PEDEVCO CORP quarterly report, Q3 FY2011

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Filing identity and period

Important: The supplied 10-Q is for Blast Energy Services, Inc., not PEDEVCO CORP. This summary reflects the filing text provided. It covers the quarter and nine months ended September 30, 2011; the filing was signed November 14, 2011.

Business context and financial results

Blast was shifting from satellite communications and a focus on applied fluid jetting (AFJ) toward oil and gas production, with AFJ as a potential future revenue source. The satellite business was sold in December 2010. The company reported oil and gas production and down-hole solutions segments.

  • Revenue: $95,942 for Q3 and $339,011 for the first nine months of 2011, versus no continuing-operation revenue in the comparable 2010 periods. Oil and gas properties contributed all revenue.
  • Oil-property economics: Lease operating costs were $65,385 in Q3 and $200,957 year to date, leaving reported revenue less lease operating costs of approximately $30,600 and $138,100, respectively. These figures do not include corporate and other operating expenses.
  • Loss: Net loss was $702,041 for Q3 and $1.741 million for nine months, compared with $231,854 and $722,208 in 2010. Loss attributable to common shareholders, after preferred dividends, was $762,534 and $1.921 million. Nine-month basic and diluted loss per share was $0.02.
  • Interest and expenses: Interest expense rose to $517,359 in Q3 and $885,434 year to date, principally from the 2011 secured financing, debt-discount and financing-cost amortization, and a $149,645 exit fee. Nine-month SG&A increased to $876,709 from $480,764, including higher payroll and stock-based compensation.
  • Cash flow: Nine-month cash used in operating activities was $364,218; investing activities used $1.875 million, primarily for oil and gas properties; financing activities provided $1.905 million. Cash declined from $373,470 at year-end 2010 to $38,786, with an additional $100,000 classified as restricted cash.
  • Balance sheet and liquidity: At September 30, current assets were $232,428 and current liabilities $2.640 million, a working-capital deficit of approximately $2.408 million. Total liabilities were $3.772 million and stockholders’ equity $236,129. Accumulated deficit was $75.804 million.

Material changes and financing

  • The North Sugar Valley acquisition began contributing production revenue in October 2010. Management reported approximately 43 gross barrels of oil per day from three wells and estimated about 75,000 recoverable net barrels based on its year-end reserve report.
  • Blast funded the Guijarral Hills drilling and testing project through secured notes with aggregate original principal of $2.522 million. The lender received first-priority security over company and subsidiary assets; the notes carried 10% interest, original issue discounts, and an exit fee. Management reported an effective interest rate of approximately 36% on the first note after fees and discounts.
  • In September, Blast used part of the final Quicksilver settlement payment to pay the lender $1.410 million, including $1.247 million of principal, accrued interest, and the exit fee. The final Quicksilver payment was $2 million gross and approximately $1.44 million net of legal fees.
  • A $1.12 million related-party note to Berg McAfee remained outstanding, amended to mature February 27, 2013 and convertible at $0.08 per share. A separate $100,000 related-party loan carried 25% interest and matured in May 2012.
  • Six million Series A preferred shares remained outstanding, with $912,658 of reported dividend arrearages (including arrearages tied to previously redeemed shares). The balance sheet also showed $331,775 in related-party accrued expenses.

Outlook, risks and unusual items

  • Going concern: Management cited low unrestricted cash, a $1.7 million nine-month continuing-operations loss, and the large accumulated deficit as creating substantial uncertainty about the company’s ability to continue as a going concern. It said additional equity, convertible financing, or third-party funding may be needed; availability was not assured.
  • Guijarral Hills: The 76-33 well reached 10,550 feet, but none of the three tested zones produced oil. Further testing, including evaluation of the Kreyhegan Shale, was under consideration. Blast said it needed about $200,000 for its share of further testing and might sell down its interest; failure to contribute could affect its net revenue interest.
  • Subsequent warrant terms: After quarter-end, a warrant for up to 12 million shares was granted to the lender and amended October 7, 2011 to an exercise price of $0.01 per share, subject to specified provisions. The lender paid Blast $30,000 for the amendment. The placement agent also earned warrants for 1.2 million shares, not yet issued. These terms present potential dilution.
  • Potential transaction: The filing disclosed an October 2011 non-binding term sheet with a third party that could result in a change of control and business focus. No definitive agreement had been entered into as of the filing; a failed transaction could consume resources and worsen funding risks.
  • AFJ: The AFJ rig was in storage after prior mechanical failures prevented lateral jetting. Management said it intended to restart the service line when liquidity permitted. No formal financial guidance was provided.
  • Management concluded disclosure controls were effective as of September 30, 2011 and reported no material internal-control changes during the quarter. The filing reported no other pending or threatened legal proceedings besides the resolved Quicksilver matter.

Key facts for investors to verify

  1. Confirm the issuer identity: the supplied filing names Blast Energy Services, Inc., not PEDEVCO CORP.
  2. Verify unrestricted cash, the restricted-cash requirement, current maturities, and the amount of secured debt outstanding after the September payment.
  3. Review the lender and placement-agent warrant issuance, the $0.01 exercise price, anti-dilution terms, and potential share dilution.
  4. Check subsequent developments on Guijarral Hills testing, funding needs, and any change to Blast’s working or revenue interest.
  5. Confirm whether the non-binding merger term sheet became a definitive transaction and assess its financing, dilution, and control implications.
  6. Assess the going-concern disclosure against the company’s cash needs, operating losses, and access to additional financing.