PEDEVCO Corp. — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed March 31, 2015. This is an annual report, not a standalone fourth-quarter report. Unless stated otherwise, financial amounts are in U.S. dollars.
Business context
PEDEVCO is an oil and gas exploration and production company focused primarily on the Denver-Julesburg Basin in Colorado. At year-end 2014, it reported approximately 14,985 net D-J Basin acres. The year included the March acquisition of Wattenberg properties from Continental Resources and a substantial increase in drilling and financing activity. Subsequent events reported in the 10-K materially changed the company’s asset base and capital structure.
Financial performance and condition
| Metric | FY2014 / Dec. 31, 2014 | FY2013 / Dec. 31, 2013 |
|---|---|---|
| Oil and gas sales | $4.812 million | $0.744 million |
| Net loss attributable to common shareholders | $29.874 million | $18.145 million |
| Basic and diluted loss per share | $1.06 | $1.07 |
| Cash and cash equivalents | $6.675 million | $6.613 million |
| Total assets | $41.740 million | $25.801 million |
| Total liabilities | $43.163 million | $14.914 million |
| Working capital | Negative $10.717 million | Negative $7.864 million |
| Shareholders’ equity (deficit) | Negative $1.423 million | Positive $10.887 million |
- Revenue rose by $4.068 million, mainly reflecting production acquired with the Wattenberg properties. Lease operating costs increased to $1.674 million from $0.648 million. Revenue less lease operating costs was approximately $3.138 million, before other expenses.
- Operating expenses were $18.101 million, including $8.712 million of selling, general and administrative costs, $5.416 million of oil and gas property impairment, and $1.306 million of exploration expense. Stock compensation accounted for $4.306 million of SG&A.
- Operating loss was $22.172 million. Other expense was $10.401 million, including $9.859 million of interest expense and an $0.823 million loss on debt extinguishment. Net loss was $32.573 million, of which $2.699 million was attributable to noncontrolling interests.
- Net cash used in operating activities was $4.867 million; investing activities used $16.077 million; financing activities provided $21.006 million. Year-end cash increased by only $0.062 million.
- The March 2014 senior secured financing had a stated facility size of up to $50 million. At year-end, reported senior-note principal was approximately $35.6 million, with approximately $13.5 million gross ($11.0 million net after fees) potentially available subject to conditions. The notes bore 15% annual interest, were secured by substantially all assets, and required a monthly revenue-based principal prepayment. Balance-sheet debt is presented net of substantial discounts and financing costs.
Material changes versus the prior year
- Reported production and sales expanded with the Wattenberg acquisition. The company attributed 73,583 BOE of 2014 production to its D-J Basin interests, versus 18,325 BOE in 2013. The filing separately reports $5.139 million of D-J Basin revenue on an ownership-attribution basis, compared with consolidated oil and gas sales of $4.812 million; the scopes differ and merit reconciliation.
- The company recorded a $5.416 million impairment charge in 2014, principally after the Mississippian leases expired when the required wells were not drilled. The asset was written off in full. The 2013 impairment was $3.303 million, mainly related to reserve revisions.
- Interest expense increased sharply from $1.591 million to $9.859 million, mainly due to the Wattenberg financing and associated financing costs. The net loss attributable to common shareholders increased by $11.729 million.
- Cash from financing, including debt and equity issuance, funded significant acquisition and development spending. Total liabilities rose by $28.249 million and equity moved from positive to a deficit.
Outlook, transactions and key risks
- Development plans: The company described a 2015 base drilling and land-renewal program of approximately $24–25 million for about 14 gross wells (approximately 3.5 net). It said the program depended on capital availability and could be reduced or deferred. If the proposed Dome transaction closed, management contemplated a substantially larger program, approximately $55.5 million including lease renewals.
- Subsequent D-J Basin acquisition: On February 23, 2015, PEDEVCO acquired approximately 12,977 net acres and interests in 53 gross wells from GGE. Consideration included 3.375 million common shares, 66,625 Series A preferred shares, and assumption of approximately $8.353 million of junior debt bearing 12% interest. The filing reported approximately 994 BOEPD and 26,990 net D-J Basin acres after giving effect to this acquisition and the divestiture described below.
- MIEJ settlement and divestiture: In February 2015, PEDEVCO sold its 20% Condor interest and certain legacy Niobrara interests, and related liabilities were restructured. The settlement reduced stated aggregate liabilities to MIEJ and Condor from approximately $9.4 million to a $4.925 million note, bearing 10% interest and due March 2017, subject to extension and potential conversion. MIEJ also paid $0.5 million toward senior debt. The company gave up assets reported to produce approximately 26 BOE per day net.
- Proposed Dome combination: A nonbinding February 2015 agreement contemplated acquiring all of Dome US for approximately 140 million PEDEVCO shares, about 64% of pro forma capital on an as-converted basis. Closing depended on definitive agreements, approvals, financing and other conditions; either party could terminate if it had not closed by September 30, 2015. Dome US was described as producing approximately 1,250 BOEPD. Completion was not assured.
- Funding and solvency: The company reported negative working capital, a shareholders’ deficit, substantial losses and dependence on additional financing and operating cash flow. The senior debt carried a high interest rate and broad collateral and covenants; failure to meet obligations could put assets at risk. Preferred stock issued to GGE carried a stated $22.65 million aggregate liquidation preference and 10% annual dividend until shareholder approval triggers specified changes, and may convert into a large number of common shares.
- Other risks and contingencies: Commodity-price volatility, limited operating history, reserve-estimate uncertainty, drilling and completion risk, water and disposal constraints, Colorado regulation, lease expirations, environmental and hydraulic-fracturing rules, customer concentration, and potential dilution are significant risks. One customer represented 40% of 2014 oil and gas revenue. No material legal proceeding was reported.
- NYSE MKT listing: The company received a deficiency notice for stockholders’ equity below $6 million and reported acceptance of a compliance plan, with until July 8, 2016 to regain compliance. Failure could lead to delisting.
- Reserves: The filing presents different reserve scopes. A pro forma D-J Basin table after subsequent transactions reports 15.089 million BOE proved reserves and $136.098 million PV-10, while the audited supplemental year-end reserve disclosure reports 6.4575 million barrels of oil and 15.361 Bcf of gas (approximately 9.018 million BOE) and a $69.775 million standardized measure. These measures and asset scopes are not interchangeable; confirm the applicable reserve report and transaction assumptions.
- Controls disclosure: The filing says management concluded disclosure controls were effective and also states that internal controls over financial reporting “were still not effective,” despite an adjacent statement that management believed them effective. The inconsistency should be checked against the full controls discussion and any later filings.
Most important facts for investors to verify
- Current debt balances, cash availability, covenant compliance, and actual net proceeds obtainable from the remaining senior facility.
- Whether the 2015 GGE acquisition and MIEJ settlement delivered the reported production, acreage, liability reduction, and equity effects, and how these were reflected in subsequent financial statements.
- The status and final terms, share issuance, financing conditions, and dilution implications of the proposed Dome transaction.
- Which reserve estimate and valuation apply to the company’s post-transaction asset base; reconcile the 15.089 million BOE pro forma figure with the audited year-end supplemental reserve disclosure.
- The status of NYSE MKT stockholders’ equity compliance and the resolution of the conflicting internal-control statements.
- Lease-renewal needs, drilling capital requirements, realized commodity prices, and the company’s ability to fund its plans without further material dilution or refinancing risk.