Business Context and Reporting Period
This Form 8-K, filed on March 2, 2011, reports material events for Blast Energy Services, Inc. (Blast) occurring between January 2011 and February 24, 2011. The filing details the entry into a Farmout Agreement for a drilling project in California and the execution of a Note Purchase Agreement to secure funding for the project and repay prior debt.
Key Financial Metrics and Obligations
- Debt Financing: Entered into a Note Purchase Agreement for an aggregate principal amount of up to $2,522,111. The First Note of $2,111,111 was delivered at closing; a Second Note of $411,000 is anticipated.
- Cost of Capital: The First Note carries a 10% annual interest rate, a 10% Original Issue Discount ($211,111), and a potential 12% Exit Fee upon repayment.
- Project Costs: The estimated gross cost for the initial Test Well is approximately $2.5 million. Blast is obligated to pay 66.67% of these costs (approx. $1.54 million), with $1.4 million funded by the First Note.
- Equity Issuance: Sold one share of Series B Preferred Stock for $100 and issued 600,000 shares of common stock to Trident Partners for $6,000.
- Liquidity Covenants: Required to maintain a minimum cash bank balance of $100,000, with flexibility for Test Well funding.
Material Changes and Agreements
Blast entered into a Farmout Agreement with Solimar Energy LLC and Neon Energy Corporation to drill a Test Well in the Guijarral Hills Field. Upon completion, Blast will earn a 50% working interest (38% net revenue interest) in the project. Concurrently, Blast secured financing to fund its share of the drilling costs and repay an outstanding promissory note to Sun Resources Texas, Inc. The company also granted a first-priority security interest in all tangible and intangible assets to the new Investor.
Outlook, Risks, and Contingencies
- Performance Contingencies: If the Test Well fails to produce an average of 350 barrels of oil equivalent per day (BOE/d) over 30 days, Blast must issue a warrant for 12,000,000 shares of common stock. If production exceeds 400 BOE/d, the royalty obligation to the Investor is capped at 30% of earnings on the first 400,000 gross barrels.
- Restrictive Covenants: While the Notes are outstanding, Blast cannot pay dividends, redeem securities, incur additional senior debt, or enter into mergers/acquisitions without Investor consent.
- Bankruptcy Control: The Series B Preferred Stock grants the Investor veto rights over any bankruptcy proceedings, appointment of receivers, or liquidation.
- Placement Fees: Blast owes Trident Partners a 10% cash fee, 10% warrants, and a 10% net revenue interest on future funding introduced by Trident.
Investor Verification Checklist
- Verify the actual production rates of the Test Well to determine if the 12 million share warrant or royalty cap provisions are triggered.
- Confirm the repayment status of the First Note and whether the 12% Exit Fee was waived or paid.
- Review the impact of the 10% net revenue interest granted to Trident Partners on future project economics.
- Assess the dilution risk associated with the potential issuance of 12 million shares if the well underperforms.
- Check the company's compliance with the $100,000 minimum cash balance covenant.