PEDEVCO Corp. — 2012 Form 10-K Summary
Business context and reporting period
The filing reports the fiscal year ended December 31, 2012; it is an annual report, not a standalone fourth-quarter report. PEDEVCO focuses on acquiring, exploring, developing and producing U.S. oil and gas, primarily in shale plays. Core interests were in the Niobrara Shale in Colorado and Eagle Ford Shale in Texas, plus a non-core North Sugar Valley asset in Texas.
On July 27, 2012, PEDEVCO completed a reverse acquisition of Pacific Energy Development Corp. and changed its name from Blast Energy Services, Inc. Pacific Energy Development is the accounting acquirer, so the 2012 statements include the combined company only after the merger; the 2011 comparative period covers Pacific Energy Development from its February 9, 2011 inception and is not a full-year comparable. PEDEVCO held a 20% interest in Niobrara operator Condor and a 50% interest in Eagle Ford entity White Hawk; both were accounted for under the equity method.
Key financial metrics
| Metric | 2012 | Prior period / year-end context |
|---|---|---|
| Oil and gas revenue | $503,153 | $0 from inception through December 31, 2011 |
| Lease operating costs | $281,103 | $0 in the 2011 inception period |
| Operating loss | Approximately $11.07 million | Operating loss of $743,667 in the 2011 inception period |
| Net loss | $12.01 million; $0.65 per share | $763,677; $0.06 per share in the 2011 inception period |
| Net cash used in operating activities | $2.80 million | $810,358 used in the 2011 inception period |
| Net cash used in investing activities | $3.74 million | $3.02 million used in the 2011 inception period |
| Net cash provided by financing activities | $8.85 million | $4.00 million in the 2011 inception period |
| Cash | $2.48 million | $176,471 at December 31, 2011 |
| Total current assets / current liabilities | $2.82 million / $4.71 million | Negative working capital of approximately $1.89 million |
| Total assets / total liabilities | $11.42 million / $4.77 million | Stockholders’ equity was $5.40 million |
Lease operating costs were about 56% of revenue, leaving approximately $222,000 before other expenses; this is not a measure of overall profitability. The $12.01 million net loss included a $6.82 million goodwill impairment, $180,262 of oil and gas property impairment, $3.73 million of selling, general and administrative expense, and $986,248 of interest expense. The company also reported a $357,612 equity-method investment loss.
At December 31, 2012, current liabilities included $2.17 million of related-party notes payable. Centurion debt was fully retired by year-end. Separately, PEDEVCO reported $3.06 million of notes receivable from related parties, primarily Condor and White Hawk. In February 2013, a related-party note documented Niobrara advances and included an additional advance, bringing principal outstanding to $4.17 million; this is a subsequent event, not year-end debt.
Year-end proved reserves attributable to PEDEVCO, directly and through equity-method investees, were reported as 964,956 BOE, including 819,394 BOE of proved undeveloped reserves. Combined PV-10 was $7.189 million; the standardized measure of discounted future net cash flows was $2.406 million. These reserve values are estimates and are not stated to be market value.
Material changes versus the prior comparable period
- Revenue began in 2012 as wells entered production; the reported $503,153 includes approximately $357,000 from Pacific Energy Development operations and $146,000 from former Blast operations after the merger.
- Net loss rose to $12.01 million from $763,677 in the prior inception period, driven largely by goodwill impairment, higher corporate and professional costs, and interest expense. The different period lengths and reverse-acquisition accounting limit direct comparison.
- Cash increased to $2.48 million from $176,471, primarily reflecting $8.02 million of preferred-stock proceeds and related financing, partly offset by operating and investing cash use.
- Proved reserves were first recorded in 2012; the filing reports no proved reserves at December 31, 2011. The increase reflects acquired acreage and drilling, not solely organic additions.
- The company restated its 2011 financial statements twice: to correct deferred acquisition costs and intercompany eliminations, and to expense a fully vested, nonforfeitable stock award.
Guidance, outlook, risks and unusual items
- Funding and outlook: Management estimated approximately $38 million of 2013 capital expenditures, conditional on timely completion of a proposed $50 million public offering. Management expected the offering, operating cash flow, asset-sale proceeds and cash on hand to fund plans through year-end 2013, but gave no assurance the offering would close or raise the full amount. The filing states that losses, negative working capital and dependence on additional financing raise substantial doubt about the company’s ability to continue as a going concern.
- Drilling plans: Subject to capital availability, PEDEVCO planned 11 gross Niobrara wells and two gross Eagle Ford wells through 2013. It also planned four wells in the Mississippian Lime if the acquisition closed and financing was secured. The filing’s broader 2013 spending plan and well schedules are conditional, not guaranteed guidance.
- Pending acquisition: A February 2013 agreement contemplated acquiring 6,763 net Mississippian acres for $4.21 million, subject to customary conditions and sufficient financing. An option covered a further 7,043 net acres for about $4.22 million. The transaction was not closed as of the filing; PEDEVCO also remained obligated to refund MIEJ $432,433 of the prior deposit.
- Related-party funding: MIEJ, an MIE Holdings affiliate and joint-venture partner, provided substantial financing. A February 2013 secured subordinated note carried 10% interest and was secured by specified Niobrara interests; repayment was due by the earlier of December 31, 2013 or a qualifying financing. This creates repayment and collateral risks alongside the company’s financing needs.
- Operating and market risks: The company highlighted commodity-price volatility, limited production history, drilling and reserve-estimation uncertainty, dependence on third-party operators and infrastructure, lease expirations, competition for capital and services, water availability, and environmental and hydraulic-fracturing regulation. It had no settled hedging program described and expected exposure to commodity prices.
- Controls and reporting: Management concluded disclosure controls were ineffective at year-end due to material weaknesses, including insufficient written accounting and reporting procedures and ineffective period-end reporting controls. Management planned to add accounting resources and implement procedures. The auditor’s financial-statement opinion was unqualified but included a going-concern emphasis; the auditor did not opine on internal-control effectiveness.
- Other items: No material legal proceedings were reported. The company reported no dividends and described its stock as thinly traded on the OTC Bulletin Board. All Series A preferred shares converted one-for-one into common stock in January 2013.
Important facts for investors to verify
- Whether the proposed equity offering or alternative financing closed, on what terms, and whether it funded the stated 2013 capital program.
- Whether the Mississippian acquisition and optional acreage purchase closed, and how the $432,433 MIEJ deposit refund and acquisition funding were resolved.
- Reconciliation of year-end cash, negative working capital, related-party receivables and payables, and the subsequent $4.17 million MIEJ note, including its repayment and collateral terms.
- Actual production, realized prices, operating costs and reserve revisions for Niobrara and Eagle Ford; initial well rates should not be treated as sustained production forecasts.
- Progress in remediating internal-control material weaknesses and any subsequent changes to reporting controls.
- The effects of preferred-stock conversion, outstanding options and warrants, and any later equity issuance on dilution and voting control.