PEDEVCO CORP. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. The company, formerly Blast Energy Services, completed its merger with Pacific Energy Development Corp. (PEDCO) on July 27, 2012, changed its name to PEDEVCO, and effected a 1-for-112 reverse stock split. The merger was accounted for as a reverse acquisition, with PEDCO as accounting acquirer; reported results therefore include the former Blast business only after the merger.
Business context
PEDEVCO is an early-stage oil and gas company focused on U.S. shale assets, principally the Niobrara in Colorado and Eagle Ford in Texas. It holds a 20% interest in Condor, which operates Niobrara interests, and a 50% interest in White Hawk, which holds the Eagle Ford asset. Management also pursued a proposed Mississippian Lime acquisition and a potential China shale-gas partnership.
Financial performance
| Metric | Q3 2012 | Nine months 2012 | Comparable 2011 |
|---|---|---|---|
| Oil and gas revenue | $175,183 | $332,848 | $0 |
| Operating expenses | $8,023,690 | $9,175,406 | $208,986 Q3; $288,875 nine months |
| Operating loss | $7,872,218 | $8,857,755 | $208,986 Q3; $288,875 nine months |
| Net loss | $8,329,245 | $9,314,492 | $216,563 Q3; $298,688 inception-to-date comparison |
| Basic and diluted loss per share | $0.48 | $0.55 | $0.01 Q3; $0.02 nine months |
Q3 revenue included approximately $115,000 from PEDCO assets and $60,000 from former Blast operations, according to MD&A. Production came from Eagle Ford wells and the newly completed Niobrara well. Lease operating costs were $123,059 for the quarter and $170,894 for the nine months. The filing does not present a consolidated gross margin measure.
The most significant unusual expense was an $6.82 million goodwill impairment recorded after the merger. Other notable items included $303,254 of interest expense and a $159,913 loss on debt extinguishment for the nine-month period. Nine-month SG&A was $2.11 million, including substantial payroll, professional services, legal costs, and stock-based compensation.
Financial position, liquidity and cash flow
- At September 30, 2012, cash was $4.65 million and restricted cash was $700,000, for total cash and restricted cash of $5.35 million. Restricted cash secured the Centurion lending arrangement.
- Current assets were $5.76 million and current liabilities were $3.92 million, yielding working capital of approximately $1.84 million. Total assets were $11.63 million; total liabilities were $3.96 million; stockholders’ equity was $6.41 million.
- Cash used in operations was $1.47 million and cash used in investing was $2.08 million during the nine months. Financing provided $8.02 million, primarily from preferred-stock sales. Ending unrestricted cash was $4.65 million.
- The balance sheet reports a convertible note payable of $1.01 million net of discount. The notes describe $1.28 million owed to Centurion at September 30, including principal, exit fees and interest; these are different carrying-value and stated-obligation measures.
- Centurion debt maturity had been extended to November 30, 2012, subject to earlier acceleration. The company also owed $1 million cash to Niobrara sellers, elected in lieu of preferred shares and due on or about November 20, 2012.
- A separate $1.25 million preferred-stock redemption exposure could arise in March 2013 if Eagle Ford acquisition sellers exercise their repurchase right under the specified market-value condition.
Material changes and management outlook
- Revenue began as acquired and developed assets entered production; the prior-year comparative periods reported no company oil and gas revenue. Losses rose sharply, principally because of the goodwill impairment, higher SG&A, debt discount amortization and debt extinguishment loss.
- Management reported one producing Niobrara well, with current production of approximately 100 gross boe per day, or 31 net boe per day. It planned two additional Niobrara wells by year-end 2012 and stated cash was available for that program.
- Management anticipated a late-2012 closing of the proposed Mississippian acquisition and first drilling in Q1 2013, with ten wells planned for 2013. The acquisition remained subject to definitive documentation, due diligence, closing conditions, and financing; the company cautioned it might not close.
- PEDEVCO had submitted bids with Guofa Zhonghai Energy for Chinese shale-gas blocks; bids were under government review. Any award would require further agreement on ownership, economics and operating responsibilities.
- Management expected substantial expenses and operating losses as it developed assets and pursued acquisitions. Capital spending could be deferred in response to commodity prices, costs, financing availability and operating results.
Risks, contingencies and controls
- The filing states that accumulated operating losses of $10.08 million and dependence on additional debt or equity financing raise substantial doubt about the company’s ability to continue as a going concern. Management intended to seek financing and rely on asset cash flows, but gave no assurance those efforts would succeed.
- Centurion’s near-term maturity, the $700,000 restricted deposit, the $1 million Niobrara cash payment, and potential $1.25 million preferred-share repurchase are significant liquidity obligations.
- Management concluded disclosure controls and procedures were not effective at September 30 due to material weaknesses: insufficient written accounting/reporting policies and ineffective period-end financial close and reporting controls. Management described remediation plans, including additional accounting resources and written procedures.
- The company reported no known pending or threatened legal proceedings. The Guijarral Hills lease expired September 30, 2012 after the test well did not produce oil; the company had relinquished its interest in the well.
Important facts for investors to verify
- Whether PEDEVCO met the November 2012 Centurion and Niobrara seller payment obligations, and the remaining terms and balance of Centurion debt after subsequent conversions.
- Whether the proposed Mississippian acquisition closed, how it was financed, and whether the planned drilling program proceeded.
- Actual production, realized prices, operating costs, and cash contributions or funding obligations for the Niobrara and Eagle Ford interests.
- Whether the Eagle Ford sellers’ March 2013 preferred-stock repurchase right was triggered, and the resulting cash impact.
- Progress in remediating the disclosed internal-control material weaknesses and the company’s ability to obtain additional financing while sustaining operations.
- Clarification of reported share counts and conversion terms: the filing contains differing preferred-stock totals in narrative disclosures, and subsequent Centurion conversions materially affected the share count.