PEDEVCO CORP. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; filed November 13, 2015. Financial figures below are in USD millions unless stated otherwise. PEDEVCO is an oil and gas exploration and production company focused primarily on the Denver-Julesburg Basin (D-J Basin) in Colorado.
Financial results and key metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Oil and gas revenue | $1.318 | $1.090 | $4.593 | $4.192 |
| Operating loss | $(1.803) | $(1.947) | $(7.172) | $(14.590) |
| Net loss attributable to PEDEVCO common stockholders | $(5.455) | $(4.804) | $(15.081) | $(22.169) |
| Basic and diluted loss per share | $(0.12) | $(0.17) | $(0.37) | $(0.81) |
| Net cash used in operating activities | Not provided for quarter | Not provided for quarter | $(7.476) | $1.069 provided |
- Q3 revenue increased 21% year over year, principally reflecting the February 2015 GGE asset acquisition. Q3 lease operating costs rose to $0.495 million from $0.105 million; SG&A declined to $1.389 million from $2.198 million. Interest expense was $3.656 million, up from $3.033 million.
- Nine-month revenue rose about 10%. The common-stockholder loss narrowed by $7.088 million, partly because 2014 included large losses on property and deposit sales; 2015 included a $2.192 million debt-extinguishment gain. Interest expense increased to $10.145 million from $7.131 million.
- Nine-month D-J Basin production was 99,093 barrels of oil and 248,348 Mcf of gas, or 140,484 BOE, compared with 46,715 barrels, 74,625 Mcf and 59,153 BOE, respectively, in 2014. Reported nine-month revenue was $4.593 million; management’s asset-level production table reports $4.623 million, and the filing does not clearly reconcile the difference.
- At September 30, cash was $1.373 million, current assets $5.150 million, current liabilities $8.801 million and working capital was negative $3.7 million. Total assets were $69.214 million, total liabilities $48.393 million, and shareholders’ equity $20.821 million, versus a $1.423 million deficit at year-end 2014. Accumulated deficit was $75.877 million.
- Balance-sheet carrying amounts included $0.544 million of current secured notes and $25.952 million of long-term secured notes, net of discounts; $8.523 million of subordinated notes; $4.925 million of other notes; and $0.588 million of current Bridge Notes. Debt discounts and deferred financing costs materially affect carrying values. The senior secured facility had about $13.5 million gross availability, subject to matching funds and other restrictions; no facility borrowings were made in the first nine months of 2015.
- Oil and gas properties, net, increased to $62.377 million from $22.055 million at year-end, mainly reflecting the GGE acquisition. Nine-month impairment was $1.337 million, and DD&A was $3.379 million. The filing reports no income tax provision and a full valuation allowance against deferred tax assets.
Material changes and transactions
- In February, PEDEVCO acquired approximately 12,977 net acres and interests in 53 gross D-J Basin wells from GGE. Consideration included 3.375 million common shares, 66,625 Series A preferred shares, assumption of approximately $8.35 million of subordinated debt, and an option relating to the Kazakhstan opportunity.
- PEDEVCO sold its Condor interest and related direct working interests to MIEJ in February. The settlement reduced aggregate liabilities owed to MIEJ and Condor, with the remaining MIEJ note principal of $4.925 million; the company recorded a $2.192 million debt-extinguishment gain and a $0.566 million gain on sale of its equity investment.
- In May, PEDEVCO agreed to acquire Dome Energy’s U.S. assets in a stock exchange. The contemplated issuance of approximately 153 million shares was intended to give Dome AB about 64% ownership on the specified as-converted basis, resulting in a change of control and substantial dilution to existing holders.
- Common shares outstanding increased to 44.594 million at September 30 from 33.118 million at December 31, 2014. A May offering of 6.366 million shares at $0.50 per share generated approximately $2.78 million net.
Liquidity, outlook, risks and unusual items
- Going concern: Management disclosed recurring operating losses, a working-capital deficit and substantial doubt about the company’s ability to continue as a going concern. Continued operations depend on raising capital and achieving profitable operations. Management expected the Dome transaction and additional financing to address obligations, but neither was assured.
- Debt relief: Lenders deferred certain principal and interest payments through January 2016, reducing stated monthly cash requirements from approximately $600,000 to approximately $100,000 during the waiver period. The relief increased borrowing costs: certain senior-note rates rose from 15% to 17%, and deferred amounts were added to principal. Lenders received warrants; further warrants could be issued depending on total deferrals.
- Dome transaction status: At filing, Dome US had not delivered all required disclosure schedules and 2015 quarterly financial statements. The parties continued preparing a registration statement, but closing remained subject to approvals and other conditions. The filing says PEDEVCO could then terminate without penalty due to missed delivery deadlines, while also describing potential $1 million termination fees in specified circumstances.
- Capital plans: If the Dome transaction closed, management anticipated drilling approximately 10 gross (8.4 net) long-lateral wells in 2015–2016 at estimated cost of $48.7 million, or $50.4 million including lease renewals. Without the transaction, the company planned to limit capital spending and participate in about six wells (approximately 1.0 net well) over the next 12 months. Funding sources and availability were uncertain.
- Management cited lower oil and gas prices, financing constraints, development costs, and lease expirations as risks. It had impaired unproved leasehold costs after revising its re-leasing plans; 2,931 net acres were due to expire in the final three months of 2015. Further impairments could occur if prices or costs worsen, or financing is insufficient.
- After September 30, stockholders approved conversion rights for the Series A preferred. The preferred ceased accruing dividends and its liquidation preference was reduced from $400 per share to $0.001. Conversion could result in up to 66.625 million common shares, subject to terms and ownership limits.
- Management stated that disclosure controls and procedures were effective as of September 30 and reported no material change in internal control over financial reporting during the quarter. No material legal proceedings were reported.
Most important facts for investors to verify
- Whether the Dome transaction closed, was amended or terminated; the final share issuance, financing terms, and any termination fee or change-of-control consequences.
- Cash runway, actual lender payments after the waiver period, senior facility availability and matching-fund requirements, and the company’s ability to meet near-term obligations.
- Fully diluted share count, including Series A conversion, options, warrants and any additional warrants tied to deferred debt payments.
- Debt balances and effective financing costs, including deferred interest, increased rates, lender covenants and collateral priorities.
- Production, realized commodity prices, operating costs and lease-renewal progress, including the acreage at risk of expiration and potential further impairments.
- The difference between the $4.593 million reported nine-month revenue and the $4.623 million asset-level revenue figure in management’s discussion.