| 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 principal amount of $34.5 million (the “Initial Notes”), which also 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,” and together with the Initial Notes, the
“Senior 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.
Effective March 9, 2018, CadleRock IV, LLC acquired all of HEARTLAND’s interests in the Senior Notes, becoming an “Investor”
for purposes of the discussion below. The Initial Notes, as originally issued, accrued
interest at the rate of 15% per annum, payable monthly, required us to make certain mandatory principal payments and was originally
to mature on March 7, 2017. On August 28, 2015, January 29, 2016, March
7, 2016 and April 1, 2016, the Company entered into several letter agreements and amendments with certain of the holders to: (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 focus and execute upon its contemplated business combinations. During the three months ended March 31, 2018,
there were no payments made to reduce the outstanding principal due under the Initial Notes, however, such Notes were restructured
as described below. 2016 Senior Note Restructuring Following a series of temporary payment deferrals
as described above, on May 12, 2016 (the “Closing Date”), the Company entered into an Amended and Restated Note Purchase
Agreement (the “Amended NPA”), with existing lenders SHIP, BRe BCLIC Sub, BRe WINIC 2013 LTC Primary, BRe WNIC 2013
LTC Sub, Heartland Bank (assigned to CadleRock IV, LLC in March 2018), and RJC, and new lenders BHLN-Pedco Corp. (“BHLN”)
and BBLN-Pedco Corp. (“BBLN,” and together with BHLN and RJC, the “Tranche A Investors”) (the investors
in the Tranche B Notes (defined below) and the Tranche A Investors, collectively, the “Lenders”), and the Agent, as
agent for the Lenders. The Amended NPA amended and restated the Senior Notes held by the Investors, and the Company issued new
Senior Secured Promissory Notes to each of the Investors (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 under Notes Payable - Related
Party Financings - Subordinated Note Payable Assumed). Subsequently, certain of the Lenders transferred
some or all of the principal outstanding under the New Senior Notes (as defined below) held by them and the term Lenders as used
herein refers to the current holders of the New Senior Notes, as applicable. The Amended NPA amended the Senior Notes as
follows:
● Created and issued to the Tranche A Investors 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 March 31, 2018, the aggregate outstanding principal balance is $49,669,000). 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 March 31, 2018 shall 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 March 31, 2018, all interest will accrue and be paid monthly in arrears in cash to the Tranche B Note holders, provided, however, no payment may be made on the Tranche B Notes unless and until the Tranche A Notes are repaid in full. 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. 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. As of March 31, 2018, the Company has
paid $688,000 of principal under the Net Revenue Sweep, of which $-0- was paid during the current three month period. On the Closing Date, Tranche A Investors BHLN
and BBLN 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 Oilfield Services, LLC (“ Liberty 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 shall have occurred
and be continuing; 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 $240,000 to the Company, 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 March 31, 2018, the Company has received no loan proceeds under this agreement, and RJC is in default of its funding obligations
thereunder. 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 1,000,000 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 the entire 10,000 pledged shares of
the Company’s Series A Convertible Preferred Stock held by GGE pursuant to the terms of the GGE Pledge Agreement, which determination
to cancel shares has not been made, and which shares have not been cancelled, as of the date of this filing. As additional consideration for the entry into
the Amended NPA, the Company granted to BHLN and BBLN, warrants exercisable for an aggregate of 596,280 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 $2.50 per share (as amended). 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 34,912 shares of the Company’s common stock at an
exercise price of $15.00 per share and warrants exercisable for an aggregate of 120,101 shares of the Company’s common stock
at an exercise price of $7.50 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 to 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. As of March 31, 2018,
the Company has paid $688,000 of principal under the Net Revenue Sweep, of which $-0- was paid during the three months ended March
31, 2018. The amount of interest deferred under the Tranche A and Tranche B Notes as of March 31, 2018 and December 31, 2017 equaled
$3,671,000 and $3,195,000, respectively, and was accounted for on the balance sheet under long-term accrued expenses and accrued
expenses - related party. 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
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 March 2014 Notes Purchase
Agreement described above, 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 Senior Notes. All debt discount amounts are amortized using
the effective interest rate method. The total amount of the remaining debt discount reflected on the accompanying balance sheet
as of March 31, 2018 and December 31, 2017 was $3,039,000 and $3,751,000, respectively. Amortization of debt discount and total
interest expense for the notes (New Senior Notes – Tranche B and Tranche A Notes and GGE Notes) was $712,000 and $2,386,000,
respectively, for the three months ended March 31, 2018 and $831,000 and $1,604,000, respectively, for the three months ended March
31, 2017. 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 March 31, 2018, the Company had Bridge
Notes with an aggregate principal balance of $475,000 remaining outstanding, plus accrued interest of $244,000 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 as follows:
(A) prior to June 1, 2014, the conversion price was $21.50 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) $5.00 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. The interest expense related to these notes for the
three months ended March 31, 2018 and 2017 was $14,000 and $14,000, respectively. The unamortized debt premium on the Convertible
Bridge Notes as of March 31, 2018 and December 31, 2017, was $113,000. No amortization was recorded during 2018 due to these notes
being subordinated by the Senior Notes. MIE Jurassic Energy Corporation On February 14, 2013, PEDCO entered into a Secured
Subordinated Promissory Note with MIE Jurassic Energy Corp. (“MIEJ”), which was 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 and issued a new promissory note in the amount of $4.925 million to MIEJ (the “NEW
MIEJ Note”). The Settlement Agreement related to the February 2015 disposition of the Company’s interest in Condor
Energy Technology, LLC, a joint venture previously owned 20% by the Company and 80% by MIEJ. As of March 31, 2018, the principal
amount outstanding under the New MIEJ Note was $4,925,000. 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 Senior 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 required 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 is required to be paid all interest and fees accrued on the New MIEJ
Note through such date. The New MIEJ Note was due and payable on March 8, 2017, subject to automatic extensions upon the occurrence
of a Long Term Financing (defined below), which as described below has occurred to date. On a one-time 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 Senior 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 a contemplated 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 $3.00 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 approval the Company obtained at its 2016 annual shareholder meeting held on December 28, 2016. In the event the Senior Notes are not refinanced,
restructured or extended by the Lenders, the maturity of both the New MIEJ Note and the Senior 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 as a result of the Company’s shareholders approving the conversion terms of the MIEJ
Note at the Company’s annual shareholder meeting held on December 28, 2016, MIEJ has had the Right of Conversion (described
above) beginning on March 8, 2017. The interest expense related to this note for
the three months ended March 31, 2018 and 2017 was $123,000 and $123,000, respectively, with the total cumulative interest equal
to $1,601,000 through March 31, 2018. 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 (the “RJC Junior Note”).
The amount outstanding on the RJC Junior Note as of March 31, 2018 and December 31, 2017 was $11,831,000 and $11,483,000, respectively.
The lender under the RJC Junior Note 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, but has been extended to July 11, 2019 in connection with the May 2016
restructuring as described above. The assumed note payable is subordinate to 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 interest expense related to this note for
the three months ended March 31, 2018 and 2017 was $348,000 and $308,000, 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 RJC Junior Note through
March 31, 2016, and reduce 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 $9,379,000, (ii) extend the maturity 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 maturity 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 granted 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 (as defined above). As of March 31, 2018 and December 31, 2017,
interest deferred and capitalized since May 12, 2016, under Amendment No. 2 to the Note, amounted to $1,657,000 and $1,309,000,
respectively, and amounted to total deferred interest of $2,912,000 since January 1, 2016. The outstanding principal amount of
the RJC Junior Note as of March 31, 2018 and December 31, 2017 was equal to $11,831,000 and $11,483,000, respectively. |
