| NOTES PAYABLE | NOTE 8
NOTES PAYABLE Note
Purchase Agreement and Sale of Secured Promissory Notes On
March 7, 2014, the Company entered into a $50 million financing facility (the Notes Purchase Agreement) between
the Company, BRe BCLIC Primary, BRe BCLIC Sub, BRe WNIC 2013 LTC Primary, BRe WNIC 2013 LTC Sub, and RJ Credit LLC (RJC),
as investors (collectively, the Investors), and BAM Administrative Services LLC, as agent for the Investors (the
Agent). The Company issued the Investors Secured Promissory Notes in the aggregate amount of $34.5 million
(the Initial Notes or Senior Notes) and provided for an additional $15.5 million available under the
financing agreement to fund the Companys future drilling costs to be evidenced by notes with substantially similar terms
as the Initial Notes (the Subsequent Notes). On March 19, 2015, BRe WNIC 2013 LTC Primary transferred a portion
of its Initial Note to HEARTLAND Bank, and effective April 1, 2015, BRe BCLIC Primary transferred its Initial Note to Senior Health
Insurance Company of Pennsylvania (SHIP), with each of HEARTLAND Bank and SHIP becoming an Investor
for purposes of the discussion below. The
Initial Notes bear interest at the rate of 15% per annum, payable monthly in arrears, on the first business day of each month
beginning April 1, 2014 (in connection with the Initial Notes), provided that upon the occurrence of an event of default, the
Initial Notes bear interest at the lesser of 30% per annum and the maximum legal rate of interest allowable by law. The
Initial Notes are due and payable on March 7, 2017 (the Maturity Date), and may be repaid in full without premium
or penalty at any time. Additionally, the Company is required on the third business day of each month, commencing on April 1,
2014, to prepay the Initial Notes in an amount equal to the lesser of (a) the outstanding principal amount of the Initial Notes or
(b) twenty-five percent (25%) of the aggregate of all net revenues actually received by us and our subsidiaries for the immediately
preceding calendar month (or such pro rata portion of the first month the payment is required). The Initial Notes also provide
that RJC is to be repaid (i) accrued interest, only after all of the other Investors are repaid any accrued interest due and (ii)
principal, only after all of the other Investors are repaid the full amount of principal due under their Initial Notes, and (iii)
that any funding in connection with Subsequent Notes will be made solely by RJC. See below and Note 16 for information related
to recent agreements to defer certain principal and interest payments. The
amount outstanding under the Initial Notes is secured by a first priority security interest in all of the Companys subsidiaries,
assets, property, real property, intellectual property, securities and proceeds therefrom, granted in favor of the Agent for the
benefit of the Investors. Additionally, the Company granted a mortgage and security interest in all of its real property
located in the state of Colorado and the state of Texas. Additionally, the Companys obligations under the Initial Notes,
Note Purchase Agreement and related agreements were guaranteed by its wholly-owned and majority-owned direct and indirect subsidiaries. On
April 24, 2015, certain of the Investors in our Initial Notes agreed to defer certain mandatory principal repayments and interest
payments that would otherwise be payable in the months of May and June 2015, with such deferred amounts to be used by us solely
to renew, extend, re-lease or otherwise acquire leases which will then become additional collateral under the Initial Notes. The
aggregate principal and interest that was deferred was approximately $354,000, which amount has been added to the principal due
under the Initial Notes as of July 31, 2015 and is due upon maturity ($320,000 of which was expensed as additional interest expense).
The Company was also charged an additional deferral fee of $354,000, the amount of the principal and interest deferred under this
agreement, which was added to the principal and due upon maturity. As consideration for the deferral, on September 10, 2015,
the Company granted warrants exercisable for an aggregate of 349,111 shares of our common stock to the Investors participating
in the deferral. Each warrant has a 3-year term and is exercisable on a cashless basis at an exercise price of $1.50 per
share. The fair value of these warrants of approximately $40,000 was recorded as additional deferred financing costs. On
August 28, 2015, the Company entered into agreements with the holders of the Senior Notes to (i) defer until the maturity date
of the Senior Notes the mandatory principal payments that would otherwise be due and payable by the Company on payment dates occurring
during the six month period of August 1, 2015 through January 31, 2016, (ii) HEARTLAND Bank agreed to change the frequency of
payment of accrued interest and mandatory principal repayments from monthly to semi-annually, with the next interest payment due
February 1, 2016 and the next mandatory principal repayment due August 3, 2016, and with the Company agreeing to place an amount
equal to 1/6th of the semi-annual principal and interest payments due into a sinking fund starting in February 2016 which
the Company shall pay to HEARTLAND Bank every six months when due and owing, (iii) RJC agreed to defer all interest payments otherwise
due and payable by the Company to RJC during the period commencing on August 1, 2015 through January 31, 2016 (the Waiver
Period), which deferred interest is added to principal each month during the Waiver Period, (iv) certain other holders
agreed to (a) defer until the maturity date of their Senior Notes 12/17ths of the interest payments that would otherwise
be due and payable by the Company to them on payment dates occurring during the six month period of August 1, 2015 through January
31, 2016, and (b) have the Company pay in cash 5/17ths of such interest payments per month, with all deferred interest being
added to principal each month until the maturity date of the Senior Notes, and (v) SHIP, BRe BCLIC Sub, BRe WINIC 2013 LTC Primary,
BRe WNIC 2013 LTC Sub and RJC increased the interest rate under their Senior Notes from 15% to 17% per annum on all outstanding
principal under their Senior Notes during the Waiver Period. These deferrals agreed upon with our Investors (the August-January
Deferrals), reduced the Companys monthly cash interest payments and mandatory principal repayments from approximately
$600,000 per month prior to these agreements, to approximately $100,000 per month during the Waiver Period. As
additional consideration for these agreements and related note amendments and deferrals, on September 10, 2015, the Company issued
warrants exercisable on a cash-only basis for an aggregate of 1,201,004 shares to the lenders, proportionately based on their
individual principal. The warrants have a three year term and are exercisable on a cash-only basis at a price of $0.75 per share.
The fair value of these 1,201,004 warrants of approximately $120,000 was recorded as additional deferred financing costs. In
addition, in the event the aggregate total of principal and interest deferred in connection with the August-January deferrals
exceeds $900,000 over the Waiver Period, within thirty days of February 1, 2016, and subject to NYSE MKT additional listing approval,
the Company will proportionately grant additional warrants such that the total aggregate number of shares of Company common stock
exercisable under all warrants granted will equal the total principal and interest deferred by such Investors divided by $0.75,
provided that such obligation has been further extended as discussed below. As of December 31, 2015, the amount of deferred interest
and deferred principal was $2,527,000 and $519,000, respectively. The number of warrants to be issued as of December 31, 2015
was approximately 3.1 million. As the fair value of the warrants is minimal, due to the exercise price being out-of-the money,
as of December 31, 2015, no liability was accrued. These warrants will not be issued and were settled as part of the
debt restructuring, discussed in more detail in the subsequent events footnote. The
Company did not borrow any proceeds under the Notes Purchase Agreement during the year ended December 31, 2015 and the three months
ended March 31, 2016. As of March 31, 2016, there was approximately $13.5 million gross ($11.0 million net, after origination-related
fees and expenses) available to draw down under Subsequent Notes from RJC. During
the three months ended March 31, 2016, there were no payments made to reduce the outstanding principal due under the Initial Notes. All
debt discount amounts are amortized using the effective interest rate method. The amount of the debt discount reflected on the
accompanying balance sheet as of March 31, 2016 was $9,706,000. Amortization of debt discount and interest expense, related to
the Initial Notes and the first advance, was $2,194,000 and $1,477,000 for the three months ended March 31, 2016, respectively. As
a result of the issuance of common and preferred shares in the acquisition of the assets from GGE in 2015, GGE became a related
party of the Company. 2016
Senior Note Deferrals On
January 29, 2016, the Company entered into a Letter Agreement (the Letter Agreement) with the Investors and the
Agent. The Letter Agreement extended by one (1) month, through February 29, 2016, the deferral of the payment of interest and
principal due under the Senior Notes (the Deferral Extension). Specifically, pursuant to the Letter Agreement, (i)
all Investors agreed to further defer until the maturity date of their Senior Notes the mandatory principal payments that would
otherwise be due and payable by the Company to them on payment dates occurring through February 29, 2016, (ii) HEARTLAND Bank
agreed to change the next scheduled semi-annual interest payment due from February 1, 2016 to March 1, 2016 (with interest due
and payable thereafter on a semi-annual basis) and to change the next mandatory principal repayment due date to September 3, 2016,
and the Company agreed to place an amount equal to 1/6th of the semi-annual principal and interest payments due into a sinking
fund which the Company shall pay to HEARTLAND Bank every six months when due and owing, and (iii) SHIP (as successor-in-interest
to BRe BCLIC Primary), BRe BCLIC Sub, BRe WINIC 2013 LTC Primary, BRe WNIC 2013 LTC Sub, and RJC agreed to (a) defer until the
maturity date of their Senior Notes and the junior note held by RJC (the RJC Junior Note) all of the interest payments
that would otherwise be due and payable by the Company to them in February 2016; (b) return the interest rate under each of their
Senior Notes to 15% per annum, and the interest rate under the RJC Junior Note to 12% cash pay per annum, effective January 31,
2016; and (c) delay the issuance of any Subsequent Warrants issuable pursuant thereto to within 30 days of March
1, 2016, subject to NYSE MKT additional listing approval. On
March 7, 2016, the Company entered into a Letter Agreement, dated March 1, 2016 (the March Letter Agreement), with
SHIP, BRe BCLIC Sub, BRe WINIC 2013 LTC Primary, BRe WNIC 2013 LTC Sub, and RJC (collectively, the Original Lenders),
and the Agent, which extended the Deferral Extension by one (1) month, through March 31, 2016. Pursuant to the March Letter
Agreement, the Original Lenders agreed to (i) further defer until the maturity date of their Senior Notes the mandatory principal
payments that would otherwise be due and payable by the Company to them on payment dates occurring through March 31, 2016, (ii)
defer until the maturity date of their Senior Notes and the RJC Junior Note all of the interest payments that would otherwise
be due and payable by the Company to them in March 2016, with all interest amounts deferred being added to principal on the first
business day of the month following the month in which such deferred interest is accrued; and (iii) delay the issuance of any
Subsequent Warrants issuable pursuant thereto to within 30 days of April 1, 2016, subject to NYSE MKT additional
listing approval. For the three-month period ending March 31, 2016, principal and interest deferred amounted to $1,577,000. An
aggregate of approximately $4,415,000 in total interest and principal payments has been deferred pursuant to these agreements
through March 2016, in which event warrants exercisable solely on a cash basis for approximately an additional 4.0 million shares
of Company common stock at an exercise price of $0.75 per share will be granted pro rata to the Investors (other than to
HEARTLAND Bank) in May 2016. These warrants will not be issued and were settled as part of the debt restructuring, discussed in
more detail in the subsequent events footnote. The
Deferral Extension was further extended in April 2016 as described below under Note 15 - Subsequent Events. Bridge
Note Financing As
of March 31, 2016, the Company had Bridge Notes with an aggregate principal amount of $475,000 remain outstanding, plus accrued
interest of $130,000 and additional payment-in-kind (PIK) of $48,000. The aggregate principal and accrued and unpaid
interest and PIK amounts are available for conversion into common stock pursuant to the terms of the Bridge Notes into common
stock of the Company, subject to no more than 19.99% of the Companys outstanding common stock on the date the Second Amended
Notes were entered into. Upon a conversion, the applicable holder shall receive that number of shares of common stock as is determined
by dividing the Conversion Amount by a conversion price (the Conversion Price) as follows:
(A) prior
to June 1, 2014, the Conversion Price was $2.15 per share; and
(B) following
June 1, 2014, the denominator used in the calculation described above is the greater of (i) 80% of the average of the closing
price per share of the Companys publicly-traded common stock for the five (5) trading days immediately preceding the
date of the conversion notice provided by the holder; and (ii) $0.50 per share. Additionally,
each Amended Bridge Investor entered into a Subordination and Intercreditor Agreement in favor of the Agent, subordinating and
deferring the repayment of the Bridge Notes until full repayment of certain senior notes. The Subordination and Intercreditor
Agreements also prohibit the Company from repaying the Bridge Notes until certain senior notes have been paid in full, except
that we are allowed to repay the Bridge Notes from net proceeds received from the sale of common or preferred stock (i) in calendar
year 2014 if such net proceeds received in such calendar year exceeds $35,000,000, (ii) in calendar year 2015 if such net proceeds
received in such calendar year exceeds $50,000,000, and (iii) in calendar year 2016 if such net proceeds actually received in
such calendar year exceeds $50,000,000. The interest expense related to these notes for the three months ended March 31, 2016
and 2015 was $14,000 and $15,000, respectively. The
unamortized debt premium on the Convertible Bridge Notes as of March 31, 2016 and December 31, 2015, was $113,000. MIE
Jurassic Energy Corporation On
February 14, 2013, PEDCO entered into a Secured Subordinated Promissory Note, as amended on March 25, 2013 and July 9, 2013 (the
MIEJ Note, as amended through December 31, 2014) with MIEJ. In
February 2015, the Company and PEDCO entered into a Settlement Agreement with MIEJ (the MIEJ Settlement Agreement).
As part of the MIEJ Settlement Agreement, the Company entered into a new Secured Subordinated Promissory Note, which extinguished
the original MIEJ Note, and reduced the principal amount owed from $6.17 million to $4.925 million (the New MIEJ Note).
As of March 31, 2016, the amount outstanding under the New MIEJ Note was $4,925,000. The Company recognized a gain on debt extinguishment
during the three months ended March 31, 2015 related to these transactions of $2,192,000. The
New MIEJ Note has an interest rate of 10.0%, with no interest due until maturity, is secured by all of the Companys assets,
and is subordinated to the Secured Promissory Notes. MIEJ also agreed to subordinate its note up to an additional $60 million
of new senior lending, with any portion of new senior lending in excess of this amount requiring to be paid first to MIEJ until
the New MIEJ Note is paid in full. Further, for every $20 million in new senior lending the Company raises, MIEJ shall be paid
all interest and fees accrued to date on the New MIEJ Note. The New MIEJ Note is due and payable on March 8, 2017, subject
to automatic extensions upon the occurrence of a Long Term Financing or PEDEVCO Senior Lending Restructuring (each as defined
below). On
a onetime basis, the Secured Promissory Notes may be refinanced by a new loan (Long-Term Financing) by one or more
third party replacement lenders (Replacement Lenders), and in such event the Company shall undertake commercially
reasonable best efforts to cause the Replacement Lenders to simultaneously refinance both the Secured Promissory Notes and the
New MIEJ Note as part of such Long-Term Financing. If the Replacement Lenders are unable or unwilling to include the New MIEJ
Note in such financing, then the Long-Term Financing may proceed without including the New MIEJ Note, and the New MIEJ Note shall
remain in place and shall be automatically subordinated, without further consent of MIEJ, to such Long-Term Financing. Furthermore,
upon the occurrence of a Long-Term Financing, the maturity of the New MIEJ Note is automatically extended to the same maturity
date of the Long-Term Financing, but to no later than March 8, 2020. Additionally, in connection with the Long-Term Financing:
● The Long-Term Financing must
not exceed $95 million;
● The Company must make commercially reasonable
best efforts to include adequate reserves or other payment provisions whereby MIEJ is paid all interest and fees accrued on
the New MIEJ Note commencing as of March 8, 2017 and annually thereafter, and to allow for quarterly interest payments starting
March 31, 2017 of not less than 5% per annum on the outstanding balance of the New MIEJ Note, plus a one-time payment of accrued
interest (not to exceed $500,000) as of March 31, 2017; and
● Commencing on March 8, 2017,
MIEJ shall have the right to convert the balance of the New MIEJ Note into the Companys common stock at a price equal
to 80% of the average closing price per share of our stock over the then previous 60 days, subject to a minimum conversion
price of $0.30 per share. MIEJ shall not be permitted to convert if the conversion would result in MIEJ holding more than
19.9% of the Companys outstanding common stock without approval from the Companys shareholders, which the Company
has agreed to seek at its 2016 annual shareholder meeting or, if not approved then, at its 2017 annual shareholder meeting. In
the event the Secured Promissory Notes are not refinanced, restructured or extended by the existing Investors, the maturity of
both the New MIEJ Note and the Secured Promissory Notes may be extended to no later than March 8, 2019, without requiring the
consent of MIEJ. However, (i) any such maturity extension of the New MIEJ Note will give MIEJ the right to convert the note into
our common stock as described above, commencing on March 8, 2017, and (ii) such extension agreement must provide that MIEJ is
paid all interest and fees accrued on the New MIEJ Note as of March 8, 2018. The New MIEJ Note may be prepaid any time without
penalty, and if we repay the New MIEJ Note on or before December 31, 2015, 20% of the principal of the New MIEJ Note amount will
be forgiven by MIEJ, and if we repay the New MIEJ Note on or before December 31, 2016, 15% of the principal of the New MIEJ Note
amount will be forgiven by MIEJ. The
interest expense related to this note for the three months ended March 31, 2016 and 2015 was $124,000 and $120,000, respectively. For
financial reporting purposes, MIEJ was considered a related party for all periods presented prior to the MIEJ Settlement Agreement
signed in February 2015. After that date, MIEJ is no longer considered a related party. Related
Party Financings Subordinated
Note Payable Assumed In
2015, the Company assumed approximately $8.35 million of subordinated note payable from GGE in the acquisition of the GGE Acquired
Assets, which amount is outstanding as of March 31, 2016. The lender under the subordinated note payable is RJC, which is one
of the lenders under the Senior Notes and is an affiliate of GGE. The note is due and payable on December 31, 2017, and bears
interest at a rate of 12% per annum (24% upon an event of default). The accrued interest is payable on a monthly basis in cash.
The assumed note payable is subordinate and subject to the terms and conditions of the Senior Notes, as well as any future secured
indebtedness from a lender with an aggregate principal amount of at least $20,000,000. Should the Company repay the Senior Notes
or replace them with secured indebtedness from a lender with an aggregate principal amount of at least $20,000,000, RJC agreed
to further amend the subordinated note payable to adjust the frequency of interest payments or to eliminate the payments and replace
them with a single payment of the accrued interest to be paid at maturity. The
subordinated note payable contains customary representations, warranties, covenants and requirements for the Company to indemnify
RJC and its affiliates, related parties and assigns. The note payable also includes various covenants (positive and negative)
binding the Company, including requiring that the Company provide RJC with quarterly (unaudited) and annual (audited) financial
statements, restricting our creation of liens and encumbrances, or sell or otherwise disposing, the collateral under the note. On
April 24, 2015, RJC agreed to defer all mandatory principal repayments and interest payments that would otherwise be payable
to RJC in May and June 2015 under the subordinated note, with such deferred amounts to be used solely to renew, extend,
re-lease or otherwise acquire leases which will then become additional collateral under the subordinated note. The aggregate
principal and interest that was deferred was approximately $170,000, which amount has been capitalized and added to the
principal due under the subordinated note effective July 31, 2015 and due upon maturity. As consideration for the
deferral, we granted warrants exercisable for an aggregate of 113,237 shares of our common stock to RJC (which are
included in the aggregate total of 349,111 shares issuable upon exercise of warrants issued to the Investors as described
above under Note Purchase Agreement and Sale of Secured Promissory Notes in this Note 8 above). The warrant
has a 3 year term and will be exercisable on a cashless basis at an exercise price of $1.50 per share, with a grant date
fair value of $13,000. On
August 28, 2015, the Company entered into agreements with RJC pursuant to which (i) RJC agreed to defer until the maturity date
of the subordinated note the mandatory principal payments that would otherwise be due and payable by the Company on payment dates
occurring during the six month period of August 1, 2015 through January 31, 2016, and (ii) RJC agreed to defer all interest payments
otherwise due and payable by the Company to RJC under the subordinated note during the Waiver Period, which deferred interest
is added to principal each month during the Waiver Period. As of December 31, 2015, the total amount of deferred interest
and principal related to this note was $565,000. As
additional consideration for these agreements and related note amendments and deferrals, on September 10, 2015, the Company granted
RJC warrants exercisable on a cash-only basis for an aggregate of 265,241 shares (which are included in the aggregate total of
1,201,004 shares issuable upon exercise of warrants issued to the Investors as described above under Note Purchase Agreement
and Sale of Secured Promissory Notes in this Note 8 above). The warrants have a three year term and are exercisable on
a cash-only basis at a price of $0.75 per share. In addition, in the event the aggregate total of principal and interest deferred
by all Investors in connection with the August-January Deferrals exceeds $900,000 over the Waiver Period as described above under
Note Purchase Agreement and Sale of Secured Promissory Notes, within thirty days of February 1, 2016, and subject
to NYSE MKT additional listing approval, the Company will proportionately grant additional warrants such that the total aggregate
number of shares of Company common stock exercisable under all warrants granted to the Investors will equal the total principal
and interest deferred by such Investors divided by $0.75, provided such obligation has been extended as discussed below. As of
December 31, 2015, the total amount (for all Investors) of deferred interest and deferred principal was $2,527,000 and $519,000,
respectively. These warrants will not be issued and were settled as part of the debt restructuring, discussed in more detail in
the subsequent events footnote. The
interest expense related to this note for the three months ended March 31, 2016 and 2015 was $276,000 and $222,000, respectively. 2016
RJC Subordinated Note Deferrals On
January 29, 2016 and March 7, 2016, the Company entered into agreements with RJC to defer until maturity the payment of interest
and principal due under the subordinated note through March 31, 2016, return the interest rate to 12% per annum effective January
31, 2016, and delay the issuance of any Subsequent Warrants issuable pursuant thereto to within 30 days of April
1, 2016, subject to NYSE MKT additional listing approval. For the three-month period ended March 31, 2016, interest
deferred amounted to $273,000. An aggregate of approximately $838,000 in total interest has been deferred pursuant
to these agreements through March 2016, The
deferral period was further extended in April 2016 as described below under Subsequent Events. |
