PEDEVCO Corp. (then Blast Energy Services, Inc.) — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are to December 31, 2011. The filing is by Blast Energy Services, Inc., which planned to change its name to PEDEVCO Corp. as part of a proposed merger with Pacific Energy Development Corp. (PEDCO). The merger had not closed as of the filing.
Business context and financial performance
The company was pursuing oil and gas production, with additional potential from its applied fluid jetting (AFJ) technology. Q1 revenue came from oil and gas production; Down-hole Solutions reported no revenue. Its North Sugar Valley properties were producing, while the Guijarral Hills test well had not produced oil from the zones tested. The AFJ rig was in storage, with a restart dependent on liquidity.
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $118,214 | $106,527 |
| Cost of revenues | $67,353 | $75,876 |
| Gross profit | $50,861 | $30,651 |
| SG&A | $190,981 | $426,514 |
| Operating loss | $(176,244) | $(430,779) |
| Interest expense | $(189,391) | $(113,775) |
| Net loss | $(365,635) | $(548,240) |
| Net loss attributable to common shareholders | $(425,471) | $(607,418) |
| Basic and diluted loss per share | $(0.01) | $(0.01) |
Gross margin was approximately 43% in Q1 2012 versus 29% in Q1 2011. The company attributed the lower operating and net losses mainly to reduced SG&A, particularly the absence of $171,168 in 2011 option and warrant expense, and lower payroll and overhead. Revenue rose about 11%; interest expense increased about 66%, partly reflecting financing-cost amortization and higher borrowing costs. Preferred dividends of $59,836 were deducted in calculating the common shareholders’ loss.
Cash flow, debt and liquidity
- Cash fell to $3,097 from $19,428 at year-end. Current assets were $92,494; current liabilities were $2,818,786, implying negative working capital of approximately $2.7 million.
- Total assets were $1,869,944; total liabilities were $3,980,498; stockholders’ deficit was $2,110,554. Accumulated deficit was $78.6 million.
- Operating cash outflow was $160,343, investing cash flow was nil, and financing provided $144,012, primarily from short-term borrowings. Ending cash was $3,097, down $16,331 for the quarter.
- Current notes payable, net of discount, were $1,561,589; current related-party notes were $106,150. Long-term related-party notes were $1,120,000. Notes payable included substantial secured debt; the lender held a first-priority security interest in substantially all company assets.
- Management stated that the conditions raised substantial doubt about the company’s ability to continue as a going concern. It might need equity, convertible instruments or third-party financing; no assurance of availability or acceptable terms was given.
Material changes, outlook and risks
- Proposed PEDCO merger: Under the January 13, 2012 agreement, PEDCO holders were expected to receive up to approximately 95% of the combined company. The proposed transaction involved preferred-stock and debt conversions, a reverse split, and a planned name change. Closing remained subject to approvals and other conditions; the parties were discussing an extension beyond June 1, 2012.
- Debt and dilution arrangements: Approximately $1.487 million owed to BMC and Clyde Berg was slated for conversion at $0.02 per pre-reverse-split share. Other specified obligations totaling approximately $666,849 were also approved for conversion at that price, subject to conditions. The lender had a right to convert up to 50% of certain outstanding loans at $0.75 per post-reverse-split share after June 9, 2012, subject to limits and other terms.
- Borrowing terms: The secured lender’s note maturity was extended under specified merger-related dates; starting February 2, 2012, the stated interest rate increased from 10% to 18% annually, and the 12% exit fee was increased by $15,000. PEDCO had advanced funds for operating and merger expenses. The filing estimated unpaid advances at closing of about $437,500, which could reduce the legacy shareholders’ share under the merger terms. If the merger failed, Blast said it could not repay PEDCO and the lender and might have to curtail or abandon operations, liquidate assets, seek bankruptcy protection or cease SEC reporting.
- Operating and execution risks: The Guijarral Hills test well failed to produce oil from the tested zones; further work had not been decided. AFJ operations had previously experienced mechanical failures and would not restart until liquidity permitted. The filing provided no formal earnings or production guidance.
- Subsequent event: In May 2012, Trident-related finder fees were reduced from $119,990 to $47,960 following settlement payments; the company expected to record a $62,030 gain from the reduction in payables.
- Other disclosures: The filing reported no material change in risk factors other than the going-concern risk. Management concluded disclosure controls were effective as of March 31, 2012, and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the PEDCO merger closed, its final terms and dilution, and the status of the planned reverse split and corporate name change.
- Current cash runway, funding sources, and the company’s ability to meet obligations given minimal cash, negative working capital and the going-concern warning.
- Outstanding secured debt, revised maturity and interest terms, exit fees, collateral, and any subsequent repayment, conversion or default developments.
- Final treatment of PEDCO advances and other debt conversions, including the resulting ownership percentages and share count.
- Production and reserve updates for North Sugar Valley, any further Guijarral Hills testing, and whether AFJ operations resumed.