UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): November 3, 2016 (October 31, 2016)
DAYBREAK OIL AND GAS, INC.
(Exact Name of Registrant as Specified in its Charter)
| Washington | 000-50107 | 91-0626366 |
| (State or other jurisdiction of incorporation) | (Commission File Number) | (IRS Employer Identification No.) |
| 1101 N. Argonne Road, Suite A 211 Spokane Valley, WA |
| 99212 |
| (Address of principal executive offices) |
| (Zip Code) |
Registrant's telephone number, including area code: (509) 232-7674
(Former Name or Former Address if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o
Pre-commencement communication pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 1.01
Entry into a Material Definitive Agreement
On October 31, 2016, Daybreak Oil and Gas, Inc. (OTC PINK:DBRM), a Washington corporation (“Daybreak” or the “Company”), entered into (1) an Asset Purchase Agreement by and among the Company and its Kentucky drilling partner, App Energy, LLC, a Kentucky limited liability company (“App Energy”), as sellers, and Sandy Valley Gas, Inc., a Kentucky corporation, and Eagle Well Service, Inc., a Kentucky corporation, as buyers (the “Asset Purchase Agreement”); and (2) a Fourth Amendment to Amended and Restated Loan and Security Agreement and Consent Agreement (the “Restructuring Agreement”) by and between the Company and Maximilian Resources, LLC (“Maximilian”), the Company’s lender pursuant to an Amended and Restated Loan and Security Agreement, dated as of August 28, 2013, as amended from time to time (the “Daybreak Loan Agreement”).
Asset Purchase Agreement
Pursuant to the Asset Purchase Agreement, effective on October 31, 2016, the Company sold its working interest in its oil and natural gas development operations in the Twin Bottoms Field in Lawrence County, Kentucky, and App Energy sold substantially all of its assets and operations, for a combined purchase price of $4.5 million (such transaction, the “Kentucky Sale”). Of the total purchase price, $4.25 million was paid to Maximilian as part of the transactions pursuant to the Restructuring Agreement and the remaining $250,000 was set aside by Maximilian to provide financing for a proposed joint venture among the Company, App Energy and Maximilian with respect to oil and natural gas assets located in Michigan (the “Michigan Joint Venture”).
Restructuring Agreement
Pursuant to the Restructuring Agreement, in exchange for the proceeds it received from the Kentucky Sale, Maximilian and the Company have agreed to: (1) the deemed payment in full and/or forgiveness of approximately $8.3 million in outstanding indebtedness under the Daybreak Loan Agreement (which includes approximately $5.4 million in indebtedness that was loaned by the Company to App Energy pursuant to the Loan and Security Agreement between the parties dated as of August 28, 2013, as amended from time to time (the “App Loan Agreement”); (2) a commitment by Maximilian to forgive an additional amount of indebtedness under the Daybreak Loan Agreement, currently estimated to be $3.2 million, in the event of the future issuance of senior preferred stock by the Company to it; (3) the deemed payment in full and termination of the App Loan Agreement; (4) the termination and release of all liens, security interests and other interests held by Maximilian or its affiliates in any of the Company’s or App Energy’s Kentucky oil and natural gas assets, including the termination of the overriding royalty interests and net profits interests held by Maximilian and/or its affiliates; (5) amendments to the Daybreak Loan Agreement to suspend principal and interest payments for up to six months and extend the maturity date to February 28, 2020; (6) a commitment by Maximilian to advance up to $250,000 in financing to the Company over the next six months; (7) the pursuit of the Michigan Joint Venture using the $250,000 set aside from the Kentucky Sale.
The parties’ commitments with respect to the Michigan Joint Venture and the issuance of senior preferred stock are subject to certain conditions, including finalizing the acquisition of Michigan assets and the terms of the financing and obtaining the necessary shareholder approvals of the issuance of senior preferred stock. There can be no assurances that the Company will successfully complete the acquisition of assets in Michigan or obtain the necessary approvals for the issuance of senior preferred stock.
Item 1.02
Termination of a Material Definitive Agreement
See discussion in Item 1.01 regarding the termination of the App Loan Agreement, which is incorporated herein by reference.
Item 2.01
Completion of Acquisition or Disposition of Assets
See discussion in Item 1.01 regarding the sale of the Company’s working interest in its oil and natural gas development operations in the Twin Bottoms Field in Lawrence County, Kentucky, which is incorporated herein by reference.
1
Item 9.01
Financial Statements and Exhibits.
(d)
Exhibits.
Number
Exhibit
99.1*
Press Release
*
Filed herewith.
[signature page follows]
2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
DAYBREAK OIL AND GAS, INC.
| By: | /s/ JAMES F. WESTMORELAND |
James F. Westmoreland, President and Chief Executive Officer
Date: November 3, 2016
3
EXHIBIT INDEX
Number
Exhibit
99.1*
Press Release
*
Filed herewith.
4
Exhibit 99.1
Daybreak Oil and Gas, Inc., Announces Restructuring of its Balance Sheet
SPOKANE, Washington, November 3, 2016 -- Daybreak Oil and Gas, Inc. (OTC PINK:DBRM) (“Daybreak” or the “Company”), a Washington corporation, is pleased to announce that it has reached an agreement to restructure its credit facility debt with Maximilian Resources, LLC (“Maximilian”), the Company’s current lender. The restructuring process has begun to take place through a series of transactions which include (i) the sale of its working interest in the Twin Bottoms Field in Lawrence County, Kentucky, (ii) the complete removal of all the Company’s current debt relating to its Kentucky interests, (iii) forgiveness of a certain portion of our credit facility debt, (iv) the removal of App Energy, LLC’s debt and note receivable balance from the Company’s Balance Sheet, (vi) converting a portion of the Company’s debt owed on the Maximilian credit facility to preferred stock subject to future shareholder approval, and (vii) a commitment by Maximilian to provide financing for a new property acquisition in Michigan to replace the Kentucky property.
Sale of Kentucky Working Interest
The Company and its partner App Energy, LLC (“App Energy”) have sold their respective working interests in the Twin Bottoms Field in Lawrence County, Kentucky to a third party for a total amount of $4.5 million. Of the purchase price, $4.25 million dollars in cash has been paid to Maximilian as a pay-down of the Daybreak and App Energy debt, and $250,000 has been set aside to initially fund the new Michigan Project. Also Maximilian has set aside and committed another $250,000 to support cash flow shortfalls that may be experienced by Daybreak in the upcoming months from the absence of Kentucky revenue, while preparing the Michigan project for startup.
New Debt Structure
Below is a table showing the restructured debt balance after the Kentucky property sale and assuming the conversion of a portion of our Maximilian credit facility debt to equity and no other draws on the facility:
| October 31, 2016 loan balance to Maximilian | $ | 17.0 million |
| Removal of App Energy debt |
| (5.4) |
| Removal of all Kentucky debt and forgiveness of debt |
| (2.9) |
| Maximilian conversion to preferred equity |
| (3.2) |
|
|
|
|
| New debt balance | $ | 5.5 million |
The maturity date of the Maximilian credit facility has been extended from August 28, 2017 to February 28, 2020. Monthly interest and principal payments have been suspended for a period of six months until May 1, 2017 with no penalty or interest, or until the first payment date occurring after the first date that the Company receives production revenue from the Michigan project, whichever event occurs first.
Upcoming Michigan Acquisition
Daybreak, App Energy and Maximilian have agreed in principle to enter into a Joint Venture Agreement to develop two shallow oil prospects in Michigan. The Joint Venture Agreement is expected to be completed before the end of November 2016. A lease option has been secured by App Energy. Multiple targets have already been identified through 2-D seismic interpretation. A partial 3-D seismic will be shot in the near future to confirm the 2-D seismic data. Wells in the immediate area of the prospects are typically expected to have 150,000 barrels of recoverable oil. We have identified 16 drilling locations on the acreage. A typical well in the area is estimated to have an initial production rate of 75 - 100 barrels of oil per day with very low decline rates. The target reservoir will be encountered at a depth of 2,500 feet to 3,000 feet. These vertical wells will require no hydraulic fracturing. The first well is expected to be drilled in the first calendar quarter of 2017. The escrowed funds discussed above will be used to acquire the 3-D seismic and to drill the first well.
James F. Westmoreland, President and Chief Executive Officer, commented, “We have had to make some hard choices within our Company however, I believe that this series of restructuring transactions, when they are all completed, will position Daybreak to be able to bring its debt in line with current market conditions, operate, compete and expand our oil reserve base in this current oil price environment. While we believed in the Kentucky project, the economics of continuing to develop the reserves in this price environment were not very attractive considering the well costs and the cost of servicing our debt. We are however, pleased that we have this new opportunity in Michigan where the well costs should be less expensive and our debt service will be more manageable. While expected initial production rates for the Michigan will be less than the Kentucky initial production rates, the decline rate in Michigan is expected to be substantially less than in Kentucky, so recouping our drilling and completion costs will take less time thus giving us a much better rate of return for our shareholders in the current price environment. We continue to operate our East Slopes Field in Kern County, California where our stable production base from our 20 producing wells provides us with a steady dependable cash flow each month. The economics of new drilling in California are not attractive until the oil prices remain steadily above $60 per barrel so we don’t expect any new drilling there in the foreseeable future.”
Daybreak Oil and Gas, Inc. is an independent oil and natural gas company currently engaged in the exploration, development and production of onshore oil and natural gas in the United States. The Company is headquartered in Spokane, Washington with an operations office in Friendswood, Texas. Daybreak owns a 3-D seismic survey that encompasses 20,000 acres over 32 square miles with approximately 6,500 acres under lease in the San Joaquin Valley of California. The Company operates production from 20 oil wells in our East Slopes project area in Kern County, California.
More information about Daybreak Oil and Gas, Inc. can be found at www.daybreakoilandgas.com.
Contact:
Ed Capko Telephone: 815-942-2581
Investor Relations Email: edc@daybreakoilandgas.com
Certain statements contained in this press release constitute “forward-looking statements” as defined by the Securities and Exchange Commission. Such statements can be identified by the use of forward-looking terminology such as “believe,” “expect,” “may,” “should,” “up to,” “approximately,” “likely,” or “anticipates” or the negative thereof. These forward-looking statements are based on our current expectations, assumptions, estimates and projections for the future of our business and our industry and are not statements of historical fact. Such forward-looking statements include, but are not limited to, statements about our expectations regarding our financing, our future operating results, our future capital expenditures, our expansion and growth of operations and our future investments in and acquisitions of oil and natural gas properties. We have based these forward-looking statements on assumptions and analyses made in light of our experience and our perception of historical trends, current conditions, and expected future developments. However, you should be aware that these forward-looking statements are only our predictions and we cannot guarantee any such outcomes. Future events and actual results may differ materially from the results set forth in or implied in the forward-looking statements. The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: general economic and business conditions; exposure to market risks in our financial instruments; fluctuations in worldwide prices and demand for oil and natural gas; fluctuations in the levels of our oil and natural gas exploration and development activities; our ability to find, acquire and develop oil and natural gas properties, including the ability to develop the East Slopes Project and Michigan prospects; risks associated with oil and natural gas exploration and development activities; competition for raw materials and customers in the oil and natural gas industry; technological changes and developments in the oil and natural gas industry; legislative and regulatory uncertainties, including proposed changes to federal tax law and climate change legislation, and potential environmental liabilities; our ability to continue as a going concern; and our ability to secure additional capital to fund operations. Additional factors that may affect future results are contained in our filings with the Securities and Exchange Commission (“SEC”) and are available at the SEC’s web site http://www.sec.gov. Daybreak Oil and Gas, Inc. disclaims any obligation to update and revise statements contained in this press release based on new information or otherwise.