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Item 8. Financial Statements and Supplementary Data

2023-03-29 compared with 2022-03-11 · 117 added, 132 removed, 542 unchanged (31% of the section changed)

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of

To the Shareholders and Board of Directors of

PEDEVCO Corp.

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federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit s in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit s to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits 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 audit s, 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.

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 audit s 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.

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 audit s 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 audit s provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

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.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Depreciation, depletion and amortization and impairment of oil and gas properties

At December 31, 2021, the net carrying value of the Company’s oil and gas properties was $66,467 thousand and depreciation, depletion and amortization (“DD&A”) expense was $7,380 thousand for the year then ended.

As described in Note 3, the Company follows the successful efforts method of accounting for its oil and gas properties.

DD&A of the cost of proved oil and gas properties is calculated using the unit-of-production method based on proved oil and gas reserves, as estimated by the Company’s internal reservoir engineers.

When circumstances indicate that the carrying value of property and equipment may not be recoverable, the Company compares unamortized capitalized costs to the expected undiscounted pre-tax future cash flows for the associated assets.

If the expected undiscounted pre-tax future cash flows are lower than the unamortized capitalized cost, the capitalized cost is reduced to fair value.

Proved oil and gas reserves are those quantities of natural gas, crude oil, condensate, and natural gas liquids, which by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations.

Additionally, the expected future cash flows used for impairment reviews and related fair value calculations are based on judgmental assessments of future production volumes from estimated oil and gas reserves.

Significant judgment is required by the Company’s internal and external reservoir engineers in evaluating geological and engineering data when estimating oil and gas reserves.

Estimating reserves also requires the selection of inputs, including oil and gas price assumptions, future operating and capital costs assumptions, and tax rates by jurisdiction, among others.

Because of the complexity involved in estimating oil and gas reserves, management engaged independent petroleum engineers to prepare the proved oil and gas reserve estimates for select properties as of December 31, 2021.

Auditing the Company’s DD&A and impairment calculations is complex because of the use of the work of the internal reservoir engineers and the independent petroleum engineers and the evaluation of management’s determination of the inputs described above used by the engineers in estimating oil and gas reserves.

We obtained an understanding of the Company’s controls over its process to calculate DD&A and impairment, including management’s controls over the completeness and accuracy of the financial data provided to the engineers for use in estimating oil and gas reserves.

Our audit procedures included, among others, evaluating the professional qualifications and objectivity of the independent petroleum engineers primarily responsible for the preparation of the reserve estimates for select properties.

In addition, in assessing whether we can use the work of the engineers, we evaluated the completeness and accuracy of the financial data and inputs described above used by the engineers in estimating oil and gas reserves by agreeing them to source documentation, and we identified and evaluated corroborative and contrary evidence.

For proved undeveloped reserves, we evaluated management’s development plan for compliance with the SEC rule that undrilled locations are scheduled to be drilled within five years, unless specific circumstances justify a longer time, by assessing consistency of the development projections with the Company’s development plan and the availability of capital relative to the development plan.

We also tested the mathematical accuracy of the DD&A and impairment calculations, including comparing the oil and gas reserve amounts used in the calculations to the Company’s reserve reports.

The Impact of Proved Oil and Natural Gas Reserves on Proved Oil and Gas Properties, Net

As described in Notes 3 and 6 to the consolidated financial statements, a significant portion of the Company’s properties and equipment, net balance of $80.1 million as of December 31, 2022 and depreciation, depletion and amortization (“DD&A”) expense of $11.2 million for the year ended December 31, 2022 relate to proved oil and gas properties.

The Company uses the successful efforts method of accounting for its oil and gas producing activities.

As disclosed by management, the Company’s rate of recording DD&A expense is dependent upon the estimate of proved reserves and proved developed reserves, which are utilized in the unit-of-production calculation.

In estimating proved oil and natural gas reserves, management relies on interpretations and judgment of available geological, geophysical, engineering and production data.

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 estimates of oil and natural gas reserves have been developed by specialists, specifically petroleum engineers.

The principal considerations for our determination that performing procedures relating to the impact of proved oil and natural gas reserves on proved oil and gas properties is a critical audit matter are (i) the significant judgment by management, including the use of specialists, when developing the estimates of proved oil and natural gas reserves, which in turn led to (ii) a high degree of auditor judgment and effort in performing procedures and evaluating the audit evidence related to the data, methods, and assumptions used by management and its specialists in developing the estimates of proved oil and natural gas reserves.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

The work of management’s specialists was used in performing the procedures to evaluate the reasonableness of the proved oil and natural gas reserves.

As a basis for using this work, the specialists’ qualifications were understood and the Company’s relationship with the specialists was assessed.

The procedures performed also included evaluation of the methods and assumptions used by the specialists, tests of the completeness and accuracy of the data used by the specialists, and an evaluation of the specialists’ findings.

/s/ Marcum LLP

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Revenue payable

PPP loan - current

Operating lease liabilities - current

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Long-term liabilities:

PPP loan, net of current portion

Operating lease liabilities, net of current portion

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Lease operating costs

Exploration expense

Selling, general and administrative expense

Depreciation, depletion, amortization and accretion

Impairment of oil and gas properties

Total operating expenses

Gain on sale of oil and gas properties

Operating loss

Operating income (loss)

Other income (expense):

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Interest income

Other income (expense)

Gain on forgiveness of PPP loan

Total other income (expense)

Total other income

Net Income (loss)

Loss per common share:

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Cash Flows From Operating Activities:

Net income (loss)

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

Depreciation, depletion and amortization

Impairment of oil and gas properties

Share-based compensation expense

Loss on disposal of fixed asset

Gain on sale of oil and gas properties

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Accrued expenses

Accrued expenses – related parties

Revenue payable

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Proceeds from the sale of oil and gas property

Cash paid for security deposit

Net cash used in investing activities

Cash Flows From Financing Activities:

Proceeds from PPP loans

Repayment of PPP loan

Proceeds from the issuance of common stock, net

Net cash provided by financing activities

Net increase (decrease) in cash and restricted cash

Net increase in cash and restricted cash

Cash and restricted cash at beginning of year

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(amounts in thousands, except share amounts)

Paid-in Capital

Balances at December 31, 2020

$ ( 128,286 )

Issuance of restricted common stock

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Issuance of common stock to non-affiliate

Issuance of common stock to affiliate

Cashless exercise of stock options

Share-based compensation

Stock-based compensation

Balances at December 31, 2021

Issuance of restricted common stock

Rescinded restricted common stock

Issuance of common stock to non-affiliate for cash proceeds, net

Cashless exercise of stock options

Share-based compensation

Issuance of common stock to non-affiliate

Stock-based compensation

Balances at December 31, 2022

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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;

(i) Blast AFJ, Inc., a Delaware corporation (dissolved on October 19, 2022);

(ii) PEDCO, a Nevada corporation;

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(v) EOR Operating Company, a Texas corporation (“EOR”);

and (vi) SRPT Acquisition, LLC, a Texas limited liability company formed on October 16, 2020.

and (vi) SRPT Acquisition, LLC, a Texas limited liability company.

All significant intercompany accounts and transactions have been eliminated.

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Diluted EPS excluded all dilutive potential shares if their effect is anti-dilutive.

For the year ended December 31, 2021, potentially dilutive securities related to options ( 1,123,435 ) which were not included in the calculation of diluted net loss per share because to do so would be anti-dilutive.

For the year ended December 31, 2022, potentially dilutive securities related to options ( 1,407,667 ) were not included in the calculation of diluted net loss per share because to do so would be anti-dilutive.

Recently Adopted Accounting Pronouncements.

Effective January 1, 2020, the Company adopted Financial Accounting Standard Board (“FASB”) Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments, which changed the way entities recognize impairment of most financial assets.

Short-term and long-term financial assets, as defined by the standard, are impacted by immediate recognition of estimated credit losses in the financial statements, reflecting the net amount expected to be collected.

The adoption of this standard did not have an impact on our Consolidated Financial Statements.

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.

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NOTE 4 - CASH

The following table provides a reconciliation of cash and restricted cash reported within the balance sheets on December 31, 2021 and 2020, which sum to the total of such amounts shown in the accompanying audited consolidated statements of cash flows (in thousands):

The following table provides a reconciliation of cash and restricted cash reported within the balance sheets on December 31, 2022 and 2021, which sum to the total of such amounts shown in the accompanying consolidated statements of cash flows (in thousands):

Restricted cash included in other assets

Total cash and restricted cash as shown in the consolidated statements of cash flows

Total restricted cash increased $ 250,000 during the current period due to an additional $ 200,000 collateralized deposit related to an increase in a plugging and abandonment bond with the State of New Mexico, and a $ 50,000 escrow account established with Zions Bancoporation, as the escrow agent, in accordance with a compliance agreement between the Company and the New Mexico Oil Conversation Division (the “OCD”) on November 10, 2022 which, among other things, requires that the Company restore to production, or plug and abandon, 49 legacy wells in its Permian Basin Asset by no later than December 31, 2024, and that the Company maintain financial assurance for the wells and place $ 50,000 cash in an escrow account in New Mexico designating the OCD as beneficiary, which escrowed funds will be forfeit in the event the Company fails to meet any well plugging deadline.

NOTE 5 - REVENUE FROM CONTRACTS WITH CUSTOMERS

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NOTE 6 - OIL AND GAS PROPERTIES

The following tables summarize the Company’s oil and gas activities by classification for the years ended December 31, 2021 and 2020, respectively (in thousands):

Balance at December 31,

The following tables summarize the Company’s oil and gas activities by classification for the years ended December 31, 2022 and 2021, respectively (in thousands):The following tables summarize the Company’s oil and gas activities by classification for the years ended December 31, 2022 and 2021, respectively (in thousands):

Oil and gas properties, subject to amortization

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Total oil and gas assets

Balance at December 31,

Oil and gas properties, subject to amortization

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Total oil and gas assets

For the year ended December 31, 2022, the Company incurred $ 23,131,000 of capital costs primarily related to drilling operations, completion and facility construction for the two new wells started at the end of 2021 and production enhancement cleanouts in our Permian Basin Asset for approximately $ 8.4 million and the acquisition and development of assets in the D-J Basin, which also includes our participation in the drilling and completion of six wells by a third-party operator for approximately $ 12.5 million in the latter part of the period.

Additionally, the Company consummated the acquisition of certain additional assets located in the D-J Basin from a third-party effective July 1, 2021, for approximately $ 500,000 in cash consideration.

These assets include approximately 46.6 net leasehold acres and interests in 14 horizontal wells currently producing from the acreage.

The Company incurred $ 1.2 million (included in the $23.1 million total above) in net capital costs for its working interest in these 14 new well interests during the year ended December 31, 2022.

As of December 31, 2022, the Company also acquired approximately 480 net mineral acres and 787 net lease acres in and around its existing footprint in the D-J Basin through multiple transactions at total acquisition and due diligence costs of $ 607,000 and $ 688,000 , respectively.

For the year ended December 31, 2021, the Company incurred $ 7,009,000 in capital costs related to capital workovers for our Permian Basin Asset, which included four clean outs, converting three wells from ESPs to rod pumps, installation of a new ESP, and purchase in place of ESP systems that were previously rentals.

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As a result of the transaction, the Company recognized a $1.8 million gain on sale of oil and gas properties on the Statement of Operations for the year ended December 31, 2021 .

For the year ended December 31, 2020, the Company incurred $ 5,943 ,000 in net capital costs primarily related to the drilling and completion of four new horizontal wells and a salt water disposal well (“SWD”) in its Permian Basin Asset.

The SWD was drilled to increase the produced water injection capacity for the Company’s Chaveroo field in its Permian Basin Asset and, in turn, increase production of the corresponding wells therein.

The drilling and completion of the SWD had been postponed due to the downturn in the economic conditions in the oil and gas industry during the first quarter of 2020, but with the subsequent partial uptick in oil prices, the Company completed the SWD in September 2020.

Also, the Company transferred $ 15,294 ,000 in capital costs from the four completed wells and the SWD noted above, for which production had not commenced, from proved developed non-producing properties, to proved properties, when production began during the current year.

The majority of the capital costs for three of the four wells were incurred in the prior year.

The depletion recorded for production on proved properties for the year ended December 31, 2022 and 2021, amounted to $ 10,069,000 and $ 7,155,000 , respectively.

The Company recorded impairment of properties subject to amortization for the years ended December 31, 2021 and 2020 of $-0- and $ 19,331 000, respectively.

The impairment in 2020 was due to a reduction in the reserve value with our D-J Basin assets relative to the carrying amount of the D-J Basin Asset.

NOTE 7 – PPP LOAN

On April 22, 2020, the Company received loan proceeds of $ 370 ,000 (the “Original PPP Loan”) under the U.S.

Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), and on April 23, 2020, the SBA issued guidance that cast doubt on the ability of public companies to qualify for a PPP loan.

As a result, out of an abundance of caution, on May 1, 2020, the Company repaid the full amount of the Original PPP Loan to Texas Capital Bank, N.A.

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

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

The Note has 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.

NOTE 7 - ASSET RETIREMENT OBLIGATION

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The Company has a sublease for its corporate offices in Houston, Texas on approximately 5,200 square feet of office space that expires on August 31, 2023 and has a base monthly rent of approximately $ 10,000 .

In December 2022, the Company entered into a new lease agreement for its existing office space that will commence on September 1, 2023, and expire on February 28, 2027 .

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

December 31, 2022

Cash paid for amounts included in the measurement of lease liabilities

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The Company’s oil and gas leasehold acreage is subject to expiration of leases if the Company does not drill and hold such acreage by production or otherwise exercises options to extend such leases, if available, in exchange for payment of additional cash consideration.

In the D-J Basin Asset, no net acres expire during 2022 or after (net to our direct ownership interest only), as all leases are held by production.

In the Permian Basin Asset, 1,265, 66 and 40 net acres are set to expire for the years ending December 31, 2022, 2023, 2024 and 1,583 thereafter, respectively, without meeting drilling commitments or term assignment extensions (net to our direct ownership interest only).

In the D-J Basin Asset, no net acres expire during 2022 (net to our direct ownership interest only).

Leases acquired in 2022 representing 792 gross acres will expire in 2025.

In the Permian Basin Asset, 66, 40 and 0 net acres are set to expire for the years ending December 31, 2023, 2024, 2025, respectively, and 1,358 thereafter, without meeting drilling commitments or term assignment extensions (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.

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NOTE 9 - SHAREHOLDERS’ EQUITY

During the year ended December 31, 2022, the Company granted an aggregate of 1,440,000 restricted stock awards to various employees and board members of the Company (see Note 10 below).

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

The Company also incurred $ 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 it may sell in the future under 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.

During the year ended December 31, 2021, the Company granted an aggregate of 1,250,000 restricted stock awards to various employees, board members and a non-affiliated advisor of the Company.

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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.

During the year ended December 31, 2020, the Company granted an aggregate of 1,499,000 restricted stock awards to various employees, board members, affiliates, and a consultant of the Company.

Additionally, 129,000 shares of restricted common stock were forfeited to the Company and canceled due to employee terminations (see Note 11 below).

During the year ended December 31, 2021, warrants to purchase 150,329 shares of common stock outstanding, with an exercise price of $ 0.32 per share expired unexercised on June 25, 2021 .

As of December 31, 2021, the Company has no warrants outstanding.

During the year ended December 31, 2020, no warrants were granted, exercised, or canceled, and as of December 31, 2020, the Company had warrants to purchase 150,329 shares of common stock outstanding, with an exercise price of $ 0.32 per share, which subsequently expired in fiscal year 2021 as noted above.

The intrinsic value of these outstanding and exercisable warrants at December 31, 2020 was $ 179,000 .

NOTE 10 - SHARE-BASED COMPENSATION

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On September 1, 2021, the shareholders of the Company approved the 2021 Equity Incentive Plan (the “2021 Incentive Plan”), which was previously approved by the Board of Directors on July 11, 2021 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 2021 Incentive Plan, to the Company’s employees, officers, directors and consultants.

A total of 8,000,000 shares of common stock are eligible to be issued under the 2021 Incentive Plan, none of which have been issued as restricted stock or options as of December 31, 2021.

A total of 8,000,000 shares of common stock are eligible to be issued under the 2021 Incentive Plan.

As of December 31, 2022, 1,440,000 shares have been issued as restricted stock, and 450,000 shares are subject to issuance upon exercise of issued and outstanding options.

2012 Incentive Plan

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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.

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 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, 2021, issued and outstanding options to purchase an aggregate of 17,381 shares of the Company’s common stock, subject to issuance upon exercise, and 55,168 shares of the Company’s restricted common stock have been granted under this plan (all of which were granted by PEDCO prior to the closing of the merger with the Company, with such grants being assumed by the Company and remaining subject to the PEDCO Incentive Plan following the consummation of the merger).

As of December 31, 2022, there were no outstanding options, and 55,168 shares of the Company’s restricted common stock have been granted under this plan (all of which were granted by PEDCO prior to the closing of the merger with the Company, with such grants being assumed by the Company and remaining subject to the PEDCO Incentive Plan following the consummation of the merger).

The Company does not plan to grant any additional awards under the PEDCO Incentive Plan.

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

On January 25, 2022, an aggregate of 1,200,000 shares of restricted common stock were granted to officers of the Company, under the Company’s 2021 Equity Incentive Plan.

The grant of the 1,200,000 shares of restricted common stock vest as follows:

33.3% vest each subsequent year from the date of grant, contingent upon the recipient’s continued service with the Company.

These shares have a total fair value of $ 1,404,000 based on the market price on the issuance date.

On August 25, 2022, restricted stock awards were granted to three board members for an aggregate of 240,000 shares of the Company’s restricted common stock, under the Company’s 2021 Equity Incentive Plan.

The grant of the 240,000 shares of restricted common stock vest as follows:

100% of 170,000 shares and 100% of 70,000 shares vesting on July 12, 2023 and September 27, 2023, respectively , contingent upon each recipient’s continued service with the Company.

These shares have a total fair value of $ 280,000 , based on the market price on the grant date.

On January 19, 2021, restricted stock awards were granted to officers of the Company for an aggregate of 940,000 of the Company’s common stock, under the Company’s Amended and Restated 2012 Equity Incentive Plan.

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These advisor shares have a total fair value of $ 58,000 , based on the market price on the grant date.

On January 13, 2020, restricted stock awards were granted to various employees and one consultant for an aggregate of 1,049,000 (including 924,000 restricted stock awards to officers of the Company) and 70,000 shares, respectively, of the Company’s common stock, under the Company’s Amended and Restated 2012 Equity Incentive Plan.

The grant of the 1,049,000 shares of restricted stock vest as follows:

33.3% vest each subsequent year from the date of grant, contingent upon the recipient’s continued service with the Company.

These shares have a total fair value of $ 1,172,000 , based on the market price on the issuance date.

The grant of the 70,000 shares of restricted stock was made to a Company advisor and vest as follows:

100 % on the first anniversary of the grant date, subject to the recipient’s continued service with the Company.

These advisor shares have a total fair value of $ 118,000 , based on the market price on the issuance date.

In February 2020 and August 2020, 55,000 and 74,000 shares of restricted common stock, respectively, were forfeited to the Company and canceled due to an employee termination.

As a result, these shares are once again eligible to be awarded under the Company’s Amended and Restated 2012 Equity Incentive Plan.

On August 27, 2020, restricted stock awards were granted to three board members, an affiliate and an advisor for an aggregate of 240,000 , 70,000 , and 70,000 shares, respectively, of the Company’s restricted common stock, under the Company’s Amended and Restated 2012 Equity Incentive Plan.

The grant of the 240,000 shares of restricted common stock vest as follows:

100 % of 170,000 shares and 100 % of 70,000 shares vesting on July 12, 2021 and September 21, 2021, respectively, contingent upon each recipient’s continued service with the Company.

These shares have a total fair value of $ 506,000 , based on the market price on the issuance date.

The grant of the remaining aggregate of 140,000 shares of restricted common stock vest as follows:

100 % on the six-month anniversary of the grant date, subject to each recipient’s continued service with the Company.

These affiliate and advisor shares have a total fair value of $ 295,000 , based on the market price on the issuance date.

The awarded shares above are subject to trading restrictions, and forfeiture, subject to the vesting terms described above.

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On January 25, 2022, the Company granted options to purchase an aggregate of 520,000 shares of common stock to various Company employees at an exercise price of $ 1.17 per share.

The options have a term of five years and fully vest in January 2024, with 33.3% vesting each subsequent year from the date of grant, contingent upon each recipient’s continued service with the Company .

The options have a term of five years and fully vest on January 2025, with 33.3% vesting each subsequent year from the date of grant, contingent upon the recipient’s continued service with the Company .

The aggregate fair value of the options on the date of grant, using the Black-Scholes model, was $ 454,000 .

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(1) a discount rate of 1.56 % based on the applicable US Treasury bill rate, (2) expected term of 3.5 years, (3) expected volatility of 120 % based on the trading history of the Company, and (4) zero expected dividends.

On January 28, 2021, the Company issued 86,430 total shares of common stock upon the cashless exercise of stock options to purchase an aggregate of 191,999 shares of common stock with exercise prices ranging between $ 1.10 and $ 1.68 per share, based on a then-current market value of $ 2.89 per share, under the terms of the options.

The options had an intrinsic value of $ 250,000 on the exercise date.

On December 21, 2021, the Company issued 52,943 total shares of common stock upon the cashless exercise of stock options to purchase an aggregate of 75,000 shares of common stock with an exercise price of $ 0.3088 per share, based on a then-current market value of $ 1.05 per share, under the terms of the options.

The options had an intrinsic value of $ 56,000 on the exercise date.

During the period ended December 31, 2022, 190,000 options were rescinded due to an employee termination.

As a result, these options once again became eligible for future awards under the Company’s Amended and Restated 2012 and 2021 Equity Incentive Plans.

An additional 45,768 options expired unexercised.

On January 19, 2021, the Company granted options to purchase an aggregate of 550,000 shares of common stock to various Company employees at an exercise price of $ 1.39 per share.

The options have a term of five years and fully vest in January 2023, with 33.3% of each grant vesting each subsequent year from the date of grant, contingent upon each 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 $ 654,000 .

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(1) a discount rate of 0.45 % based on the applicable US Treasury bill rate, (2) expected term of 3.5 years, (3) expected volatility of 156 % based on the trading history of the Company, and (4) zero expected dividends.

On August 27, 2020, the Company issued 32,012 total shares of common stock upon the cashless exercise of stock options to purchase an aggregate of 37,500 shares of common stock with an exercise price of $ 0.3088 per share, based on a then-current market value of $ 2.11 per share, under the terms of the options.

The options had an intrinsic value of $ 250,000 on the exercise date.

The options had an intrinsic value of $ 56,000 on the exercise date.

During the period ended December 31, 2021, 113,334 options were rescinded due to an employee termination.

As a result, these options once again became eligible for future awards under the Company’s Amended and Restated 2012 and 2021 Equity Incentive Plans.

An additional 281,081 options expired unexercised.

During the year ended December 31, 2022 and 2021, the Company recognized stock option-based compensation expense related to options of $ 424,000 and $ 533,000 , respectively.

The remaining amount of unamortized stock options expense at December 31, 2022 and 2021 was $ 206,000 and $ 287,000 , respectively.

The intrinsic value of outstanding and exercisable options at December 31, 2021 and 2020 was $- 0 - and $ 121,000 , respectively.

There was no intrinsic value of outstanding and exercisable options at December 31, 2022 and 2021, respectively.

Option activity during the years ended December 31, 2022 and 2021 was:

Number of Stock Options

Weighted Average Grant Price

Weighted Average Remaining Contract Term (Years)

Number of Stock Options

Weighted Average Grant Price

Weighted Average Remaining Contract Term (Years)

Contract Term

Average Grant

Contract Term

Outstanding at Beginning of Period

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Exercisable at End of Period

NOTE 11 – EARNINGS PER COMMON SHARE

Earnings (loss) per common share-basic is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period.

Net income (loss) per common share-diluted assumes the conversion of all potentially dilutive securities and is calculated by dividing net (loss) income by the sum of the weighted average number of shares of common stock, as defined above, outstanding plus potentially dilutive securities.

Net (loss) income per common share-diluted considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares, as defined above, would have an anti-dilutive effect.

The calculation of earnings per share for the years ended December 31, 2022 and December 31, 2021 were as follows (amounts in thousands, except share and per share data):

Net income (loss)

Weighted average common shares – basic

Dilutive effect of common stock equivalents:

Weighted average common shares – diluted

Earnings (loss) per share – basic

Earnings (loss) per share – diluted

For the years ended December 31, 2022 and 2021, share equivalents related to options to purchase 1,407,667 and 1,123,435 shares of common stock, respectively, were excluded from the computation of diluted net income per share as the inclusion of such shares would be anti-dilutive.

NOTE 12 - INCOME TAXES

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federal statutory income tax rate in effect for the years ended December 31, 2022, and 2021, and the Company’s effective tax rate:

federal statutory income tax (benefit)

federal statutory income tax

State and local income tax, net of benefits

Amortization of debt discount

Meals and entertainment

Meals & Entertainment

Other Income - PPP Loan

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Difference in depreciation, depletion, and capitalization methods - oil and natural gas properties

Lease liability

Interest Expense - PPP Loan

Lease Liability

Gain/Loss from sale of FA and/or O&G properties

Stock options - NQ

Stock-Based Compensation

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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, 2021 and 2020.

The net change in the total valuation allowance from December 31, 2021 to December 31, 2020 was an increase of $ 471,000 .

Accordingly, management has applied a full valuation allowance against its net deferred tax assets on December 31, 2022, and 2021.

The net change in the total valuation allowance from December 31, 2022, to December 31, 2021, was a decrease of $ 858,000 .

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.

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The Company did not have associated accrued interest or penalties, nor was any interest expense or penalties recognized for the years ended December 31, 2022, and 2021.

As of December 31, 2021, the Company has federal net operating loss carryforwards of approximately $ 116,000,000 , which if not utilized, approximately $ 95,000,000 of which will begin expiring in 2023 and ending 2037, respectively, and $ 21,000,000 under The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, can be carried back up to five years but also, can be carried forward indefinitely, limited to 80 % of a given years taxable income.

Prior to the TCJA amendment, Section 174 allowed taxpayers to either immediately deduct R&E expenditures in the year paid or incurred or elect to capitalize and amortize R&E expenditures over a period of at least 60 months.

Starting after December 31, 2021, TCJA’s amendment to Section 174 requires U.S.-based and non-U.

S-based research and experimental (R&E) expenditures to be capitalized and amortized over a period of five or 15 years, respectively, for amounts paid in tax years.

Additionally, software development costs are specifically included as R&E expenditures under Section 174(c)(3) and, therefore, will be subject to the same mandatory amortization period of five or 15 years.

Currently, there are no R&E expenditure that will apply to this regulation.

As of December 31, 2022, the Company has federal net operating loss carryforwards of approximately $ 115,000,000 , which if not utilized, approximately $ 93,000,000 of which will begin expiring in 2023 and ending 2037, respectively, and $ 22,000,000 under CARES Act can be carried back up to five years but also, can be carried forward indefinitely, limited to 80 % of a given years taxable income.

The Company currently has tax returns open for examination by the Internal Revenue Service for all years, since 2018.

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33.3 % vest each subsequent year from the date of grant contingent upon the recipient’s continued service with the Company.

These shares have a total fair value of $ 1,404,000 based on the market price on the issuance date.

In February 2022, the Company consummated the acquisition of certain additional assets located in the D-J Basin from a third-party effective July 1, 2021 for approximately $ 500,000 in cash consideration.

These assets include approximately 46.6 net leasehold acres and interests in 14 horizontal wells currently producing from the acreage.

The estimated total drilling and completion expense payable by the Company for its working interest in these 14 new well interests is $ 2.4 million.

These shares have a total fair value of $ 1,363,000 based on the market price on the grant date.

The Company also acquired approximately 1,118 net lease acres in the D-J Basin in the first quarter of 2023, at total acquisition and due diligence costs of $ 1,000,000 .

SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES

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Included in the increase, the Company had a 0.46 MMBoe increase in proved undeveloped reserves (noted below) resulting from the addition of volumes in the D-J Basin due to increased activity.

The Company also had an increase of 0.02 MMBoe in proved developed reserves resulting from wells moving from proved undeveloped to proved developed in the Chaveroo field of our Permian Basin Asset as well as an increase in non-operated volumes in our D-J Basin Asset.

The Company also had an increase of 0.98 MMBoe in proved developed reserves resulting from wells moving from proved undeveloped to proved developed in the D-J Basin Asset as well as an increase in non-operated volumes in our D-J Basin Asset.

The following table sets forth the Company’s proved developed and undeveloped reserves at December 31, 2022 and 2021, respectively:

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For the year ended December 31, 2021, total proved undeveloped reserves (PUDs) increased by 574 MBoe to 12,487 MBoe, primarily related to the following:

Revisions of prior estimates resulted in net additions of 179 MBoe consisting of:

A combination of hi-grading locations with the highest oil in place and improved results from offset well performance with longer horizontal well lengths and modern completion techniques resulted in upward revision of 3,531 MBoe.

The changes to the future development plan were derived from technical work and studies of our Permian Basin Asset since acquisition in 2018;

Pricing related revisions resulting in removal of PUD locations that were deemed uneconomic in the Chaveroo field of our Permian Basin Asset and our D-J Basin Asset resulting in a lower revision of 3,352 MBoe.

For the year ended December 31, 2021, total proved undeveloped reserves (PUDs) increased by 574 MBoe to 12,487 MBoe, primarily related to the following:

Transfer of 597 MBoe from PUD to proved developed reserves in Chaveroo field based on total capital expenditures during 2021;

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Revisions related to expected performance decreases of 1,569 MBoe and removal of PUD locations in Chaveroo and Milnesand fields of our Permian Basin Asset outside of the five-year development plan of 1,108 MBoe.

For the year ended December 31, 2022, total proved undeveloped reserves (PUDs) increased by 455 MBoe to 12,942 MBoe, primarily related to the following:

Transfer of 887 MBoe from PUD to proved developed reserves in D-J Basin Asset based on total capital expenditures during 2022;

Additions related to the development of operated (3,341 MBoe) and non-operated (278 MBoe) sections in the D-J Basin;

Revisions related to expected performance increase of 1,192 MBoe in the D-J Basin Asset based on offset well results and removal of PUD locations in D-J Basin Asset based on revised development activity of 334 MBoe, and removal of PUD locations in Chaveroo and Milnesand fields of our Permian Basin Asset outside of the five-year development plan of 3,134 MBoe.

We expect to spend an aggregate of $170-$190 million developing proved undeveloped reserves through December 31, 2027.

All proved undeveloped reserves are scheduled to be developed within five years of initial booking.

We expect to fund these development costs with cash from operations and cash on hand, supplemented as needed by proceeds from asset sales, private and public offerings, credit availability and financial sponsorship from SK Energy.

Simon Kukes, the Company’s Chief Executive Officer and director, which funding Dr.

Kukes is under no obligation to provide.

Capitalized Costs Relating to Oil and Natural Gas Producing Activities .

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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 8. Financial Statements and Supplementary Data