PEDEVCO CORP. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Financial statements are unaudited. PEDEVCO is an oil and gas exploration, development and production company focused on U.S. shale assets, including the Niobrara, Eagle Ford and newly acquired Mississippian Lime positions. The 2012 comparison reflects the continuing accounting entity, Pacific Energy Development, following the July 2012 reverse acquisition.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Oil and gas revenue | $269,067 | $0 |
| Operating expenses | $1,552,857 | $634,752 |
| Operating loss | $1,369,091 | $662,323 |
| Net loss | $1,481,323 | $662,037 |
| Basic and diluted loss per share | $0.17 | $0.12 |
| Cash used in operations | $1,678,529 | $176,845 |
| Cash used in investing | $4,777,662 | $1,699,357 |
| Cash provided by financing | $7,960,000 | $1,950,615 |
- Cash was $3.98 million at March 31, up from $2.48 million at December 31, 2012. Current assets were $4.43 million and current liabilities $13.75 million, producing negative working capital of approximately $9.32 million.
- Total assets were $19.33 million and total liabilities $13.82 million; shareholders’ equity was $5.51 million. The balance sheet reports $2.52 million of current notes payable and $7.07 million of current related-party notes payable, net of discounts.
- Revenue began from producing assets: $211,000 was attributed to Niobrara wells and $58,000 to legacy Blast operations. Lease operating expense was $119,676; DD&A and accretion were $138,451. SG&A rose to $1.26 million from $634,263, and interest expense was $174,555.
Material changes and operating developments
- On March 25, PEDEVCO completed the Mississippian acquisition: approximately 6,763 net acres at an average 97% working interest, for a stated purchase price of approximately $4.21 million. It also paid two $100,000 installments toward an option for a further approximately 7,043 net acres, exercisable by May 30, 2013 for approximately $4.22 million.
- Oil and gas properties, net, increased to $9.01 million from $3.35 million at year-end, largely reflecting the Mississippian acquisition and drilling costs. The company reported impairment expense of $34,641 for expired leasehold costs.
- Q1 financing included $4.0 million of secured bridge notes and $5.05 million of advances under the MIEJ related-party note. MIEJ principal outstanding was reported at $6.17 million as of March 25, with approximately $330,000 remaining available under its $6.5 million facility.
- Management reported three producing Niobrara wells with aggregate current production of approximately 462 BOE/day gross and 140 BOE/day net. The first Mississippian well was planned for Q2 2013.
Outlook, risks and unusual items
- Management estimated approximately $15.4 million of capital expenditures from May 1 through December 31, 2013. It expected the proposed underwritten public offering, operating cash flow and existing cash would not cover planned expenditures through year-end, and anticipated additional debt financing. The offering’s completion and proceeds were not assured.
- The filing states that accumulated operating losses and negative working capital raise substantial doubt about PEDEVCO’s ability to continue as a going concern. Continued operations depend on additional debt or equity financing and successful development of existing assets.
- The bridge notes bear 10% interest, mature 30 days after a qualifying public offering or December 31, 2013, whichever occurs first, and include a 10% payment-in-kind amount ($400,000 at original principal). They are secured by company assets, subject to MIEJ’s senior lien on Niobrara assets. The MIEJ note also bears 10% interest and is due upon the earlier of December 31, 2013 or a financing of at least $10 million.
- Two customers accounted for 78% of oil revenue and all gas revenue in Q1. Management also identified lease-expiration and drilling execution risks; the Mississippian assignment requires drilling to preserve or extend lease rights.
- Disclosure controls were deemed ineffective due to material weaknesses in written accounting policies and period-end financial reporting controls. The filing says prior 2011 and 2012 annual statements and 2012 interim statements had been restated for several accounting and presentation matters. Management was developing and documenting controls.
- After quarter-end, the company completed a 1-for-3 reverse stock split on April 23, 2013, effective in the marketplace May 9. The filing reports no pending legal proceedings and no defaults upon senior securities.
Important facts for investors to verify
- Whether the proposed public offering closed, how much it raised, and the resulting dilution and funding runway.
- Bridge-note and MIEJ-note repayment timing, total accrued interest and PIK obligations, and the collateral and priority of liens.
- Mississippian option exercise or expiration, subsequent drilling results, costs, and the acreage-retention terms.
- Actual production, realized prices, customer concentration and collection of related-party receivables and loans.
- Progress in remediating the disclosed material weaknesses and whether further restatements or reporting issues arise.