PEDEVCO CORP. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Financial statements are unaudited. PEDEVCO is an oil and gas exploration and production company focused on its Denver-Julesburg Basin assets in Colorado.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / prior balance date |
|---|---|---|
| Oil and gas revenue | $644,000 | $734,000 |
| Operating expenses | $1.642 million | $1.810 million |
| Operating loss | $998,000 | $1.076 million |
| Interest expense | $3.236 million | $3.096 million |
| Net loss | $4.234 million | $4.172 million |
| Net loss per share | $0.58 | $0.76 |
| Net cash used in operating activities | $41,000 | $76,000 |
| Cash at period end | $876,000 | $917,000 at Dec. 31, 2017 |
| Total assets | $35.831 million | $36.401 million at Dec. 31, 2017 |
| Total liabilities | $77.022 million | $73.541 million at Dec. 31, 2017 |
| Working capital | Deficit of approximately $2.3 million | Deficit of approximately $2.0 million at Dec. 31, 2017 |
Revenue fell about 12%, primarily because of lower production. Oil, gas and NGL volumes were 9,472 barrels, 17,551 Mcf and 11,198 Mcf, respectively; total production was 14,264 BOE, down from 18,302 BOE in Q1 2017. Operating costs remained above revenue. Net loss increased modestly, principally because interest expense rose. Operating cash use was limited in part by noncash interest and debt-discount amortization and increased accrued expenses.
At March 31, the balance sheet reported $34.359 million of net oil and gas properties and a shareholders’ deficit of $41.191 million. Current assets were $1.387 million versus current liabilities of $3.735 million. The filing reports substantial secured and subordinated debt, including $35.821 million of secured notes and $16.543 million of related-party secured notes, both net of debt discount. The company also disclosed $49.669 million of outstanding Tranche B principal and $11.831 million outstanding under the related-party RJC subordinated note. These disclosed balances have different presentation bases and should not be treated as directly equivalent.
Material changes and operating developments
- Revenue declined $90,000 year over year as production volumes decreased from natural well decline and periodic shut-ins for workovers.
- Lease operating costs declined $18,000; SG&A declined $62,000, mainly due to lower stock-based compensation; and DD&A declined $98,000, largely with lower production.
- Interest expense increased $140,000, attributed to higher capitalized loan balances. The company recorded no cash interest payments in Q1.
- PEDEVCO held approximately 9,895 net D-J Basin acres and interests in 61 gross (17.4 net) wells at quarter-end. Fourteen gross (12.5 net) operated wells were producing.
- The company adopted the new revenue recognition standard on January 1, 2018; management reported no significant change to revenue timing or valuation and no material cumulative opening adjustment.
Outlook, financing and risks
- Going concern: Management concluded there is substantial doubt about PEDEVCO’s ability to continue as a going concern within one year after issuance of the financial statements. It said approximately $18 million of financing was needed in 2018 and was being actively negotiated. Failure to secure financing could materially affect operations and debt service; the company estimated potential additional oil and gas property impairment of up to $29 million.
- Capital plan: Management planned approximately $8.37 million of 2018 development spending, targeting about 2.1 net wells, and an approximately $34.85 million combined 2018–2019 drilling budget, including 6.4 net wells in 2019. Funding plans include operating cash, cash on hand, up to $1.359 million remaining under the ATM offering (subject to SEC limits), and approximately $18 million potentially available under the senior facility. Further senior advances are at lenders’ sole discretion and require matching funds; the company stated no lender is obligated to fund them.
- Debt and cash sweep: Net oil and gas revenues are subject to a senior-lender sweep after specified operating costs, interest and G&A allowances. The senior notes mature in 2019, and much interest has been deferred or capitalized. The company reported no Q1 principal payment under the revenue sweep. RJC had not provided funding it was obligated to provide, and the company had not canceled the pledged preferred shares available as a remedy.
- Other risks: One customer accounted for 55% of Q1 oil and gas revenue; approximately $618,000 of cash deposits were uninsured. Lease expirations and financing constraints could affect acreage retention and drilling plans; 1,066 net acres expired in Q1 2018. The filing reported no material legal proceedings.
- Management and controls: CEO Michael Peterson was expected to depart May 31, 2018, with Chairman Frank Ingriselli to become CEO and President. Management concluded disclosure controls and procedures were not effective as of March 31, 2018; no material Q1 change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the anticipated financing was secured, on what terms, and whether required matching funds and lender approvals were obtained.
- Debt principal, accrued and deferred interest, maturity and refinancing obligations, including the senior facility’s net-revenue sweep and the RJC and MIEJ notes.
- Whether the proposed drilling budget and well schedule were funded and completed, and how production, prices and workovers affected subsequent revenue and cash flow.
- The basis for management’s going-concern assessment and potential impairment exposure of up to $29 million.
- Remediation of ineffective disclosure controls and any subsequent developments in internal controls.