What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-29 compared with 2022-03-11 · 101 added, 73 removed, 161 unchanged (52% of the section changed)

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

We are an oil and gas company focused on the development, acquisition and production of oil and natural gas assets where the latest in modern drilling and completion techniques and technologies have yet to be applied.

We are an oil and gas company focused on the acquisition and development of oil and natural gas assets where the latest in modern drilling and completion techniques and technologies have yet to be applied.

In particular, we focus on legacy proven properties where there is a long production history, well defined geology and existing infrastructure that can be leveraged when applying modern field management technologies.

Our current properties are located in the San Andres formation of the Permian Basin situated in West Texas and eastern New Mexico and in the Denver-Julesberg Basin in Colorado.

As of December 31, 2021, we held approximately 32,870 net Permian Basin acres located in Chaves and Roosevelt Counties, New Mexico, through PEDCO and approximately 11,580 net D-J Basin acres located in Weld and Morgan Counties, Colorado, through our wholly-owned operating subsidiary, Red Hawk.

As of December 31, 2020, we held interests in 385 gross (381 net) wells in our Permian Basin Asset of which 33 are active producers, 14 are active injectors and two are active salt water disposal wells (“ SWDs ”), all of which are held by PEDCO and operated by its wholly-owned operating subsidiaries, and interests in 78 gross (21.7 net) wells in our D-J Basin Asset, of which 18 gross (16.2 net) wells are operated by Red Hawk and currently producing, 39 gross (5.5 net) wells are non-operated, and 21 wells have an after-payout interest.

Our current properties are located in the San Andres formation of the Permian Basin situated in West Texas and eastern New Mexico (the “ Permian Basin ”) and in the Denver-Julesberg Basin (“ D-J Basin ”) in Colorado.

As of December 31, 2022, we held approximately 31,308 net Permian Basin acres located in Chaves and Roosevelt Counties, New Mexico, through our wholly-owned operating subsidiary, PEDCO and approximately 12,372 net D-J Basin acres located in Weld and Morgan Counties, Colorado, through our wholly-owned operating subsidiary, Red Hawk.

As of December 31, 2022, we held interests in 381 gross (377 net) wells in our Permian Basin Asset, of which 42 are active producers, 16 are active injectors and two are active SWD’s, all of which are held by PEDCO and operated by its wholly-owned operating subsidiaries, and interests in 92 gross (24.1 net) wells in our D-J Basin Asset, of which 18 gross (16.2 net) wells are operated by Red Hawk and currently producing, 53 gross (7.9 net) wells are non-operated, and 21 wells have an after-payout interest.

Detailed information about our business plans and operations, including our core D-J Basin and Permian Basin Assets, is contained under “ Part 1 ” - “ Item 1.

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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 have historically acquired properties that we believe have 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.

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production volumes;

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

realized prices on the sale of oil and natural gasgas;

oil and natural gas production and operating expenses;

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The 1.4 MMBoe increase was primarily due to the addition of proved undeveloped reserves in our D-J Basin Asset as a result of increased activity around our acreage and favorable pricing.

Using the average monthly crude oil price of $66.56 per Bbl and natural gas price of $3.60 per thousand cubic feet (“ Mcf ”) for the twelve months ended December 31, 2021, our estimated discounted future net cash flow (“ PV-10 ”) before tax expenses for our proved reserves was approximately $196.6 million, of which approximately $149.8 million are proved undeveloped reserves.

Using the average monthly crude oil price of $93.67 per Bbl and natural gas price of $6.36 per thousand cubic feet (“ Mcf ”) for the twelve months ended December 31, 2022, our estimated discounted future net cash flow (“ PV-10 ”) for our proved reserves was approximately $374.5 million, of which approximately $268.7 million are proved undeveloped reserves.

Total reserve value at December 31, 2022, represents an increase of approximately $177.8 million or 90% from approximately $196.7 million a year earlier using the same SEC pricing and reserves methodology.

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During the year ended December 31, 2022, our net crude oil, natural gas, and NGLs sales volumes increased to 364,771 Bbls, or 999 Bopd, from 265,302 Bbls, or 727 Bopd, a 37% increase over the previous fiscal year.

The production increase is related to optimization of production efficiency on existing wells, both in the Permian Basin and D-J Basin Asset.

This was driven by horizontal clean outs and artificial lift conversions in the Permian Basin and an improved chemical program in the DJ Basin.

The remaining wells that were shut-in in early 2020 due to the COVID outbreak that were not brought back online prior to the end of 2020 have also now been returned to production.

Additional production increases are related to our participation in four new wells from a third party operator in our D-J Basin Asset.

The increase in production volume is primarily driven by two main factors including, production from two new wells in the operated Permian Basin asset which came online in Q2 2022, and the positive performance from our participation in non-operated wells in the D-J Basin Asset which came online in Q1 2022 (see additional detail below).

Significant Capital Expenditures

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Financial Statements and Supplementary Data ”).

We reported a net loss for the year ended December 31, 2021 of $1.3 million, or ($0.02) per share, compared to a net loss for the year ended December 31, 2020 of $32.7 million or ($0.45) per share.

The decrease in net loss of $31.4 million was primarily due to a $19.3 million impairment of our oil and gas properties in the prior period, and, when excluding this significant transaction, our net loss would have still decreased by $12.1 million, primarily due to a $7.8 million increase in revenue coupled with a $1.8 million gain on sale of oil and gas properties, a $3.0 million decrease in total operating expenses (when not including impairment a non-cash item), and a $0.4 million gain from forgiveness of a Paycheck Protection Program (“ PPP ”) loan (discussed below), offset by a $0.9 million decrease in other income, when comparing the current period to the prior year period (all of which are discussed in more detail below).

On June 2, 2020, the Company received loan proceeds of $370,000 (the “ New PPP Loan ”) under the Small Business Association (SBA) PPP.

The New PPP Loan was evidenced by a promissory note, dated as of May 28, 2020 (the “ Note ”), between the Company and Texas Capital Bank, N.A.

Net Income (Loss)

We reported net income for the year ended December 31, 2022 of $2.8 million, or $0.03 per share, compared to a net loss for the year ended December 31, 2021 of $1.3 million or ($0.02) per share.

The increase in net income of $4.1 million was primarily due to a $14.2 million increase in revenue, offset by an increase of $7.9 million in total operating expenses in the current period, offset further by a $0.4 million gain from forgiveness of our $0.4 million Paycheck Protection Program loan in May 2021, coupled with a $1.8 million gain on sale of oil and gas properties each in the prior period (all of which are discussed in more detail below).

On June 2, 2020, the Company received loan proceeds of $370,000 (the “ PPP Loan ”) under the Small Business Association (SBA) Paycheck Protection Program.

The PPP Loan was evidenced by a promissory note, dated as of May 28, 2020 (the “ Note ”), between the Company and Texas Capital Bank, N.A.

The Note had a two-year term, bears interest at the rate of 1.00% per annum, and may be prepaid at any time without payment of any premium.

Effective May 20, 2021, the Company received notification from Texas Capital Bank, N.A.

that the SBA had fully forgiven the Company’s New PPP Loan principal and accrued interest of $370,000 and $4,000, respectively.

Therefore, as of December 31, 2021, the Company recognized no debt or accrued interest related to the New PPP Loan on the balance sheet, and a gain on forgiveness of PPP Loan of $374,000 for the year ended December 31, 2021 in connection with such forgiveness.

that the SBA had fully forgiven the Company’s PPP Loan principal and accrued interest of $370,000 and $4,000, respectively.

Therefore, as of December 31, 2021, the Company recognized no debt or accrued interest related to the PPP Loan on the balance sheet, and a gain on forgiveness of PPP Loan of $374,000 for the year ended December 31, 2021 in connection with such forgiveness.

The following table sets forth the revenue and production data for the years ended December 31, 2022 and 2021:

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Total Revenues

Less than 1%.

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

Total crude oil and natural gas revenues for the year ended December 31, 2021, increased $7.8 million, or 97%, to $15.9 million, compared to $8.1 million for the same period a year ago, due primarily to a favorable price variance of $6.7 million, coupled with a favorable volume variance of $1.1 million.

During 2021, despite the natural decline of existing production, a favorable production volume variance was achieved through reduction of downtime and optimization of production efficiency on existing wells, both in the Permian Basin and D-J Basin Asset.

This was driven by horizontal clean outs and artificial lift conversions in the Permian Basin and improved chemical program in the D-J Basin coupled with production increases from our participation in four non-operated wells in the D-J Basin in the latter part of 2021.

Total crude oil, natural gas and NGL revenues for the year ended December 31, 2022, increased $14.2 million, or 89%, to $30.0 million, compared to $15.9 million for the same period a year ago, due primarily to a favorable volume variance of $7.9 million, coupled with a favorable price variance of $6.3 million.

The increase in production volume is primarily driven by two main factors including, production from two new wells in the operated Permian Basin asset in Q2 2022, and the positive performance from our participation in non-operated wells in the D-J Basin Asset in Q1 2022.

Net Operating and Other (Income) Expenses

The following table sets forth operating and other expenses for the years ended December 31, 2022 and 2021 (in thousands):

Increase (Decrease)

% Increase (Decrease)

Direct Lease Operating Expense

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Lease Operating Expenses

Exploration Expenses

Depreciation, Depletion,

Amortization and Accretion

Impairment of Oil and Gas Properties

General and Administrative (Cash)

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Interest Income

Other Income (Expense)

Gain on forgiveness of PPP loan

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Lease Operating Expenses.

The increase of $1.5 million was due to the increased activity levels of 2021, brought on by a more favorable commodity pricing environment.

Production operations remained online through 2021 (2020 saw a shut-in period of 42 days).

Costs were incurred to execute workover and lease operating expense projects that were elected to be put on hold due to the poor price environment of 2020.

There was also an increase in service and materials pricing due supply chain limitations and increased industry demand throughout 2021.

Discounted rates negotiated during the 2020 downturn have now returned to normal or higher levels due to the overall higher industry activity levels.

Exploration Expense.

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

The increase of $4.5 million was primarily due to increased overall activity compared to the prior period as well as increased taxes and marketing fees from higher production volumes.

Also, additional workovers for well reactivations, artificial lift repairs and optimizations have been executed during the current period in an effort to maximize production volumes during the current increased commodity pricing environment.

Workover expense included approximately $0.7 million of one-time non-recurring operating expenses for improving the Permian Basin Asset’s water handling infrastructure and approximately $0.5 million of non-recurring costs for environmental cleanup and reclamations of historic well and facility sites that were inherited from previous operators in our Permian Basin Asset.

Increased commodity pricing period over period caused increased production taxes coupled with increased marketing fees from higher production volumes.

Service and materials costs have also increased accordingly with general supply chain and inflation issues seen throughout the industry leading to increased operating and workover costs.

Depreciation, Depletion, Amortization and Accretion.

Although production increased during the current period, the $4.0 million decrease in depreciation, depletion, amortization and accretion was primarily the result of a decrease in our depletable base due to the impairment of our oil and gas properties at the prior year end (discussed below), when compared to the prior period.

For the year ended December 31, 2020, due to falling oil and gas prices, we incurred a $19.3 million impairment of our oil and gas properties (discussed below).

Impairment of Oil and Gas Properties .

For the year ended December 31, 2021, impairment of oil and gas properties was $-0-, compared to $19.3 million for the year ended December 31, 2020.

The impairment in 2020 resulted from a reduction of our reserve value for our oil and gas assets relative to the carrying amount of our oil and gas assets, which was predominately commodity price driven, mainly as a result of the sharp decrease in prices resulting from the decrease in demand associated with COVID-19 and the governmental response thereto in 2020.

The $3.8 million increase was primarily the result of an increase in production (noted above) in the current period when compared to the prior period.

Also, as production increased during the period, there was a corresponding decrease in our proved developed reserves in our December 31, 2022 reserve report.

This resulted in a reduction in our depletable base in our Permian Basin Asset, which, in turn caused our depletion rate to increase from 28.21% to 37.86%.

This increase resulted in approximately $2.1 million in additional depletion expense in Q4 2022.

The decrease in proved developed producing reserves in our Permian Basin Asset was related to the natural decline in production from existing wells and pushing the drilling and completion of certain Permian Basin Asset wells into future periods due to timing and allocation of capital to D-J Basin Asset projects.

Additionally, the Company elevated its plugging and abandonment program in the Permian Basin Asset (in accordance with the terms of a new compliance order) to plug additional wells over the next two years, which increased accretion expense in Q4 2022 by approximately $0.5 million.

General and Administrative Expenses (excluding share-based compensation).

The decrease of $0.2 million in general and administrative expenses (excluding share-based compensation) was primarily due to $0.5 million in costs related to a terminated exchange offer to acquire all of the issued and outstanding common units of a trust in the prior period offset by $0.3 million in accrued bonuses to officers and employees of the Company in the current period, which were subsequently paid in January 2022.

There was no change in general and administrative expenses (excluding share-based compensation) as the Company continues to strive to contain costs and remain within budget from period to period.

Share-Based Compensation.

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Interest Expense.

There was minimal interest expense in the current year’s period and the prior year’s period.

The accrued interest in both periods related to the Company’s New PPP Loan (see “ Item 8.

Financial Statements and Supplementary Data ” — “ Note 7 - PPP Loan ” for more information), which was forgiven during the current period as discussed below.

The $0.01 million of interest expense in the prior period was due to accrued interest related to the Company’s PPP Loan, which was forgiven in the prior period (see above for more information).

Interest Income and Other Expense.

Includes interest earned from our interest-bearing cash accounts, and for the 2021 period includes the settlement of accounts payables for $0.1 million and for the 2020 period includes the settlement of accounts payable of $0.9 million and $0.1 million in working interest credits.

Gain on forgiveness of New PPP loan .

Includes principal and accrued interest from our New PPP Loan that was fully forgiven during the current period (see “ Item 8.

Financial Statements and Supplementary Data ” — “ Note 7 - PPP Loan ” for more information).

Includes interest earned from our interest-bearing cash accounts, for which interest rates have increased in the current period, compared to the prior period.

Other income in the current period is primarily related to an $80,000 vendor dispute settlement coupled with a $24,000 non-refundable two-year rent payment made in September 2022, to the Company for office space leased by SK Energy, which is 100% owned and controlled by Dr.

Simon Kukes, our Chief Executive Officer and director, offset by a $15,000 royalty adjustment.

The prior period other income consisted primarily of $0.1 million in accounts payable settlements and other miscellaneous income items.

Gain on forgiveness of PPP loan .

Includes principal and accrued interest from our PPP Loan that was fully forgiven during the prior period (see above for more information).

Liquidity and Capital Resources

The primary sources of cash for the Company during the year ended December 31, 2021, were from an underwritten public offering pursuant to which we sold 5,968,500 shares of common stock at a public offering price of $1.50 per share, and generated net proceeds of approximately $8.2 million, a registered direct offering of 4,458,600 shares of common stock at a price of $1.57 per share, pursuant to which we generated net proceeds of $6.5 million, $1.9 million from the sale of oil and gas properties, and sales of crude oil and natural gas.

The primary uses of cash were funds used for well completion and operating expenses.

The primary sources of cash for the Company during the year ended December 31, 2022 were from $30.0 million in sales of crude oil and natural gas.

The primary uses of cash were funds used for drilling, completion, acquisition and operating costs.

Impact of COVID-19

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The World Health Organization declared COVID-19 a “ Public Health Emergency of International Concern ” on January 30, 2020, and a global pandemic on March 11, 2020.

COVID-19 and the governmental responses thereto significantly reduced worldwide economic activity during much of 2020, and continues to threaten the global economy, as variants and mutations of the disease continue to spread, even as vaccines and boosters have become more widely available.

While oil and gas prices have increased above pre-pandemic levels, it is not possible at this time for the Company to estimate the full impact that COVID-19 will have on the Company’s business in the future as such estimate would need to be based on whether or not COVID-19 continues to spread and the effectiveness of the containment of the virus, by the governments of countries affected and in which the Company operates.

However, the Company’s operations have previously been disrupted, and may be disrupted again in the future due to COVID-19.

The COVID-19 outbreak and mitigation measures have also had an adverse impact on global economic conditions, as well as an adverse effect on the Company’s business and financial condition and may continue to have an adverse effect on the Company, including on its potential to conduct financings on terms acceptable to the Company, if at all.

The Company implemented temporary precautionary measures intended to help minimize the risk of the virus to its employees, vendors, and guests, including limiting the number of occupants at the Company’s Houston headquarters and requiring all others to work remotely, and discouraged employee attendance at in-person work-related meetings, which could negatively affect the Company’s business, which measures have recently eased in accordance with federal, state and local guidance, and the vaccination of substantially all of the Company’s office-based employees.

The extent to which the COVID-19 outbreak will continue to impact the Company’s results will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus, the continued availability and efficacy of vaccines and booster shots, the willingness of individuals to be vaccinated initially, and to obtain booster shots, the effect of virus mutations, and the actions to contain its impact.

Any future decrease in the price of oil, or the demand for oil and gas, as a result of COVID-19 or otherwise, will likely have a negative impact on our results of operations and cash flows.

In response to the effects of COVID-19, the Company has adopted policies, procedures, and practices both in its Houston office headquarters and across its field operations to protect its employees, contractors, and guests from COVID-19, including the adoption of a COVID-19 Response Plan, implementation of contractor questionnaires to assess COVID-19 risk and exposure prior to entering any Company facility or worksite, adopting best practices, guidelines and protocols recommended by the Centers for Disease Control (the “ CDC ”) and the Office of the Texas Governor for the prevention of exposure and spread of COVID-19, and instituting twice-monthly management calls discussing the COVID-19 pandemic and the Company’s ongoing response to the COVID-19 pandemic and effectiveness thereof.

Given the Company’s robust online systems and workflow practices and procedures, the Company has not experienced any material challenges or reductions in efficiency or effectiveness of its office-based workforce, while its field personnel continue to attend to their daily field operations uninterrupted, while mindful of social distancing and other preventative measures and safeguards recommended by the CDC, and subject to the CDC’s updated guidance.

We plan to continue to closely monitor the global energy markets and oil and gas pricing, with the remainder of our 2022 development plan being subject to revision, if and as necessary, to react to market conditions in the best interest of its shareholders, while prioritizing its financial strength and liquidity.

COVID-19 and the governmental responses thereto significantly reduced worldwide economic activity during much of 2020.

On January 30, 2023, the Biden Administration announced it will end the public health emergency (and national emergency) declarations on May 11, 2023.

During 2021 and 2022, oil and gas prices increased above pre-pandemic levels, and the effect of the pandemic on the Company’s operations in 2022 was minimal.

Any future decrease in the price of oil, or the demand for oil and gas, as a result of COVID-19, recessions, or otherwise, will likely have a negative impact on our results of operations and cash flows.

Ukraine Conflict

In late February 2022, Russia launched a significant military action against Ukraine.

The conflict has caused, and could intensify, volatility in natural gas, oil and NGL prices, and the extent and duration of the military action, sanctions and resulting market disruptions could be significant and could potentially have a substantial negative impact on the global economy and/or our business for an unknown period of time.

We believe that the increase in crude oil prices during the first half of 2022 was partially due to the impact of the conflict between Russia and Ukraine on the global commodity and financial markets, and in response to economic and trade sanctions that certain countries have imposed on Russia.

Working Capital

At December 31, 2022, the Company’s total current assets of $32.1 million exceeded its total current liabilities of $17.0 million, resulting in a working capital surplus of $15.1 million, while at December 31, 2021, the Company’s total current assets of $28.0 million exceeded its total current liabilities of $5.2 million, resulting in a working capital surplus of $22.8 million.

The $16.0 million increase in our working capital surplus is primarily related to cash received from the sale of common stock in our February and October 2021 offerings (discussed below), the sale of certain oil and gas properties and the forgiveness in full of our New PPP Loan principal and accrued interest.

On February 5, 2021, the Company closed an underwritten public offering of 5,968,500 shares of common stock at a public offering price of $1.50 per share, which included the full exercise of the underwriter’s over-allotment option, for net proceeds (after deducting the underwriters’ discount equal to 6% of the public offering price and expenses associated with the offering) of approximately $8.2 million.

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

On November 17, 2021, the Company registered up to $3.6 million in securities for sale in an “at the market offering” from time to time (the “ ATM Offering ”), although no securities have been sold by us to date in the ATM Offering.

Our estimated net capital expenditures for 2022 are estimated at the time of this Annual Report to range between $35 million to $40 million.

This estimate includes a range of $33 million to $38 million for drilling and completion costs on our Permian Basin and D-J Basin Assets and approximately $2 million in estimated capital expenditures for ESP purchases, rod pump conversions, recompletions, well cleanouts, leasing, facilities, and other miscellaneous capital expenses.

The $7.7 million decrease in our working capital surplus is primarily related to accrued capital expenditures related to our participation in the drilling and completion of six well in our D-J Basin Asset by a third-party operator (see “ Item 8.

Financial Statements and Supplementary Data ” - “ Note 6 - Oil and Gas Properties ”) offset by increases in revenue as a result of our oil and gas sales (described above).

The Company has an ongoing $3.6 million offering of securities in an “at the market offering”, pursuant to which the Company may sell securities from time to time (the “ ATM Offering ”).

On June 10, 2022, the Company sold 87,121 shares of common stock at a sales price of $1.66 per share in the ATM Offering for net proceeds of $141,000, which includes $4,000 in commission fees.

The Company also incurred $106,000 in initial and subsequent legal and audit fees for registration and placement of the ATM Offering.

The ATM Offering was made pursuant to the terms of that certain November 17, 2021, Sales Agreement (the “ Sales Agreement ”) with Roth Capital Partners, LLC (“ Roth Capital ”, or the “ Agent ”).

The Company will pay the sales agent a commission of 3.0% of the gross sales price of any shares sold under the Sales Agreement, less reimbursement of the first $40,000 of such gross proceeds.

The Company has also provided the Agent with customary indemnification rights and has agreed to reimburse the sales agent for certain specified expenses up to $25,000.

The Company currently has $3.5 million remaining available in securities which we may sell in the future via the Sales Agreement, subject to availability under the Company’s shelf-registration, which limits the maximum amount of securities which can be sold in any 12 month period to 1/3 of the Company’s then public float.

Our net capital expenditures for 2023 are estimated at the time of this Annual Report to range between $25 million to $35 million.

This estimate includes a range of $23 million to $33 million for drilling and completion costs on our Permian Basin and D-J Basin Asset and approximately $2 million in estimated capital expenditures for ESP purchases, rod pump conversions, recompletions, well cleanouts, leasing, facilities, remediation and other miscellaneous capital expenses.

This estimate does not include anything for acquisitions or other projects that may arise but are not currently anticipated.

We periodically review our capital expenditures and adjust our capital forecasts and allocations based on liquidity, drilling results, leasehold acquisition opportunities, proposals from third party operators, and commodity prices in the best interest of our shareholders, while prioritizing its financial strength and liquidity (see “ Part I ” – “ Item 1A.

We periodically review our capital expenditures and adjust our capital forecasts and allocations based on liquidity, drilling results, leasehold acquisition opportunities, partner non-consents, proposals from third party operators, and commodity prices, while prioritizing our financial strength and liquidity (see “ Part I ” - “ Item 1A.

Risk Factors ”).

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If new proposals are received that meet our economic thresholds and require material capital expenditures, we have flexibility to move capital from our Permian Asset to our D-J Basin Asset, or vice versa, as our Permian Asset is 100% operated and held by production (“ HBP ”), allowing for flexibility of timing on development.

Our 2022 development program incorporates an increase in both basins relating to service cost inflation resulting in an estimated cost increase of approximately 10 to 15 percent per well, based on costs we have experienced since the third quarter of 2021.

Our 2022 development program is based upon our current outlook for the remainder of the year and is subject to revision, if and as necessary, to react to market conditions, product pricing, contractor availability, requisite permitting and capital availability, capital allocation changes between assets, acquisitions, divestitures and other adjustments determined by us in the best interest of our shareholders while prioritizing our financial strength and liquidity.

We expect that we will have sufficient cash available to meet our needs over the foreseeable future, including to fund the remainder of our 2022 development program, discussed above, which cash we anticipate being available from (i) projected cash flow from our operations, (ii) existing cash on hand, (iii) equity infusions or loans (which may be convertible) made available from SK Energy LLC (“ SK Energy ”), which is 100% owned and controlled by Simon Kukes, our Chief Executive Officer and director, which funding SK Energy is under no obligation to provide, (iv) public or private debt or equity financings, including up to $3.6 million in securities which we may sell in the future in an on-going “at the market offering”, of which no shares have been sold in connection with to date, and (v) funding through credit or loan facilities.

Our 2023 development program incorporates service costs that have remained relatively flat, based on costs we have experienced since the end of the third quarter of 2022.

Our 2023 development program is based upon our current outlook for the year and is subject to revision, if and as necessary, to react to market conditions, product pricing, contractor availability, requisite permitting, capital availability, partner non-consents, capital allocation changes between assets, acquisitions, divestitures and other adjustments determined by the Company in the best interest of its shareholders while prioritizing our financial strength and liquidity.

We expect that we will have sufficient cash available to meet our needs over the next 12 months after the filing of this report and in the foreseeable future, including to fund our 2023 development program, discussed above, which cash we anticipate being available from (i) projected cash flow from our operations, (ii) existing cash on hand, (iii) equity infusions or loans (which may be convertible) made available from Dr.

Simon Kukes, our Chief Executive Officer and director, which funding Dr.

Kukes under no obligation to provide, (iv) public or private debt or equity financings, including up to $3.5 million in securities which we may sell in the future in an on-going “at the market offering”, subject to availability under the Company’s shelf-registration, which limits the maximum amount of securities which can be sold in any 12 month period to 1/3 of the Company’s then public float, and (v) funding through credit or loan facilities.

In addition, we may seek additional funding through asset sales, farm-out arrangements, and credit facilities to fund potential acquisitions during the remainder of 2023.

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Cash flows provided by financing activities

Net increase (decrease) in cash and restricted cash

Net increase in cash and restricted cash

Cash provided by operating activities.

Net cash provided by operating activities increased by $6.0 million for the current year’s period, when compared to the prior year’s period, primarily due to a decrease in net loss of $31.2 million when factoring in our $19.3 million impairment in the prior period, coupled with increased revenues in the current period, which are a function of higher commodity prices and production increases.

Additional increases are related to a decrease of $4.0 million in depreciation, depletion and amortization and a $1.8 million gain on the sale of oil and gas properties, offset by net decreases to our other components of working capital, which are related to our increased payables and accrued expenses in the current period, when compared to the prior period.

Net cash provided by operating activities increased by $10.0 million for the current year’s period, when compared to the prior year’s period, primarily due to an increase in net income of $4.1 million, coupled with a $3.8 million increase in depreciation, depletion and amortization (due to increased sales production), and by a $0.1 million net decrease to our other components of working capital in the current period.

During the year ended December 31, 2021, we also had a $1.8 million gain on the sale of oil and gas properties and a $0.4 million gain from forgiveness of our PPP Loan.

Cash used in investing activities.

Net cash used in investing activities decreased by $12.0 million for the current year’s period, when compared to the prior year’s period, primarily due to an $11.2 million decrease in cash paid for oil and gas development costs, which in the current period related to capital projects in the latter part of 2021, coupled with $1.9 million in proceeds from the sale of oil and gas properties, offset by $1.1 million in additional capital costs incurred.

Net cash used in investing activities increased by $9.5 million for the current year’s period, when compared to the prior year’s period, primarily due to increased capital spending relating to our drilling and completion activities.

Cash provided by financing activities.

In the current period, the Company generated net cash from financing activities by selling common stock, net of offering costs, of $14.7 million, compared to net cash from financing activities of $0.4 million in the prior period, due to proceeds from obtaining the New PPP Loan financing.

In the prior period, the Company closed an underwritten public offering of 5,968,500 shares of common stock at a public offering price of $1.50 per share, which included the full exercise of the underwriter’s over-allotment option, for net proceeds (after deducting the underwriters’ discount equal to 6% of the public offering price and expenses associated with the offering) of $8.2 million, net of offering costs.

The current period sales of our common stock via our ATM Offering are discussed above.

Non-GAAP Financial Measures

We have included EBITDA and Adjusted EBITDA in this Report as supplements to GAAP measures of performance to provide investors with an additional financial analytical framework which management uses, in addition to historical operating results, as the basis for financial, operational and planning decisions and present measurements that third parties have indicated are useful in assessing the Company and its results of operations.

“EBITDA” represents net income before interest, taxes, depreciation and amortization.

“Adjusted EBITDA” represents EBITDA, less share-based compensation, gain on sale of oil and gas properties, gain on forgiveness of the PPP Loan, and accounts payable settlements.

Adjusted EBITDA excludes certain items that we believe affect the comparability of operating results and can exclude items that are generally non-recurring in nature or whose timing and/or amount cannot be reasonably estimated.

EBITDA and Adjusted EBITDA are presented because we believe they provide additional useful information to investors due to the various noncash items during the period.

EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry.

EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our operating results as reported under GAAP.

Some of these limitations are:

EBITDA and Adjusted EBITDA do not reflect cash expenditures, future requirements for capital expenditures, or contractual commitments;

EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, working capital needs;

and EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on debt or cash income tax payments.

For example, although depreciation and amortization are noncash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements.

Additionally, other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than PEDEVCO Corp.

does, limiting its usefulness as a comparative measure.

You should not consider EBITDA and Adjusted EBITDA in isolation, or as substitutes for analysis of the Company’s results as reported under GAAP.

The Company’s presentation of these measures should not be construed as an inference that future results will be unaffected by unusual or nonrecurring items.

We compensate for these limitations by providing a reconciliation of each of these non-GAAP measures to the most comparable GAAP measure.

We encourage investors and others to review our business, results of operations, and financial information in their entirety, not to rely on any single financial measure, and to view these non-GAAP measures in conjunction with the most directly comparable GAAP financial measure.

The following table presents a reconciliation of the GAAP financial measure of net income to the non-GAAP financial measure of Adjusted EBITDA (in thousands):

Net income (loss)

Depreciation, depletion, amortization and accretion

Interest expense

Share-based compensation

Gain on sale of oil and gas properties

Gain on forgiveness of PPP loan

Accounts payable settlements

Adjusted EBITDA

Critical Accounting Policies and Estimates

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Recently Adopted Accounting Pronouncements.

Refer to Note 3 of the Notes to the Consolidated Financial Statements, “Summary of Significant Accounting Policies,” included herein under “ Item 8.

Financial Statements and Supplementary Data ”, below, for a discussion of recently adopted accounting pronouncements.

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

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis