PEDEVCO CORP. — Q3 2017 Form 10-Q
Reporting period: Quarter ended September 30, 2017; filed November 9, 2017. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context
PEDEVCO is an oil and gas exploration, development and production company focused primarily on its Denver-Julesburg Basin assets in Weld County, Colorado. At quarter-end it reported approximately 10,966 net acres and interests in 61 gross wells (17.4 net). Management’s development plan targeted approximately 3.3 net wells over the next 12 months.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Oil and gas revenue | $0.744 | $1.218 | $2.290 | $3.003 |
| Operating loss | $(1.374) | $(0.426) | $(3.602) | $(2.760) |
| Interest expense | $(3.231) | $(3.088) | $(9.489) | $(10.766) |
| Net loss | $(4.605) | $(3.514) | $(13.091) | $(13.526) |
| Net loss per common share | $(0.76) | $(0.70) | $(2.28) | $(2.79) |
| Net cash used in operations | Not presented by quarter | $(0.218) | $(6.094) |
- Q3 production was 37,606 BOE, down from 62,748 BOE a year earlier. Nine-month production was 117,061 BOE versus 141,701 BOE. Management attributed lower revenue principally to natural production decline.
- Q3 lease operating costs fell to $0.304 million from $0.512 million as production declined. DD&A rose to $1.299 million from $0.521 million, primarily due to higher depletion rates associated with reserve-value changes.
- For the first nine months, SG&A decreased to $2.005 million from $3.318 million, chiefly reflecting lower stock compensation and other cost reductions. Interest expense declined year over year, primarily because of lower debt-discount amortization.
- Cash was $0.941 million at September 30, versus $0.659 million at year-end 2016. Current assets were $1.566 million and current liabilities $3.340 million, producing a reported working capital deficit of approximately $1.8 million. Total liabilities were $70.122 million; shareholders’ deficit was $13.920 million.
- Oil and gas properties, net, were $54.551 million, down from $57.395 million at December 31, 2016. No investing cash outflow was reported for the first nine months of 2017. Financing activities provided $0.500 million, including net proceeds from common stock issuance.
Material changes, financing and outlook
- Q3 net loss worsened by $1.091 million year over year, mainly from lower revenue and higher depletion expense. Nine-month net loss improved by $0.435 million, reflecting lower SG&A and interest expense, partly offset by the absence of the $1.282 million settlement gain recorded in 2016.
- A proposed $12 million equity investment and large debt-conversion transaction with Dragon Gem Limited and Absolute Frontier Limited was terminated effective September 30, 2017 after the parties could not agree to extend the closing deadline while CFIUS review was pending. PEDEVCO said it was seeking alternative investors and intended to continue pursuing a similar recapitalization; completion was uncertain.
- Management estimated approximately $11 million was needed over the next 12 months to execute its plan. It cited operating cash flow, cash on hand, up to $1.359 million remaining under its ATM offering (subject to SEC limits), and approximately $18 million potentially available under the senior facility. Further senior advances were at lenders’ discretion, with no obligation to fund.
- The senior debt arrangement requires a sweep of monthly net revenues to debt repayment after specified operating and permitted costs; monthly G&A is generally capped at $150,000 absent lender preapproval. The company reported $682,000 in cumulative principal payments through the sweep, including $30,000 during the first nine months of 2017.
- The filing states that PEDEVCO anticipates needing approximately $11 million in the next 12 months and is actively seeking financing. Management concluded there is substantial doubt about the company’s ability to continue as a going concern within one year after issuance. Without financing, the company said an impairment of oil and gas properties of approximately $27 million could result and its ability to meet obligations from existing cash flows would be significantly affected.
- Tranche B notes accrued interest at 15%; interest through December 31, 2017 was deferred and added to principal, with subsequent interest payable monthly, subject to Tranche A priority. Several other debts were subordinated or had extended maturities. The MIEJ note of $4.925 million carried 10% interest and had a March 8, 2019 maturity following extension. RJC had not provided required fundings under its agreement as of quarter-end.
- The company sold 590,335 common shares under its ATM during the first nine months for $641,000 gross proceeds and $622,000 net proceeds. The 1-for-10 reverse stock split took effect April 7, 2017. Common shares outstanding were 6,084,729 at September 30.
Risks, contingencies and other notable items
- One customer represented 52% of oil and gas revenue for the first nine months of 2017, compared with 51% in the prior-year period.
- Approximately $646,000 of cash at September 30 was uninsured. The company also reported no material legal proceedings then pending; the prior Liberty Oilfield Services dispute had been settled in 2016.
- Management concluded disclosure controls and procedures were not effective at September 30 because independent outside testing was not being performed to reduce G&A expense. No material change in internal control over financial reporting was reported during the quarter.
- Management said the revenue-recognition standard was not expected to affect the company’s statements and the new lease standard was expected to have minimal impact given one operating lease.
Most important facts for investors to verify
- Whether PEDEVCO secured the financing needed to fund operations and its planned development, and whether the stated going-concern uncertainty was resolved.
- Availability and terms of any senior-facility advances, including lender discretion, debt-service priority, cash-sweep requirements and compliance with covenants.
- Progress on an alternative equity investment or debt-conversion transaction after termination of the DGL transaction, including potential dilution and debt treatment.
- Production trends, reserve assumptions and depletion rates supporting the carrying value of oil and gas assets, including the disclosed potential impairment if financing is not obtained.
- Liquidity composition and near-term obligations, including the working capital deficit, accrued interest, related-party balances and customer concentration.
- Remediation of the ineffective disclosure controls and the status of independent testing.