PEDEVCO CORP current report, Q1 FY2014

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PEDEVCO CORP. Form 8-K Summary

Business Context and Reporting Period

This Current Report on Form 8-K, dated March 7, 2014, details significant financing activities, asset acquisitions, and debt restructuring by PEDEVCO Corp. The primary events include the closing of a $34.5 million secured note purchase, the acquisition of oil and gas assets from Continental Resources, Inc., and the disposition of 50% interests in various assets to investors as consideration for the financing.

Key Financial Metrics and Capital Structure

  • Debt Financing: The Company sold Secured Promissory Notes (Initial Notes) with an aggregate face value of $34.5 million.
  • Net Proceeds: The Company received approximately $27.47 million in net cash proceeds after deducting a 5% original issue discount ($1.725 million), a 10% underwriting fee ($3.45 million), legal fees (~$135,000), and a closing fee to the investment banker ($1.466 million).
  • Interest Rate: Notes bear interest at 15% per annum, payable monthly. In the event of default, the rate increases to the lesser of 30% or the maximum legal rate.
  • Maturity: The Notes are due March 6, 2017, with no prepayment penalty.
  • Repayment Terms: The Company must prepay 25% of net revenues received each month, commencing April 1, 2014.
  • Asset Acquisition: The Company acquired approximately 27,990 net acres in the Niobrara Shale (Colorado) for a final purchase price of $28.52 million, assuming $845,000 in suspense accounts payable.
  • Equity Issuance: Granted 1,000,000 warrants to Casimir Capital LP at an exercise price of $2.50 per share. Issued 190,000 restricted shares to South Texas Reservoir Alliance LLC to settle $405,777 in consulting fees.

Material Changes and Transactions

  • Asset Dispositions (50% Interests): As additional consideration for the loan, the Company transferred 50% ownership of the newly acquired Continental assets, 50% of rights to Kazakhstan assets (Asia Sixth), and 50% of the Mississippian Property to RJ Resources Corp. and its affiliates.
  • Bridge Note Amendment: Amended existing $4.0 million Bridge Notes to allow conversion into common stock. Conversion price is $2.15 per share prior to June 1, 2014, and market-based thereafter. These notes were subordinated to the new Notes.
  • Rescission of Prior Investment: Rescinded 3,333,333 shares and related warrants held in escrow by a Lead Investor (Yao Hang Finance) due to failure to pay a $10 million note balance. The note was cancelled and forgiven.
  • Collateral: The new Notes are secured by a first-priority security interest in substantially all of the Company's assets, including real property in Colorado and Texas.

Outlook, Risks, and Management Commentary

  • Use of Proceeds: Funds were used to close the Continental Acquisition and pay transaction expenses. Future borrowings (up to $15.5 million additional) are restricted to drilling and completing wells on specific properties.
  • Operational Restrictions: The Company is prohibited from drilling dry holes and using subsequent note proceeds without investor consent if a dry hole occurs. Proceeds from the sale of the Mississippian Property cannot be used to fund required deposits for subsequent loans.
  • Key Personnel Risk: An event of default occurs if CEO Frank Ingriselli or CFO Michael Peterson cease to be involved in management (with limited exceptions), triggering immediate repayment of the Notes.
  • Financial Covenants: The Company must maintain NYSE MKT listing, file periodic reports, and provide quarterly budgets and reserve reports to the agent.

Investor Verification Checklist

  • Verify the Company's ability to generate sufficient net revenues to meet the mandatory 25% monthly prepayment requirement.
  • Confirm the status of the NYSE MKT listing approval for the 190,000 shares issued to STXRA and potential shares from Bridge Note conversions.
  • Review the specific terms of the subordination agreement regarding the $4.0 million Bridge Notes and the conditions under which they can be repaid.
  • Assess the impact of transferring 50% of the newly acquired Continental assets and Mississippian Property on future production and revenue potential.
  • Monitor the Company's compliance with the "dry hole" restriction on subsequent borrowings.