PEDEVCO CORP. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited consolidated results. The filing presents Pacific Energy Development as the continuing accounting entity following the merger. Comparisons are with Q1 2013 unless otherwise noted.
Business context
PEDEVCO acquires, explores, develops and produces oil and gas, primarily in U.S. shale plays. Its core U.S. areas were the DJ Basin in Colorado and the Mississippian Lime in Kansas. In March 2014, it acquired the Wattenberg properties from Continental Resources and sold RJ Corp. a 50% interest in those assets, its Mississippian entity, and its planned Asia Sixth interest as part of financing arrangements. The company also held a 20% equity-method interest in Condor and had a proposed Kazakhstan acquisition subject to approvals and financing.
Financial results and position
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior year-end |
|---|---|---|
| Oil and gas revenue | $1.01 million | $269,000 in Q1 2013 |
| Operating expenses | $3.48 million, including $606,000 lease operating costs and $2.36 million SG&A | $1.55 million in Q1 2013 |
| Net loss | $13.17 million; $0.50 per basic and diluted share | $1.48 million; $0.17 per share in Q1 2013 |
| Cash from operations | $(2.17) million | $(1.68) million in Q1 2013 |
| Cash from investing | $(14.44) million | $(4.78) million in Q1 2013 |
| Cash from financing | $18.48 million | $7.96 million in Q1 2013 |
| Cash | $8.48 million | $6.61 million at December 31, 2013 |
| Total assets | $44.37 million | $25.80 million at December 31, 2013 |
| Total liabilities | $34.24 million; current liabilities $15.68 million | $14.91 million total liabilities at December 31, 2013 |
| Working capital | Negative $4.82 million | Negative $7.86 million at December 31, 2013 |
| Shareholders’ equity | $10.13 million | $10.89 million at December 31, 2013 |
The filing does not report a gross margin; revenue less lease operating costs was not presented as a margin measure. Revenue growth reflected the Wattenberg acquisition and White Hawk operations. The substantially larger net loss included $5.66 million of losses on oil-and-gas property sales, $1.03 million on the Mississippian investment sale, $1.94 million on the Asia Sixth interest sale, $1.09 million of interest expense, and a $763,000 debt-extinguishment loss. SG&A increased by $1.10 million, mainly from stock-based compensation and legal fees.
Investing cash outflow included approximately $28.5 million paid for the Continental acquisition, partly offset by asset-sale proceeds. Financing included $34.5 million face amount of initial secured notes and a $6.58 million net public stock offering, offset by financing costs and repayments. The balance sheet reflects substantial discounts and premiums on debt; carrying values therefore differ from face amounts.
Material changes, financing and outlook
- Wattenberg acquisition: Closed March 7 for an adjusted purchase price of $28.52 million, plus assumed suspense payables of approximately $845,000. PEDEVCO conveyed 50% of the acquired interests to RJ Corp. The company reported 13,995 net acres in its operating discussion and described 40 acquired wells.
- Senior secured facility: Initial notes had $34.5 million face value, 15% annual interest, a March 2017 maturity and first-priority security over substantially all company and subsidiary assets, with subsidiary guarantees. The facility provided up to another $15.5 million, subject to conditions and approved uses. Monthly principal prepayments equal the lesser of the outstanding balance or 25% of specified prior-month net revenues. The filing reports net initial proceeds of about $27.39 million after discounts, fees and expenses.
- Other debt: Bridge notes had approximately $2.375 million deferred principal outstanding and were subordinated to the senior facility; eligible amounts could convert to common stock at specified prices. MIEJ-related debt was $6.17 million, plus $738,000 accrued interest, with an August 2014 stated maturity; repayment was restricted by subordination arrangements. The balance sheet classifies the related-party notes as current.
- Capital plan: Management planned up to $22 million of 2014 capital expenditures, excluding capitalized interest and G&A, and approximately 16 gross wells (about six net to PEDEVCO). It expected cash, operating cash flow and the remaining debt facility to fund operations for 12 months, while acknowledging dependence on financing and operating outcomes. The company could defer spending if prices fell, costs rose or financing was unavailable. No formal earnings or production guidance was provided.
- Operating and transaction risks: Management reported Wattenberg operated-well production averaging approximately 434 gross BOE/day over two weeks after acquisition, excluding two wells under repair; 504 gross BOE/day was an estimate after repairs. Mississippian leases required at least three horizontal wells by December 29, 2014 to preserve extension options; the filing warned that acreage could expire. The proposed Kazakhstan transaction remained subject to government approvals, production conditions and sufficient financing; commercial production was delayed pending a gas-flaring permit or gas-offtake agreement.
- Unusual and governance items: A prospective investor failed to pay a promised $10 million; related escrowed shares and warrants were rescinded and the note cancelled. The company recognized no gain or loss. Management concluded disclosure controls were ineffective due to material weaknesses in written accounting/reporting procedures and period-end reporting controls. No material legal proceedings were reported.
Most important facts for investors to verify
- Availability and conditions for drawing the remaining $15.5 million, net proceeds after fees, debt-service burden and revenue-sweep mechanics.
- Progress on the 2014 drilling program, well repairs, production, lease retention and associated capital requirements.
- Whether the Kazakhstan approvals, gas permit or offtake agreement, production targets and remaining financing are achieved.
- Reconciliation of reported debt face amounts, discounts, premiums, maturities and restrictions on repayment or conversion.
- Collection and recoverability of related-party receivables and loans, customer concentration, and progress in remediating the disclosed control weaknesses.