PEDEVCO CORP. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparative period is Q1 2016. Amounts are in U.S. dollars; financial statement amounts are generally in thousands unless noted. PEDEVCO is an oil and gas exploration and production company focused on its Denver-Julesburg Basin assets in Colorado.
Business context and operating results
- At quarter-end, the company reported approximately 11,129 net acres and interests in 61 gross (17.4 net) wells. It reported production of 14,998 BOE, down from 25,841 BOE in Q1 2016.
- Oil and gas revenue was $734,000, compared with $582,000. Management attributed the increase primarily to higher crude oil prices, partly offset by lower production volumes.
- Lease operating costs were $330,000 versus $264,000, with the increase attributed primarily to workover expenses. Exploration expense was zero, compared with $117,000.
Financial performance, cash flow and liquidity
| Metric | Q1 2017 | Q1 2016 or comparison |
|---|---|---|
| Operating expenses | $1.810 million | $3.074 million |
| Operating loss | $1.076 million | $2.492 million loss |
| Interest expense | $3.096 million | $4.086 million |
| Net loss | $4.172 million | $6.578 million |
| Basic and diluted loss per share | $0.76 | $1.40 |
| Net cash used in operating activities | $76,000 | $406,000 |
| Net cash used in financing activities | $24,000 | None |
- SG&A fell to $800,000 from $1.416 million, mainly due to lower payroll, stock compensation and other costs, and recovery of a prior doubtful-account allowance. DD&A decreased to $680,000 from $1.277 million, primarily reflecting lower production.
- Cash was $559,000 at March 31, 2017, down from $659,000 at year-end 2016. Current assets were $1.152 million and current liabilities $3.147 million; the company reported a $2.0 million working capital deficit.
- Total assets were $57.978 million; total liabilities were $63.830 million; shareholders’ deficit was $5.852 million. Net oil and gas properties were $56.737 million.
- Debt includes senior secured notes accruing interest at 15%, subordinated related-party debt, a $4.925 million MIEJ note, and convertible Bridge Notes. The balance sheet reports $29.301 million and $13.965 million of secured notes, net of discounts, plus $10.482 million of subordinated related-party notes and $588,000 of Bridge Notes, net of premium. The filing reports $43.677 million of outstanding Tranche B principal at March 31.
Changes, outlook and material risks
- Net loss narrowed by $2.406 million year over year, primarily due to lower operating and interest expenses. Revenue rose despite the substantial year-over-year decline in reported production.
- Management estimated approximately $11 million of 2017 funding needs to execute its business plan and planned up to $11.1 million of capital expenditures, targeting approximately 3.3 net wells. Funding plans included operating cash flow, cash on hand, up to $2 million under the at-the-market offering, and approximately $18 million potentially available under the senior facility. Further senior funding is discretionary to lenders and, under the filing’s description, requires matching funds.
- Management and the auditor-related financial statement disclosure identify substantial doubt about the company’s ability to continue as a going concern within one year. The company said it was negotiating financing; failure to obtain it could materially affect operations and obligations and could result in an estimated $28 million impairment of oil and gas properties.
- Senior debt is subject to a net-revenue sweep after specified operating costs, interest and capped monthly G&A. Interest on Tranche B notes accrued at 15%; amounts accrued through December 31, 2017 were deferred under the terms described in the filing. The company reported that RJC had not provided required funding under its agreement and was in default of those funding obligations; the company had not cancelled pledged preferred shares as of the filing date.
- The contemplated GOM merger remained conditional and its timing uncertain. Management cited financial distress, investigations, liquidation and bankruptcy proceedings involving GOM’s parent, as well as unresolved asset-debt and closing conditions.
- Disclosure controls and procedures were concluded to be ineffective as of March 31, 2017. The filing reported no material change in internal control over financial reporting during the quarter.
- After quarter-end, the company completed a 1-for-10 reverse stock split effective April 7, 2017, and reported a small $1,000 gross stock sale under its ATM agreement on April 19. Reported share and per-share figures reflect the reverse split as described in the filing.
Important facts for investors to verify
- Whether the company secures the financing needed for its 2017 plan and satisfies any matching-fund requirements for additional senior borrowing.
- Cash runway, near-term obligations and the assumptions supporting management’s going-concern assessment, including the potential property impairment.
- Senior debt balances, deferred interest, net-revenue sweep mechanics, lender discretion and the status of RJC’s undelivered funding and pledged preferred shares.
- Production trends and the extent to which revenue depends on higher oil prices; one customer accounted for 63% of Q1 2017 oil and gas revenue.
- Whether the GOM transaction can meet its conditions and what debt, assets and financing would be included if it proceeds.
- Remediation of ineffective disclosure controls and the company’s ability to meet NYSE MKT continued-listing requirements following the reverse split.