8-K: PEDEVCO Corp. to Restate Prior Financial Statements Due to Accounting Errors

PEDEVCO Corp. announced that its previously issued financial statements for 2022 and 2023 should no longer be relied upon due to errors in the accounting for depletion expense related to its oil and gas properties.

Summary

• PEDEVCO Corp.'s Audit Committee concluded that the company's previously issued audited financial statements for the fiscal years ended December 31, 2023, and December 31, 2022, should no longer be relied upon.
• The decision was made after discussions with senior management and the company's independent registered public accounting firm, Marcum LLP.
• The reason for the restatement is due to errors in the accounting for the depletion expense related to the company's oil and gas properties.
• These errors led to an overstatement of depletion expense during the impacted periods.
• The Errors resulted in an overstatement of depreciation, depletion, amortization and accretion expense of approximately $1.4 million and $1.25 million for the fiscal years ended December 31, 2023 and 2022, respectively.
• The correction of the Errors will result in an increase in net income for December 31, 2023 of approximately $1.4 million and an increase in net income for December 31, 2022 of approximately $1.25 million.
• The company is working to complete the filing of its Annual Report Form 10-K for the fiscal year ended December 31, 2024, which will include restated consolidated financial statements for the years ended December 31, 2023 and December 31, 2022.
• The company has identified a material weakness in its internal control over financial reporting and that its internal control over financial reporting and disclosure controls and procedures were ineffective as of December 31, 2024.
• Management has created a plan of remediation to address the material weakness.

Sentiment

Score: 4

Explanation: The sentiment is negative due to the restatement of financial statements and the identification of a material weakness in internal controls, despite the errors not affecting cash flow.

Positives

• The errors did not have any impact on the company's cash position, cash flow, revenues, or liquidity.
• The correction of the Errors will result in an increase in net income for December 31, 2023 of approximately $1.4 million and an increase in net income for December 31, 2022 of approximately $1.25 million.
• Management has created a plan of remediation to address the material weakness.

Negatives

• Previously issued financial statements for 2022 and 2023 should no longer be relied upon.
• There was an overstatement of depletion expense during the impacted periods.
• A material weakness in the company's internal control over financial reporting has been identified.

Risks

• The timing and nature of the resolution of the issues discussed in the report could impact future results.
• Any delay in the filing of required periodic reports could have adverse effects.
• A restatement of financial results may be required for other accounting issues.
• Adverse effects on the company's business related to the disclosures made in the report are possible.
• Volatility of the company's stock price is a risk factor.

Future Outlook

The company is working to complete the filing of its Annual Report Form 10-K for the fiscal year ended December 31, 2024, which will include restated consolidated financial statements and notes thereto and any other appropriate revisions for the years ended December 31, 2023 and December 31, 2022.

Management Comments

• The Audit Committee, after discussion with senior management and Marcum LLP, concluded that the prior financial statements should no longer be relied upon.
• Management has created a plan of remediation to address the material weakness.

Industry Context

Restatements due to accounting errors are not uncommon in the oil and gas industry, particularly concerning complex calculations like depletion expense. Companies like Chesapeake Energy and Stone Energy have faced similar issues in the past, leading to restatements and increased scrutiny from regulators and investors.

Comparison to Industry Standards

• When compared to industry standards, PEDEVCO's restatement is relatively small in monetary value, but the identification of a material weakness in internal controls is a serious concern.
• Companies like ExxonMobil and Chevron maintain robust internal controls and rarely face such issues, while smaller companies with less sophisticated accounting systems are more prone to errors.
• The materiality threshold for restatements varies, but generally, errors exceeding 5% of net income are considered material, potentially triggering SEC investigations and shareholder lawsuits.

Stakeholder Impact

• Shareholders should no longer rely on previously issued financial statements.
• The company's stock price may be volatile due to the restatement.
• The company's reputation may be negatively impacted.

Next Steps

• The company will amend its previously filed Prior Financial Statements and restate financial statements and other disclosures contained therein.
• The company will file its Annual Report on Form 10-K for the year ended December 31, 2024.
• Management will implement a plan of remediation to address the material weakness.

Key Dates

Keywords

financial statements, restatement, depletion expense, accounting errors, internal control, PEDEVCO, Marcum LLP, Audit Committee