PEDEVCO CORP. — Q2 2017 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2017. PEDEVCO is an oil and gas exploration, development and production company focused principally on its Denver-Julesburg Basin assets in Colorado. At June 30, it reported interests in 61 gross (17.4 net) wells; 14 gross (12.5 net) operated wells were producing. The company completed a 1-for-10 reverse stock split in April 2017.
Financial results and liquidity
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Oil and gas revenue | $0.812 | $1.203 | $1.546 | $1.785 |
| Operating income (loss) | $(1.152) | $0.158 | $(2.228) | $(2.334) |
| Interest expense | $3.162 | $3.592 | $6.258 | $7.678 |
| Net loss | $(4.314) | $(3.434) | $(8.486) | $(10.012) |
| Loss per share, basic and diluted | $(0.76) | $(0.71) | $(1.52) | $(2.10) |
- Q2 production was 20,421 BOE versus 38,663 BOE a year earlier; first-half production was 35,419 BOE versus 62,274 BOE. Management attributed lower revenue mainly to natural well declines and periodic shut-ins.
- Q2 lease operating costs were $0.397 million; first-half costs were $0.727 million. SG&A was $0.694 million for Q2 and $1.494 million for the first half. First-half SG&A fell $1.227 million year over year, mainly from lower stock compensation and other cost reductions.
- Cash was $0.891 million at June 30, 2017, compared with $0.659 million at year-end 2016. Current assets were $1.417 million and current liabilities $3.098 million, a working capital deficit of approximately $1.7 million. Total assets were $57.380 million, total liabilities $66.810 million, and shareholders’ deficit $9.430 million.
- For the first half, operating cash use was $0.233 million, investing cash flow was zero, and financing provided $0.465 million, including $0.495 million net proceeds from common-stock issuance. Cash increased $0.232 million.
- Debt is substantial. Balance-sheet carrying amounts included $30.868 million of secured notes and $14.615 million of related-party secured notes, both net of discounts, plus $10.803 million of related-party subordinated notes, $4.925 million of other notes and $0.588 million of convertible bridge notes. Senior notes carry 15% interest; deferred interest and debt discounts materially affect reported balances and expense.
Changes, outlook and principal risks
- Compared with Q2 2016, Q2 2017 net loss increased $0.880 million. The prior-year quarter included a $1.282 million gain on settlement of payables; lower current-period revenue also contributed. For the first half, net loss improved $1.526 million, primarily due to lower SG&A and interest expense, partly offset by the absence of that prior-year gain.
- Management planned approximately $11.1 million of 2017 capital expenditures to drill, participate in or acquire approximately 3.3 net wells. Funding assumptions included operating cash flow, up to $1.359 million remaining under the ATM offering and approximately $18 million potentially available under the senior facility. Further senior advances are at lenders’ sole discretion; no lender is obligated to fund them. Management said it might defer drilling into 2018 if funding or market conditions warrant.
- Management disclosed substantial doubt about the company’s ability to continue as a going concern within one year after issuance of the financial statements. It estimated a need for approximately $11 million in 2017 and said it was negotiating financing. If financing is not completed or replaced, management anticipated a possible oil and gas property impairment of approximately $27 million and significantly reduced ability to meet obligations from existing cash flows.
- A non-binding term sheet with a Hong Kong-based investor group contemplated converting substantially all fixed debt, except approximately $6 million of senior secured debt, into 75% of company equity, followed by a $12 million equity investment for approximately 51% of common stock. The transaction was subject to due diligence, definitive agreements, NYSE American approval and lender sign-off; it might not close. A binding 90-day no-shop period was to expire in late August 2017. The company had terminated its pending GOM merger in June without further termination liability.
- The senior debt facility imposes a net revenue sweep, subject to permitted operating expenses and a $150,000 monthly G&A cap. The filing states that RJC had failed to provide required funding under its agreement; the company had received no proceeds under that commitment as of June 30. The company could cancel and forfeit 10,000 pledged Series A preferred shares, but had not done so as of filing.
- Sales to one customer represented 56% of first-half oil and gas revenue. The filing also notes lease acreage expirations, dependence on external financing, possible dilution from equity issuance, and the risk of asset sales, foreclosure or bankruptcy if funding is unavailable. Disclosure controls and procedures were reported ineffective as of June 30.
Key facts for investors to verify
- Whether the proposed debt conversion and $12 million investment were finalized, including the precise debt remaining, ownership allocation, conditions and dilution.
- Whether the company obtained the financing needed for its 2017 plan and whether senior lenders funded any discretionary advances.
- Updated cash, working capital, cash-sweep payments, debt balances, accrued interest and maturity or default status.
- Whether production declines, customer concentration or lease expirations changed, and whether any impairment was recorded.
- What remediation was undertaken for ineffective disclosure controls and whether the company’s going-concern assessment changed.