| 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 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 Company’s 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. Pursuant to letter agreements and amendments
thereto entered into with the holders of the Senior Notes on August 28, 2015, January 29, 2016, March 7, 2016 and April 1, 2016,
certain of the holders agreed to, among other things, (i) defer until the maturity date of their Senior Notes the mandatory principal
payments that would otherwise be due and payable by the Company to them on payment dates occurring from August 2015 through April
2016; and (ii) defer until the maturity date of their Senior Notes and the RJC Junior Note all of the interest payments that would
otherwise be due and payable by the Company to them from August 2015 to April 2016, with all interest amounts deferred being added
to principal on the first business day of the month following the month in which such deferred interest is accrued. The purpose
of these deferrals was to provide the Company with temporary relief from cash requirements to fully-focus and execute upon its
contemplated business combinations. As consideration for the 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
of common stock 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. During the nine months ended September 30, 2016,
there were no payments made to reduce the outstanding principal due under the Initial Notes, however, such Notes were restructured
as described below. 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 Restructuring Following a series of temporary payment deferrals,
on May 12, 2016 (the “Closing Date”), the Company entered into an Amended and Restated Note Purchase Agreement (the
“Amended NPA”), with SHIP, BRe BCLIC Sub, BRe WINIC 2013 LTC Primary, BRe WNIC 2013 LTC Sub, Heartland Bank, BHLN-Pedco
Corp. (“BHLN”), BBLN-Pedco Corp. (“BBLN”), and RJC (together with BHLN and BBLN, the “Tranche A Investors”)
(collectively, the “Lenders”), and the Agent, as agent for the Lenders. The Amended NPA amended and restated the Senior
Notes, and the Company issued new Senior Secured Promissory Notes to each of the Lenders (collectively, the “Tranche B Notes”)
in a transaction that qualified as a troubled debt restructuring. RJC is also a party to the RJC Junior Note (discussed below). The Amended NPA amended the Senior Notes as
follows:
● Created new “Tranche A Notes,” in substantially the same form and with similar terms as the Tranche B Notes, except as discussed below, consisting of a term loan issuable in tranches with a maximum aggregate principal amount of $25,960,000, with borrowed funds accruing interest at 15% per annum, and maturing on May 11, 2019 (the “Tranche A Maturity Date”) (the “Tranche A Notes,” and together with the Tranche B Notes, the “New Senior Notes”);
● The Company capitalized all accrued and unpaid interest under the Tranche B Notes as a term loan with an aggregate outstanding principal balance as of May 12, 2016 equal to $39,065,000 (as of September 30, 2016, the aggregate outstanding principal balance is $41,010,000).The Tranche B Notes mature on June 11, 2019 except for the Tranche B Note issued to RJC, which matures on July 11, 2019;
● Amended the provisions of the Senior Notes which required mandatory prepayments from our revenues, replacing them with a Net Revenue Sweep as described below; and
● Provides that interest on the Tranche B Notes will continue to accrue at the rate of 15% per annum, but all accrued interest through December 31, 2017 will be deferred until due and payable on the maturity date, with all interest amounts deferred being added to the principal of the Tranche B Notes on a monthly basis and that following December 31, 2017, all interest will accrue and be paid monthly in arrears in cash to the Tranche B Note holders. The Tranche A Notes are substantially similar
to the Tranche B Notes, except that such notes are senior to the Tranche B Notes, accrue interest until maturity and have priority
to the payment of Monthly Net Revenues as discussed below. On the Closing Date, the Tranche A Investors
loaned the Company their pro rata share of an aggregate of $6,422,000 (the “Initial Tranche A Funding”). The Initial
Tranche A Funding net proceeds (amounting to $6,422,000 less legal fees of $127,000) were used by the Company to (i) fund approximately
$5.1 million due to a third party operator for drilling and completion expenses related to the acquired working interests in eight
wells from Dome Energy, (ii) pay $750,000 of the Company’s past due payables to Liberty (defined below under “Note
10 – Commitments and Contingencies” – “Other Commitments”), (iii) pay $445,000 of unpaid interest
payments due to Heartland Bank under its Tranche B Note through February 29, 2016, and (iv) pay fees and expenses of $127,000 incurred
in connection with the transactions contemplated by the Amended NPA and related documents. Subject to the terms and conditions of the Amended
NPA, the Company may request each Tranche A Investor, from time to time, to advance to the Company additional amounts of funding
(each, a “Subsequent Tranche A Funding”), provided that: (i) the Company may not request a Subsequent Tranche A Funding
more than one time in any calendar month; (ii) Agent shall have received a written request from the Company at least 15 business
days prior to the requested date of such advance (the “Advance Request”); (iii) no Event of Default or event that with
the passage of time or the giving of notice, or both, would become an Event of Default (a “Default”) shall have occurred
and be continuing or would result therefrom; and (iv) the Company shall provide to the Agent such documents, instruments, certificates
and other writings as the Agent shall reasonably require in its sole and absolute discretion. The advancement of all or any portion
of the Subsequent Tranche A Funding is in the sole and absolute discretion of the Agent and the Investors and no Investor is obligated
to fund all or any part of the Subsequent Tranche A Funding. Each Subsequent Tranche A Funding shall be in a minimum amount of
$500,000 and multiples of $100,000 in excess thereof. The aggregate amount of Subsequent Tranche A Fundings that may be made by
the Investors under the Amended NPA shall not exceed $18,577,876 and any Subsequent Tranche A Funding repaid may not be re-borrowed. In addition, subject to the terms and conditions
of the Amended NPA, RJC agreed to loan to the Company $240,000, within 30 days of the Closing Date and within 30 days of each of
July 1, 2016, October 1, 2016 and January 1, 2017 (collectively, the “RJC Fundings” and collectively with the Investor
Tranche A Fundings, the “Fundings”), provided that no Event of Default or Default shall exist. The aggregate amount
of the RJC Fundings made by RJC under the Amended NPA shall not exceed $960,000 and any Funding repaid may not be re-borrowed.
As of September 30, 2016, the Company has received no loan proceeds under this agreement. To guarantee RJC’s obligation in connection
with the RJC Fundings as required under the Amended NPA, GGE entered into a Share Pledge Agreement with the Company, dated May
12, 2016 (the “GGE Pledge Agreement”), pursuant to which GGE agreed to pledge an aggregate of 10,000 shares of the
Company’s Series A Convertible Preferred Stock held by GGE (convertible into 10,000,000 shares of Company common stock),
which pledged shares are subject to automatic cancellation and forfeiture based on a schedule set forth in the GGE Share Pledge
Agreement, in the event RJC fails to meet each of its RJC Funding obligations pursuant to the Amended NPA. To date, RJC has not
met its RJC Funding obligations under the Amended NPA and the Company is entitled to cancel and forfeit 7,500 shares of the Company’s
Series A Convertible Preferred Stock held by GGE (convertible into 7,500,000 shares of Company common stock) pursuant to the terms
of the GGE Pledge Agreement, which shares have not been cancelled as of the date of this filing. As additional consideration for the entry into
the Amended NPA and transactions related thereto, the Company granted to BHLN and BBLN, warrants exercisable for an aggregate of
5,962,800 shares of common stock of the Company (the “Investor Warrants”). The warrants have a 3 year term, are transferrable,
and are exercisable on a cashless basis at any time at $0.25 per share (as amended), subject to receipt of additional listing approval
of such underlying shares of common stock from the NYSE MKT (which additional listing approval was received from the NYSE MKT on
June 1, 2016). The Investor Warrants include a beneficial ownership limitation that prohibits the exercise of the Investor Warrants
to the extent such exercise would result in the holder, together with its affiliates, holding more than 9.99% of the Company’s
outstanding voting stock (the “Blocker Provision”). The estimated fair value of the Investor Warrants issued is approximately
$707,000 based on the Black-Scholes option pricing model. The relative fair value allocated to the Tranche A Notes and recorded
as debt discount was $636,000. Other than the Investor Warrants, no additional
warrants exercisable for common stock of the Company are due, owing, or shall be granted to the Lenders pursuant to the Senior
Notes, as amended. In addition, warrants exercisable for an aggregate of 349,111 shares of the Company’s common stock at
an exercise price of $1.50 per share and warrants exercisable for an aggregate of 1,201,004 shares of the Company’s common
stock at an exercise price of $0.75 per share previously granted by the Company to certain of the Lenders on September 10, 2015
in connection with prior interest payment deferrals have been amended and restated to provide that all such warrants are exercisable
on a cashless basis and include a Blocker Provision (the “Amended and Restated Warrants”). Additionally, the Company also agreed to (a)
provide to the Agent and the Investors a monthly projected general and administrative expense report (the “Projected G&A”)
and a monthly comparison report of the Projected G&A provided for the preceding month, with an explanation of any variances,
provided that in no event shall such variances exceed $150,000, and (B) pay to the Agent within 2 business days following the end
of each calendar month all of the Company’s oil and gas revenue received by the Company during such month (the “Net
Revenue Sweep”), less (i) lease operating expenses, (ii) interest payments due to Investors under the New Senior Notes, (iii)
general and administrative expenses not to exceed $150,000 per month unless preapproved by the Agent (the “G&A Cap”),
and (iv) preapproved extraordinary expenses (together the “Monthly Net Revenues”). Amounts paid to the Agent through
the Net Revenue Sweep are applied first to the repayment of principal and interest due under the Tranche A Notes until such notes
are paid in full and then to the repayment of principal and interest amounts due under the Tranche B Notes. During the nine months
ended September 30, 2016, the Company has paid $499,000 of principal under the Net Revenue Sweep. The amount of interest deferred
under the Tranche A Notes as of September 30, 2016 equaled $367,000. The amounts outstanding under the New Senior
Notes are secured by a first priority security interest in all of the Company’s and its subsidiaries’ assets, property,
real property, intellectual property, securities and proceeds therefrom, granted in favor of the Agent for the benefit of the Lenders,
pursuant to a Security Agreement and a Patent Security Agreement, each entered into as of March 7, 2014, as amended on May 12,
2016 (the “Amended Security Agreement” and “Amended Patent Agreement,” respectively). Additionally, the
Agent, for the benefit of the Lenders, was granted a mortgage and security interest in all of the Company’s and its subsidiaries
real property as located in the State of Colorado and the State of Texas pursuant to (i) a Leasehold Deed of Trust, Fixture Filing,
Assignment of Rents and Leases, and Security Agreements, dated March 7, 2014, as amended May 12, 2016, filed in Weld County and
Morgan County, Colorado; and (ii) a Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production
to be filed in Matagorda County, Texas (collectively, the “Amended Mortgages”). Other than as described above, the terms of
the Amended NPA (including the covenants and obligations thereunder) are substantially the same as the Senior Notes, and the terms
of the Tranche A Notes and Tranche B Notes (including the events of default, interest rates and conditions associated therewith)
are substantially the same as the original notes sold pursuant to the terms of the Senior Notes. All debt discount amounts are amortized using
the effective interest rate method. The total amount of the debt discount reflected on the accompanying balance sheet as of September
30, 2016 was $7,926,000. Amortization of debt discount and interest expense was $4,638,000 and $5,715,000 for the nine months ended
September 30, 2016, respectively, and was $882,000 and $2,069,000 for the three months ended September 30, 2016, respectively. Junior Debt Restructuring On May 12, 2016, the Company entered into an
Amendment No. 2 to Note and Security Agreement with RJC (the “Second Amendment”). The Company and RJC agreed to amend
the RJC Junior Note to (i) capitalize all accrued and unpaid interest under the RJC Junior Note as of May 12, 2016, and add it
to the note principal, making the outstanding principal amount of the RJC Junior Note as of May 12, 2016 equal to $9,379,000, (ii)
extend the maturity date (“Termination Date”) from December 31, 2017 to July 11, 2019, (iii) provide that all future
interest accruing under the RJC Junior Note is deferred until payable on the Termination Date, with all future interest amounts
deferred being added to the principal on a monthly basis, and (iv) subordinate the RJC Junior Note to the New Senior Notes. Bridge Note Financing As of September 30, 2016, the Company had Bridge
Notes with an aggregate principal amount of $475,000 remaining outstanding, plus accrued interest of $159,000 and additional payment-in-kind
(“PIK”) of $48,000. The aggregate principal and accrued and unpaid interest and PIK amounts are available for
conversion into common stock pursuant to the terms of the Bridge Notes into common stock of the Company, subject to no more than
19.99% of the Company’s outstanding common stock on the date the Second Amended Notes were entered into. Upon a conversion,
the applicable holder shall receive that number of shares of common stock as is determined by dividing the Conversion Amount by
a conversion price (the “Conversion Price”) as follows:
(A) prior to June 1, 2014, the Conversion Price was $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 Company’s publicly-traded common stock for the five (5) trading days immediately preceding the date of the conversion notice provided by the holder; and (ii) $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,
none of which has occurred to date. The interest expense related to these notes for the three and nine months ended September 30,
2016 and 2015 was $15,000 compared to $14,000 and $43,000 compared to $43,000, respectively. The unamortized debt premium on the Convertible
Bridge Notes as of September 30, 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 September 30, 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 Company’s 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 was 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), which as described below has occurred to
date. 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 Company’s common stock at a price equal to 80% of the average closing price per share of our stock over the then previous 60 days, subject to a minimum conversion price of $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 Company’s outstanding common stock without approval from the Company’s 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. As a result of the Company’s May 2016
senior debt restructuring pursuant to the Amended NPA (as described above under “Note Purchase Agreement and Sale of Secured
Promissory Notes” – “2016 Senior Note Restructuring”), the maturity date of the New MIEJ Note has automatically
been extended to March 8, 2019 and MIEJ has the Right of Conversion (described above) beginning on March 8, 2017. The interest expense related to this note for
the three and nine months ended September 30, 2016 and 2015 was $123,000 compared to $41,000 and $371,000 compared to $367,000,
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
was 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. The amount outstanding as of September
30, 2016 equaled $9,868,000. 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 was originally due and payable on December 31, 2017. 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. As consideration for deferral of payments and
related note amendments, 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 the Notes above).
The warrants have a three year term and were exercisable on a cash-only basis at a price of $0.75 per share. The interest expense related to this note for
the three and nine months ended September 30, 2016 and 2015 was $297,000 compared to $74,000 and $858,000 compared to $430,000,
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, and return the interest rate to 12% per annum effective January 31, 2016. The deferral period was further extended on
May 12, 2016, on which date the Company entered into an Amendment No. 2 to Note and Security Agreement with RJC (the “Second
Amendment”). The Company and RJC agreed to amend the RJC Junior Note to (i) capitalize all accrued and unpaid interest under
the RJC Junior Note as of May 12, 2016, and add it to the note principal, making the outstanding principal amount of the RJC Junior
Note as of June 12 2016 equal to $9,379,432, (ii) extend the maturity date (“Termination Date”) from December 31, 2017
to July 11, 2019, (iii) provide that all future interest accruing under the RJC Junior Note is deferred until payable on the Termination
Date, with all future interest amounts deferred being added to the principal on a monthly basis, and (iv) subordinate the RJC Junior
Note to the New Senior Notes. The warrants previously issued to RJC on September 10, 2015 were also amended to provide that such
warrants are exercisable on a cashless basis and to include a Blocker Provision. For the nine-month period ended September 30,
2016, interest deferred and capitalized since May 12, 2016, under Amendment No. 2 to the Note amounted to $488,000 and amounted
to a total deferred of $950,000 since January 1, 2016. The outstanding principal amount of the RJC Junior Note as of September
30, 2016 was equal to $9,868,000. |
