PEDEVCO Corp. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; filed November 9, 2016. PEDEVCO is an oil and gas exploration, development and production company focused on the Denver-Julesburg Basin in Colorado. At quarter-end it reported approximately 11,556 net acres and interests in 61 gross wells (17.4 net).
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Oil and gas revenue | $1.218 million | $1.318 million | $3.003 million | $4.593 million |
| Operating income (loss) | $(0.426) million | $(1.803) million | $(2.760) million | $(7.172) million |
| Net loss attributable to common shareholders | $(3.514) million | $(5.455) million | $(13.526) million | $(15.081) million |
| Basic and diluted loss per share | $(0.07) | $(0.12) | $(0.28) | $(0.37) |
| Cash used in operating activities | Not provided for quarter | Not provided for quarter | $6.094 million | $7.476 million |
- For the nine months, production was 74,022 barrels of oil and 135,111 Mcf of gas, or 96,541 BOE. Management attributed lower revenue chiefly to declining production and lower oil prices.
- Q3 operating expenses were $1.644 million; nine-month operating expenses were $5.763 million. No operating margin percentage was stated.
- At September 30, cash was $0.692 million; current assets $1.380 million; total assets $61.602 million; current liabilities $3.095 million; total liabilities $57.598 million; and shareholders’ equity $4.004 million. The company reported a $1.7 million working-capital deficit.
- Cash declined by $0.446 million over the nine months. Financing provided $5.722 million, principally from notes payable; investing used $0.074 million.
- Interest expense was $10.766 million for the nine months. The filing reports $7.926 million of unamortized debt discount, materially affecting reported interest expense.
Changes versus prior comparable periods
- Nine-month revenue fell $1.590 million (about 35%); oil and gas volumes also declined. Q3 revenue decreased $0.100 million year over year.
- Nine-month net loss narrowed by $1.555 million, and Q3 net loss narrowed by $1.941 million. Lower SG&A and depletion helped; nine-month other expense rose to $10.766 million from $7.913 million, partly because 2015 included a $2.192 million gain on debt extinguishment.
- Nine-month SG&A decreased to $3.318 million from $5.672 million, primarily due to lower stock compensation and payroll. Exploration expense also declined, reflecting reduced activity amid price volatility and capital constraints.
- Liabilities rose to $57.598 million from $45.740 million at year-end 2015, while equity fell to $4.004 million from $15.037 million. Common shares outstanding increased to 49,849,297 from 45,236,497.
Debt, liquidity, outlook and risks
- In May 2016, the company restructured senior debt into Tranche A and B notes, generally bearing 15% interest and maturing in 2019. Tranche B interest through December 31, 2017 is deferred and added to principal; a net-revenue sweep directs available monthly cash after specified expenses to debt repayment, first to Tranche A. The company paid $499,000 of principal under the sweep during the nine months.
- The facility provides for up to $25.96 million of Tranche A funding. The initial funding was approximately $6.422 million; additional advances are subject to lender discretion. The filing says the company had not received any of the scheduled RJC funding advances through September 30, 2016. Related-party junior debt was extended to 2019 and is subordinated to the new senior notes.
- Management planned approximately $35.6 million of drilling, completion and acquisition spending for about 8.5 net wells over the next 12 months, with $5.1 million already deployed for interests in 2.1 net wells. It estimated that a further $11–12 million from other sources would be needed to complete the plan. If financing is unavailable, the program may be extended into 2017. No formal earnings or production guidance was provided.
- Management cautioned that the revenue sweep limits cash available for development and operations, additional lender advances are discretionary, and future financing may be unavailable or dilutive. The company also reported an at-the-market offering of up to $2 million; no shares had been sold under it as of the filing date.
- The proposed GOM merger remained conditional. GOM reported approximately $7.5 million deposited in escrow on October 19, 2016 to pay down accounts payable, but closing remained subject to conditions, potentially including bankruptcy-court approval. The filing identifies financial distress, investigations and bankruptcy proceedings involving GOM’s parent as risks.
- NYSE MKT notified the company that it must complete a reverse stock split by May 3, 2017 to address its low share price or risk delisting. The filing also notes customer concentration: one customer accounted for 51% of nine-month 2016 oil and gas revenue.
- An unusual vendor settlement resolved approximately $2.6 million owed to Liberty through $750,000 cash and 2.45 million shares, producing a $1.282 million gain. Management said there were no material legal proceedings and reported disclosure controls as effective.
Important facts for investors to verify
- Whether the company can fund the planned drilling program, including availability and conditions on remaining senior-facility advances and other financing.
- Cash needs under the net-revenue sweep, debt balances and deferred interest accruals, given low cash and the working-capital deficit.
- Progress and closing conditions for the GOM merger, including the status and use of the escrowed funds.
- Compliance with NYSE MKT listing requirements and the timing, approval and effect of any reverse stock split.
- Production trends, commodity-price exposure and customer concentration; also reconcile the filing’s production discussion, which gives 2015 nine-month revenue as $4.623 million in one table versus $4.593 million in the financial statements and MD&A.