Business context and reporting period
This is Blast Energy Services, Inc.’s Form 10-K for the fiscal year ended December 31, 2011, filed April 16, 2012; it is not a standalone fourth-quarter report. The filing identifies the registrant as Blast Energy Services, not PEDEVCO Corp. The company proposed changing its name to PEDEVCO in connection with a pending merger with Pacific Energy Development Corp. (PEDCO).
Blast was pursuing oil and gas production, principally through three producing wells in Texas, while its applied fluid jetting (AFJ) equipment remained idle. Satellite communications had been sold. The planned California Guijarral Hills well did not produce oil in tests, and the company reduced its working interest there to 25% in December 2011.
Financial and operating highlights
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $446,526 | $109,443 |
| Operating loss | $3.09 million | $1.46 million |
| Net loss | $4.15 million | $1.52 million |
| Net loss attributable to common shareholders | $4.39 million | $1.76 million |
| Cash used in operating activities | $461,532 | $508,548 |
| Cash used in investing activities | $1.88 million | $655,000 |
| Cash provided by (used in) financing activities | $546,565 | ($125,221) |
- Oil sales were 5,031 barrels at an average $93.04 per barrel; reported production cost was $53.82 per barrel. Revenue growth largely reflects that 2010 included only three months of production from the Texas properties.
- A $1.64 million oil-and-gas impairment, primarily associated with the unsuccessful Guijarral Hills well, and a rise in interest expense to $1.06 million from $98,000 contributed to the larger loss. SG&A rose to $1.47 million from $764,000, including $643,000 of option and warrant expense.
- Year-end cash was $19,428; current assets were $66,407 against current liabilities of $2.46 million, a working-capital deficit of approximately $2.40 million. Total assets were $1.88 million, total liabilities $3.63 million, and stockholders’ deficit $1.74 million.
- Balance-sheet notes payable included $1.27 million of current notes, net of discount, and a $1.12 million related-party note classified as long term. The lender held a first-priority security interest in substantially all company assets.
- Proved oil reserves declined to 44,600 barrels from 75,000, including a 25,500-barrel downward revision and 5,000 barrels of production. Year-end PV-10 was $925,230, down from $1.13 million.
Material changes, outlook and risks
- The company received the final $2 million Quicksilver settlement installment in September 2011 ($1.44 million net of legal fees); proceeds were largely applied to lender debt, interest and an exit fee. The satellite business sale was completed for $50,000, received in January 2011.
- The auditor’s report raises substantial doubt about Blast’s ability to continue as a going concern. Management reported limited cash, continuing losses and a need for additional capital; the statements contain no adjustments for a possible inability to continue.
- In January 2012, Blast agreed to merge with PEDCO, subject to approvals and other closing conditions. PEDCO shareholders were expected to own approximately 95% of the post-merger company, leaving pre-merger Blast shareholders approximately 5%. The transaction contemplated a reverse split estimated at 1-for-100 to 1-for-110, plus conversions of existing preferred stock and certain debt into shares.
- The merger was not assured. The filing warns that, if it failed, amounts owed to PEDCO and the secured lender could become payable on short notice, and Blast said it lacked cash to repay them and could have to curtail operations, liquidate assets or seek bankruptcy protection. Merger-related advances also affected the share limit and proposed reverse-split terms.
- Under the January 2012 lender amendment, the secured notes’ rate increased from 10% to 18% beginning February 2, 2012, and maturities were extended subject to specified merger-related dates and conditions. Up to 50% of outstanding lender debt could be converted after the merger at the lender’s option, subject to limits.
- AFJ had not been commercialized and required mechanical repairs and funding; its patent application had not been granted. Oil-price volatility, reserve-estimation uncertainty, operating and environmental hazards, financing availability, dilution and the thin OTC market were additional disclosed risks.
Important facts for investors to verify
- Whether the PEDCO merger closed, its final terms, share ownership, reverse-split ratio and treatment of advances and debt conversions.
- Current cash, liquidity, debt balances, accrued interest, lender maturity/default status and the status of liens on company assets.
- Whether operations generated sufficient cash after year-end, and the latest production, realized prices, operating costs and reserve revisions for the Texas properties.
- The final accounting and remaining carrying value of the Guijarral Hills interests and AFJ equipment, including any further impairment or work plans.
- Potential dilution from warrants, options, preferred stock and the contemplated debt conversions; confirm the final share count and capitalization after any merger-related transactions.