Business Context and Reporting Period
Company: Blast Energy Services, Inc. (PEDEVCO CORP)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: An emerging technology company in the energy sector operating two segments: Satellite Communications Services and Down-hole Solutions (Applied Fluid Jetting technology). The company is a smaller reporting company and has emerged from Chapter 11 bankruptcy.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2010 | Six Months Ended June 30, 2009 |
|---|---|---|
| Total Revenue | $154,025 | $202,332 |
| Net Loss | $(490,355) | $(1,082,423) |
| Net Loss Attributable to Common Shareholders | $(609,369) | $(1,201,437) |
| Operating Cash Flow | $(218,248) | $(608,378) |
| Cash Balance (End of Period) | $22,638 | $27,075 |
| Total Assets | $4,078,693 | $4,338,889 |
| Total Liabilities | $1,886,530 | $1,676,687 |
| Stockholders' Equity | $2,192,163 | $2,662,202 |
| Accumulated Deficit | $(73,032,826) | $(72,542,471) |
Debt and Liquidity: The company has a secured $1.12 million note payable to a related party (Berg McAfee Companies) due February 27, 2011, bearing 8% interest. Current liabilities ($1.87 million) exceed current assets ($1.61 million), resulting in negative working capital of approximately $265,000.
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 24% year-over-year for the six-month period, driven by a 15% drop in Satellite Communications revenue due to lower natural gas prices reducing customer drilling activity. Down-hole Solutions revenue was $0 for the period compared to $20,000 in the prior year due to suspended field testing.
- Improved Loss Profile: Net loss decreased by 55% (from $1.08 million to $490,000) primarily due to significant reductions in Selling, General, and Administrative (SG&A) expenses ($360,000 decrease) and Down-hole Solutions costs.
- Cost Cutting Measures: SG&A reductions resulted from executive furloughs (CEO furloughed without pay since June 2009), reduced legal fees, and insurance cancellations.
- Segment Performance: Satellite Communications remained profitable with an operating profit of $13,919 for the six months, while Down-hole Solutions incurred an operating loss of $49,888.
Outlook, Risks, and Contingencies
- Going Concern Warning: Management has raised substantial doubt about the company's ability to continue as a going concern. Cash on hand ($22,638) is insufficient to fund operations for the next 12 months. Additional capital raising via equity or debt is required.
- Liquidity Event: The company anticipates receiving $1.44 million (net of legal fees) in September 2010 from a settlement with Quicksilver Resources. This is expected to fund an acquisition of oil and gas properties from Sun Resources Texas, Inc.
- Acquisition Plans: Entered a letter of intent to acquire oil and gas interests in the Sugar Valley Field for $1.2 million in cash and stock. Closing is expected in September 2010, subject to funding.
- Legal Settlements: Settled ongoing litigation with Alberta Energy Partners in February 2010, transferring 50% of Abrasive Fluid Jetting technology back to Alberta in exchange for a release of claims.
- Preferred Stock: 6 million shares of Series A Convertible Preferred Stock are outstanding with $612,165 in accrued dividends. A "Dividend Default" could be triggered if a cash settlement exceeding $4 million is received and dividends are not paid within 30 days.
Investor Verification Checklist
- Cash Runway: Verify the sufficiency of the $22,638 cash balance against immediate operational burn rates and the certainty of the September 2010 Quicksilver settlement payment.
- Acquisition Funding: Confirm the closing of the Sun Resources Texas acquisition and whether the Quicksilver settlement proceeds are legally restricted or sufficient to cover the $1.2 million purchase price.
- Debt Covenants: Review the terms of the $1.12 million related-party note due in February 2011 and the potential for conversion or extension given the current liquidity position.
- Preferred Dividend Default: Assess the risk of a dividend default on Series A Preferred Stock if the Quicksilver settlement is classified as a "Cash Settlement" exceeding $4 million.
- Revenue Sustainability: Evaluate the correlation between natural gas prices and Satellite Communications revenue to determine if the current revenue decline is a temporary market fluctuation or a structural shift.