PEDEVCO CORP quarterly report, Q3 FY2014

PEDEVCO CORP. — Form 10-Q Summary

Reporting period: Quarter ended September 30, 2014; financial comparisons are to the three and nine months ended September 30, 2013, and balance-sheet comparisons are to December 31, 2013. PEDEVCO is an oil and gas exploration and production company focused mainly on the Denver-Julesburg Basin (DJ Basin) in Colorado.

Financial performance and position

Metric	Q3 2014	Q3 2013	Nine months 2014	Nine months 2013
Oil and gas revenue	$1.090 million	$0.199 million	$4.192 million	$0.624 million
Operating loss	$1.947 million	$1.627 million	$14.590 million	$5.050 million
Net loss attributable to PEDEVCO common stockholders	$4.804 million	$2.065 million	$22.169 million	$5.980 million
Loss per common share, basic and diluted	$0.17	$0.11	$0.81	$0.40

For the nine months, lease operating costs were $1.367 million, exploration expense $1.213 million, SG&A $6.208 million, and depreciation, depletion, amortization and accretion $0.753 million. Interest expense was $7.131 million, versus $1.099 million a year earlier. The filing does not provide a consolidated gross-margin percentage.

Nine-month cash provided by operating activities was $1.069 million, compared with $3.372 million used in 2013. Investing activities used $18.167 million and financing activities provided $19.376 million. Cash increased to $8.891 million from $6.613 million at year-end 2013.

At September 30, 2014, total assets were $46.796 million, total liabilities $41.269 million, and shareholders’ equity $5.527 million. Current assets of $13.084 million were below current liabilities of $19.787 million, resulting in negative working capital of approximately $6.7 million. The balance sheet reported secured notes payable of $22.636 million net of discounts, related-party notes payable of $6.170 million, and convertible Bridge Notes of $0.711 million net of premium. The senior notes bear 15% annual interest and mature in March 2017; the filing also describes approximately $13.5 million gross (about $11.0 million net of fees) available for future borrowing.

Material changes and unusual items

• Revenue rose substantially, primarily following the March 2014 acquisition of Continental Resources’ DJ Basin properties. Reported DJ Basin production attributable to PEDEVCO was 58,240 BOE for the nine months, versus 14,369 BOE in 2013; management described this as a four-fold increase.
• The company acquired the Wattenberg properties for a final purchase price of $28.522 million and, as part of the financing arrangement, conveyed 50% interests in the Wattenberg and Mississippian assets and its planned Asia Sixth interest to Golden Globe. Related dispositions and allocations contributed substantial reported losses, including a $5.414 million loss on sale of oil and gas properties, a $1.028 million loss on sale of an equity investment, and a $1.945 million loss on sale of the Asia Sixth interest.
• The year-to-date net loss increased by $16.190 million. Management attributed the change principally to higher financing-related interest expense, asset-sale losses, and higher operating and stock-compensation expenses. Debt extinguishment added an $0.823 million loss.
• Cash and oil and gas properties increased, while total liabilities rose to $41.269 million from $14.914 million at year-end. Common shares outstanding were 29,430,374 at September 30, compared with 26,121,062 at December 31, 2013; subsequent Bridge Note conversions and equity awards are also disclosed.
• The company restructured its proposed Kazakhstan investment. It terminated the prior agreement to acquire a controlling interest in Asia Sixth and received a $5.0 million secured note; it expects to exchange that note for a 5% interest in Caspian Energy if the transaction closes, anticipated by July 2015 subject to approvals.

Outlook, risks and contingencies

• Management planned up to $30 million of capital expenditures over the next 12 months, excluding capitalized interest and G&A, assuming financing is available. It planned approximately 15 additional total DJ Basin wells, equivalent to five net wells, through mid-2015. Funding sources identified include operating cash flow, cash on hand, remaining facility availability, and potential future debt or equity financing.
• Management said the 2014 development plan had been delayed by about six months due to permitting, spacing, vendor, and water-sourcing and disposal constraints. A preferential-access agreement for a newly completed salt-water disposal well was expected to support full production; management reported that production had recovered after earlier shut-ins.
• The Mississippian term assignment expires December 29, 2014 unless extended or the required drilling conditions are met. The company said it did not expect to complete the three required horizontal wells by that date, was seeking an extension, and could face a full impairment of approximately $5.1 million if unsuccessful. Drilling was anticipated to begin in the first half of 2015 if an extension is obtained.
• The $6.17 million MIEJ related-party note was past due under its stated maturity. MIEJ gave notice on October 8, 2014; management believed senior-creditor subordination prevented immediate repayment, but said repayment from operating cash flow would require senior-creditor approval. The filing’s MIEJ accrued-interest amounts differ between disclosures; the text does not provide a single clear value.
• The senior credit facility is secured by company assets and subsidiaries and requires monthly prepayments tied to a portion of net revenues. Debt availability and future financing are important to the company’s development plans. Management cautioned that additional financing may be needed.
• Disclosure controls and procedures were deemed ineffective as of September 30, 2014 because of material weaknesses, including insufficient written accounting and reporting procedures and ineffective period-end reporting controls. Management said it was developing controls and adding accounting resources.
• Other risks include lease expirations, commodity and operating-cost changes, reserve and impairment estimates, customer concentration (one customer accounted for 42% of nine-month oil and gas revenue), and uninsured cash balances of approximately $8.141 million. The company reported no material pending legal proceedings.

Key facts for investors to verify

• Whether the Mississippian term assignment was extended and whether the potential $5.1 million impairment was avoided.
• Actual drilling pace, production, and realized cash flow after the new water-disposal access became available.
• Remaining borrowing capacity, fees and conditions under the senior facility, and the company’s ability to fund planned capital expenditures and meet debt obligations.
• Status of the past-due MIEJ note, creditor approvals for any repayment, and the correct accrued-interest balance.
• Progress and required Kazakhstan approvals for the Caspian Energy transaction, including collection or conversion of the $5.0 million note.
• Remediation of the disclosed material weaknesses in internal controls and the effect of continued share issuance and convertible debt on dilution.