PEDEVCO Corp. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Filed March 27, 2017. This is an annual report, not a standalone fourth-quarter filing. PEDEVCO is an oil and gas exploration and production company focused primarily on the Denver-Julesburg Basin in Colorado.
Business context and operating results
At year-end, the company reported approximately 11,538 net acres in Weld County and interests in 61 gross (17.4 net) wells. Red Hawk operated 14 gross (12.5 net) producing wells. Fourth-quarter production averaged approximately 1,232 gross (272 net) BOE per day.
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Oil and gas sales | $3.968 million | $5.326 million | Down $1.358 million (about 25%) |
| Net loss attributable to common shareholders | $19.619 million | $21.316 million | Loss narrowed $1.697 million |
| Basic and diluted loss per share | $0.40 | $0.51 | Improved |
| Net cash used in operating activities | $5.974 million | $7.619 million | Use decreased $1.645 million |
| Net cash used in investing activities | $0.075 million | Net cash provided: $0.265 million | — |
| Net cash provided by financing activities | $5.570 million | $1.817 million | Increased $3.753 million |
| Cash at year-end | $0.659 million | $1.138 million | Down $0.479 million |
Operating loss was $5.660 million, compared with $9.648 million in 2015. The filing does not provide a clear consolidated margin measure; production costs per BOE were $10.42 versus $6.63, excluding ad valorem and severance taxes.
For the D-J Basin asset, reported net production was 121,058 BOE in 2016 versus 174,693 BOE in 2015; average daily production was 332 versus 479 BOE. Average oil sales price declined to $36.98 per barrel from $41.13, while natural gas price increased to $1.98 per Mcf from $1.54. Management attributed lower revenue primarily to natural production decline, periodic shut-ins and lower oil prices.
Financial position, debt and liquidity
- Total assets were $58.780 million, including $57.395 million of net oil and gas properties. Total liabilities were $60.736 million, compared with $45.740 million at year-end 2015.
- Current assets were $1.296 million and current liabilities $3.310 million, producing negative working capital of approximately $2.0 million. Shareholders’ equity moved from $15.037 million to a deficit of $1.956 million; accumulated deficit reached $101.731 million.
- Cash was $0.659 million. Operating activities used $5.974 million, and the company reported recurring losses and negative operating cash flows. The auditor and management concluded substantial doubt existed about the company’s ability to continue as a going concern.
- In May 2016, PEDEVCO restructured its senior debt. The notes carry 15% interest; the Tranche B balance was $42.333 million at year-end, and the company drew an initial $6.422 million under the Tranche A facility. Additional Tranche A funding of up to approximately $18.6 million was subject to lender discretion and conditions, not a committed advance.
- The senior lenders receive a sweep of monthly net oil and gas revenues, after specified operating costs, interest and permitted G&A (generally capped at $150,000 monthly). Senior debt is secured by substantially all company and subsidiary assets. The related-party RJC subordinated note was reported at $10.173 million; the MIEJ note at $4.925 million. Notes are presented net of discounts where applicable.
- Management said 2017 funding was needed to execute its plan. It was negotiating financing; absent financing, the filing warned of impaired property values and significant effects on the ability to meet obligations.
Material changes and unusual items
- Revenue fell about 25%, while the common-shareholder net loss narrowed about 8%. SG&A declined to $3.912 million from $6.962 million, mainly due to cost reductions, lower payroll and lower stock-based compensation. Cash-based G&A was reported at $2.436 million for 2016, with a beginning-2017 run-rate of approximately $1.8 million.
- Interest expense remained substantial: $13.959 million in 2016 versus $13.904 million in 2015. Debt restructuring deferred and capitalized interest, increasing liabilities while easing near-term cash payments.
- The 2016 Liberty Oilfield settlement resolved claims relating to approximately $2.6 million owed: PEDEVCO paid $750,000 and issued 2.45 million shares valued at $588,000, recording a $1.282 million gain on settlement of payables.
- Net loss was lower partly because 2015 included a $1.337 million oil and gas impairment and a $2.192 million debt-extinguishment gain. No oil and gas property impairment was recorded in 2016; management noted future impairment risk if financing, commodity prices or development economics weaken.
- Proved reserves at year-end were 2.591 million barrels of oil and 11.053 Bcf of gas, including 2.200 million barrels and 9.854 Bcf of proved undeveloped reserves. The standardized measure of discounted future net cash flows was $19.154 million, down from $26.152 million in 2015.
Outlook, risks and contingencies
- 2017 plan: Approximately $11.1 million of capital expenditures to drill, complete, participate in or acquire approximately 3.3 net wells. The company cited operating cash flow, cash on hand, up to $2.0 million from an at-the-market offering and approximately $18.0 million potentially available under its senior facility. Lender advances were discretionary; if funding or market conditions were inadequate, the program could be delayed into 2018.
- GOM merger: Still pending and subject to closing conditions, debt restructuring and possible bankruptcy-court approvals; management could not estimate whether or when it would close. Proposed consideration included common and Series B preferred shares and assumption of approximately $125 million of subordinated debt plus a $30 million undrawn letter of credit. The transaction was not completed as of the filing.
- Listing and dilution: NYSE MKT accepted a compliance plan addressing stockholders’ equity below the $6 million standard, with a deadline of June 27, 2018. A separate low-share-price notice required a reverse split by May 3, 2017 to maintain listing. The company also disclosed substantial potential dilution from options, warrants, preferred stock and convertible notes, including MIEJ’s conversion right beginning March 8, 2017 at a price subject to a $0.30 floor.
- Controls: Management concluded disclosure controls and internal control over financial reporting were not effective as of December 31, 2016; independent testing of year-end controls had not been performed.
- Principal risks: Commodity-price volatility, declining production, high-cost debt, dependence on outside financing, lender control over advances and revenue, concentrated Colorado assets, drilling and reserve-estimation uncertainty, environmental and hydraulic-fracturing regulation, and possible failure or delay of the GOM merger. The company reported no current material legal proceeding after settling the Liberty matter.
Investor verification priorities
- Confirm available cash, current maturities, actual gross debt and accrued interest, and whether subsequent lender funding or refinancing became available.
- Check whether PEDEVCO completed its 2017 drilling budget, achieved expected well results and maintained lease acreage.
- Verify the GOM merger’s status, the treatment of GOM debt and letter-of-credit obligations, and any resulting dilution or control changes.
- Review progress on NYSE MKT listing requirements and the reverse split, and reconcile the potential share issuance from convertible securities, warrants and equity awards.
- Assess the going-concern warning, control deficiencies and any subsequent impairment charges or financing developments.