PEDEVCO Corp. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2013; comparisons are with the three and nine months ended September 30, 2012, and balance-sheet figures with December 31, 2012. PEDEVCO is an early-stage oil and gas company focused on U.S. shale assets, with a proposed Kazakhstan acquisition. Financial statements are unaudited.
Financial results and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Oil and gas revenue | $198,768 | $175,183 | $623,981 | $332,848 |
| Operating loss | $(1.63) million | $(8.01) million | $(5.05) million | $(9.00) million |
| Net loss | $(2.07) million | $(8.47) million | $(5.98) million | $(9.45) million |
| Net loss per share, basic and diluted | $(0.11) | $(0.49) | $(0.40) | $(0.56) |
- Revenue and operations: Q3 revenue rose about 13% year over year; nine-month revenue rose about 87%. Direct company revenue remained small. Management reported five producing Niobrara wells and stated that PEDEVCO’s net share of production and revenue from equity-method ventures Condor and White Hawk is not included in consolidated revenue.
- Expenses and margins: SG&A was $1.50 million in Q3 and $4.05 million for nine months, up from $1.02 million and $2.11 million, respectively. The filing attributes increases chiefly to stock-based compensation and professional fees. Nine-month lease operating costs were $512,034 against $623,981 of revenue. The filing does not present a consolidated gross-margin measure.
- Cash flow: Nine-month operating cash use was $3.37 million; investing cash use was $16.81 million; financing provided $19.97 million. Cash declined $214,732 to $2.26 million. An additional $2.00 million was restricted cash, so cash plus restricted cash was approximately $4.26 million.
- Liquidity and debt: Current assets were $4.65 million and current liabilities $14.63 million, a working-capital deficit of approximately $9.98 million. Total liabilities were $14.69 million. Current notes payable, net of discounts, totaled about $9.96 million, including $2.79 million of notes and $7.16 million of related-party notes. The $4.0 million secured Bridge Notes carried 10% interest and were due December 31, 2013; the related-party MIEJ note had $6.17 million principal outstanding, bore 10% interest, and was due in August 2014. The filing states that available cash and projected operating cash flow would not fund the next 12 months’ operations and debt obligations.
- Balance-sheet changes: Total assets increased to $28.77 million from $11.15 million, largely reflecting oil and gas property additions, related-party notes receivable, and an $8.00 million deposit for the proposed Kazakhstan acquisition. Shareholders’ equity was $14.08 million, and accumulated deficit was $18.76 million.
Material changes and significant developments
- The company completed an $22 million private placement in August, issuing 7.33 million common shares and warrants. By September 30, it had received $12 million in cash; the remaining $10 million from the lead investor was due December 1, 2013 under a full-recourse note and was recorded as a stock subscription receivable. The company’s reported shares outstanding rose to 22.53 million at September 30; 22,848,914 were outstanding November 14.
- PEDEVCO acquired an average 98% working interest in approximately 6,885 net Mississippian Lime acres in Kansas. Management anticipated drilling its first well in Q4 2013. Lease assignments have a primary term ending December 29, 2014, with a three-horizontal-well condition for an extension option.
- The company signed an agreement to acquire approximately 51% of Asia Sixth, which may provide an indirect beneficial interest of approximately 34% in Kazakhstan’s Aral asset. Closing was anticipated in September 2014, subject to regulatory approvals, other conditions, and financing. The agreement provides for additional closing payments of $0, $15 million, or $20 million depending on specified production tests. The $8 million deposit recorded at quarter-end was increased by a further $2 million on October 1.
- The NYSE MKT listing began September 10, 2013, and the company completed a 1-for-3 reverse stock split in April. Q3 net loss improved substantially year over year primarily because the 2012 quarter included an $6.82 million goodwill impairment; this was not a comparable improvement in underlying profitability.
Outlook, risks, and unusual items
- Management planned up to $4.5 million of capital expenditures from October through December 2013, subject to obtaining additional financing. It anticipated continued losses and stated that the company would need additional debt or equity financing, asset sales, or farm-outs to fund operations, planned investment, and debt repayment. No production or earnings guidance was provided.
- The financial statements disclose substantial doubt about the company’s ability to continue as a going concern, citing operating losses, negative working capital, and dependence on further financing.
- The Kazakhstan transaction is conditional on government approvals and financing; the unpaid $10 million private-placement note was a key funding dependency. The filing says the deposit is refundable if the transaction fails, except in specified circumstances involving the company’s uncured breach.
- Lease expirations led to $307,093 of nine-month oil and gas property impairment. A separate $200,000 loss resulted when the company allowed an option to acquire additional Mississippian acreage to expire. Concentrated sales are another exposure: three customers represented all oil revenue and one customer all gas revenue for the nine-month period.
- Management reported ineffective disclosure controls because of material weaknesses, including insufficient written accounting and reporting procedures and ineffective period-end reporting controls. The company had restated prior financial statements and said it was developing and documenting improved controls.
- Other notable items include $1.21 million of nine-month stock-based compensation and $1.10 million of interest expense. The filing reports no pending legal proceedings and no defaults upon senior securities.
Important facts for investors to verify
- Whether the lead investor paid the outstanding $10 million subscription note by its December 1, 2013 due date, and how any nonpayment affected the issued shares and warrants.
- Cash availability after restricted funds, the maturity and repayment terms of the Bridge Notes, and the company’s ability to refinance or repay obligations.
- Progress, approvals, funding requirements, refund conditions, and production-test results for the Kazakhstan acquisition and its contingent closing payments.
- Actual performance and economics of the Niobrara and Mississippian programs, including the planned Mississippian drilling, lease retention, and any subsequent production data.
- Remediation of the disclosed material weaknesses and reliability of future financial reporting, including the treatment of related-party balances and equity-method interests.