PEDEVCO CORP 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO FINANCIAL STATEMENTS Audited Financial Statements for Years Ended December 31, 2022 and 2021 PEDEVCO Corp.: Report of Independent Registered Public Accounting Firm (PCAOB ID Number 688) 76 Consolidated Balance Sheets as of December 31, 2022 and 2021 78 Consolidated Statements of Operations for the Years Ended December 31, 2022 and 2021 79 Consolidated Statements of Cash Flows for the Years Ended December 31, 2022 and 2021 80 Consolidated Statement of Changes in Shareholders’ Equity For the Years Ended December 31, 2022 and 2021 81 Notes to Consolidated Financial Statements 82 75 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of PEDEVCO Corp. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of PEDEVCO Corp. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the years ended December 31, 2022 and 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years ended December 31, 2022 and 2021, in conformity with accounting principles generally accepted in the United States of America Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit s . We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the 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 audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. 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. 76 Table of Contents 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 Marcum LLP We have served as the Company’s auditor since 2008. Houston, Texas March 29, 2023 77 Table of Contents PEDEVCO CORP. CONSOLIDATED BALANCE SHEETS (amounts in thousands, except share and per share data) December 31, 2022 2021 Assets Current assets: Cash $ 29,430 $ 25,930 Accounts receivable - oil and gas 2,430 1,782 Prepaid expenses and other current assets 249 326 Total current assets 32,109 28,038 Oil and gas properties: Oil and gas properties, subject to amortization, net 79,372 63,908 Oil and gas properties, not subject to amortization, net 775 2,559 Total oil and gas properties, net 80,147 66,467 Operating lease - right-of-use asset 71 173 Other assets 3,783 3,543 Total assets $ 116,110 $ 98,221 Liabilities and Shareholders’ Equity Current liabilities: Accounts payable $ 1,556 $ 2,626 Accrued expenses 13,835 1,454 Revenue payable 1,018 938 Operating lease liabilities - current 81 114 Asset retirement obligations - current 472 49 Total current liabilities 16,962 5,181 Long-term liabilities: Operating lease liabilities, net of current portion - 81 Asset retirement obligations, net of current portion 2,689 1,476 Total liabilities 19,651 6,738 Commitments and contingencies Shareholders’ equity: Common stock, $ 0.001 par value, 200,000,000 shares authorized; 85,790,267 and 84,236,146 shares issued and outstanding, respectively 86 84 Additional paid-in capital 223,114 220,984 Accumulated deficit ( 126,741 ) ( 129,585 ) Total shareholders’ equity 96,459 91,483 Total liabilities and shareholders’ equity $ 116,110 $ 98,221 See accompanying notes to consolidated financial statements. 78 Table of Contents PEDEVCO CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (amounts in thousands, except share and per share data) December 31, Revenue: 2022 2021 Oil and gas sales $ 30,034 $ 15,860 Operating expenses: Lease operating costs 10,397 5,943 Selling, general and administrative expense 5,854 6,209 Depreciation, depletion, amortization and accretion 11,153 7,380 Total operating expenses 27,404 19,532 Gain on sale of oil and gas properties - 1,805 Operating income (loss) 2,630 ( 1,867 ) Other income (expense): Interest expense - ( 1 ) Interest income 117 15 Other income 97 180 Gain on forgiveness of PPP loan - 374 Total other income 214 568 Net Income (loss) $ 2,844 $ ( 1,299 ) Loss per common share: Basic $ 0.03 $ ( 0.02 ) Diluted $ 0.03 $ ( 0.02 ) Weighted average number of common shares outstanding: Basic 85,513,095 79,963,237 Diluted 85,513,095 79,963,237 See accompanying notes to consolidated financial statements. 79 Table of Contents PEDEVCO CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in thousands) December 31, 2022 2021 Cash Flows From Operating Activities: Net income (loss) $ 2,844 $ ( 1,299 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation, depletion and amortization 11,153 7,380 Share-based compensation expense 2,097 2,452 Gain on sale of oil and gas properties - ( 1,805 ) Gain on forgiveness of PPP loan - ( 374 ) Amortization of right-of-use asset 102 97 Changes in operating assets and liabilities: Accounts receivable - oil and gas ( 648 ) ( 1,122 ) Prepaid expenses and other current assets 77 ( 260 ) Accounts payable ( 159 ) ( 356 ) Accrued expenses 435 1,155 Revenue payable 80 102 Net cash provided by operating activities 15,981 5,970 Cash Flows From Investing Activities: Cash paid for drilling and completion costs ( 12,252 ) ( 4,597 ) Cash paid for other property and equipment - ( 35 ) Proceeds from the sale of oil and gas property - 1,871 Cash paid for security deposit ( 14 ) - Net cash used in investing activities ( 12,266 ) ( 2,761 ) Cash Flows From Financing Activities: Proceeds from the issuance of common stock, net 35 14,694 Net cash provided by financing activities 35 14,694 Net increase in cash and restricted cash 3,750 17,903 Cash and restricted cash at beginning of year 29,227 11,324 Cash and restricted cash at end of year $ 32,977 $ 29,227 Supplemental Disclosure of Cash Flow Information Cash paid for: Interest $ - $ - Income taxes $ - $ - Noncash investing and financing activities: Change in accrued oil and gas development costs $ 10,879 $ 2,412 Change in estimates of asset retirement costs $ 618 $ 319 Issuance of restricted common stock $ 2 $ 1 See accompanying notes to consolidated financial statements. 80 Table of Contents PEDEVCO CORP. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY For the Years Ended December 31, 2022 and 2021 (amounts in thousands, except share amounts) Common Stock Additional Accumulated Shares Amount Paid-in Capital Deficit Totals Balances at December 31, 2020 72,463,340 $ 72 $ 203,850 $ ( 128,286 ) $ 75,636 Issuance of restricted common stock 1,200,000 1 ( 1 ) - - Rescinded restricted common stock ( 16,667 ) - - - - Issuance of common stock to non-affiliate 10,477,100 11 14,683 - 14,694 Cashless exercise of stock options 139,373 - - - - Stock-based compensation - - 2,452 - 2,452 Net loss - - - ( 1,299 ) ( 1,299 ) Balances at December 31, 2021 84,263,146 84 220,984 ( 129,585 ) 91,483 Issuance of restricted common stock 1,440,000 2 ( 2 ) - - Issuance of common stock to non-affiliate 87,121 - 35 - 35 Stock-based compensation - - 2,097 - 2,097 Net income - - - 2,844 2,844 Balances at December 31, 2022 85,790,267 $ 86 $ 223,114 $ ( 126,741 ) $ 96,459 See accompanying notes to consolidated financial statements. 81 Table of Contents PEDEVCO CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The accompanying consolidated financial statements of PEDEVCO Corp. (“PEDEVCO” or the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and the rules of the Securities and Exchange Commission (“SEC”). The Company’s consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and subsidiaries in which the Company has a controlling financial interest. All significant inter-company accounts and transactions have been eliminated in consolidation. NOTE 2 - DESCRIPTION OF BUSINESS PEDEVCO is an oil and gas company focused on the development, acquisition and production of oil and natural gas assets where the latest in modern drilling and completion techniques and technologies have yet to be applied. In particular, the Company focuses on legacy proven properties where there is a long production history, well defined geology and existing infrastructure that can be leveraged when applying modern field management technologies. The Company’s current properties are located in the San Andres formation of the Permian Basin situated in West Texas and eastern New Mexico (the “Permian Basin”) and in the Denver-Julesberg Basin (“D-J Basin”) in Colorado. The Company holds its Permian Basin acres located in Chaves and Roosevelt Counties, New Mexico, through its wholly-owned operating subsidiary, Pacific Energy Development Corp. (“PEDCO”), which asset the Company refers to as its “Permian Basin Asset,” and it holds its D-J Basin acres located in Weld and Morgan Counties, Colorado, through its wholly-owned operating subsidiary, Red Hawk Petroleum, LLC (“Red Hawk”), which asset the Company refers to as its “D-J Basin Asset.” The Company believes that horizontal development and exploitation of conventional assets in the Permian Basin and development of the Wattenberg and Wattenberg Extension in the D-J Basin represent among the most economic oil and natural gas plays in the United States (“U.S.”). Moving forward, the Company plans to optimize its existing assets and opportunistically seek additional acreage proximate to its currently held core acreage, as well as other attractive onshore U.S. oil and gas assets that fit the Company’s acquisition criteria, that Company management believes can be developed using its technical and operating expertise and be accretive to shareholder value. NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Principles of Consolidation. The consolidated financial statements herein have been prepared in accordance with GAAP and include the accounts of the Company and those of its wholly and partially-owned subsidiaries as follows: (i) Blast AFJ, Inc., a Delaware corporation (dissolved on October 19, 2022); (ii) PEDCO, a Nevada corporation; (iii) Red Hawk, a Nevada limited liability company; (iv) Ridgeway Arizona Oil Corp., an Arizona corporation (“RAOC”); (v) EOR Operating Company, a Texas corporation (“EOR”); and (vi) SRPT Acquisition, LLC, a Texas limited liability company. All significant intercompany accounts and transactions have been eliminated. Use of Estimates in Financial Statement Preparation. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as certain financial statement disclosures. While management believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from these estimates. Significant estimates generally include those with respect to the amount of recoverable oil and gas reserves, the fair value of financial instruments, oil and gas depletion, asset retirement obligations, and stock-based compensation. 82 Table of Contents Cash and Cash Equivalents. The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. As of December 31, 2022 and 2021, cash equivalents consisted of money market funds and cash on deposit. The Company includes restricted cash within cash and cash equivalents on the consolidated statements of cash flows. Concentrations of Credit Risk. Financial instruments which potentially subject the Company to concentrations of credit risk include cash deposits placed with financial institutions. The Company periodically assesses the financial condition of its financial institutions and considers any possible credit risk to be minimal. Sales to two customers comprised 63 % and 20 %, respectively, of the Company’s total oil and gas revenues for the year ended December 31, 2022. The Company believes that, in the event that its primary customers are unable or unwilling to continue to purchase the Company’s production, there are a substantial number of alternative buyers for its production at comparable prices. Accounts Receivable. Accounts receivable typically consist of oil and gas receivables. The Company has classified these as short-term assets in the balance sheet because the Company expects repayment or recovery within the next 12 months. The Company evaluates these accounts receivable for collectability considering the results of operations of these related entities and, when necessary, records allowances for expected unrecoverable amounts. To date, no allowances have been recorded. Included in accounts receivable - oil and gas are $ 116,000 related to receivables from joint interest owners. Bad Debt Expense. The Company’s ability to collect outstanding receivables is critical to its operating performance and cash flows. Accounts receivable are stated at an amount management expects to collect from outstanding balances. The Company extends credit in the normal course of business. The Company regularly reviews outstanding receivables and when the Company determines that a party may not be able to make required payments, a charge to bad debt expense in the period of determination is made. Though the Company’s bad debts have not historically been significant, the Company could experience increased bad debt expense should a financial downturn occur. Equipment. Equipment is stated at cost less accumulated depreciation and amortization. Maintenance and repairs are charged to expense as incurred. Renewals and betterments which extend the life or improve existing equipment are capitalized. Upon disposition or retirement of equipment, the cost and related accumulated depreciation are removed, and any resulting gain or loss is reflected in operations. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which are 3 to 10 years. Oil and Gas Properties, Successful Efforts Method. The successful efforts method of accounting is used for oil and gas exploration and production activities. Under this method, all costs for development wells, support equipment and facilities, and proved mineral interests in oil and gas properties are capitalized. Geological and geophysical costs are expensed when incurred. Costs of exploratory wells are capitalized as exploration and evaluation assets pending determination of whether the wells find proved oil and gas reserves. Proved oil and gas reserves are the estimated quantities of crude oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, (i.e., prices and costs as of the date the estimate is made). Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions. Exploratory wells in areas not requiring major capital expenditures are evaluated for economic viability within one year of completion of drilling. The related well costs are expensed as dry holes if it is determined that such economic viability is not attained. Otherwise, the related well costs are reclassified to oil and gas properties and subject to impairment review. For exploratory wells that are found to have economically viable reserves in areas where major capital expenditure will be required before production can commence, the related well costs remain capitalized only if additional drilling is under way or firmly planned. Otherwise, the related well costs are expensed as dry holes. Exploration and evaluation expenditures incurred subsequent to the acquisition of an exploration asset in a business combination are accounted for in accordance with the policy outlined above. Depreciation, depletion and amortization of capitalized oil and gas properties is calculated on a field-by-field basis using the unit of production method. Lease acquisition costs are amortized over the total estimated proved developed and undeveloped reserves and all other capitalized costs are amortized over proved developed reserves. Costs specific to developmental wells for which drilling is in progress or uncompleted are capitalized as wells in progress and not subject to amortization until completion and production commences, at which time amortization on the basis of production will begin. 83 Table of Contents Impairment of Long-Lived Assets. The Company reviews the carrying value of its long-lived assets annually or whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of the asset by estimating the future net undiscounted cash flows expected to result from the asset, including eventual disposition. If the future net undiscounted cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and estimated fair value. Asset Retirement Obligations. If a reasonable estimate of the fair value of an obligation to perform site reclamation, dismantle facilities or plug and abandon wells can be made, the Company will record a liability (an asset retirement obligation or “ARO”) on its consolidated balance sheet and capitalize the present value of the asset retirement cost in oil and gas properties in the period in which the retirement obligation is incurred. In general, the amount of an ARO and the costs capitalized will be equal to the estimated future cost to satisfy the abandonment obligation assuming the normal operation of the asset, using current prices that are escalated by an assumed inflation factor up to the estimated settlement date, which is then discounted back to the date that the abandonment obligation was incurred using an assumed cost of funds for the Company. After recording these amounts, the ARO will be accreted to its future estimated value using the same assumed cost of funds and the capitalized costs are depreciated on a unit-of-production basis over the estimated proved developed reserves. Both the accretion and the depreciation will be included in depreciation, depletion and amortization expense on our consolidated statements of operations. Revenue Recognition. The Company’s revenue is comprised entirely of revenue from exploration and production activities. The Company’s oil is sold primarily to marketers, gatherers, and refiners. Natural gas is sold primarily to interstate and intrastate natural-gas pipelines, direct end-users, industrial users, local distribution companies, and natural-gas marketers. NGLs are sold primarily to direct end-users, refiners, and marketers. Payment is generally received from the customer in the month following delivery. Contracts with customers have varying terms, including month-to-month contracts, and contracts with a finite term. The Company recognizes sales revenues for oil, natural gas, and NGLs based on the amount of each product sold to a customer when control transfers to the customer. Generally, control transfers at the time of delivery to the customer at a pipeline interconnect, the tailgate of a processing facility, or as a tanker lifting is completed. Revenue is measured based on the contract price, which may be index-based or fixed, and may include adjustments for market differentials and downstream costs incurred by the customer, including gathering, transportation, and fuel costs. Revenues are recognized for the sale of the Company’s net share of production volumes. Sales on behalf of other working interest owners and royalty interest owners are not recognized as revenues. Income Taxes. The Company utilizes the asset and liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for operating loss and tax credit carry-forwards and for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that the value of such assets will be realized. Uncertain Tax Positions. The Company evaluates uncertain tax positions to recognize a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. Those tax positions failing to qualify for initial recognition are recognized in the first interim period in which they meet the more likely than not standard or are resolved through negotiation or litigation with the taxing authority, or upon expiration of the statute of limitations. De-recognition of a tax position that was previously recognized occurs when an entity subsequently determines that a tax position no longer meets the more likely than not threshold of being sustained. 84 Table of Contents The Company is subject to ongoing tax exposures, examinations and assessments in various jurisdictions. Accordingly, the Company may incur additional tax expense based upon the outcomes of such matters. In addition, when applicable, the Company will adjust tax expense to reflect the Company’s ongoing assessments of such matters, which require judgment and can materially increase or decrease its effective rate as well as impact operating results. Stock-Based Compensation. The Company utilizes the Black-Scholes option pricing model to estimate the fair value of employee stock option awards at the date of grant, which requires the input of highly subjective assumptions, including expected volatility and expected life. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our share-based compensation. These assumptions are subjective and generally require significant analysis and judgment to develop. When estimating fair value, some of the assumptions will be based on, or determined from, external data and other assumptions may be derived from our historical experience with stock-based payment arrangements. The appropriate weight to place on historical experience is a matter of judgment, based on relevant facts and circumstances. The Company estimates volatility by considering the historical stock volatility. The Company has opted to use the simplified method for estimating expected term, which is generally equal to the midpoint between the vesting period and the contractual term. Earnings (Loss) per Common Share. Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS give effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used to determine the number of shares assumed to be purchased from the exercise of stock options and/or warrants. Diluted EPS excluded all dilutive potential shares if their effect is 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. The Company does not expect the adoption of any other recently issued accounting pronouncements to have a significant impact on its financial position, results of operations, or cash flows. Subsequent Events. The Company has evaluated all transactions through the date the consolidated financial statements were issued for subsequent event disclosure consideration. NOTE 4 - CASH 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): 2022 2021 Cash $ 29,430 $ 25,930 Restricted cash included in other assets 3,547 3,297 Total cash and restricted cash as shown in the consolidated statements of cash flows $ 32,977 $ 29,227 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. 85 Table of Contents NOTE 5 - REVENUE FROM CONTRACTS WITH CUSTOMERS Disaggregation of Revenue from Contracts with Customers. The following table disaggregates revenue by significant product type for the years ended December 31, 2022 and 2021 (in thousands): 2022 2021 Oil sales $ 27,669 $ 14,769 Natural gas sales 1,577 902 Natural gas liquids sales 788 189 Total revenue from customers $ 30,034 $ 15,860 There were no significant contract liabilities or transaction price allocations to any remaining performance obligations as of December 31, 2022 or 2021, respectively. 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, 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): Balance at December 31, Balance at December 31, 2021 Additions Disposals Transfers 2022 Oil and gas properties, subject to amortization $ 151,338 $ 22,356 $ - $ 2,559 $ 176,253 Oil and gas properties, not subject to amortization 2,559 775 - ( 2,559 ) 775 Asset retirement costs 789 618 - - 1,407 Accumulated depreciation, depletion and impairment ( 88,219 ) ( 10,069 ) - - ( 98,288 ) Total oil and gas assets $ 66,467 $ 13,680 $ - $ - $ 80,147 Balance at December 31, Balance at December 31, 2020 Additions Disposals Transfers 2021 Oil and gas properties, subject to amortization $ 146,950 $ 4,454 $ ( 66 ) $ - $ 151,338 Oil and gas properties, not subject to amortization 4 2,555 - - 2,559 Asset retirement costs 1,108 ( 314 ) ( 5 ) - 789 Accumulated depreciation, depletion and impairment ( 81,064 ) ( 7,155 ) - - (88,219 ) ) Total oil and gas assets $ 66,998 $ ( 460 ) $ ( 71 ) $ - $ 66,467 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. 86 Table of Contents 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. The Company incurred additional capital costs upon implementation of a recompletions and reactivation program for our existing vertical wells in the Permian Basin Asset, and in our D-J Basin Asset, the Company incurred capital costs related to converting a well from gas lift to rod pump. In the D-J Basin Asset, the Company also participated in the drilling and completion of four non-operated wells and began drilling operations for two new wells and construction of a new production facility began in our Permian Basin Asset. On March 18, 2021, the Company, through its wholly-owned subsidiary Red Hawk, consummated the sale of certain assets and associated liabilities located in its D-J Basin Asset to third parties pursuant to a Purchase and Sale Agreement. The Company received net cash at closing of $ 1.9 million. The final purchase price was further subject to customary post-closing adjustments, resulting in an additional $52,000 paid by Red Hawk in July 2021. 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 . 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. NOTE 7 - ASSET RETIREMENT OBLIGATION Activity related to the Company’s asset retirement obligations is as follows for the year ended December 31, 2022 (in thousands): 2022 Balance at the beginning of the period (1) $ 1,525 Accretion expense 1,060 Liabilities settled ( 42 ) Changes in estimates 618 Balance at end of period (2) $ 3,161 (1) Includes $ 49,000 of current asset retirement obligations at December 31, 2021. (2) Includes $ 472,000 of current asset retirement obligations at December 31, 2022. NOTE 8 - COMMITMENTS AND CONTINGENCIES Lease Agreements Currently, the Company has one operating lease for office space that requires Accounting Standards Codification (“ASC”) Topic 842 treatment, discussed below. The Company’s leases typically do not provide an implicit rate. Accordingly, the Company is required to use its incremental borrowing rate in determining the present value of lease payments based on the information available at the commencement date. The Company’s incremental borrowing rate would reflect the estimated rate of interest that it would pay to borrow on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. However, the Company currently maintains no debt, and in order to apply an appropriate discount rate, the Company used an average discount rate of eight publicly traded peer group companies similar to it based on size, geographic location, asset types, and/or operating characteristics. The Company has a sublease for its corporate offices in Houston, Texas on approximately 5,200 square feet of office space that expires on August 31, 2023 and has a base monthly rent of approximately $ 10,000 . 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 . 87 Table of Contents Supplemental cash flow information related to the Company’s operating lease is included in the table below (in thousands): Year Ended December 31, 2022 Cash paid for amounts included in the measurement of lease liabilities $ 121 Supplemental balance sheet information related to operating leases is included in the table below (in thousands): December 31, 2022 Operating lease - right-of-use asset $ 71 Operating lease liabilities - current $ 81 Operating lease liabilities - long-term - Total lease liability $ 81 The weighted-average remaining lease term for the Company’s operating lease is 0.7 years as of December 31, 2022, with a weighted-average discount rate of 5.35 %. Lease liability with enforceable contract terms that have greater than one-year terms are as follows (in thousands): 2023 $ 82 Thereafter - Total lease payments 82 Less imputed interest ( 1 ) Total lease liability $ 81 Leasehold Drilling Commitments The Company’s oil and gas leasehold acreage is subject to expiration of leases if the Company does not drill and hold such acreage by production or otherwise exercises options to extend such leases, if available, in exchange for payment of additional cash consideration. In the D-J Basin Asset, no net acres expire during 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. If the Company is not able to drill and complete a well before term assignment expiration, the Company may seek to extend terms of contractual assignments. Other Commitments Although the Company may, from time to time, be involved in litigation and claims arising out of its operations in the normal course of business, the Company is not currently a party to any material legal proceeding. In addition, the Company is not aware of any material legal or governmental proceedings against it or contemplated to be brought against it. As part of its regular operations, the Company may become party to various pending or threatened claims, lawsuits and administrative proceedings seeking damages or other remedies concerning its commercial operations, products, employees and other matters. 88 Table of Contents Although the Company provides no assurance about the outcome of these or any other pending legal and administrative proceedings and the effect such outcomes may have on the Company, the Company believes that any ultimate liability resulting from the outcome of such proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on the Company’s financial condition or results of operations. NOTE 9 - SHAREHOLDERS’ EQUITY Common Stock 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. Additionally, 16,667 shares of restricted common stock were forfeited to the Company and canceled due to an employee termination (see Note 11 below). 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. NOTE 10 - SHARE-BASED COMPENSATION 2021 Incentive Plan 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. 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. 89 Table of Contents 2012 Incentive Plan On July 27, 2012, the shareholders of the Company approved the 2012 Equity Incentive Plan (the “2012 Incentive Plan”), which was previously approved by the Board of Directors on June 27, 2012 and authorizes the issuance of various forms of stock-based awards, including incentive or non-qualified options, restricted stock awards, performance shares and other securities as described in greater detail in the 2012 Incentive Plan, to the Company’s employees, officers, directors and consultants. The 2012 Incentive Plan was amended on June 27, 2014, October 7, 2015 and December 28, 2016, December 28, 2017, September 27, 2018 and August 28, 2019 to increase by 500,000 , 300,000 , 500,000 , 1,500,000 , 3,000,000 and 2,000,000 (to 8,000,000 currently), respectively, the number of shares of common stock reserved for issuance under the 2012 Incentive Plan. As of December 31, 2022, 6,449,503 shares have been issued as restricted stock, and 957,667 shares are subject to issuance upon exercise of issued and outstanding options. The Company does not plan to grant any additional awards under the 2012 Incentive Plan. 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 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, 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. Common Stock On January 25, 2022, an aggregate of 1,200,000 shares of restricted common stock were granted to officers of the Company, under the Company’s 2021 Equity Incentive Plan. The grant of the 1,200,000 shares of restricted common stock vest as follows: 33.3% vest each subsequent year from the date of grant, contingent upon the recipient’s continued service with the Company. These shares have a total fair value of $ 1,404,000 based on the market price on the issuance date. On August 25, 2022, restricted stock awards were granted to three board members for an aggregate of 240,000 shares of the Company’s restricted common stock, under the Company’s 2021 Equity Incentive Plan. The grant of the 240,000 shares of restricted common stock vest as follows: 100% of 170,000 shares and 100% of 70,000 shares vesting on July 12, 2023 and September 27, 2023, respectively , contingent upon each recipient’s continued service with the Company. These shares have a total fair value of $ 280,000 , based on the market price on the grant date. 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. The grant for the 940,000 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 $ 1,307,000 based on the market price on the issuance date. On February 28, 2021, 16,667 shares of restricted common stock were rescinded due to an employee termination. As a result, these shares were canceled and the shares once again became eligible for future awards under the Company’s Amended and Restated 2012 Equity Incentive Plan. On March 31, 2021, 20,000 restricted stock awards were granted to a new employee of the Company, under the Company’s Amended and Restated 2012 Equity Incentive Plan. The grant for the 20,000 shares of restricted stock vest as follows: 100% vest on March 22, 2022, contingent upon the recipient’s continued service with the Company. These shares have a total fair value of $ 29,000 based on the market price on the issuance date. 90 Table of Contents On September 1, 2021, restricted stock awards were granted to three board members and an advisor for an aggregate of 240,000 , and 50,000 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, 2022 and September 27, 2022 , respectively, contingent upon each recipient’s continued service with the Company. These shares have a total fair value of $ 276,000 , based on the market price on the grant date. The grant of the remaining aggregate of 50,000 shares of restricted common stock vest as follows: 100 % on the six-month anniversary of the grant date, subject to recipient’s continued service with the Company. These advisor shares have a total fair value of $ 58,000 , based on the market price on the grant date. The awarded shares above are subject to trading restrictions, and forfeiture, subject to the vesting terms described above. When such securities are vested in accordance with their terms, the trading restrictions are lifted. Stock-based compensation expense recorded related to restricted stock during the years ended December 31, 2022 and 2021 was $ 1,673,000 and $ 1,919,000 , respectively. The remaining amount of unamortized stock-based compensation expense related to restricted stock at December 31, 2022 and 2021 was $ 878,000 and $ 866,000 , respectively. Optio ns On January 25, 2022, the Company granted options to purchase an aggregate of 520,000 shares of common stock to various Company employees at an exercise price of $ 1.17 per share. The options have a term of five years and fully vest on January 2025, with 33.3% vesting each subsequent year from the date of grant, contingent upon the recipient’s continued service with the Company . The aggregate fair value of the options on the date of grant, using the Black-Scholes model, was $ 454,000 . Variables used in the Black-Scholes option-pricing model for the options issued include: (1) a discount rate of 1.56 % based on the applicable US Treasury bill rate, (2) expected term of 3.5 years, (3) expected volatility of 120 % based on the trading history of the Company, and (4) zero expected dividends. 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 2024, with 33.3% 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 . Variables used in the Black-Scholes option-pricing model for the options issued include: (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 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, 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. 91 Table of Contents 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. 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: 2022 2021 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) Outstanding at Beginning of Period 1,123,435 $ 1.80 3.0 1,234,849 $ 2.43 2.7 Granted 520,000 1.17 550,000 1.39 Expired/Canceled ( 235,768 ) 2.17 ( 394,415 ) 3.57 Exercised - - ( 266,999 ) 1.23 Outstanding at End of Period 1,407,667 $ 1.51 2.7 1,123,435 $ 1.80 3.0 Exercisable at End of Period 575,667 $ 1.79 1.6 366,101 $ 2.42 1.7 NOTE 11 – EARNINGS PER COMMON SHARE Earnings (loss) per common share-basic is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Net income (loss) per common share-diluted assumes the conversion of all potentially dilutive securities and is calculated by dividing net (loss) income by the sum of the weighted average number of shares of common stock, as defined above, outstanding plus potentially dilutive securities. Net (loss) income per common share-diluted considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares, as defined above, would have an anti-dilutive effect. The calculation of earnings per share for the years ended December 31, 2022 and December 31, 2021 were as follows (amounts in thousands, except share and per share data): Numerator: 2022 2021 Net income (loss) $ 2,844 $ ( 1,299 ) Denominator: Weighted average common shares – basic 85,513,095 79,963,237 Dilutive effect of common stock equivalents: Options - - Denominator: Weighted average common shares – diluted 85,513,095 79,963,237 Earnings (loss) per share – basic $ 0.03 $ ( 0.02 ) Earnings (loss) per share – diluted $ 0.03 $ ( 0.02 ) 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 Due to the Company’s net losses, there were no provisions for income taxes for the years ended December 31, 2022, and 2021. The following table reconciles the U.S. federal statutory income tax rate in effect for the years ended December 31, 2022, and 2021, and the Company’s effective tax rate: 2022 2021 U.S. federal statutory income tax 21.00 % 21.00 % State and local income tax, net of benefits 6.64 % 6.64 % Amortization of debt discount 0.00 % 0.00 % Meals & Entertainment 0.02 % ( 0.03 %) Other Income - PPP Loan 0.00 % 7.95 % Officer life insurance and D&O insurance 2.49 % ( 5.73 %) Stock-based compensation 0.00 % 6.50 % Tax rate changes and other 0.00 % 0.00 % Valuation allowance for deferred income tax assets ( 30.15 %) ( 36.34 %) Effective income tax rate 0.00 % 0.00 % 92 Table of Contents Deferred income tax assets as of December 31, 2022, and 2021 are as follows (in thousands): Deferred Tax Assets 2022 2021 Accretion $ 425 $ 132 Difference in depreciation, depletion, and capitalization methods - oil and natural gas properties 1,516 2,389 Interest Expense - PPP Loan 1 0 Impairment 5,343 5,343 Lease Liability ( 58 ) ( 56 ) ROU Assets 80 52 Gain/Loss from sale of FA and/or O&G properties ( 59 ) - Loss on ARO 23 - Stock options - NQ ( 174 ) - Stock-Based Compensation 1,507 1,149 Net operating loss - federal taxes 24,080 24,422 Net operating loss - state taxes 3,423 3,531 Total deferred tax asset $ 36,106 $ 39,963 Less valuation allowance ( 36,106 ) ( 36,963 ) Total deferred tax assets $ - $ - In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all deferred assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Utilization of NOL and tax credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by the Internal Revenue Code (the “Code”), as amended, as well as similar state provisions. In general, an “ownership change” as defined by the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percent of the outstanding stock of a company by certain shareholders or public groups. 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 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. As of December 31, 2022, and 2021, the Company did not have any significant uncertain tax positions or unrecognized tax benefits. The Company did not have associated accrued interest or penalties, nor was any interest expense or penalties recognized for the years ended December 31, 2022, and 2021. 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. 93 Table of Contents NOTE 13 - SUBSEQUENT EVENTS On January 23, 2023, the Company granted options to purchase an aggregate of 540,000 shares of common stock to various Company employees at an exercise price of $ 1.09 per share. The options have a term of five years and fully vest in January 2026. 33.3 % vest 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 $ 429,000 . Variables used in the Black-Scholes option-pricing model for the options issued include: (1) a discount rate of 3.61 % based on the applicable US Treasury bill rate, (2) expected term of 3.5 years, (3) expected volatility of 113 % based on the trading history of the Company, and (4) zero expected dividends. Additionally, on January 23, 2023, restricted stock awards were granted to officers of the Company for an aggregate of 1,250,000 shares of the Company’s restricted common stock, under the Company’s 2021 Equity Incentive Plan. The grant for the 1,250,000 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 $ 1,363,000 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 . 94 Table of Contents SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) The following disclosures for the Company are made in accordance with authoritative guidance regarding disclosures about oil and natural gas producing activities. Users of this information should be aware that the process of estimating quantities of “proved,” “proved developed,” and “proved undeveloped” crude oil, natural gas liquids and natural gas reserves is complex, requiring significant subjective decisions in the evaluation of all available geological, engineering and economic data for each reservoir. The data for a given reservoir may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. Consequently, material revisions (upward or downward) to existing reserve estimates may occur from time to time. Although reasonable effort is made to ensure that reserve estimates reported represent the most accurate assessments possible, the significance of the subjective decisions required and variances in available data for various reservoirs make these estimates generally less precise than other estimates presented in connection with financial statement disclosures. Proved reserves . Reserves of oil and natural gas that have been proved to a high degree of certainty by analysis of the producing history of a reservoir and/or by volumetric analysis of adequate geological and engineering data. Proved developed reserves . Proved reserves that can be expected to be recovered through existing wells and facilities and by existing operating methods. Proved undeveloped reserves or PUDs . Proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion. PROVED RESERVE SUMMARY All of the Company’s reserves are located in the United States. The following tables sets forth the changes in the Company’s net proved reserves (including developed and undeveloped reserves) for the years ended December 31, 2022 and 2021. Reserves estimates as of December 31, 2022 were estimated by the independent petroleum consulting firm Cawley, Gillespie & Associates, Inc. The reserve report is incorporated herein by reference to Exhibit 99.1 of the Annual Report on Form 10-K which these financial statements are filed with. December 31, 2022 2021 Crude Oil (MBbls) Net proved reserves at beginning of year 12,065 12,096 Revisions of previous estimates (210 ) 234 Purchases in place 31 - Extensions, discoveries and other additions - - Sales in place - (75 ) Production (275 ) (190 ) Net proved reserves at end of year 11,611 12,065 Natural Gas (Mmcf) Net proved reserves at beginning of year 12,881 11,895 Revisions of previous estimates 3,606 1,333 Purchases in place 96 - Extensions, discoveries and other additions - - Sales in place - (190 ) Production (204 ) (157 ) Net proved reserves at end of year 16,379 12,881 NGL (MBbbls) Net proved reserves at beginning of year 488 34 Revisions of previous estimates 1,305 477 Purchases in place 17 - Extensions, discoveries and other additions - - Sales in place - (19 ) Production (14 ) (4 ) Net proved reserves at end of year 1,796 488 Oil Equivalents (MBoe) Net proved reserves at beginning of year 14,700 14,113 Revisions of previous estimates 1,696 933 Purchases in place 64 - Extensions, discoveries and other additions - - Sales in place - (126 ) Production (323 ) (220 ) Net proved reserves at end of year 16,137 14,700 95 Table of Contents RESERVES During the year ended December 31, 2022, the Company’s reserves increased by 1.4 MMBoe of proved reserves. 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 0.98 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: 2022 2021 Proved Developed Reserves Crude Oil (MBbls) 2,147 1,363 Natural Gas (Mmcf) 3,150 1,302 NGL (MBbls) 304 34 Oil Equivalents (MMBoe) 2,976 1,614 Proved Developed Non-Producing Reserves Crude Oil (MBbls) 146 510 Natural Gas (Mmcf) 214 536 NGL (MBbls) 38 - Oil Equivalents (MMBoe) 220 599 Proved Undeveloped Reserves Crude Oil (MBbls) 9,319 10,192 Natural Gas (Mmcf) 13,016 11,043 NGL (MBbls) 1,454 454 Oil Equivalents (MMBoe) 12,942 12,487 Proved Reserves Crude Oil (MBbls) 11,612 12,065 Natural Gas (Mmcf) 16,380 12,881 NGL (MBbls) 1,796 488 Oil Equivalents (MMBoe) 16,137 14,700 96 Table of Contents Proved Undeveloped Reserves The following table is a reconciliation of the change in our PUD reserves for the periods indicated below (quantities in net MBoe): Proved undeveloped reserves, December 31, 2020 11,913 Transfers to proved developed (597 ) Additions 3,848 Revisions of prior estimates (2,677 ) Proved undeveloped reserves, December 31, 2021 12,487 Transfers to proved developed (887 ) Additions 3,619 Revisions of prior estimates (2,276 ) Proved undeveloped reserves, December 31, 2022 12,942 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; · Additions related to the development of operated (1,164 MBoe) and non-operated (2,684 MBoe) sections in the D-J Basin; and · 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; and · 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 equity infusions or loans (which may be convertible) made available from Dr. 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 . The following table sets forth the capitalized costs relating to the Company’s crude oil and natural gas producing activities at December 31, 2022 and 2021 (in thousands): 2022 2021 Proved oil and gas properties $ 178,435 $ 154,686 Unproved oil and gas properties - - Total oil & gas properties 178,435 154,686 Accumulated depreciation and depletion and impairment (98,288 ) (88,219 ) Net Capitalized Costs $ 80,147 $ 66,467 97 Table of Contents Costs Incurred in Oil and Natural Gas Property Acquisition, Exploration and Development Activities . The following table sets forth the costs incurred in the Company’s oil and natural gas property acquisition, exploration and development activities for the years ended December 31, 2022 and 2021 (in thousands): 2022 2021 Acquisition of properties Proved $ 18 $ 135 Unproved - - Exploration costs - - Development costs 23,113 6,874 Total $ 23,131 $ 7,009 Results of Operations for Oil and Natural Gas Producing Activities . The following table sets forth the results of operations for oil and natural gas producing activities for the years ended December 31, 2022 and 2021 (in thousands): 2022 2021 Crude oil and natural gas revenues $ 30,034 $ 15,860 Production costs (10,397 ) (5,943 ) Depreciation and depletion and impairment (10,069 ) (7,155 ) Results of operations for producing activities, excluding corporate overhead and interest costs $ 9,568 $ 2,761 Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Natural Gas Reserves. The following information has been developed utilizing procedures prescribed by ASC Topic 932 and based on crude oil and natural gas reserves and production volumes estimated by the independent petroleum consultants of the Company. The estimates were based on a 12-month average of first-of-the-month commodity prices for the years ended December 31, 2022 and 2021. The following information may be useful for certain comparison purposes, but should not be solely relied upon in evaluating the Company or its performance. Further, information contained in the following table should not be considered as representative of realistic assessments of future cash flows, nor should the Standardized Measure of Discounted Future Net Cash Flows be viewed as representative of the current value of the Company. The future cash flows presented below are based on cost rates and statutory income tax rates in existence as of the date of the projections and average prices over the preceding twelve months. It is expected that material revisions to some estimates of crude oil and natural gas reserves may occur in the future, development and production of the reserves may occur in periods other than those assumed, and actual prices realized and costs incurred may vary significantly from those used. Management does not rely upon the following information in making investment and operating decisions. Such decisions are based upon a wide range of factors, including estimates of probable and possible as well as proved reserves, and varying price and cost assumptions considered more representative of a range of possible economic conditions that may be anticipated. The following table sets forth the standardized measure of discounted future net cash flows from projected production of the Company’s oil and natural gas reserves as of December 31, 2022 and 2021 (in thousands): 2022 2021 Future cash inflows $ 1,248,436 $ 834,741 Future production costs (320,078 ) (225,799 ) Future development costs (180,739 ) (180,422 ) Future income taxes (230,937 ) (93,261 ) Future net cash flows 526,682 335,259 Discount to present value at 10% annual rate (251,766 ) (171,292 ) Standardized measure of discounted future net cash flows relating to proved oil and gas reserves $ 274,916 $ 163,967 98 Table of Contents Changes in Standardized Measure of Discounted Future Net Cash Flows. The following table sets forth the changes in the standardized measure of discounted future net cash flows for each of the years ended December 31, 2022 and 2021 (in thousands): 2022 2021 Standardized measure, beginning of year $ 163,967 $ 57,275 Crude oil and natural gas sales, net of production costs (19,817 ) (9,762 ) Net changes in prices and production costs 89,565 108,918 Extensions, discoveries, additions and improved recovery - - Changes in estimated future development costs 1,493 1,416 Development costs incurred - - Revisions of previous quantity estimates 67,995 (1,472 ) Accretion of discount 36,819 40,540 Net change in income taxes (66,928 ) (31,717 ) Purchases of reserves in place 1,818 - Sales of reserves in place - (1,212 ) Change in timing of estimated future production 4 (19 ) Standardized measure, end of year $ 274,916 $ 163,967 99 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.