100
|
120,100
|
|
10.00
|
0.87
|
370,076
|
370,076
|
|
15.00
|
0.05
|
34,912
|
34,912
|
|
23.40
|
0.00
|
16,678
|
16,678
|
|
25.00
|
0.18
|
100,000
|
100,000
|
|
52.50
|
0.00
|
8,572
|
8,572
|
|
|
|
|
|
|
$
2.50 to $52.50
|
2.4
|
1,256,618
|
1,256,618
|
Note Amendments and Warrant Issuances to RJC
See
Notes above for a discussion of certain amendments to the Senior
Note and RJC Junior Note held by RJC.
See
Notes above for a discussion of certain warrants issued to RJC by
the Company in connection with the amendment of the Senior Note and
RJC Junior Note held by RJC.
GGE Acquisition
As a
result of the 66,625 restricted shares of the Company’s
Series A Convertible Preferred Stock issued to GGE which can be
converted into shares of the Company’s common stock on a
100:1 basis as described below in greater detail, and the
appointment by GGE of a representative to the Company’s Board
of Directors, GGE became a related party to the Company in 2015.
The following table reflects the related party amounts for GGE
included in the December 31, 2017 and 2016 balance sheets (in
thousands):
|
|
As
of
December 31,
2017
|
As
of
December 31,
2016
|
|
Accrued
expenses
|
$
1,733
|
$
677
|
|
Long-term notes
payable – Secured Promissory Notes, net of discount of
$1,148,000
|
15,930
|
13,319
|
|
Long notes payable
– Subordinated
|
11,483
|
10,173
|
|
Total
liabilities
|
$
29,146
|
$
24,169
|
F-28
As
defined in our accounting policy on the fair value of financial
instruments, financial assets and liabilities are classified based
on the lowest level of input that is significant to the fair value
measurement. The Company’s assessment of the significance of
a particular input to the fair value measurement requires judgment,
and may affect the valuation of the fair value of assets and
liabilities and their placement within the fair value hierarchy
levels.
The
following table sets forth by level within the fair value hierarchy
our financial instruments that were accounted for at fair value as
of December 31, 2017 (in thousands):
|
|
Fair Value
Measurements At December 31, 2017
|
|||
|
|
Quoted Prices
in Active Markets for Identical Assets
|
Significant
Other Observable Inputs
|
Significant
Unobservable Inputs
|
Total
Carrying
|
|
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
Value
|
|
Series A
Convertible Preferred Stock
|
$
-
|
$
-
|
$
28,402
|
$
28,402
|
The
Company believes there is no active market or significant other
market data for the Series A Preferred stock as it is held by a
limited number of closely held entities, therefore the Company has
determined it should use Level 3 inputs.
The
Series A Convertible Preferred Stock was valued using
a binomial lattice option pricing model for which
the significant assumptions were expected term and expected
volatility. The binomial lattice model used a probabilistic
approach in which the Company assigned percentages to each
scenario based on the chance of repayment. The percentages
used were as follows: the non-repayment scenario was assigned a 25%
probability and the repayment scenario was assigned a 75%
probability.
Due to
the Company’s net losses, there were no provisions for income
taxes for the years ended December 31, 2017 and 2016.
On
December 22, 2017, new federal tax reform legislation was enacted
in the United States (the “2017 Tax Act”), resulting in
significant changes from previous tax law. The 2017 Tax Act
reduces the federal corporate income tax rate to 21% from 34%
effective January 1, 2018. The rate change, along with
certain immaterial changes in tax basis resulting from the 2017 Tax
Act, resulted in a reduction of the Company’s deferred tax
assets of $18,589,000 and a corresponding reduction in the
valuation allowance. The following table reconciles the U.S.
federal statutory income tax rate in effect for the years ended
December 1, 2017 and 2016, and the Company’s effective tax
rate:
|
|
Year
Ended
December
31,
2017
|
Year
Ended
December
31,
2016
|
|
|
|
|
|
U.S. federal
statutory income tax
|
34.00
%
|
34.00
%
|
|
State and local
income tax, net of benefits
|
4.63
%
|
4.63
%
|
|
Amortization of
debt discount
|
(1.22
%)
|
(0.15
%)
|
|
Loss on write-off
of cost method investment
|
0.00
%
|
0.00
%
|
|
Officer life
insurance and D&O insurance
|
(0.08
%)
|
0.00
%
|
|
Stock-based
compensation
|
(0.70
%)
|
(2.91
%)
|
|
Tax rate changes
and other
|
(51.12
%)
|
0.20
%
|
|
Valuation allowance
for deferred income tax assets
|
14.49
%
|
(35.77
%)
|
|
Effective income
tax rate
|
0.00
%
|
0.00
%
|
|
|
|
|
Deferred
income tax assets as of December 31, 2017 and 2016 are as follows
(in thousands):
|
Deferred
Tax Assets
|
December 31,
2017
|
December 31,
2016
|
|
Difference in
depreciation, depletion, and capitalization methods – oil and
natural gas properties
|
$
3,649
|
$
3,967
|
|
Net operating loss
– federal taxes
|
30,322
|
38,369
|
|
Net operating loss
– state taxes
|
5,398
|
2,303
|
|
Total deferred tax
asset
|
39,369
|
44,639
|
|
|
|
|
|
Less valuation
allowance
|
(39,369
)
|
(44,639
)
|
|
Total deferred tax
assets
|
$
-
|
$
-
|
F-29
In
assessing the realization of deferred tax assets, management
considers whether it is more likely than not that some portion or
all of deferred assets will not be realized. The ultimate
realization of the deferred tax assets is dependent upon the
generation of future taxable income during the periods in which
those temporary differences become deductible.
Based
on the available objective evidence, management believes it is more
likely than not that the net deferred tax assets will not be fully
realizable. Accordingly, management has applied a full valuation
allowance against its net deferred tax assets at December 31, 2017
and 2016. The net change in the total valuation allowance from
December 31, 2016 to December 31, 2017 was a decrease of
$13,319,000.
The
Company’s policy is to recognize interest and penalties
accrued on any unrecognized tax benefits as a component of income
tax expense. As of December 31, 2017 and 2016, the Company did not
have any significant uncertain tax positions or unrecognized tax
benefits. The Company did not have associated accrued interest or
penalties, nor was any interest expense or penalties recognized for
the years ended December 31, 2017 and 2016.
As of
December 31, 2017, the Company has federal net operating loss
carryforwards of approximately $94,477,000 (not subject to
limitations) and $49,922,000 (subject to limitations),
which if not utilized, will expire beginning in 2033 and
2023, respectively.
Utilization
of NOL and tax credit carryforwards may be subject to a substantial
annual limitation due to ownership change limitations that may have
occurred or that could occur in the future, as required by the
Internal Revenue Code (the “Code”), as amended, as well
as similar state provisions. In general, an “ownership
change” as defined by the Code results from a transaction or
series of transactions over a three-year period resulting in an
ownership change of more than 50 percent of the outstanding stock
of a company by certain shareholders or public groups.
The
Company currently has tax returns open for examination by the
Internal Revenue Service for all years since 2010.
F-30
SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING
ACTIVITIES
(UNAUDITED)
The
following supplemental unaudited information regarding
PEDEVCO’s direct oil and gas activities is presented pursuant
to the disclosure requirements of ASC 932. All oil and
gas operations are located in the U.S.
(1)
Capitalized costs relating to Oil and Gas Producing Activities (in
thousands):
|
|
2017
|
2016
|
|
Proved oil and gas
properties
|
$
68,566
|
$
68,469
|
|
Unproved oil and
gas properties
|
-
|
-
|
|
Subtotal
|
68,566
|
68,469
|
|
Accumulated
depreciation, amortization and impairment
|
(33,644
)
|
(11,074
)
|
|
Net capitalized
costs
|
$
34,922
|
$
57,395
|
(2) Costs Incurred in Oil and Gas Property Acquisition and
Development Costs (in thousands):
|
|
2017
|
2016
|
|
Acquisition of
properties:
|
|
|
|
Proved
|
$
-
|
$
3,670
|
|
Unproved
|
-
|
-
|
|
Exploration
costs
|
-
|
-
|
|
Development
costs
|
-
|
-
|
|
Total
|
$
-
|
$
3,670
|
(3) Results of Operations for Producing Activities (in
thousands):
|
|
2017
|
2016
|
|
Sales
|
$
3,015
|
$
3,968
|
|
Production
costs
|
(1,348
)
|
(1,687
)
|
|
Depletion,
accretion and impairment
|
(22,704
)
|
(5,080
)
|
|
Income tax
benefit
|
-
|
-
|
|
Results of
operations
|
$
(21,037
)
|
$
(2,799
)
|
(4) Reserve quantity information:
The
supplemental unaudited presentation of proved reserve quantities
and related standardized measure of discounted future net cash
flows provides estimates only and does not purport to reflect
realizable values or fair market values of the Company’s
reserves. The Company emphasizes that reserve estimates are
inherently imprecise and that estimates of new discoveries are more
imprecise than those of producing oil and gas properties.
Accordingly, significant changes to these estimates can be expected
as future information becomes available. All of the Company’s
reserves are located in the United States.
Proved
reserves are those estimated reserves of crude oil (including
condensate and natural gas liquids) and natural gas that geological
and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing
economic and operating conditions. Proved developed reserves are
those expected to be recovered through existing wells, equipment,
and operating methods.
F-31
The
standardized measure of discounted future net cash flows is
computed by applying the average first day of the month price of
oil and gas during the 12 month period before the end of the year
(with consideration of price changes only to the extent provided by
contractual arrangements) to the estimated future production of
proved oil and gas reserves, less the estimated future expenditures
(based on year-end costs) to be incurred in developing and
producing the proved reserves, less estimated future income tax
expenses (based on year-end statutory tax rates, with consideration
of future tax rates already legislated) to be incurred on pretax
net cash flows less tax basis of the properties and available
credits, and assuming continuation of existing economic conditions.
The estimated future net cash flows are then discounted using a
rate of 10 percent per year to reflect the estimated timing of the
future cash flows.
The
reserve estimates set forth below for 2017 were prepared by Tenet
Advisory Group, LLC (“TAG”), an
independent professional engineering firm certified by the
Texas Board of Professional Engineers (Registration
number F-18903), under the direction of Joe C.
Bullard of TAG. TAG, and its employees, have no material
interest in our Company.
TAG also
performs oilfield operational and engineering services for the
Company
.
The
reserve estimates were prepared by TAG using reserve definitions
and pricing requirements prescribed by the SEC.
TAG
estimated the proved reserves for our properties by performance
methods and analogy. All of the proved producing reserves
attributable to producing wells and/or reservoirs were estimated by
performance methods. These performance methods, such as decline
curve analysis, utilized extrapolations of historical production
and pressure data available through December 2017 in those cases
where such data were considered to be definitive. The data utilized
were furnished to TAG by the Company or obtained from public data
sources. All of the proved developed non-producing and undeveloped
reserves were estimated by analogy.
Estimated
Quantities of Proved Oil and Gas Reserves
|
|
2017
|
||
|
|
Ngl
|
Oil
|
Gas
|
|
|
(MBbls)
|
(Mbbls)
|
(Mmcf)
|
|
Proved Developed
Producing
|
51
|
326
|
800
|
|
Proved Developed
Non-Producing
|
-
|
-
|
-
|
|
Total
Proved Developed
|
51
|
326
|
800
|
|
Proved
Undeveloped
|
622
|
1,616
|
5,554
|
|
Total
Proved as of December 31, 2017
|
673
|
1,942
|
6,354
|
|
|
2017
|
||
|
|
Ngl
|
Oil
|
Gas
|
|
|
(MBbls)
|
(MBbls)
|
(Mmcf)
|
|
Total Proved
Reserves:
|
|
|
|
|
Beginning of
year
|
-
|
2,591
|
11,053
|
|
Extensions and
discoveries
|
-
|
-
|
-
|
|
Revisions of
previous estimates
|
685
|
(597
)
|
(4,599
)
|
|
Purchase of
minerals in place
|
-
|
-
|
-
|
|
Sales of minerals
in place
|
-
|
-
|
-
|
|
Production
|
(12
)
|
(52
)
|
(100
)
|
|
End of year proved
reserves
|
673
|
1,942
|
6,354
|
|
Estimated
Quantities of Proved Oil and Gas Reserves
|
2016
|
|
|
|
Oil
|
Gas
|
|
|
(MBbls)
|
(Mmcf)
|
|
Proved Developed
Producing
|
391
|
1,199
|
|
Proved Developed
Non-Producing
|
-
|
-
|
|
Total Proved
Developed
|
391
|
1,199
|
|
Proved
Undeveloped
|
2,200
|
9,854
|
|
Total Proved as of
December 31, 2016
|
2,591
|
11,053
|
F-32
|
|
2016
|
|
|
|
Oil
|
Gas
|
|
|
(MBbls)
|
(Mmcf)
|
|
Total Proved
Reserves:
|
|
|
|
Beginning of
year
|
2,431
|
10,252
|
|
Extensions and
discoveries
|
-
|
-
|
|
Revisions of
previous estimates
|
138
|
658
|
|
Purchase of
minerals in place
|
114
|
742
|
|
Sale of minerals in
place
|
-
|
-
|
|
Production
|
(92
)
|
(599
)
|
|
End of year proved
reserves
|
2,591
|
11,053
|
The
standardized measure of discounted future net cash flows, in
management’s opinion, should be examined with caution. The
basis for this table is the reserve studies prepared by independent
petroleum engineering consultants, which contain imprecise
estimates of quantities and rates of future production of reserves.
Revisions of previous year estimates can have a significant impact
on these results. Therefore, the standardized measure of discounted
future net cash flow is not necessarily indicative of the fair
value of the Company’s proved oil and natural gas
properties.
Future
income tax expense was computed by applying statutory rates, less
the effects of tax credits for each period presented,
to calculate the difference between pre-tax net cash
flows relating to the Company’s proved reserves and the tax
basis of proved properties, after consideration of available net
operating loss and percentage depletion carryovers.
The
following table sets forth the standardized measure of discounted
future net cash flows (stated in thousands) relating to the proved
reserves as of December 31, 2017:
|
For the year ended December 31,
2017
|
($
000's)
|
|
Future cash
inflows
|
$
120,897
|
|
Future production
costs
|
(26,743
)
|
|
Future development
costs
|
(36,185
)
|
|
Future income tax
expense
|
(9
)
|
|
Future net cash
flows
|
57,960
|
|
10% annual
discount
|
(26,737
)
|
|
Standardized
measure of discounted future net cash flows
|
$
31,223
|
|
Changes
in Standardized Measure of Discounted Future Cash
Flows
|
|
|
|
($
000's)
|
|
Beginning of
year
|
$
19,154
|
|
Sales and transfers
of oil and gas produced, net of production costs
|
(1,595
)
|
|
Net changes in
prices and production costs
|
8,931
|
|
Extensions,
discoveries, additions and improved recovery, net of related
costs
|
-
|
|
Development costs
incurred
|
-
|
|
Revisions of
estimated development costs
|
(60
)
|
|
Revisions of
previous quantity estimates
|
(6,316
)
|
|
Accretion of
discount
|
1,916
|
|
Net change in
income taxes
|
(7
)
|
|
Purchases of
reserves in place
|
-
|
|
Sales of reserves
in place
|
-
|
|
Changes in timing
and other
|
9,200
|
|
End of
year
|
$
31,223
|
F-33
The
following table sets forth the standardized measure of discounted
future net cash flows (stated in thousands) relating to the proved
reserves as of December 31, 2016:
|
|
($
000's)
|
|
For the year ended
December 31, 2016
|
|
|
Future cash
inflows
|
$
123,261
|
|
Future production
costs
|
(34,665
)
|
|
Future development
costs
|
(36,118
)
|
|
Future income tax
expense
|
-
|
|
Future net cash
flows
|
52,478
|
|
10% annual
discount
|
(33,324
)
|
|
Standardized
measure of discounted future net cash flows
|
$
19,154
|
|
Changes in Standardized Measure of Discounted Future Cash
Flows
|
|
|
|
|
|
($
000's)
|
|
Beginning of
year
|
$
26,152
|
|
Sales and transfers
of oil and gas produced, net of production costs
|
(2,281
)
|
|
Net changes in
prices and production costs
|
(11,753
)
|
|
Extensions,
discoveries, additions and improved recovery, net of related
costs
|
-
|
|
Development costs
incurred
|
3,662
|
|
Revisions of
estimated development costs
|
(2,808
)
|
|
Revisions of
previous quantity estimates
|
5,088
|
|
Accretion of
discount
|
5,858
|
|
Net change in
income taxes
|
32,434
|
|
Purchases of
reserves in place
|
2,279
|
|
Sales of reserves
in place
|
-
|
|
Changes in timing
and other
|
(39,477
)
|
|
End of
year
|
$
19,154
|
F-34
TABLE OF CONTENTS
Part IItem 1. BusinessItem 10. Directors, Executive Officers and Corporate GovernanceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial StatementsNote 1 Basis Of PresentationNote 2 Description Of BusinessNote 3 Summary Of Significant Accounting PoliciesNote 4 Going ConcernNote 5 Oil and Gas PropertiesNote 6 Accounts ReceivableNote 7 Other Current AssetsNote 8 Notes PayableNote 9 Commitments and ContingenciesNote 10 Shareholders EquityNote 11 Stock Options and WarrantsNote 12 Related Party TransactionsNote 13 Fair Value Of Financial InstrumentsNote 14 Income Taxes