PEDEVCO Corp. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter earnings report; fourth-quarter data are limited in the supplied filing text. PEDEVCO is an oil and gas producer focused principally on its Denver-Julesburg Basin (D-J Basin) assets in Weld County, Colorado.
Business and operating context
- At year-end, the company reported approximately 10,961 net D-J Basin acres and interests in 61 gross (17.4 net) wells: 14 gross (12.5 net) operated producing wells, 25 gross (4.9 net) non-operated wells, and 22 wells with after-payout interests.
- Reported D-J Basin production was 81,178 BOE in 2017, averaging 222 BOE per day, versus 132,064 BOE and 362 BOE per day in 2016. Separately, the company reported average net production of approximately 189 BOEPD in Q4 2017.
Financial results and liquidity
| Metric | FY2017 / Dec. 31, 2017 | FY2016 / Dec. 31, 2016 |
|---|---|---|
| Oil and gas revenue | $3.015 million | $3.968 million |
| Lease operating costs | $1.348 million | $1.687 million |
| SG&A | $2.529 million | $3.912 million |
| Depreciation, depletion, amortization and accretion | $3.754 million | $5.080 million |
| Oil and gas property impairment | $18.950 million | None reported |
| Interest expense | $12.798 million | $13.959 million |
| Net loss | $36.370 million | $19.619 million |
| Cash used in operating activities | $0.236 million | $5.974 million |
| Cash from financing activities | $0.494 million | $5.570 million |
| Cash | $0.917 million | $0.659 million |
| Total assets | $36.401 million | $58.780 million |
| Total liabilities | $73.541 million | $60.736 million |
| Working capital | Deficit of approximately $2.0 million | Deficit of approximately $2.0 million |
| Shareholders’ deficit | $37.140 million | $1.956 million |
Management attributed the revenue decline primarily to natural production declines and periodic well shut-ins. Lower SG&A reflected cost reductions, including workforce and professional-fee cuts. Operating cash outflow fell substantially, in part because accounts payable and accrued expenses increased; it does not by itself establish improved underlying cash generation.
- The $18.950 million impairment related primarily to delayed funding for development assumed in the proved undeveloped reserve plan. The company warned that failure to obtain financing could result in up to a further $29 million of impairment.
- Reported oil and gas sales prices improved year over year: oil averaged $47.15 per barrel versus $36.98; natural gas $2.97 per Mcf versus $2.04; and NGL $3.46 per Mcf versus $2.82. Production volumes declined across oil and gas.
- Proved reserves at year-end included 1.942 million barrels of oil, 6.354 Bcf of gas, and 673,000 barrels of NGL, compared with 2.591 million barrels of oil and 11.053 Bcf of gas at year-end 2016. The filing reports a 2017 standardized measure of discounted future net cash flows of $31.223 million, versus $19.154 million in 2016; these estimates are not fair market value.
Debt, material changes, and financing
- Year-end liabilities included secured promissory notes, net of discounts, of $34.159 million and $15.930 million, plus $11.483 million of related-party subordinated notes and $4.925 million owed under the MIEJ note. The filing’s balance sheet also reports accrued and other liabilities. Debt carrying amounts are net of discounts and should not be equated with face principal.
- Senior notes generally bear 15% interest and mature in 2019. A monthly net-revenue sweep pays operating expenses, interest, and permitted G&A (capped at $150,000 per month unless lender-approved), with remaining net revenues applied first to senior Tranche A debt. The senior debt is secured by substantially all company and subsidiary assets.
- Approximately $18 million of additional Tranche A funding was described as available for development, but advances are subject to lender discretion, conditions, and matching funds; lenders are not obligated to fund requests. The filing states that RJC failed to meet its agreed funding obligations. A related pledge could allow cancellation of 10,000 Series A preferred shares, but the company had not made that determination as of filing.
- The $4.925 million MIEJ note bears 10% interest, is subordinated, and was extended to March 8, 2019. It is convertible into common shares at a discount to market subject to a $3.00 floor, creating potential dilution.
- Common shares outstanding rose from 5.494 million at year-end 2016 to 7.279 million at year-end 2017, including 590,335 shares sold through the at-the-market offering for approximately $641,000 gross proceeds. A 1-for-10 reverse split took effect in April 2017.
Outlook, risks, and unusual matters
- Management planned approximately $8.37 million of 2018 capital expenditures to drill, participate in, or acquire approximately 2.1 net wells, with a stated combined 2018–2019 drilling budget of $34.85 million for 8.52 net wells. The plan depended on cash flow, existing cash, remaining ATM capacity, and discretionary senior-lender advances; management said the program could move into 2020 if funding or market conditions were unfavorable.
- The audited financial statements and auditor’s report raise substantial doubt about the company’s ability to continue as a going concern. The company said it anticipated needing approximately $18 million in 2018 and was negotiating financing. Without financing or a replacement source, its ability to fund operations and meet obligations would be materially affected.
- Other key risks include commodity-price volatility, declining production, concentrated exposure to Colorado and the D-J Basin, high leverage and 15% borrowing costs, lender control over additional funding and cash flows, reserve-estimate uncertainty, environmental and hydraulic-fracturing regulation, and potential share dilution. The company also faced NYSE American continued-listing noncompliance, with a compliance deadline of June 27, 2018.
- Two customers represented 38% and 51% of 2017 oil and gas revenue, respectively, indicating customer concentration. The company reported no material legal proceedings outstanding; the Liberty vendor dispute had been settled in 2016 for cash and stock.
- Disclosure controls and procedures were deemed ineffective at year-end. Management stated internal financial-reporting controls were effective, but also said independent year-end testing was not performed and effectiveness could not be confirmed. The auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Whether the company obtained the financing required to fund operations, debt service, and its planned drilling program—and whether discretionary lender advances were actually made.
- Current debt principal, accrued interest, covenant and default status, collateral exposure, maturity terms, and the status of the agent’s resignation and lender administration.
- Whether production stabilized and whether the reserve revisions, development assumptions, and impairment estimates remain supportable.
- Whether listing standards were regained by the stated deadline, and the current status of the company’s disclosure and financial-reporting controls.
- The potential fully diluted share count, including MIEJ conversion rights, preferred shares, warrants, options, and further equity issuance.