PEDEVCO Corp. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Financial statements are unaudited. PEDEVCO is an early-stage oil and gas company focused on U.S. shale assets, with interests in the Niobrara, Eagle Ford and Mississippian plays and strategic ambitions in Asia.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Oil and gas revenue | $156,146 | $157,665 | $425,213 | $157,665 |
| Operating expenses | $1,928,053 | $518,455 | $3,480,910 | $1,153,207 |
| Operating loss | $(2,054,208) | $(324,705) | $(3,423,299) | $(987,028) |
| Net loss | $(2,432,931) | $(323,209) | $(3,914,254) | $(985,246) |
| Loss per share, basic and diluted | $(0.17) | $(0.05) | $(0.30) | $(0.17) |
For the six-month period, revenue increased about 170% year over year, but losses widened substantially. Higher SG&A, lease operating costs, DD&A, equity-method losses and interest expense contributed. Q2 revenue was nearly flat year over year. The filing does not provide a clear consolidated gross margin measure.
- Six-month SG&A was $2.55 million versus $1.09 million, primarily reflecting higher professional and legal fees and stock-based compensation.
- Six-month lease operating costs rose to $389,044 from $47,835; management attributed much of the increase to workovers on legacy Blast wells.
- Six-month interest expense was $606,682, versus none in the comparable 2012 period.
- The company recorded $88,503 of oil and gas property impairment and a $200,000 loss on an expired Mississippian acreage option.
Cash flow, balance sheet and funding
- Cash was $1.77 million at June 30, 2013, down from $2.48 million at December 31, 2012. Six-month operating cash use was $2.71 million, investing cash use was $5.95 million, and financing provided $7.96 million.
- Total assets were $17.64 million; total liabilities were $14.50 million, including $8.26 million current liabilities. Working capital was negative by approximately $6.0 million, compared with negative $1.9 million at year-end 2012. Shareholders’ equity was $3.14 million.
- At quarter-end, principal outstanding included $4.0 million of Bridge Notes and $6.17 million owed to related-party lender MIEJ. The Bridge Notes bear 10% interest, include a $400,000 payment-in-kind amount at maturity, and were due by December 31, 2013 or 30 days after a qualifying underwritten offering, whichever came first. They are secured by company assets, subject to MIEJ’s senior lien on Niobrara assets.
- After quarter-end, MIEJ amended its note to extend maturity to August 31, 2014 and remove the financing-triggered maturity provision. The note bears 10% interest and is secured by Niobrara interests.
- On August 12, 2013, PEDEVCO closed a private placement for $22 million of shares and warrants. It received $10 million in cash initially; promissory notes for the remaining $12 million were due by September 11 and December 1, 2013. Related shares and warrants were held in escrow pending payment. Completion of the planned NYSE MKT uplisting was a required condition of the placement.
Operations, outlook and notable items
- Three Niobrara wells were producing; reported average production for the prior quarter was approximately 257 gross BOE per day, or 70 net BOE per day. Two additional Niobrara wells were drilled in June and July 2013; one was flowing back and being tested and the other was planned for completion in early August.
- PEDEVCO acquired and operates a large working interest in approximately 7,006 gross acres in the Kansas Mississippian Lime play. Management anticipated drilling its first well there in Q3 2013. The acreage assignment’s primary term expires December 29, 2014, with drilling conditions governing possible extension and retention.
- The company let an option to acquire additional Mississippian acreage expire after paying $200,000 of a nonrefundable $300,000 fee; the $200,000 was expensed. It cautioned that any later acquisition might not be available on acceptable terms.
- Management estimated approximately $3.1 million of capital expenditures for July–December 2013 and expected that cash on hand, operating cash flow and the initial $10 million placement funding would support operations for at least 12 months. Management also said additional capital may be needed to complete the full drilling program. Plans included development, acquisitions, debt repayment and working capital; up to $20 million could be directed to potential Asian oil and gas acquisitions.
- Funding and execution risks include continuing operating losses, negative working capital, reliance on related-party financing, drilling and commodity-price uncertainty, and lease expirations. The company reported that all oil revenue came from two customers and all gas revenue from one customer during the first half of 2013.
- Disclosure controls were deemed ineffective at June 30 because of material weaknesses, including inadequate written accounting and reporting procedures and ineffective period-end controls. The company had restated prior financial statements for several accounting and presentation matters and said it was developing improved controls.
- No pending legal proceedings were reported. A 1-for-3 reverse stock split took effect in April 2013; share and per-share figures are presented on a retroactively adjusted basis.
Most important facts for investors to verify
- Whether the remaining $12 million placement proceeds were paid by their stated deadlines, and whether the NYSE MKT uplisting condition was satisfied.
- How the placement proceeds affected liquidity, short-term liabilities and the need for further financing.
- Progress, costs and results of planned Mississippian and Niobrara drilling, including the tested production of the new Niobrara wells.
- Whether management remediated the disclosed material weaknesses and whether future filings avoid further restatements.
- Related-party balances, interest accruals, collateral priority and repayment terms for MIEJ and other affiliate transactions.
- The filing gives differing Mississippian net-acreage figures in different sections; verify the final working-interest acreage and lease obligations.