PEDEVCO CORP. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context
PEDEVCO acquires, explores, develops and produces oil and natural gas, primarily in Colorado’s Denver-Julesburg (D-J) Basin. At June 30, it reported approximately 22,799 net D-J Basin acres and interests in 53 gross wells. In February, it acquired approximately 12,977 net acres and interests in 53 gross wells from Golden Globe Energy (GGE); it also sold its Condor interest and certain associated properties to MIE Jurassic Energy (MIEJ).
Financial and operating results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Oil and gas revenue | $1.787 | $2.095 | $3.275 | $3.102 |
| Operating loss | $(2.098) | $(1.264) | $(5.369) | $(12.643) |
| Net loss | $(5.444) | $(4.202) | $(9.626) | $(17.372) |
| Net loss per share, basic and diluted | $(0.13) | $(0.16) | $(0.25) | $(0.66) |
| Net cash used in operating activities | Not provided quarterly | $(6.320) | $(3.741) |
- Q2 revenue fell 15% year over year, which management attributed primarily to lower oil prices. Six-month revenue rose 6%, reflecting the GGE assets and production from three Loomis wells.
- Six-month operating costs included $4.283 million of selling, general and administrative expense, $2.307 million of depreciation, depletion, amortization and accretion, and $1.337 million of impairment. The impairment related to unproved leases after management revised its re-leasing plans in response to lower commodity prices.
- Interest expense was $6.489 million for the first half, up from $4.098 million. The six-month net loss improved year over year mainly because 2014 included substantial losses on property, equity investment and deposit dispositions, and because of a 2015 debt-extinguishment gain.
- Cash fell to $2.560 million from $6.675 million at year-end. Cash used in investing was $0.274 million net provided, while financing provided $1.931 million. Cash paid for interest was $3.905 million.
- Total assets were $70.290 million, including $61.590 million of net oil and gas properties. Total liabilities were $45.800 million; shareholders’ equity was $24.490 million. Current assets of $6.373 million were below current liabilities of $8.292 million, leaving a $1.919 million working-capital deficit. Accumulated deficit was $70.422 million.
- Debt carrying amounts included approximately $24.634 million of senior secured notes, $8.353 million of assumed subordinated debt, $4.925 million under the MIEJ note, and $0.588 million of Bridge Notes, net of premiums or discounts as presented. The senior notes bear 15% interest and mature in 2017; the assumed subordinated note bears 12% and matures in 2017; the MIEJ note bears 10%, with interest deferred until maturity.
Material changes and transactions
- The GGE acquisition was funded with 3.375 million common shares, 66,625 Series A preferred shares valued at $28.402 million, assumed subordinated debt of approximately $8.353 million and a Kazakhstan-related option. The preferred shares have a $400-per-share liquidation preference and a 10% annual dividend; $0.927 million of dividends had accrued at June 30.
- Common shares outstanding increased to 44,203,639 at June 30 from 33,117,516 at December 31, 2014. A May public offering of 6,366,197 shares at $0.50 per share generated approximately $2.780 million net.
- The MIEJ settlement reduced approximately $9.4 million of aggregate liabilities owed to MIEJ and Condor to a new $4.925 million note, and generated a reported $2.192 million gain on debt extinguishment. The settlement also included the sale of PEDEVCO’s Condor and related property interests.
- In April, certain senior lenders deferred approximately $0.972 million of May and June principal and interest payments for lease-related uses. The deferred amount was added to principal effective July 31; warrants for 349,111 shares were planned as consideration.
Outlook, risks and contingencies
- Going concern: Management disclosed recurring operating losses, a working-capital deficit and accumulated deficit, and stated these conditions raise substantial doubt about the company’s ability to continue as a going concern. Management expected the Dome transaction to help meet obligations and achieve profitability, but completion was not assured; alternative financing might not be available on acceptable terms.
- Dome transaction: The proposed acquisition of Dome US assets would issue approximately 152.6 million PEDEVCO shares to Dome AB, subject to adjustment, representing about 64% of the company on an as-converted basis under stated assumptions and resulting in a change of control and substantial dilution. Closing required, among other things, shareholder, regulatory and NYSE MKT approvals and an effective registration statement. The agreement was amended in July to extend certain document and audited-financial-statement deadlines.
- Capital plans: If the Dome transaction closed, management anticipated a 2015–2016 program of approximately 10 gross (8.4 net) long-lateral wells, estimated at $48.7 million, or $50.4 million including lease renewals. Without the transaction, PEDEVCO planned to limit spending and participate in approximately six additional wells (about 1.0 net well). These are plans, not guaranteed results; the filing states none of the planned program expenditures had been spent in the first half.
- Funding plans relied on operating cash flow, cash on hand, up to approximately $13.5 million gross ($11.0 million net) available under the senior facility, and potential additional financing or asset-level arrangements. The senior facility carries a 15% rate and collateralizes substantially all assets. Two customers accounted for 52% and 32% of first-half oil and gas revenue.
- Approximately 6,791 net acres were due to expire in the second half of 2015; 2,331 net acres had expired in the first half. Management had fully impaired unproved leasehold costs based on its revised re-leasing program. Oil-price declines, lease renewals, financing access and transaction execution are significant risks.
- The Dome agreement included possible $1 million termination fees in specified circumstances and restrictions on pursuing competing transactions. Management also agreed to potential accelerated executive equity vesting and up to $370,000 of related tax payments.
- No material legal proceedings were reported. Management concluded disclosure controls were effective as of June 30 and reported no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether the Dome transaction closed, its final share issuance and dilution, and the status of required approvals, financing and closing conditions.
- Cash runway, actual access to remaining senior-facility commitments, debt service and compliance with loan terms.
- Progress on financing or other measures to address the disclosed going-concern uncertainty and working-capital deficit.
- Production, realized prices, customer concentration and lease expirations/renewals, including whether planned drilling proceeds and is funded.
- Potential preferred-stock dividends, redemption or conversion outcomes, and dilution from preferred shares, options, warrants and convertible notes.