| NOTES PAYABLE | Debt Restructuring On June 26, 2018, the Company borrowed $7.7
million from SK Energy LLC, which is 100% owned and controlled by Dr. Simon Kukes, the Company’s Chief Executive Officer
and director (“SK Energy”), under a Promissory Note dated June 25, 2018, in the amount of $7.7 million (the “SK
Energy Note”), the terms of which are discussed below. Also on June 25, 2018, the Company entered into
Debt Repayment Agreements (the “Repayment Agreements”, each described in greater detail below) with (i) the holders
of our outstanding Tranche A Secured Promissory Notes (“Tranche A Notes”) and Tranche B Secured Promissory Notes (“Tranche
B Notes”), which the Company entered into pursuant to the terms of the May 12, 2016 Amended and Restated Note Purchase Agreement,
(ii) RJ Credit LLC (“RJC”), which held a subordinated promissory note issued by the Company pursuant to that certain
Note and Security Agreement, dated April 10, 2014, as amended (the “RJC Subordinated Note”), and (iii) MIE Jurassic
Energy Corporation, which held a subordinated promissory note issued by the Company pursuant to that certain Amended and Restated
Secured Subordinated Promissory Note, dated February 18, 2015, as amended (the “MIEJ Note”, and together with the “Tranche
B Notes,” the “Junior Notes”), pursuant to which, on June 26, 2018, the Company retired all of the then outstanding
Tranche A Notes, in the aggregate amount of approximately $7,260,000 in exchange for cash paid of $3,800,000 and all of the then
outstanding Junior Notes, in the aggregate amount of approximately $70,299,000, in exchange for an aggregate amount of cash paid
of $3,876,000. As part of the same transactions, and as required
conditions to closing the sale of the SK Energy Note, SK Energy entered into a Stock Purchase Agreement with GGE, the holder of
the Company’s then outstanding 66,625 shares of Series A Convertible Preferred Stock (convertible pursuant to their terms
into 6,662,500 shares of the Company’s common stock – approximately 47.6% of the Company’s then outstanding shares
post-conversion), pursuant to which, SK Energy purchased, for $100,000, all of the Series A Convertible Preferred Stock (the “Stock
Purchase Agreement”). Additionally, on June 25, 2018, the Company
entered into a Debt Repayment Agreement (the “Bridge Note Repayment Agreement”) with all of the holders of its convertible
subordinated promissory notes issued pursuant to the Second Amendment to Secured Promissory Notes, dated March 7, 2014, originally
issued on March 22, 2013 (the “Bridge Notes”), pursuant to which all the holders, holding in aggregate $475,000 of
outstanding principal amount under the Bridge Notes, agreed to the payment and full satisfaction of all outstanding amounts (including
accrued interest and additional payment-in-kind) for 25% of the principal amounts owed thereunder, or an aggregate amount of cash
paid of $119,000. The result of the above transactions was a net
reduction of liabilities of approximately $70,728,000 that were removed from the Company’s balance sheet as of June 25, 2018.
For the three and six months ended June 30, 2018, a gain on the settlement of all of these debts in the amount of $70,309,000 was
recorded ($70,631,000, net of the expense related to the issuance of warrants to certain of the Tranche A Note holders with an
estimated fair value of $322,000 based on the Black-Scholes option pricing model). See the table
below for a summary (amounts in thousands).
Debt and accrued interest retired as part of debt restructuring $ 78,331
New debt recorded under troubled debt restructuring (7,700 )
Expense for issuance of warrants (322 )
Net gain on troubled debt restructuring $ 70,309 The three-year promissory note of $7.7 million
in principal with an 8% annual interest rate was recorded at $7,700,000 (and shown on the balance sheet as Note Payable –
Related Party), net of debt discount from the issuance of 600,000 shares of common stock (as described below) with a fair value
of $185,000 based on the market price at the issuance date. The Company accounted for the debt reduction as a troubled debt restructuring
as the debt balance, which the Company did not currently have the funds to repay, was now to be classified as current due to the
principal and accumulated interest being due in May 2019. It is probable that the Company would have been in payment default in
the foreseeable future without this restructuring modification. As indicated in previous SEC financial filings, the Company had
indicated that there was doubt before the restructuring as to whether the Company would be able to continue to operate as a going
concern. In recognition of this, the creditors granted a concession on the debt balance that was paid and considered payment in
full on June 25, 2018. The warrants were issued as an inducement for the previous creditors to cancel a significant portion of
the debt were an integral part of this troubled debt restructuring
and therefore were included as a reduction to the gain recognized on the restructuring. SK Energy Note Terms The SK Energy Note accrues interest monthly
at 8% per annum, payable quarterly (beginning October 15, 2018), in either cash or shares of common stock (at the option of the
Company), or, with the consent of SK Energy, such interest may be accrued and capitalized. Additionally, in the event that the
Company is prohibited from paying the interest payments due on the SK Energy Note in cash pursuant to the terms of its senior debt
and/or the requirement that the Company obtain shareholder approval for the issuance of shares of common stock in lieu of interest
due under the SK Energy Note due to the Share Cap (described and defined below), such interest will continue to accrue until such
time as the Company can either pay such accrued interest in cash or stock. If interest on the SK Energy Note is paid in
common stock, SK Energy will be due that number of shares of common stock as equals the amount due divided by the average of the
closing sales prices of the Company’s common stock for the ten trading days immediately preceding the last day of the calendar
quarter prior to the applicable payment date, rounded up to the nearest whole share of common stock (the “Interest Shares”).
The SK Energy Note is due and payable on June 25, 2021, but may be prepaid at any time, without penalty. Other than in connection
with the Interest Shares, the principal amount of the SK Energy Note is not convertible into common stock of the Company. The SK
Energy Note contains standard and customary events of default, and, upon the occurrence of an event of default, the amount owed
under the SK Energy Note accrues interest at 10% per annum. As additional consideration for SK
Energy agreeing to the terms of the SK Energy Note, the Company agreed to issue SK Energy 600,000 shares of common stock
(the “Loan Shares”), with a fair value of $185,000 based on the market price on the date of issuance that was
accounted for as a debt discount and is being amortized over the term of the note. The SK Energy Note includes a share issuance
limitation preventing the Company from issuing Interest Shares thereunder, if such issuance, together with the number of Loan
Shares, plus such number of Interest Shares issued previously, as of the date of such new issuance, totals more than 19.99%
of the Company’s outstanding shares of common stock as of June 25, 2018 (i.e., 1,455,023 shares) (the
“Share Cap”). Repayment Agreement Terms As described above, pursuant to the Repayment
Agreements, the holders of the Company’s outstanding Tranche A Notes and Junior Notes retired all of the then outstanding
Tranche A Notes, in the aggregate amount of $7,260,000, in exchange for an aggregate of $3,800,000 of cash and all of the then
outstanding Junior Notes, in the aggregate amount of $70,299,000, in exchange for an aggregate of $3,876,000 of cash. The note
holders also agreed to forgive all amounts owed under the terms of the Tranche A Notes and Junior Notes, as applicable, other than
the amounts paid. The Tranche A Note Repayment Agreement was entered into by and between the Company and each of the then holders
of the Company’s Tranche A Notes, BBLN-PEDCO Corp., BHLN-PEDCO Corp. and PBLA ULICO 2017 (collectively, the “Tranche
A Noteholders”). The Tranche B Note Repayment Agreement was entered into by and between the Company and each of the then
holders of the Company’s Tranche B Notes, Senior Health Insurance Company of Pennsylvania, Bankers Conseco Life Insurance
Company, Washington National Insurance Company, Principal Growth Strategies, LLC, Cadle Rock IV, LLC, and RJ Credit LLC, and holders
of the RJC Subordinated Note held by RJ Credit LLC and the MIEJ Note held by MIE Jurassic Energy Corporation (collectively, the
“Junior Noteholders”). Pursuant to the terms of the Repayment Agreement relating to the Tranche B Notes, in addition
to the cash consideration due to the Tranche B Noteholders, as described above, the Company agreed to grant to certain of the Junior
Noteholders their pro rata share of warrants to purchase an aggregate of 1,448,472 shares of common stock of the Company (the “Tranche
B Warrants”). The Tranche B Warrants have a term of three years, an exercise price equal to $0.328 per share, and the estimated
fair value of $322,000 was based on the Black-Scholes option pricing model. Amendment to Series A Convertible Preferred
Stock Designation; Rights of Shareholders In connection with the Stock Purchase Agreement,
and immediately following the closing of the acquisition described in the Stock Purchase Agreement (discussed above), the Company
and SK Energy, as the then holder of all of the then outstanding shares of Series A Convertible Preferred Stock, agreed to the
filing of an Amendment to the Amended and Restated Certificate of Designations of PEDEVCO Corp. Establishing the Designations,
Preferences, Limitations and Relative Rights of Its Series A Convertible Preferred Stock (the “Preferred Amendment”),
which amended the designation of our Series A Convertible Preferred Stock (the “Designation”) to remove the beneficial
ownership restriction contained therein, which prevented any holder of Series A Convertible Preferred Stock from converting such
Series A Convertible Preferred Stock into shares of common stock of the Company if such conversion would result in the holder thereof
holding more than 9.9% of the Company’s then outstanding common stock. The Company filed the Preferred Amendment with
the Secretary of State of Texas on June 26, 2018. As a result of the Stock Purchase Agreement
(i.e., the sale of the Series A Convertible Preferred Stock to a party other than GGE), automatic termination, pursuant to the
terms of the Designation, of the right of GGE, upon notice to the Company, voting the Series A Convertible Preferred Stock separately
as a single class, to appoint designees to fill up to two (2) seats on our Board of Directors, one of which must be an independent
director as defined by applicable rules was triggered. As such, effective upon the closing of the Stock Purchase Agreement, the
Company’s common stockholders have the right to appoint all members of our Board of Directors via plurality vote. 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”). 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. 2016 Senior Note Restructuring 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 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”). On June 25, 2018, the Company entered into Debt
Repayment Agreements (the “Repayment Agreements”, each described in greater detail above), pursuant to which, the holders
of our outstanding Tranche A Notes and Junior Notes retired all of the then outstanding Tranche A Notes, in the aggregate amount
of $7,260,000, in exchange for an aggregate of $3,800,000 of cash and all of the then outstanding Junior Notes, in the aggregate
amount of $70,299,000, in exchange for an aggregate of $3,876,000 in cash. The note holders also agreed to forgive all amounts
owed under the terms of the Tranche A Notes and Junior Notes, as applicable, other than the amounts paid. The amount of interest deferred under the Tranche
A and Tranche B Notes as of June 25, 2018 and December 31, 2017 equaled $4,125,000 and $3,195,000, respectively, and was previously
accounted for on the balance sheet under long-term accrued expenses and accrued expenses - related party. All debt discount amounts were amortized using
the effective interest rate method. The total amount of the remaining debt discount reflected on the accompanying balance sheet
as of June 30, 2018 was $-0-. As of June 25, 2018 and December 31, 2017, the remaining unamortized debt discount was $2,359,000
and $3,751,000, respectively. Amortization of debt discount and total interest expense for the notes (New Senior Notes –
Tranche A and Tranche B Notes and the Junior Notes) was $1,391,000 and $4,732,000, respectively, for the six months ended June 30,
2018 and $1,643,000 and $3,278,000, respectively, for the six months ended June 30, 2017. Amortization of debt discount and total interest
expense for the notes was $679,000 and $2,346,000, respectively, for the three months ended June 30, 2018, and was $812,000 and
$1,674,000, respectively, for the three months ended June 30, 2017. Bridge Note Financing On June 25, 2018, the Company entered into a
Debt Repayment Agreement (the “Bridge Note Repayment Agreement”) with all of the holders of its convertible subordinated
promissory notes issued pursuant to that certain Second Amendment to Secured Promissory Notes, dated March 7, 2014, originally
issued on March 22, 2013 (the “Bridge Notes”), which notes had an aggregate principal balance of $475,000, plus accrued
interest of $258,000 and additional payment-in-kind (“PIK”) of $48,000, as of June 25, 2018, pursuant to which all
the holders agreed to the payment and full satisfaction of all outstanding amounts (including accrued interest and additional payment-in-kind)
for 25% of the principal amounts owed thereunder, or an aggregate of $119,000. The unamortized debt premium on the Convertible
Bridge Notes as of June 25, 2018 and December 31, 2017, was $113,000. The gain recorded in the three and six months ending June
30, 2018 on the settlement of the bridge note debt was $775,000. The interest expense related to these notes
for the three and six months ended June 30, 2018 and 2017 was $13,000 compared to $14,000, and $27,000 compared to $28,000, respectively. MIE Jurassic Energy Corporation On February 14, 2013, PEDCO entered into a Secured
Subordinated Promissory Note with MIE Jurassic Energy Corp. (“MIEJ”) (as amended from time to time, the “MIEJ
Note”). 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 June 25, 2018, the principal
amount outstanding under the MIEJ Note was $4,925,000 with accrued interest of $1,718,000. As described above, on June 25, 2018, the Company
entered into Repayment Agreements, with various parties, including MIEJ, pursuant to which the Company retired all of the then
outstanding MIEJ debt in exchange for an aggregate of $320,000 in cash. As described above, pursuant to the Repayment Agreements,
the note holders also agreed to forgive all amounts owed under the terms of the Junior Notes, as applicable, other than the amounts
paid. The gain recorded in the three and six months ending June 30, 2018 on the settlement of the MIEJ debt was $6,323,000. The interest expense related to this note for
the three and six months ended June 30, 2018 and 2017 was $118,000 compared to $123,000 and $241,000, compared to $246,000, respectively,
with the total cumulative interest equal to $1,718,000 through June 25, 2018. 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 June 25, 2018 and December 31, 2017 was $12,173,000 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. As described above, on June 25, 2018, the Company
entered into Repayment Agreements with various parties, including RJ Credit LLC, pursuant to which, on June 26, 2018, the Company
retired all of the then outstanding Junior Notes, in exchange for an aggregate of $3,876,000 in cash. As described above, pursuant to the Repayment
Agreements, the note holders also agreed to forgive all amounts owed under the terms of the Junior Notes, as applicable, other
than the amounts paid. The interest expense related to this note for
the three and six months ended June 30, 2018 and 2017 was $342,000 compared to $322,000, and $690,000 compared to $630,000, respectively. |
