DAYBREAK OIL AND GAS, INC. UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2021
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from______________ to _______________
Commission File Number: 000-50107
DAYBREAK OIL AND GAS, INC.
(Exact name of registrant as specified in its charter)
| Washington | 91-0626366 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 1101 N. Argonne Road, Suite A 211, Spokane Valley, WA | 99212 | |
| (Address of principal executive offices) | (Zip code) |
(509)232-7674
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: NONE
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| n/a | n/a | n/a |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þYes¨No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YesþNo ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated Filer¨ | Accelerated Filer¨ | |
| Non-accelerated Filer☑ | Smaller reporting company ☑ | |
| Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨Yes þNo
At January 14, 2022 the registrant had 60,491,122outstanding shares of $0.001 par value common stock.
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TABLE OF CONTENTS
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAYBREAK OIL AND GAS, INC.
Balance Sheets - Unaudited
As of November 30, 2021 | As of February 28, 2021 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 17,392 | $ | 33,528 | ||||
| Accounts receivable: | ||||||||
| Crude oil sales | 111,782 | 108,993 | ||||||
| Joint interest participants | 77,245 | 79,411 | ||||||
| Prepaid expenses and other current assets | 96,493 | 61,307 | ||||||
| Total current assets | 302,912 | 283,239 | ||||||
| LONG-TERM ASSETS: | ||||||||
| Crude oil properties, successful efforts method, net | ||||||||
| Proved properties | 523,406 | 556,456 | ||||||
| Unproved properties | 55,978 | 55,978 | ||||||
| Prepaid drilling costs | 16,452 | 16,452 | ||||||
| Vehicles and equipment, net | 7,357 | - | ||||||
| Total long-term assets | 603,193 | 628,886 | ||||||
| Total assets | $ | 906,105 | $ | 912,125 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable and other accrued liabilities | $ | 1,857,833 | $ | 1,710,922 | ||||
| Accounts payable - related parties | 981,634 | 988,966 | ||||||
| Accrued interest | 161,138 | 123,659 | ||||||
| Note payable | 120,000 | 120,000 | ||||||
| Note payable - related party, current, net of unamortized discount of $730and $728, respectively | 8,042 | 7,870 | ||||||
| 12% Notes payable | 315,000 | 315,000 | ||||||
| 12% Notes payable - related party | 250,000 | 250,000 | ||||||
| Production revenue payable - current, net of unamortized discount | 85,759 | 111,753 | ||||||
| Line of credit | 816,583 | 840,904 | ||||||
| Total current liabilities | 4,595,989 | 4,469,074 | ||||||
| LONG-TERM LIABILITIES: | ||||||||
| Note payable - related party, net of current portion and net of unamortized discount of $9,532and $10,080, respectively | 129,407 | 135,460 | ||||||
| Production revenue payable, net of unamortized discount and current portion | 1,504,671 | 1,391,669 | ||||||
| Asset retirement obligation | 36,700 | 33,062 | ||||||
| Total long-term liabilities | 1,670,778 | 1,560,191 | ||||||
| Total liabilities | 6,266,767 | 6,029,265 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS' DEFICIT: | ||||||||
| Preferred stock - 10,000,000shares authorized, $0.001par value; | - | - | ||||||
| Series A Convertible Preferred stock - 2,400,000shares authorized, $0.001par value, 6% cumulative dividends; 709,568shares issued and outstanding, respectively | 710 | 710 | ||||||
| Common stock - 200,000,000shares authorized; $0.001par value, 60,491,122shares issued and outstanding, respectively | 60,491 | 60,491 | ||||||
| Additional paid-in capital | 24,254,978 | 24,250,556 | ||||||
| Accumulated deficit | (29,676,841 | ) | (29,428,897 | ) | ||||
| Total stockholders' deficit | (5,360,662 | ) | (5,117,140 | ) | ||||
| Total liabilities and stockholders' deficit | $ | 906,105 | $ | 912,125 |
The accompanying notes are an integral part of these unaudited financial statements
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DAYBREAK OIL AND GAS, INC.
Statements of Operations - Unaudited
For the Three Months Ended November 30, | For the Nine Months Ended November 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| REVENUE: | ||||||||||||||||
| Crude oil sales | $ | 188,792 | $ | 96,322 | $ | 505,410 | $ | 274,085 | ||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Production | 65,788 | 53,581 | 165,357 | 136,218 | ||||||||||||
| Exploration and drilling (G&G) | 34 | 73 | 235 | 73 | ||||||||||||
| Depreciation, depletion, and amortization (DD&A) | 15,196 | 13,491 | 44,004 | 42,318 | ||||||||||||
| General and administrative | 161,164 | 124,792 | 447,952 | 427,345 | ||||||||||||
| Total operating expenses | 242,182 | 191,937 | 657,548 | 605,954 | ||||||||||||
| OPERATING LOSS | (53,390 | ) | (95,615 | ) | (152,138 | ) | (331,869 | ) | ||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||
| Gain on asset disposal | - | - | 9,614 | - | ||||||||||||
| Gain on SBA PPP loan forgiveness | 72,800 | - | 72,800 | - | ||||||||||||
| Interest expense, net | (62,623 | ) | (56,302 | ) | (178,220 | ) | (182,246 | ) | ||||||||
| NET LOSS | (43,213 | ) | (151,917 | ) | (247,944 | ) | (514,115 | ) | ||||||||
| Cumulative convertible preferred stock dividend requirement | (31,841 | ) | (31,841 | ) | (96,223 | ) | (96,223 | ) | ||||||||
| NET LOSS AVAILABLE TO COMMON SHAREHOLDERS | $ | (75,054 | ) | $ | (183,758 | ) | $ | (344,167 | ) | $ | (610,338 | ) | ||||
| NET LOSS PER COMMON SHARE, basic and diluted | $ | (0.001 | ) | $ | (0.003 | ) | $ | (0.006 | ) | $ | (0.011 | ) | ||||
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING | ||||||||||||||||
| Basic and diluted | 60,491,122 | 60,491,122 | 60,491,122 | 57,081,331 |
The accompanying notes are an integral part of these unaudited financial statements
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DAYBREAK OIL AND GAS, INC.
Statements of Changes in Stockholders' Deficit - Unaudited
For the Three Months and Nine Months Ended November 30, 2021 and 2020
| Series A Convertible | Additional | |||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-In | Accumulated | |||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||
| BALANCE, FEBRUARY 28, 2021 | 709,568 | $ | 710 | 60,491,122 | $ | 60,491 | $ | 24,250,556 | $ | (29,428,897 | ) | $ | (5,117,140 | ) | ||||||||||||
| Recognition of warrants issued for: | ||||||||||||||||||||||||||
| Investor relations services | - | - | - | - | 1,474 | - | 1,474 | |||||||||||||||||||
| Net loss | - | - | - | - | - | (132,651 | ) | (132,651 | ) | |||||||||||||||||
| BALANCE, MAY 31, 2021 | 709,568 | 710 | 60,491,122 | 60,491 | 24,252,030 | (29,561,548 | ) | (5,248,317 | ) | |||||||||||||||||
| Recognition of warrants issued for: | ||||||||||||||||||||||||||
| Investor relations services | - | - | - | - | 1,474 | - | 1,474 | |||||||||||||||||||
| Net loss | - | - | - | - | - | (72,080 | ) | (72,080 | ) | |||||||||||||||||
| BALANCE, AUGUST 31, 2021 | 709,568 | $ | 710 | 60,491,122 | $ | 60,491 | $ | 24,253,504 | $ | (29,633,628 | ) | $ | (5,318,923 | ) | ||||||||||||
| Recognition of warrants issued for: | ||||||||||||||||||||||||||
| Investor relations services | - | - | - | - | 1,474 | - | 1,474 | |||||||||||||||||||
| Net loss | - | - | - | - | - | (43,213 | ) | (43,213 | ) | |||||||||||||||||
| BALANCE, NOVEMBER 30, 2021 | 709,568 | $ | 710 | 60,491,122 | $ | 60,491 | $ | 24,254,978 | $ | (29,676,841 | ) | $ | (5,360,662 | ) |
| Series A Convertible | Additional | |||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-In | Accumulated | |||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||
| BALANCE, FEBRUARY 29, 2020 | 709,568 | $ | 710 | 53,532,364 | $ | 53,532 | $ | 24,223,783 | $ | (28,916,632 | ) | $ | (4,638,607 | ) | ||||||||||||
| Recognition of warrants issued for: | ||||||||||||||||||||||||||
| Investor relations services | - | - | - | - | 1,474 | - | 1,474 | |||||||||||||||||||
| Net loss | - | - | - | - | - | (196,997 | ) | (196,997 | ) | |||||||||||||||||
| BALANCE, MAY 31, 2020 | 709,568 | 710 | 53,532,364 | 53,532 | 24,225,257 | (29,113,629 | ) | (4,834,130 | ) | |||||||||||||||||
| Issuance of common stock for: | ||||||||||||||||||||||||||
| Conversion of related party note payable | - | - | 6,958,758 | 6,959 | 20,876 | - | 27,835 | |||||||||||||||||||
| Recognition of warrants issued for: | ||||||||||||||||||||||||||
| Investor relations services | - | - | - | - | 1,474 | - | 1,474 | |||||||||||||||||||
| Net loss | - | - | - | - | - | (165,201 | ) | (165,201 | ) | |||||||||||||||||
| BALANCE, AUGUST 31, 2020 | 709,568 | $ | 710 | 60,491,122 | $ | 60,491 | $ | 24,247,607 | $ | (29,278,830 | ) | $ | (4,970,022 | ) | ||||||||||||
| Recognition of warrants issued for: | ||||||||||||||||||||||||||
| Investor relations services | - | - | - | - | 1,474 | - | 1,474 | |||||||||||||||||||
| Net loss | - | - | - | - | - | (151,917 | ) | (151,917 | ) | |||||||||||||||||
| BALANCE, NOVEMBER 30, 2020 | 709,568 | $ | 710 | 60,491,122 | $ | 60,491 | $ | 24,249,081 | $ | (29,430,747 | ) | $ | (5,120,465 | ) |
The accompanying notes are an integral part of these unaudited financial statements
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DAYBREAK OIL AND GAS, INC.
Statements of Cash Flows - Unaudited
| Nine Months Ended | ||||||||
| November 30, 2021 | November 30, 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (247,944 | ) | $ | (514,115 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation, depletion, amortization and impairment expense | 44,004 | 42,318 | ||||||
| Amortization of debt discount | 87,554 | 88,786 | ||||||
| Operating lease expense in conjunction with right of use asset | - | 5,857 | ||||||
| Warrant issued for investor relations services | 4,422 | 4,422 | ||||||
| Gain on forgiveness of PPP 2nd Draw loan | (72,800 | ) | - | |||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable - crude oil sales | (2,789 | ) | (81 | ) | ||||
| Accounts receivable - joint interest participants | 2,166 | (10,817 | ) | |||||
| Prepaid expenses and other current assets | 45,968 | 38,067 | ||||||
| Accounts payable and other accrued liabilities | 120,577 | 226,689 | ||||||
| Accounts payable - related parties | (7,332 | ) | 48,592 | |||||
| Operating lease liability in conjunction with right of use asset | - | (5,857 | ) | |||||
| Accrued interest | 58,158 | 59,120 | ||||||
| Net cash provided by (used in) operating activities | 31,984 | (17,019 | ) | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Additions to crude oil properties | (5,213 | ) | - | |||||
| Purchase of fixed assets | (9,460 | ) | - | |||||
| Net cash used in investing activities | (14,673 | ) | - | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from paycheck protection program (PPP) loan | 72,800 | 74,355 | ||||||
| Payments to line of credit | (45,000 | ) | (45,000 | ) | ||||
| Insurance financing repayments | (54,820 | ) | (44,662 | ) | ||||
| Payments on note payable - related party | (6,427 | ) | - | |||||
| Net cash used in financing activities | (33,447 | ) | (15,307 | ) | ||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (16,136 | ) | (32,326 | ) | ||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 33,528 | 94,043 | ||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 17,392 | $ | 61,717 | ||||
| CASH PAID FOR: | ||||||||
| Interest | $ | 10,145 | $ | 19,261 | ||||
| Income taxes | $ | - | $ | - | ||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
| Unpaid additions to crude oil properties | $ | - | $ | 10,826 | ||||
| Non-cash increase to line of credit due to monthly interest | $ | 20,679 | $ | 21,744 | ||||
| Financing of insurance premiums | $ | 81,154 | $ | 65,088 | ||||
| Common stock issued for settlement of related party note payable | $ | - | $ | 27,835 |
The accompanying notes are an integral part of these unaudited financial statements
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DAYBREAK OIL AND GAS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
Organization
Originally incorporated as Daybreak Uranium, Inc., ("Daybreak Uranium") on March 11, 1955, under the laws of the State of Washington, Daybreak Uranium was organized to explore for, acquire, and develop mineral properties in the Western United States. In August 1955, the assets of Morning Sun Uranium, Inc. were acquired by Daybreak Uranium. In May 1964, Daybreak Uranium changed its name to Daybreak Mines, Inc. During 2005, management of the Company decided to enter the crude oil and natural gas exploration, development and production industry. On October 25, 2005, the Company shareholders approved a name change from Daybreak Mines, Inc. to Daybreak Oil and Gas, Inc. (referred to herein as "Daybreak" or the "Company") to better reflect the business of the Company.
All of the Company's crude oil production is sold under contracts which are market-sensitive. Accordingly, the Company's financial condition, results of operations, and capital resources are highly dependent upon prevailing market prices of, and demand for, crude oil. These commodity prices are subject to wide fluctuations and market uncertainties due to a variety of factors that are beyond the control of the Company. These factors include the level of global demand for petroleum (hydrocarbon) products; foreign supply of crude oil and natural gas; the establishment of and compliance with production quotas by crude oil-exporting countries; the relative strength of the U.S. dollar; weather conditions; the price and availability of alternative fuels; overall economic conditions, both foreign and domestic; crude oil price disputes between OPEC and non-OPEC members; and national and international pandemics like the coronavirus outbreak.
Basis of Presentation
The accompanying unaudited interim financial statements and notes for the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q for quarterly reports under Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"). Accordingly, they do not include all of the information and footnote disclosures normally required by accounting principles generally accepted in the United States of America for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements have been included and such adjustments are of a normal recurring nature. Operating results for the nine months ended November 30, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending February 28, 2022.
These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2021.
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions. These estimates and assumptions may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results could differ materially from those estimates. The accounting policies most affected by management's estimates and assumptions are as follows:
| · | The reliance on estimates of proved reserves to compute the provision for depreciation, depletion and amortization ("DD&A") and to determine the amount of any impairment of proved properties; |
| · | The valuation of unproved acreage and proved crude oil properties to determine the amount of any impairment of crude oil properties; |
| · | Judgment regarding the productive status of in-progress exploratory wells to determine the amount of any provision for abandonment; and |
| · | Estimates regarding abandonment obligations; and |
| · | Estimates regarding projected cash flows used in determining the production payable discount. |
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Earnings per Share
The Company follows ASC Topic 260, Earnings per Share, to account for the earnings per share. Basic earnings per common share ("EPS") calculations are determined by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share calculations are determined by dividing net income (loss) by the weighted average number of common shares and dilutive common share equivalents outstanding. During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation.
NOTE 2 - GOING CONCERN:
Financial Condition
The Company's financial statements for the nine months ended November 30, 2021 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company has incurred net operating losses since entering the crude oil exploration industry and as of November 30, 2021 has an accumulated deficit of $29.7million and a working capital deficit of $4.29million whichraises substantial doubt about the Company's ability to continue as a going concern.
Management Plans to Continue as a Going Concern
The Company continues to implement plans to enhance its ability to continue as a going concern. Daybreak currently has a net revenue interest ("NRI") in 20producing crude oil wells in its East Slopes Project located in Kern County, California (the "East Slopes Project"). The revenue from these wells has created a steady and reliable source of income for the Company. The Company's average working interest ("WI") in these wells is 36.6% and the average net revenue interest ("NRI") is 28.4% for these same wells.
In December 2019, the 2019 novel coronavirus ("COVID-19") surfaced in Wuhan, China. The World Health Organization declared a global emergency on January 30, 2020, with respect to the outbreak and most countries throughout the world initiated travel restrictions to and from other countries. With the appearance of the Omicron variant travel restrictions are also in place. This widespread health crisis and the governmental restrictions associated with it, have adversely affected demand for crude oil, depressed crude oil prices, and affected our ability to access capital. These factors, in turn, have had a negative impact on our operations, and financial condition as evidenced by the unprecedented decline in crude oil prices and our revenues during this same time period.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act commonly referred to as the CARES Act became law. One component of the CARES Act was the paycheck protection program ("PPP") which provides small business with the resources needed to maintain their payroll and cover applicable overhead. The PPP is implemented by the Small Business Administration ("SBA") with support from the Department of the Treasury. The Company applied for, and was accepted to participate in this program. On May 11, 2020, the Company received funding for approximately $74,355. In February 2021, the Company applied for full loan forgiveness and later that month was notified by our lender that the SBA had forgiven our original loan in full. On March 15, 2021, the Company received $72,800in funding through the SBA second draw paycheck protection program. Second Draw PPP loans can be used to help fund payroll costs, including benefits. Funds can also be used to pay for mortgage interest, rent and utilities over a 24 week period.The Company applied for full loan forgiveness on this PPP second draw loan and on October 6, 2021, and the SBA notified our lender that the loan was forgiven and repaid the loan in full.
On October 20, 2021, we entered into an Equity Exchange Agreement (the "Exchange Agreement") by and between Daybreak, Reabold California LLC, a California limited liability company ("Reabold"), and Gaelic Resources Ltd., a private company incorporated in the Isle of Man and the 100% owner of Reabold ("Gaelic"), pursuant to which the parties propose for (i) Daybreak to acquire 100% ownership of Reabold, in exchange for (ii) Daybreak issuing 160,964,489 shares of its common stock, par value $0.0001 ("Common Stock") to Gaelic (the "Exchange Shares"), which will result in Reabold becoming a wholly-owned subsidiary of Daybreak named "Daybreak, LLC" and Gaelic becoming the owner of the Exchange Shares and a major shareholder of Daybreak (the foregoing transaction and the transactions contemplated thereby, the "Equity Exchange").
In connection with the Equity Exchange, and as conditions to closing the Equity Exchange, among other things we also propose to enter into agreements to sell a minimum of $2,500,000 of shares of Daybreak's Common Stock, and a minimum of 125,000,000 shares of Common Stock, to one or more investors in a private placement expected to close promptly following the closing of the Equity Exchange (the "Capital Raise"), with the proceeds of the Capital Raise to be used to repay in full the Company's line of credit with UBS Bank and for drilling and exploration activities and other working capital purposes.
8
As of November 30, 2021, all of the conditions for the closing of the Exchange Agreement have not yet been met. The Company is continuing to work towards satisfying all of the Exchange Agreement conditions including having certain conditions of the Exchange Agreement approved by the Company's shareholders.
The Company anticipates its revenue will continue to increase as the Company participates in the drilling of more wells in the East Slopes Project in California and as our drilling project begins in Michigan.
Daybreak's financial statements as of November 30, 2021 do not include any adjustments that might result from the inability to implement or execute the Company's plans to improve its ability to continue as a going concern.
NOTE 3- CONCENTRATION RISK:
Substantially all of the Company's trade accounts receivable consists of receivables from the sale of crude oil production from operations by the Company and receivables from the Company's working interest partners in crude oil projects in which the Company acts as Operator of the project. This concentration of customers and joint interest owners may impact the Company's overall credit risk, as these entities could be affected by similar changes in economic conditions including lower crude oil prices as well as other related factors. Trade accounts receivable are generally not collateralized.
At the Company's East Slopes project in California, there is only one buyer for the purchase of crude oil production. The Company has no natural gas production in California. At November 30, 2021 and February 28, 2021 this one customer represented 100.0% of crude oil sales receivable. If this buyer is unable to resell its products or if they lose a significant sales contract, the Company may incur difficulties in selling its crude oil production.
Crude oil sales receivables balances of $111,782and $108,993at November 30, 2021 and February 28, 2021, were from one customer, Plains Marketing; and represent crude oil sales that occurred in November and February 2021, respectively.
Joint interest participant receivables balances of $77,245and $79,411at November 30, 2021 and February 28, 2021, respectively, represent amounts due from working interest partners in California, where the Company is the Operator. There were no allowances for doubtful accounts for the Company's trade accounts receivable at November 30, 2021 and February 28, 2021, as the joint interest owners have a history of paying their obligations.
NOTE 4 - CRUDE OIL PROPERTIES:
Crude oil property balances at November 30, 2021 and February 28, 2021 are set forth in the table below.
| November 30, 2021 | February 28, 2021 | |||||||
| Proved leasehold costs | $ | 115,119 | $ | 115,119 | ||||
| Costs of wells and development | 2,297,137 | 2,291,924 | ||||||
| Capitalized exploratory well costs | 1,341,494 | 1,341,494 | ||||||
| Cost of proved crude oil properties | 3,753,750 | 3,748,537 | ||||||
| Accumulated depletion, depreciation, amortization and impairment | (3,230,344 | ) | (3,192,081 | ) | ||||
| Proved crude oil properties, net | $ | 523,406 | $ | 556,456 | ||||
| Michigan unproved crude oil properties | 55,978 | 55,978 | ||||||
| Total proved and unproved crude oil properties, net | $ | 579,384 | $ | 612,434 |
NOTE 5 - ACCOUNTS PAYABLE:
On March 1, 2009, the Company became the operator for its East Slopes Project located in Kern County, California. Additionally, the Company then assumed certain original defaulting partners' approximate $1.5million liability representing a 25% working interest in the drilling and completion costs associated with the East Slopes Project four earning well program. The Company subsequently sold the same 25% working interest on June 11, 2009.Of the $1.5million liability, $244,849remains unpaid and is included in both the November 30, 2021 and February 28, 2021 accounts payable balances. Payment of this liability has been delayed until the Company's cash flow situation improves. On October 17, 2018, a working interest partner in California filed a UCC financing statement in regards to payables owed to the partner by the Company. At November 30, 2021 and February 28, 2021, the balance owed this working interest partner was $77,889and $88,905, respectively, and is included in the approximate $1.86million and $1.71million accounts payable balance at November 30, 2021 and February 28, 2021, respectively.
9
NOTE 6 - ACCOUNTS PAYABLE- RELATED PARTIES:
The November 30, 2021 and February 28, 2021 accounts payable - related parties balances of approximately $0.98million and $0.99million respectively, were comprised primarily of deferred salaries of one of the Company's Executive Officers and certain employees; directors' fees; expense reimbursements; and deferred interest payments on a 12% Subordinated Notes owed to the Company's Chairman, President and Chief Executive Officer. Payment of any other deferred items has been delayed until the Company's cash flow situation improves.
In California at the East Slopes Project, two of the vendors that the Company uses for services are partially owned by a related party, the Company's Chief Operating Officer. The Company's Chief Operating Officer is a 50% owner in both Great Earth Power and ABPlus Net Holdings.Great Earth Power began providing a portion of the solar power electrical service for production operations in July 2020. ABPlus Net Holdings began providing portable tank rentals to the Company as a part of its water treatment and disposal operations in September 2020. The services provided by Great Earth Power and ABPlus Net Holdings are competitive with other vendors and save the Company significant expense. For the nine months ended November 30, 2021 and 2020, Great Earth Power was paid $20,038and $1,925, respectively. For the nine months ended November 30, 2021 and 2020, ABPlus Net holdings was paid $10,560and $-0-, respectively.
NOTE 7 - SHORT-TERM AND LONG-TERM BORROWINGS:
Note Payable
In December 2018, the Company was able to settle an outstanding balance owed to one of its third-party vendors. This settlement resulted in a $120,000note payable being issued to the vendor. Additionally, the Company agreed to issue 2,000,000shares of the Company's common stock as a part of the settlement agreement. Based on the closing price of the Company's common stock on the date of the settlement agreement, the value of the common stock transaction was determined to be $6,000. The common stock shares were issued during the twelve months ended February 29, 2020. The note has a maturity date of January 1, 2022and bears an interest rate of 10% rate per annum. Monthly interest is accrued and payable on January 1st of each anniversary date until maturity of the note. At November 30, 2021, the accrued interest had not been paid and was outstanding. The accrued interest on the Note was $35,000and $26,000at November 30, 2021 and February 28, 2021, respectively.
Note Payable - Related Party
On December 22, 2020, the Company entered into a Secured Promissory Note (the "Note"), as borrower, with James Forrest Westmoreland and Angela Marie Westmoreland, Co-Trustees of the James and Angela Westmoreland Revocable Trust, or its assigns (the "Noteholder"), as the lender. James F. Westmoreland is the Company's Chairman, President and Chief Executive Officer. Pursuant to the Note, the Noteholder loaned the Company an aggregate principal amount of $155,548. After the deduction of loan fees of $10,929the net proceeds from the loan were $144,619. The loan fees are being amortized as original issue discount (OID) over the term of the loan. The interest rate of the loan is 2.25%. The Note requires monthly payments on the Note balance until repaid in full. The maturity date of the Note is December 21, 2035. For the nine months ended November 30, 2021, the Company made principal payments of $6,427and amortized debt discount of $546. The obligations under the Note are secured by a lien on and security interest in the Company's oil and gas assets located in Kern County, California, as described in a Deed of Trust entered into by the Company in favor of the Noteholder to secure the obligations under the Note. Such lien shall be a first priority lien, subject only to a pre-existing lien filed by a working interest partner of the Company.
The Company may prepay the Note at any time. Upon the occurrence of any Event of Default and expiration of any applicable cure period, and at any time thereafter during the continuance of such Event of Default, the Noteholder may at its option, by written notice to the Company: (a) declare the entire principal amount of the Note, together with all accrued interest thereon and all other amounts payable hereunder, immediately due and payable; (b) exercise any of its remedies with respect to the collateral set forth in the Deed of Trust; and/or (c) exercise any or all of its other rights, powers or remedies under applicable law.
Current portion of note payable - related party balances at November 30, 2021 and February 28, 2021 are set forth in the table below:
| November 30, 2021 | February 28, 2021 | |||||||
| Note payable - related party, current portion | $ | 8,772 | $ | 8,598 | ||||
| Unamortized debt issuance expenses | (730 | ) | (728 | ) | ||||
| Note payable - related party, current portion, net | $ | 8,042 | $ | 7,870 |
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Note payable - related party long-term balances at November 30, 2021 and February 28, 2021 are set forth in the table below:
| November 30, 2021 | February 28, 2021 | |||||||
| Note payable - related party, non-current | $ | 138,939 | $ | 145,540 | ||||
| Unamortized debt issuance expenses | (9,532 | ) | (10,080 | ) | ||||
| Note payable - related party, non-current, net | $ | 129,407 | $ | 135,460 |
Future estimated payments on the outstanding note payable - related party are set forth in the table below:
| Twelve month periods ending November 30, | |||
| 2022 | $ | 8,771 | |
| 2023 | 9,006 | ||
| 2024 | 9,247 | ||
| 2025 | 9,495 | ||
| 2026 | 9,750 | ||
| Thereafter | 101,442 | ||
| Total | $ | 147,711 |
12% Subordinated Notes
The Company's 12% Subordinated Notes ("the Notes") issued pursuant to a January 2010 private placement offering to accredited investors, resulted in $595,000in gross proceeds (of which $250,000was from a related party) to the Company and accrue interest at 12% per annum, payable semi-annually on January 29th and July 29th.On January 29, 2015, the Company and 12 of the 13 holders of the Notes agreed to extend the maturity date of the Notes for an additional two years to January 29, 2017. Effective January 29, 2017, the maturity date of the Notes and the expiration date of the warrants that were issued in conjunction with the Notes were extended for an additional two years to January 29, 2019.
The Company has informed the Note holders that the payment of principal and final interest will be late and is subject to future financing being completed. The Notes principal of $565,000was payable in full at the amended maturity date of the Notes, January 29, 2019, and has not been paid. The terms of the Notes, state that should the Board of Directors decide that the payment of the principal and any unpaid interest would impair the financial condition or operations of the Company, the Company may then elect a mandatory conversion of the unpaid principal and interest into the Company's common stock at a conversion rate equal to 75% of the average closing price of the Company's common stock over the 20 consecutive trading days preceding December 31, 2018.As of November 30, 2021, no conversion of the unpaid principal and interest into the Company's common stock has occurred. The accrued interest on the 12% Notes at November 30, 2021 and February 28, 2021 was $391,124and $340,042, respectively.
12% Note balances at November 30, 2021 and February 28, 2021 are set forth in the table below:
| November 30, 2021 | February 28, 2021 | |||||||
| 12% Subordinated Notes | $ | 315,000 | $ | 315,000 | ||||
| 12% Subordinated Notes - related party | 250,000 | 250,000 | ||||||
| Total 12% Subordinated Note balance | $ | 565,000 | $ | 565,000 |
The accrued interest owed on the 12% Subordinated Note to the related party is presented on the Company's Balance Sheets at February 28, 2021 under the caption Accounts payable - related party rather than under the caption Accrued interest.
Production Revenue Payable
Beginning in December 2018, the Company conducted a fundraising program to fund the drilling of future wells in California and Michigan and to settle some of its historical debt. The purchaser(s) of a production revenue payment interest received a production revenue payment on future wells to be drilled in California and Michigan in exchange for their purchase.
The production revenue payment program balance as of November 30, 2021 was $950,100of which $550,100was owed to a related party - the Company's Chairman, President and Chief Executive Officer.
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The production payment interest entitles the purchasers to receive production payments equal to twice their original amount paid, payable from a percentage of the Company's future net production payments from wells drilled after the date of the purchase and until the Production Payment Target (as described below) is met. The Company shall pay fifty percent of its net production payments from the relevant wells to the purchasers until each purchaser has received two times the purchase price (the "Production Payment Target"). Once the Company pays the purchasers amounts equal to the Production Payment Target, it shall thereafter pay a pro-rated eight percent (8%) of $1.3 million on its net production payments from the relevant wells to each of the purchasers. However, if the total raised is less than the target $1.3 million, then the payment will be a proportionate amount of the eight percent (8%). Additionally, if the Production Payment Target is not met within the first three years, the Company shall pay seventy-five percent of its production payments from the relevant wells to the purchasers until the Production Payment Target is met.
The Company accounted for the amounts received from these sales in accordance with ASC 470-10-25 and 470-10-35 which require amounts recorded as debt to be amortized under the interest method as described in ASC 835-30, Interest Method. Consequently, the program balance of $950,100has been recognized as a production revenue payable. The Company determined an effective interest rate based on future expected cash flows to be paid to the holders of the production payment interests. This rate represents the discount rate that equates estimated cash flows with the initial proceeds received from the sales and is used to compute the amount of interest to be recognized each period. Estimating the future cash outflows under this agreement requires the Company to make certain estimates and assumptions about future revenues and payments and such estimates are subject to significant variability. Therefore, the estimates are likely to change which may result in future adjustments to the accretion of the interest expense and the amortized cost based carrying value of the related payables.
Accordingly, the Company has estimated the cash flows associated with the production revenue payments and determined a discount of $1,430,648as of November 30, 2021, which is being accounted as interest expense over the estimated period over which payments will be made based on expected future revenue streams. For the nine months ended November 30, 2021 and 2020, amortization of the debt discount on these payables amounted to $87,008and $88,786, respectively, which has been included in interest expense in the statements of operations.Production revenue payable balances at November 30, 2021 and February 28, 2021 are set forth in the table below:
| November 30, 2021 | February 28, 2021 | |||||||
| Estimated payments of production revenue payable | $ | 2,380,748 | $ | 2,000,258 | ||||
| Less: unamortized discount | (730,318 | ) | (496,836 | ) | ||||
| 1,590,430 | 1,503,422 | |||||||
| Less: current portion | (85,759 | ) | (111,753 | ) | ||||
| Net production revenue payable - long-term | $ | 1,504,671 | $ | 1,391,669 |
Line of Credit
The Company has an existing $890,000line of credit for working capital purposes with UBS Bank USA ("UBS"), established pursuant to a Credit Line Agreement dated October 24, 2011 that is secured by the personal guarantee of its Chairman, President and Chief Executive Officer. On July 10, 2017, a $700,000portion of the outstanding line of credit balance was converted to a 24 month fixed term annual interest rate of 3.244% with interest payable monthly. On July 10, 2021, the fixed term loan amount of $700,000 was renewed to an annual percentage interest rate of 3.20%. The Company has been notified that effective January 1, 2022 a new interest rate benchmark will be used for fixed rate interest calculations. The new rate will use the UBS Bank USA Fixed Funding Rate (UBSFFR), which is based on the Chicago Mercantile Exchange (CME) Term SOFR Rate or US Treasury Rate, plus a liquidity premium depending on the duration of the contract. The remaining principal balance of the line of credit has a stated reference rate of 0.249% + 337.5 basis points with interest payable monthly.The reference rate is based on the 30 day LIBOR ("London Interbank Offered Rate") and is subject to change from UBS. The Company has been notified that effective January 1, 2022 a new interest rate benchmark will be used for interest calculations. The new rate will be the UBS Variable Rate (UBSVR), which is comprised of the 30-day average of the Secured Overnight Financing Rate (SOFR) plus a fixed spread of 0.110%.
During the nine months ended November 30, 2021 and 2020, the Company did not receive any advances on the line of credit. During the nine months ended November 30, 2021 and 2020, the Company made payments to the line of credit of $45,000and $45,000, respectively. Interest converted to principal for the nine months ended November 30, 2021 and 2020 was $20,679and $21,744, respectively. At November 30, 2021 and February 28, 2021, the line of credit had an outstanding balance of $816,583and $840,904, respectively.
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Paycheck Protection Program (PPP) Loans
In March 2020, the Coronavirus Aid, Relief, and Economic Security Act commonly referred to as the CARES Act became law. One component of the CARES Act was the paycheck protection program ("PPP") which provides small business with the resources needed to maintain their payroll and cover applicable overhead. The PPP is implemented by the Small Business Administration ("SBA") with support from the Department of the Treasury. The Company applied for, and was accepted to participate in this program. On May 11, 2020, the Company received funding for approximately $74,355. On February 12, 2021, the Company applied for loan forgiveness under the provisions of Section 1106 of the CARES Act. Loan forgiveness was subject to the sole approval of the SBA. On February 23, 2021, the SBA notified our lender that the loan was forgiven and repaid the loan in full.
On March 4, 2021, the Company applied for, and was accepted to participate in the SBA PPP Second Draw program with funding pursuant to the Economic Aid Act that was passed in December, 2020. On March 15, 2021, Daybreak received funding for $72,800. The Company applied for full loan forgiveness for the PPP Second Draw PPP loan and on October 6, 2021, the SBA notified our lender that the loan was forgiven and repaid the loan in full.
Encumbrances
On October 17, 2018, a working interest partner in California filed a UCC financing statement in regards to payable amounts owed to the partner by the Company. As of November 30, 2021, we had no encumbrances on our crude oil project in Michigan.
NOTE 8 - GAIN ON ASSET DISPOSAL:
During the nine months ended November 30, 2021, the Company recognized a gain on asset disposal of $9,614. The gain was the result of an insurance settlement on the theft of a company vehicle that was fully depreciated.
NOTE 9 - LEASES:
The Company leases approximately 988rentable square feet of office space from an unaffiliated third party for our corporate office located in Spokane Valley, Washington. Additionally, we lease approximately 416and 695rentable square feet from unaffiliated third parties for our regional operations office in Friendswood, Texas and storage and auxiliary office space in Wallace, Idaho, respectively. The lease in Friendswood is a 12-month lease that expires on October 31, 2022and as such is considered a short-term lease. The Company has elected to not apply the recognition requirements of ASC 842 to this short-term lease. The Spokane Valley and Wallace leases are currently on a month-to-month basis. The Company's lease agreements do not contain any residual value guarantees, restrictive covenants or variable lease payments. The Company has not entered into any financing leases.
Rent expense for the nine months ended November 30, 2021 and 2020 was $17,542and $17,642, respectively.
NOTE 10 - STOCKHOLDERS' DEFICIT:
Preferred Stock
The Company is authorized to issue up to 10,000,000shares of preferred stock with a par value of $0.001. The Company's preferred stock may be entitled to preference over the common stock with respect to the distribution of assets of the Company in the event of liquidation, dissolution, or winding-up of the Company, whether voluntarily or involuntarily, or in the event of any other distribution of assets of the Company among its shareholders for the purpose of winding-up its affairs. The authorized but unissued shares of preferred stock may be divided into and issued in designated series from time to time by one or more resolutions adopted by the Board of Directors. The directors in their sole discretion shall have the power to determine the relative powers, preferences, and rights of each series of preferred stock.
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Series A Convertible Preferred Stock
The Company has designated 2,400,000shares of the 10,000,000preferred shares as Series A Convertible Preferred Stock ("Series A Preferred"), with a $0.001par value. At November 30, 2021 and February 28, 2021, there were 709,568shares issued and outstanding, respectively, that had not been converted into our common stock. As of November 30, 2021, there are 44accredited investors who have converted 690,197Series A Preferred shares into 2,070,591shares of Daybreak common stock.
The conversions of Series A Preferred that have occurred since the Series A Preferred was first issued in July 2006 are set forth in the table below.
| Fiscal Period Ended | Shares of Series A Preferred Converted to Common Stock | Shares of Common Stock Issued from Conversion | Number of Accredited Investors | ||||||
| Periods prior to February 29, 2014 | 662,200 | 1,986,600 | 41 | ||||||
| February 28, 2015 | 3,000 | 9,000 | 1 | ||||||
| February 29, 2016 | 10,000 | 30,000 | 1 | ||||||
| February 28, 2017 | - | - | - | ||||||
| February 28, 2018 | 14,997 | 44,991 | 1 | ||||||
| February 28, 2019 | - | - | - | ||||||
| February 29, 2020 | - | - | - | ||||||
| February 28, 2021 | - | - | - | ||||||
| November 30, 2021 | - | - | - | ||||||
| Totals | 690,197 | 2,070,591 | 44 |
Holders of Series A Preferred shall accrue dividends, in the amount of 6% of the original purchase price per annum. Dividends may be paid in cash or common stock at the discretion of the Company. Dividends are cumulative whether or not in any dividend period or periods the Company has assets legally available for the payment of such dividends. Accumulations of dividends on Series A Preferred do not bear interest. Dividends are payable upon declaration by the Board of Directors.
As of November 30, 2021 no dividends have been declared or paid. Dividends earned since issuance for each fiscal year and the nine months ended November 30, 2021 are set forth in the table below:
| Fiscal Period Ended | Shareholders at Period End | Accumulated Dividends | |||
| Periods prior to February 28, 2014 | $ | 1,447,943 | |||
| February 28, 2015 | 58 | 132,634 | |||
| February 29, 2016 | 57 | 130,925 | |||
| February 28, 2017 | 57 | 130,415 | |||
| February 28, 2018 | 56 | 128,231 | |||
| February 28, 2019 | 56 | 127,714 | |||
| February 29, 2020 | 56 | 128,063 | |||
| February 28, 2021 | 56 | 127,714 | |||
| November 30, 2021 | 56 | 96,223 | |||
| $ | 2,449,862 |
Common Stock
The Company is authorized to issue up to 200,000,000shares of $0.001par value common stock of which 60,491,122shares were issued and outstanding as of November 30, 2021 and February 28, 2021, respectively.
NOTE 11 - WARRANTS:
During the twelve months ended February 29, 2020 there were 2.1million warrants issued to a third party for investor relations services. The fair value of the warrants was determined by the Black-Scholes pricing model, was $17,689, and is being amortized over the 3year vesting period of the warrants. The Black-Scholes valuation encompassed the following assumptions: a risk free interest rate of 1.68%; volatility rate of 260.23%; and a dividend yield of 0.0%.
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The warrants contain a vesting blocking provision that prevents the vesting of any warrants that such vesting would cause the warrant holder's beneficial ownership (as such term is defined in Section 13d-3 of the Securities Exchange Act of 1934, as amended) to exceed more than four and ninety-nine one-hundredths percent (4.99%) of the Company's outstanding Common Stock. The foregoing restriction may not be waived by either party.
The warrants vest in equal parts over a 3 year period beginning on January 2, 2020 and all warrants expire on January 2, 2024. At November 30, 2021, both the outstanding warrants and the exercisable have a weighted average exercise price of $0.01, a weighted average remaining life of 2.08years, and an intrinsic value of $8,826for the exercisable warrants and an intrinsic value of $35,070for the outstanding warrants. For the nine months ended November 30, 2021 and 2020, the recorded amount of warrant expense was $4,422and $4,422, respectively.
Warrant activity for the nine months ended November 30, 2021 is set forth in the table below:
| Warrants | Weighted Average Exercise Price | |||||||
| Warrants outstanding, February 28, 2021 | 2,100,000 | $ | 0.01 | |||||
| Changes during the nine months ended November 30, 2021: | ||||||||
| Issued | - | $ | - | |||||
| Expired / cancelled / forfeited | - | $ | - | |||||
| Warrants outstanding, November 30, 2021 | 2,100,000 | $ | 0.01 | |||||
| Warrants exercisable, November 30, 2021 | 528,507 | $ | 0.01 |
NOTE 12 - INCOME TAXES:
On December 22, 2017, the federal government enacted a tax bill H.R.1, an act to provide for reconciliation pursuant to Titles II and V of the concurrent resolution on the budget for fiscal year 2018, commonly referred to as the Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act contains significant changes to corporate taxation, including, but not limited to, reducing the U.S. federal corporate income tax rate from 35% to 21% and modifying or limiting many business deductions. The Company has re-measured its deferred tax liabilities based on rates at which they are expected to be utilized in the future, which is generally 21%.
Reconciliation between actual tax expense (benefit) and income taxes computed by applying the U.S. federal income tax rate and state income tax rates to income from continuing operations before income taxes is set forth in the table below:
| November 30, 2021 | February 28, 2021 | |||||||
| Computed at U.S. and state statutory rates | $ | (73,986 | ) | $ | (152,860 | ) | ||
| Permanent differences | 7,142 | 15,342 | ||||||
| Changes in valuation allowance | 66,844 | 137,518 | ||||||
| Total | $ | - | $ | - |
Tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred liabilities are set forth in the table below:
| November 30, 2021 | February 28, 2021 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | $ | 5,644,405 | $ | 5,587,416 | ||||
| Crude oil properties | 73,293 | 63,438 | ||||||
| Stock based compensation | 66,187 | 66,187 | ||||||
| Other | 27,838 | 27,838 | ||||||
| Less valuation allowance | (5,811,723 | ) | (5,744,879 | ) | ||||
| Total | $ | - | $ | - |
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The above estimates are based on management's decisions concerning elections which could change the relationship between net income and taxable income. Management decisions are made annually and could cause estimates to vary significantly. The Company files federal income tax returns with the United States Internal Revenue Service and state income tax returns in various state tax jurisdictions. As a general rule the Company's tax returns for the fiscal years after 2015 currently remain subject to examinations by appropriate tax authorities. None of our tax returns are under examination at this time.
NOTE 13 - COMMITMENTS AND CONTINGENCIES:
Various lawsuits, claims and other contingencies arise in the ordinary course of the Company's business activities. While the ultimate outcome of any future contingency is not determinable at this time, management believes that any liability or loss resulting therefrom will not materially affect the financial position, results of operations or cash flows of the Company.
The Company, as an owner or lessee and operator of crude oil properties, is subject to various federal, state and local laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability on the lessee under a crude oil lease for the cost of pollution clean-up resulting from operations and subject the lessee to liability for pollution damages. In some instances, the Company may be directed to suspend or cease operations in the affected area. The Company maintains insurance coverage that is customary in the industry, although the Company is not fully insured against all environmental risks.
The Company is not aware of any environmental claims existing as of November 30, 2021. There can be no assurance, however, that current regulatory requirements will not change or that past non-compliance with environmental issues will not be discovered on the Company's crude oil properties.
NOTE 14 - SUBSEQUENT EVENTS:
On December 15, 2021, Daybreak finalized agreements with its directors, executive officers, and other employees with respect to the forgiveness and conversion of related party debts into shares of the Company's common stock at a conversion rate of $0.45per share of common stock.
The tables below detail the changes to certain Balance Sheet accounts either through debt forgiveness or conversion to the Company's common stock. Since the common stock shares will be issued in the Company's fourth quarter, this information is being presented as a subsequent event in a pro forma format.
| November 30, 2021 (Unaudited) | Adjustments | Pro Forma November 30, 2021 (Unaudited) | ||||||||||
| CURRENT LIABILITIES: | ||||||||||||
| Accounts payable and other accrued liabilities | $ | 1,857,833 | $ | (194,030 | )(1) | $ | 1,663,803 | |||||
| Accounts payable related parties | 981,634 | (938,310 | )(2) | 43,324 | ||||||||
| Accrued interest | 161,138 | - | 161,138 | |||||||||
| Note payable | 120,000 | - | 120,000 | |||||||||
| 12% Notes payable | 315,000 | - | 315,000 | |||||||||
| 12% Notes payable, related party | 250,000 | (250,000 | )(3) | - | ||||||||
| Note payable, related party | 8,042 | - | 8,042 | |||||||||
| Production revenue payable - current, net of discount | 85,759 | (49,654 | )(4) | 36,105 | ||||||||
| Line of credit | 816,583 | - | 816,583 | |||||||||
| Total current liabilities | 4,595,989 | (1,431,994 | ) | 3,163,995 | ||||||||
| LONG TERM LIABILITIES: | ||||||||||||
| Note payable, related party | 129,407 | - | 129,407 | |||||||||
| Production revenue payable - net of discount and current | 1,504,671 | (871,192 | )(4) | 633,479 | ||||||||
| Asset retirement obligation | 36,700 | - | 36,700 | |||||||||
| Total long-term liabilities | 1,670,778 | (871,192 | ) | 799,586 | ||||||||
| Total liabilities | 6,266,767 | (2,303,186 | ) | 3,963,581 | ||||||||
| STOCKHOLDERS' DEFICIT: | ||||||||||||
| Preferred stock | - | - | - | |||||||||
| Series A Convertible preferred stock | 710 | - | 710 | |||||||||
| Common stock 60,491,122 and 64,573,570 shares | 60,491 | 4,082 | (5) | 64,573 | ||||||||
| Additional paid-in capital | 24,254,978 | 2,299,104 | (6) | 26,554,082 | ||||||||
| Accumulated deficit | (29,676,841 | ) | - | (29,676,841 | ) | |||||||
| Total stockholders' deficit | (5,360,662 | ) | 2,303,186 | (3,057,476 | ) |
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(1) Adjustment of $194,030 consists of conversion of $141,501 estimated employee taxes previously recorded on accrued salaries into 314,447 shares of common stock; writing off of $52,529 estimated employer payroll taxes on previously recorded on accrued salaries that were converted
(2) Adjustment of $938,310 consists of conversion of $487,545 employee net accrued salaries into 1,083,434 shares of common stock; conversion of $264,986 in 12% Note accrued interest into 588,859 shares of common stock; conversion of $142,969 accrued director fees into 317,708 shares of common stock; and forgiveness of $42,810 accounts payable related parties and employee net accrued salaries
(3) Adjustment of $250,000 consists of conversion of $250,000 related party 12% Note principal into 555,556 shares of common stock
(4) Adjustment represents the fair value of the current portion and long term portion of the $550,100 related party production revenue payable that was converted into 1,222,444 shares of common stock
(5) Adjustment of $4,082 reflecting 4,082,488 shares of common stock that will be issued for the conversion at par value $0.001
(6) Adjustment of $2,299,104 consists of $105,528 fair value of the 4,082,448 shares to be issued for related party debt conversion, based on $0.0268 share closing price on November 30, 2021 net of the $4,082 par value; $2,193,776 forgiveness of liabilities to related parties for the difference of the fair value of the shares converted and the related party debt amount forgiven or converted.
An aggregate of 4,082,448shares of common stock valued at $0.45per share will be issued to satisfy certain related party debt as detailed in the table below:
| Common Stock Activity | ||
| Share issuances for accrued salaries to employees | 1,397,881 | |
| Share issuances for accrued director fees | 317,708 | |
| Share issuances for related party 12% Subordinated Note and interest | 1,144,415 | |
| Share issuances for related party production revenue payable program | 1,222,444 | |
| Common stock increase | 4,082,448 |
| 17 |
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is management's assessment of the current and historical financial and operating results of the Company and of our financial condition. It is intended to provide information relevant to an understanding of our financial condition, changes in our financial condition and our results of operations and cash flows and should be read in conjunction with our unaudited financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q for the nine months ended November 30, 2021 and in our Annual Report on Form 10-K for the year ended February 28, 2021. References to "Daybreak", the "Company", "we", "us" or "our" mean Daybreak Oil and Gas, Inc.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements contained in our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") are intended to be covered by the safe harbor provided for under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act.
All statements other than statements of historical fact contained in this MD&A report are inherently uncertain and are forward-looking statements. Statements that relate to results or developments that we anticipate will or may occur in the future are not statements of historical fact. Words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project," "will" and similar expressions identify forward-looking statements. Examples of forward-looking statements include, without limitation, statements about the following:
| · | Our future operating results; |
| · | Our future capital expenditures; |
| · | Our future financing; |
| · | Our expansion and growth of operations; and |
| · | Our future investments in and acquisitions of crude oil 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. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, the following risks and uncertainties:
| · | General economic and business conditions; |
| · | National and international pandemics such as the novel coronavirus COVID-19 outbreak; |
| · | Exposure to market risks in our financial instruments; |
| · | Fluctuations in worldwide prices and demand for crude oil; |
| · | Our ability to find, acquire and develop crude oil properties; |
| · | Fluctuations in the levels of our crude oil exploration and development activities; |
| · | Risks associated with crude oil exploration and development activities; |
| · | Competition for raw materials and customers in the crude oil industry; |
| · | Technological changes and developments in the crude oil industry; |
| · | Legislative and regulatory uncertainties, including proposed changes to federal tax law and climate change legislation, regulation of hydraulic fracturing and potential environmental liabilities; |
| · | Our ability to continue as a going concern; |
| · | Our ability to secure financing under any commitments as well as additional capital to fund operations; and |
| · | Other factors discussed elsewhere in this Form 10-Q; in our other public filings and press releases; and discussions with Company management. |
Our reserve estimates are determined through a subjective process and are subject to revision.
In December 2019, the 2019 novel coronavirus ("COVID-19") surfaced in Wuhan, China. The World Health Organization declared a global emergency on January 30, 2020, with respect to the outbreak and most countries throughout the world initiated severe travel restrictions to and from other countries. This widespread health crisis and the governmental restrictions associated with it, have adversely affected demand for crude oil and natural gas, depressed crude oil prices, and affected our ability to access capital. The resurgence of the Omicron variant has continued to have negative influence on our economy. These factors, in turn, have had a negative impact on our operations, and financial condition as evidenced by the unprecedented decline in crude oil prices and our revenues during this same time period.
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Should one or more of the risks or uncertainties described above or elsewhere in our Form 10-K for the year ended February 28, 2021 and in this Form 10-Q for the nine months ended November 30, 2021 occur, or should any underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. We specifically undertake no obligation to publicly update or revise any information contained in any forward-looking statement or any forward-looking statement in its entirety, whether as a result of new information, future events, or otherwise, except as required by law.
All forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement.
Introduction and Overview
We are an independent crude oil exploration, development and production company. Our basic business model is to increase shareholder value by finding and developing crude oil and natural gas reserves through exploration and development activities, and selling the production from those reserves at a profit. To be successful, we must, over time, be able to find crude oil reserves and then sell the resulting production at a price that is sufficient to cover our finding costs, operating expenses, administrative costs and interest expense, plus offer us a return on our capital investment. A secondary means of generating returns can include the sale of either producing or non-producing lease properties.
Our longer-term success depends on, among many other factors, the acquisition and drilling of commercial grade crude oil properties and on the prevailing sales prices for crude oil along with associated operating expenses. The volatile nature of the energy markets makes it difficult to estimate future prices of crude oil and natural gas; however, any prolonged period of depressed prices or market volatility, would have a material adverse effect on our results of operations and financial condition.
Our operations are focused on identifying and evaluating prospective crude oil and natural gas properties and funding projects that we believe have the potential to produce crude oil or natural gas in commercial quantities. We conduct all of our drilling, exploration and production activities in the United States, and all of our revenues are derived from sales to customers within the United States. Currently, we are in the process of developing a multi-well oilfield project in Kern County, California.
Our management cannot provide any assurances that Daybreak will ever operate profitably. While, in the past, we have had positive cash flow from our crude oil operations in California, we have not yet generated sustainable positive cash flow or earnings on a company-wide basis. As a small company, we are more susceptible to the numerous business, investment and industry risks that have been described in Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended February 28, 2021 and in Part III, Item 1A. Risk Factors of this 10-Q Report. Throughout this Quarterly Report on Form 10-Q, crude oil is shown in barrels ("Bbls"); natural gas is shown in thousands of cubic feet ("Mcf") unless otherwise specified, and hydrocarbon totals are expressed in barrels of crude oil equivalent ("BOE").
Below is brief summary of our crude oil projects in California and Michigan. Refer to our discussion in Item 2. Properties, in our Annual Report on Form 10-K for the year ended February 28, 2021 for more information on our multi-well oilfield project in California and our exploratory joint drilling project in Michigan.
Kern County, California (East Slopes Project)
The East Slopes Project is located in the southeastern part of the San Joaquin Basin near Bakersfield, California. Drilling targets are porous and permeable sandstone reservoirs that exist at depths of 1,200 feet to 4,500 feet. Since January 2009, we have participated in the drilling of 25 wells in this project. We have been the Operator at the East Slopes Project since March 2009.
The crude oil produced from our acreage in the Vedder Sand is considered heavy oil. The gravity of the crude oil ranges from 14°to 16°API (American Petroleum Institute) gravity and must be heated to separate and remove water prior to sale. Our crude oil wells in the East Slopes Project produce from five reservoirs at our Sunday, Bear, Black, Ball and Dyer Creek locations. The Sunday property has six producing wells, while the Bear property has nine producing wells. The Black property is the smallest of all currently producing reservoirs, and currently has two producing wells at this property. The Ball property also has two producing wells while the Dyer Creek property has one producing well. During the nine months ended November 30, 2021 we had production from 20 crude oil wells. Our average working interest ("WI") and net revenue interest ("NRI") in these 20 wells is 36.6% and 28.4%, respectively.
We plan on acquiring additional acreage exhibiting the same seismic characteristics and on trend with the Bear, Black and Dyer Creek reservoirs. Some of these prospects, if successful, would utilize the Company's existing production facilities. In addition to the current field development, there are several other exploratory prospects that have been identified from the seismic data, which we plan to drill in the future.
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California Drilling Plans
Planned drilling activity and implementation of our oilfield development plan will not begin until there is additional financing is put in place. We do not plan to make any capital investments within the East Slopes Project area for the remainder of the 2021-2022 fiscal year.
Michigan Acreage
In January 2017, Daybreak acquired a 30% working interest in 1,400 acres in the Michigan Basin. The leases have been secured and multiple targets were identified through a 2-D seismic interpretation. A 3-D seismic survey was obtained in January and February of 2017. An analysis of the 3-D seismic survey confirmed the first prospect originally identified on the 2-D seismic, as well as several additional drilling locations. We have plans to obtain an additional 3-D survey on the second prospect after drilling a well on the first prospect. The two prospects are independent of each other and the success or lack of results of either prospect does not affect the potential of the other prospect. The wells will be drilled vertically with conventional completions and no hydraulic fracturing is anticipated. With the settlement of our debt obligations to a former lender in December 2018, we acquired an additional 40% working interest, bringing our aggregate working interest to 70% in Michigan. The first well is expected to be drilled when additional financing is secured.
Encumbrances
On October 17, 2018, a working interest partner in California filed a UCC financing statement in regards to payables owed to the partner by the Company. As of November 30, 2021, we had no encumbrances on our crude oil project in Michigan.
Results of Operations - Nine months ended November 30, 2021 compared to the nine months ended November 30, 2020
California Crude Oil Prices
The price we receive for crude oil sales in California is based on prices posted for Midway-Sunset crude oil delivery contracts, less deductions that vary by grade of crude oil sold and transportation costs. The posted Midway-Sunset price generally moves in correlation to, and at a discount to, prices quoted on the New York Mercantile Exchange ("NYMEX") for spot West Texas Intermediate ("WTI") crude oil, Cushing, Oklahoma delivery contracts. We do not have any natural gas revenues in California.
There continues to be a significant amount of volatility in crude oil prices and a dramatic fluctuation in our realized sale price of crude oil since June of 2014, when the monthly average price of WTI crude oil was $105.79 per barrel and our realized sale price per barrel of crude oil was $98.78. As an example, for the month of April 2020 the monthly average closing price of WTI crude oil was $16.55 and our monthly realized oil price was $16.96 per barrel. This volatility in crude oil prices continued through most of our 2020-2021 fiscal year. The volatility and decline in the price of crude oil has had a substantial negative impact on our cash flow from our producing California properties. While there has been some improvement in crude oil prices for the nine months ended November 30, 2021, there is no guarantee that this trend will continue. It is beyond our ability to accurately predict crude oil prices over any substantial length of time.
A comparison of the average WTI price and average realized crude oil sales price for the nine months ended November 30, 2021 and 2020 is shown in the table below:
| Nine Months Ended | |||||||||||||
| November 30, 2021 | November 30, 2020 | Percentage Change | |||||||||||
| Average nine month WTI crude oil price (Bbl) | $ | 70.34 | $ | 35.07 | 100.6 | % | |||||||
| Average nine month realized crude oil sales price (Bbl) | $ | 67.97 | $ | 32.52 | 109.0 | % |
For the nine months ended November 30, 2021, the average WTI price was $70.34 and our average realized crude oil sale price was $67.97, representing a discount of $2.37 per barrel or 3.4% lower than the average WTI price. In comparison, for the nine months ended November 30, 2020, the average WTI price was $35.07 and our average realized sale price was $32.52 representing a discount of $2.55 per barrel or 7.3% lower than the average WTI price. Historically, the sale price we receive for California heavy crude oil has been less than the quoted WTI price because of the lower API gravity of our California crude oil in comparison to the API gravity of quoted WTI crude oil.
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California Crude Oil Revenue and Production
Crude oil revenue in California for the nine months ended November 30, 2021 increased $231,325 or 84.4% to $505,410 in comparison to revenue of $274,085 for the nine months ended November 30, 2020. The average sale price of a barrel of crude oil for the nine months ended November 30, 2021 was $67.97 in comparison to $32.52 for the nine months ended November 30, 2020. The 2019 novel coronavirus ("COVID-19") and the Omicron variant that has spread throughout the world including the United States had a substantial negative impact on the demand for crude oil and was largely responsible for the decline in crude oil prices for the nine months ended November 30, 2020. The increase of $35.45 or 109.0% per barrel in the average realized price of a barrel of crude oil accounted for 129.1% of the increase in crude oil revenue for the nine months ended November 30, 2021.
Our net sales volume for the nine months ended November 30, 2021 was 7,436 barrels of crude oil in comparison to 8,427 barrels sold for the nine months ended November 30, 2020. This decrease in crude oil sales volume of 991 barrels or 11.8% was primarily due to fewer days of production during the nine months ended November 30, 2021 and the timing of oil sales transportation.
The gravity of our produced crude oil in California ranges between 14° API and 16° API. Production for the nine months ended November 30, 2021 was from 20 wells resulting in 5,415 well days of production in comparison to 5,495 well days of production for the nine months ended November 30, 2020.
Our crude oil sales revenue for the nine months ended November 30, 2021 and 2020 is set forth in the following table:
Nine Months Ended November 30, 2021 | Nine Months Ended November 30, 2020 | |||||||||||||||
| Project | Revenue | Percentage | Revenue | Percentage | ||||||||||||
| California - East Slopes Project | $ | 505,410 | 100.0 | % | $ | 274,085 | 100.0 | % |
*Our average realized sale price on a BOE basis for the nine months ended November 30, 2021 was $67.97 in comparison to $32.52 for the nine months ended November 30, 2020, representing an increase of $35.45 or 109.0% per barrel.
Operating Expenses
Total operating expenses for the nine months ended November 30, 2021 were $657,548, an increase of $51,594 or 8.5% compared to $605,954 for the nine months ended November 30, 2020. Operating expenses for the nine months ended November 30, 2021 and 2020 are set forth in the table below:
Nine Months Ended November 30, 2021 | Nine Months Ended November 30, 2020 | |||||||||||||||||||||||
| Expenses | Percentage | BOE Basis | Expenses | Percentage | BOE Basis | |||||||||||||||||||
| Production expenses | $ | 165,357 | 25.1 | % | $ | 136,218 | 22.5 | % | ||||||||||||||||
| Exploration and drilling expenses | 235 | 0.0 | % | 73 | 0.0 | % | ||||||||||||||||||
| Depreciation, depletion, amortization ("DD&A") | 44,004 | 6.7 | % | 42,318 | 7.0 | % | ||||||||||||||||||
| General and administrative ("G&A") expenses | 447,952 | 68.2 | % | 427,345 | 70.5 | % | ||||||||||||||||||
| Total operating expenses | $ | 657,548 | 100.0 | % | $ | 88.43 | $ | 605,954 | 100.0 | % | $ | 71.91 |
Production expenses include expenses associated with the production of crude oil. These expenses include contract pumpers, electricity, road maintenance, control of well insurance, property taxes and well workover expenses; and, relate directly to the number of wells that are in production. For the nine months ended November 30, 2021, these expenses increased by $29,139 or 21.4% to $165,357 in comparison to $136,218 for the nine months ended November 30, 2020. For the nine months ended November 30, 2021 and 2020, we had 20 wells on production in California. Production expense on a barrel of oil equivalent ("BOE") basis for the nine months ended November 30, 2021 and 2020 was $22.24 and $16.16, respectively. Production expenses represented 25.1% and 22.5% of total operating expenses for the nine months ended November 30, 2021 and 2020, respectively.
Exploration and drilling expenses include geological and geophysical ("G&G") expenses as well as leasehold maintenance, plugging and abandonment ("P&A") expenses and dry hole expenses. For the nine months ended November 30, 2021, these expenses were $235 in comparison to $73 the nine months ended November 30, 2020. Exploration and drilling expenses represented 0.0% and 0.0% of total operating expenses for the nine months ended November 30, 2021 and 2020, respectively.
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Depreciation, depletion and amortization ("DD&A") expenses relate to equipment, proven reserves and property costs, along with impairment, and is another component of operating expenses. For the nine months ended November 30, 2021, DD&A expenses increased $1,686 or 4.0% to $44,004 in comparison to $42,318 for the nine months ended November 30, 2020. On a BOE basis, DD&A expense was $5.92 and $5.02 for the nine months ended November 30, 2021 and 2020, respectively. DD&A expenses represented 6.7% and 7.0% of total operating expenses for the nine months ended November 30, 2021 and 2020, respectively.
General and administrative ("G&A") expenses include the salaries of six employees, including management. Other items included in our G&A expenses are legal and accounting expenses, investor relations fees, travel expenses, insurance expenses and other administrative expenses necessary for an operator of crude oil properties as well as for running a public company. For the nine months ended November 30, 2021, G&A expenses increased $20,607 or 4.8% to $447,952 in comparison to $427,345 for the nine months ended November 30, 2020. We received, as Operator, administrative overhead reimbursement of $39,965 during the nine months ended November 30, 2021 for the East Slopes Project which was used to directly offset certain employee salaries. We are continuing a program of controlling our G&A costs wherever possible. G&A expenses represented 68.2% and 70.5% of total operating expenses for the nine months ended November 30, 2021 and 2020, respectively.
Interest expense, net for the nine months ended November 30, 2021 decreased $4,026 or 2.2% to $178,220 in comparison to $182,246 for the nine months ended November 30, 2020.
During the nine months ended November 30, 2021, the Company recognized a gain on asset disposal of $9,614. The gain was the result of an insurance settlement on the theft of a company vehicle that was fully depreciated.
During the nine months ended November 30, 2021, the Company recognized a gain on debt forgiveness in the amount of $72,800 due to notification that the SBA had approved the company's application for loan forgiveness on the PPP 2nd Draw loan.
Results of Operations - Three months ended November 30, 2021 compared to the three months ended November 30, 2020
A comparison of the average WTI price and average realized crude oil sales price at our East Slopes Project in California for the three months ended November 30, 2021 and 2020 is shown in the table below:
| Three Months Ended | |||||||||||||
| November 30, 2021 | November 30, 2020 | Percentage Change | |||||||||||
| Average three month WTI crude oil price (Bbl) | $ | 77.43 | $ | 39.99 | 93.6 | % | |||||||
| Average three month realized crude oil sales price (Bbl) | $ | 74.12 | $ | 36.58 | 102.6 | % |
For the three months ended November 30, 2021, the average WTI price was $77.43 and our average realized crude oil sale price was $74.12, representing a discount of $3.31 per barrel or 4.3% lower than the average WTI price. In comparison, for the three months ended November 30, 2020, the average WTI price was $39.99 and our average realized sale price was $36.58 representing a discount of $3.41 per barrel or 8.5% lower than the average WTI price. Historically, the sale price we receive for California heavy crude oil has been less than the quoted WTI price because of the lower API gravity of our California crude oil in comparison to the API gravity of quoted WTI crude oil.
California Crude Oil Revenue and Production
Crude oil revenue in California for the three months ended November 30, 2021, increased $92,470 or 96.0% to $188,792 in comparison to revenue of $96,322 for the three months ended November 30, 2020. The average sale price of a barrel of crude oil for the three months ended November 30, 2021 was $74.12 in comparison to $36.58 for the three months ended November 30, 2020. The increase of $37.54 or 102.6% per barrel in the average realized price of a barrel of crude oil accounted for 106.9% of the increase in crude oil revenue for the three months ended November 30, 2021.
Our net sales volume for the three months ended November 30, 2021 was 2,547 barrels of crude oil in comparison to 2,633 barrels sold for the three months ended November 30, 2020. This decrease in crude oil sales volume of 86 barrels or 3.3% was primarily due to fewer days of production during the three months ended November 30, 2021 and the timing of oil sales transportation.
The gravity of our produced crude oil in California ranges between 14° API and 16° API. Production for the three months ended November 30, 2021 was from 20 wells resulting in 1,784 well days of production in comparison to 1,820 well days of production for the three months ended November 30, 2020.
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Our crude oil sales revenue for the three months ended November 30, 2021 and 2020 is set forth in the following table:
Three Months Ended November 30, 2021 | Three Months Ended November 30, 2020 | |||||||||||||||
| Project | Revenue | Percentage | Revenue | Percentage | ||||||||||||
| California - East Slopes Project | $ | 188,792 | 100.0 | % | $ | 96,322 | 100.0 | % |
*Our average realized sale price on a BOE basis for the three months ended November 30, 2021 was $74.12 in comparison to $36.58 for the three months ended November 30, 2020, representing an increase of $37.54 or 102.6% per barrel.
Operating Expenses
Total operating expenses for the three months ended November 30, 2021 were $242,182, an increase of $50,245 or 26.2% compared to $191,937 for the three months ended November 30, 2020. Operating expenses for the three months ended November 30, 2021 and 2020 are set forth in the table below:
Three Months Ended November 30, 2021 | Three Months Ended November 30, 2020 | |||||||||||||||||||||||
| Expenses | Percentage | BOE Basis | Expenses | Percentage | BOE Basis | |||||||||||||||||||
| Production expenses | $ | 65,788 | 27.2 | % | $ | 53,581 | 28.0 | % | ||||||||||||||||
| Exploration and drilling expenses | 34 | 0.0 | % | 73 | 0.0 | % | ||||||||||||||||||
| Depreciation, depletion, amortization ("DD&A") | 15,196 | 6.3 | % | 13,491 | 7.0 | % | ||||||||||||||||||
| General and administrative ("G&A") expenses | 161,164 | 66.5 | % | 124,792 | 65.0 | % | ||||||||||||||||||
| Total operating expenses | $ | 242,182 | 100.0 | % | $ | 95.09 | $ | 191,937 | 100.0 | % | $ | 72.90 |
Production expenses for the three months ended November 30, 2021, increased by $12,207 or 22.8% to $65,788 in comparison to $53,581 for the three months ended November 30, 2020. For the three months ended November 30, 2021 and 2020, we had 20 wells on production in California. Production expense on a barrel of oil equivalent ("BOE") basis for the three months ended November 30, 2021 and 2020 were $25.83 and $20.35, respectively. Production expenses represented 27.2% and 28.0% of total operating expenses for the three months ended November 30, 2021 and 2020, respectively.
Exploration and drilling expenses for the three months ended November 30, 2021 were $34 in comparison to $73 for the three months ended November 30, 2020. Exploration and drilling expenses represented 0.0% and 0.0% of total operating expenses for the three months ended November 30, 2021 and 2020, respectively.
DD&A expenses for the three months ended November 30, 2021, increased $1,705 or 12.6% to $15,196 in comparison to $13,491 for the three months ended November 30, 2020. DD&A on a BOE basis was $5.97 and $5.12 for the three months ended November 30, 2021 and 2020, respectively. DD&A expenses represented 6.3% and 7.0% of total operating expenses for the three months ended November 30, 2021 and 2020, respectively.
General and administrative ("G&A") expenses include the salaries of six employees, including management. Other items included in our G&A expenses are legal and accounting expenses, investor relations fees, travel expenses, insurance expenses and other administrative expenses necessary for an operator of crude oil properties as well as for running a public company. G&A expenses for the three months ended November 30, 2021, increased $36,372 or 29.1% to $161,164 in comparison to $124,792 for the three months ended November 30, 2020. We received, as Operator in California, administrative overhead reimbursement of $13,321 during the three months ended November 30, 2021 for the East Slopes Project which was used to directly offset certain employee salaries. We are continuing a program of controlling our G&A costs wherever possible. G&A expenses represented 66.5% and 65.0% of total operating expenses for the three months ended November 30, 2021 and 2020, respectively.
Interest expense, net for the three months ended November 30, 2021 increased $6,321 or 11.2% to $62,623 in comparison to $56,302 for the three months ended November 30, 2020.
During the three months ended November 30, 2021, the Company recognized a gain on debt forgiveness in the amount of $72,800 due to notification that the SBA had approved the company's application for loan forgiveness on the PPP 2nd Draw loan.
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Due to the nature of our business, we expect that revenues, as well as all categories of expenses, will continue to fluctuate substantially on a quarter-to-quarter and year-to-year basis. Revenues are highly dependent on the volatility of hydrocarbon prices and production volumes. Production expenses will fluctuate according to the number and percentage ownership of producing wells as well as the amount of revenues we receive based on the price of crude oil. Exploration and drilling expenses will be dependent upon the amount of capital that we have to invest in future development projects, as well as the success or failure of such projects. Likewise, the amount of DD&A expense will depend upon the factors cited above including the size of our proven reserves base and the market price of energy products. G&A expenses will also fluctuate based on our current requirements, but will generally tend to increase as we expand the business operations of the Company. An on-going goal of the Company is to improve cash flow to cover the current level of G&A expenses and to fund our drilling programs in California and Michigan.
Capital Resources and Liquidity
Our primary financial resource is our proven crude oil reserve base. Our ability to fund any future capital expenditure programs is dependent upon the prices we receive from crude oil sales, the success of our drilling programs in California and Michigan and the availability of capital resource financing. There continues to be a significant amount of volatility in crude oil prices and dramatic fluctuation in our realized sale price of crude oil since June of 2014, when the monthly average price of WTI crude oil was $105.79 per barrel, and our realized sale price per barrel of crude oil was $98.78. As an example, for the month of April 2020 the monthly average closing price of WTI crude oil was $16.55 and our monthly realized oil price was $16.96 per barrel. This volatility in crude oil prices continued through most of our 2020-2021 fiscal year. The volatility and decline in the price of crude oil has had a substantial negative impact on our cash flow from our producing California properties. While there has been improvement in crude oil prices for the nine months ended November 30, 2021, there is no guarantee that this trend will continue. It is beyond our ability to accurately predict crude oil prices over any substantial length of time.
We do not plan to make any capital investments within the East Slopes Project area for the remainder of the 2021-2022 fiscal year.
Changes in our capital resources at November 30, 2021 in comparison to February 28, 2021 are set forth in the table below:
| November 30, 2021 | February 28, 2021 | Increase (Decrease) | Percentage Change | |||||||||||||
| Cash | $ | 17,392 | $ | 33,528 | $ | (16,136 | ) | (48.1 | %) | |||||||
| Current assets | $ | 302,912 | $ | 283,239 | $ | 19,673 | 6.9 | % | ||||||||
| Total assets | $ | 906,105 | $ | 912,125 | $ | (6,020 | ) | (0.7 | %) | |||||||
| Current liabilities | $ | (4,595,989 | ) | $ | (4,469,074 | ) | $ | 126,915 | 2.8 | % | ||||||
| Total liabilities | $ | (6,266,767 | ) | $ | (6,029,265 | ) | $ | 237,502 | 3.9 | % | ||||||
| Working capital deficit | $ | (4,293,077 | ) | $ | (4,185,835 | ) | $ | 107,242 | 2.6 | % |
Our working capital deficit increased approximately $107,242 or 2.6% to approximately $4.293 million at November 30, 2021 in comparison to approximately $4.186 million at February 28, 2021. The increase in our working capital deficit was primarily due to an increase in our accounts payable and accrued interest balances. We anticipate an increase in our cash flow will occur when we are able to return to our planned drilling program that will result in an increase in the number of wells on production.
Our business is capital intensive. Our ability to grow is dependent upon favorably obtaining outside capital and generating cash flows from operating activities necessary to fund our investment activities. There is no assurance that we will be able to achieve profitability. Since our future operations will continue to be dependent on successful exploration and development activities and our ability to seek and secure capital from external sources, should we be unable to achieve sustainable profitability this could cause any equity investment in the Company to become worthless.
Major sources of funds in the past for us have included the debt or equity markets and the sale of assets. We anticipate that we will have to rely on these capital markets to fund future operations and growth. Our business model is focused on acquiring exploration or development properties as well as existing production. Our ability to generate future revenues and operating cash flow will depend on successful exploration, and/or acquisition of crude oil producing properties, which may very likely require us to continue to raise equity or debt capital from outside sources.
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Daybreak has ongoing capital commitments to develop certain leases pursuant to their underlying terms. Failure to meet such ongoing commitments may result in the loss of the right to participate in future drilling on certain leases or the loss of the lease itself. These ongoing capital commitments will cause us to seek additional forms of financing through various methods, including issuing debt securities, equity securities, bank debt, or combinations of these instruments which could result in dilution to existing security holders and increased debt and leverage. The current uncertainty in the credit and capital markets as well as the instability and volatility in crude oil prices since June of 2014, has restricted our ability to obtain needed capital. The 2019 novel coronavirus ("COVID-19") and now the Omicron variant that spread to countries throughout the world including the United States had a substantial negative impact on the demand for crude oil and is largely responsible for the decline in crude oil prices in 2020. No assurance can be given that we will be able to obtain funding under any loan commitments or any additional financing on favorable terms, if at all. Sales of interests in our assets may be another source of cash flow available to us.
The Company's financial statements for the nine months ended November 30, 2021 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. We have incurred net losses since entering the crude oil exploration industry in 2005, and as of the nine months ended November 30, 2021, we have an accumulated deficit of $29.7 million and a working capital deficit of $4.293 million which raises substantial doubt about our ability to continue as a going concern.
On October 20, 2021, we entered into an Equity Exchange Agreement (the "Exchange Agreement") by and between Daybreak, Reabold California LLC, a California limited liability company ("Reabold"), and Gaelic Resources Ltd., a private company incorporated in the Isle of Man and the 100% owner of Reabold ("Gaelic"), pursuant to which the parties propose for (i) Daybreak to acquire 100% ownership of Reabold, in exchange for (ii) Daybreak issuing 160,964,489 shares of its common stock, par value $0.0001 ("Common Stock") to Gaelic (the "Exchange Shares"), which will result in Reabold becoming a wholly-owned subsidiary of Daybreak named "Daybreak, LLC" and Gaelic becoming the owner of the Exchange Shares and a major shareholder of Daybreak (the foregoing transaction and the transactions contemplated thereby, the "Equity Exchange").
In connection with the Equity Exchange, and as conditions to closing the Equity Exchange, among other things we also propose to enter into agreements to sell a minimum of $2,500,000 of shares of Daybreak's Common Stock, and a minimum of 125,000,000 shares of Common Stock, to one or more investors in a private placement expected to close promptly following the closing of the Equity Exchange (the "Capital Raise"), with the proceeds of the Capital Raise to be used to repay in full the Company's line of credit with UBS Bank and for drilling and exploration activities and other working capital purposes.
As of November 30, 2021, all of the conditions for the closing of the Exchange Agreement have not yet been met. The Company is continuing to work towards satisfying all of the Exchange Agreement conditions including having certain conditions of the Exchange Agreement approved by the Company's shareholders.
Changes in Financial Condition
During the nine months ended November 30, 2021, we received crude oil sales revenue from 20 wells in California. Our commitment to improving corporate profitability remains unchanged. We experienced an increase in revenues of $231,325 or 84.4% to $505,410 for the nine months ended November 30, 2021 in comparison to revenues of $274,085 for the nine months ended November 30, 2020. The increase of $35.45 or 109.0% per barrel in the average realized price of a barrel of crude oil accounted for 129.1% of the increase in crude oil revenue for the nine months ended November 30, 2021. For the nine months ended November 30, 2021, we had an operating loss of $152,138 in comparison to an operating loss of $331,869 for the nine months ended November 30, 2020.
Our balance sheet at November 30, 2021 reflects total assets of approximately $0.91 million in comparison to approximately $0.91 million at February 28, 2021. The decrease of $6,020 is primarily due to declines in our cash balance and depletion of our crude oil properties.
At November 30, 2021, total liabilities were approximately $6.27 million in comparison to approximately $6.03 million at February 28, 2021. The increase in liabilities of approximately $238,000 was primarily due to an increase in payables and revisions of the production revenue payable discount during the nine months ended November 30, 2021.
The issued and outstanding shares of common stock at November 30, 2021 remained unchanged from the February 28, 2021 balance of 60,491,122.
Additional paid in capital (APIC) increased $4,422 to $24,254,978 at November 30, 2021 as a result of the recognition of warrant expense for investor relations services.
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On December 15, 2021, we finalized agreements with our directors, executive officers, and other employees with respect to the forgiveness and conversion of related party debts into shares of the Company's common stock at a conversion rate of $0.45 per share of common stock.
The tables below detail the changes to certain Balance Sheet accounts either through debt forgiveness or conversion to the Company's common stock. Since the common stock shares will be issued in the Company's fourth quarter, this information is being presented in a pro forma format.
| November 30, 2021 (Unaudited) | Adjustments | Pro Forma November 30, 2021 (Unaudited) | ||||||||||
| CURRENT LIABILITIES: | ||||||||||||
| Accounts payable and other accrued liabilities | $ | 1,857,833 | $ | (194,030 | )(1) | $ | 1,663,803 | |||||
| Accounts payable related parties | 981,634 | (938,310 | )(2) | 43,324 | ||||||||
| Accrued interest | 161,138 | - | 161,138 | |||||||||
| Note payable | 120,000 | - | 120,000 | |||||||||
| 12% Notes payable | 315,000 | - | 315,000 | |||||||||
| 12% Notes payable, related party | 250,000 | (250,000 | )(3) | - | ||||||||
| Note payable, related party | 8,042 | - | 8,042 | |||||||||
| Production revenue payable - current, net of discount | 85,759 | (49,654 | )(4) | 36,105 | ||||||||
| Line of credit | 816,583 | - | 816,583 | |||||||||
| Total current liabilities | 4,595,989 | (1,431,994 | ) | 3,163,995 | ||||||||
| LONG TERM LIABILITIES: | ||||||||||||
| Note payable, related party | 129,407 | - | 129,407 | |||||||||
| Production revenue payable - net of discount and current | 1,504,671 | (871,192 | )(4) | 633,479 | ||||||||
| Asset retirement obligation | 36,700 | - | 36,700 | |||||||||
| Total long-term liabilities | 1,670,778 | (871,192 | ) | 799,586 | ||||||||
| Total liabilities | 6,266,767 | (2,303,186 | ) | 3,963,581 | ||||||||
| STOCKHOLDERS' DEFICIT: | ||||||||||||
| Preferred stock | - | - | - | |||||||||
| Series A Convertible preferred stock | 710 | - | 710 | |||||||||
| Common stock 60,491,122 and 64,573,570 shares | 60,491 | 4,082 | (5) | 64,573 | ||||||||
| Additional paid-in capital | 24,254,978 | 2,299,104 | (6) | 26,554,082 | ||||||||
| Accumulated deficit | (29,676,841 | ) | - | (29,676,841 | ) | |||||||
| Total stockholders' deficit | (5,360,662 | ) | 2,303,186 | (3,057,476 | ) |
(1) Adjustment of $194,030 consists of conversion of $141,501 estimated employee taxes previously recorded on accrued salaries into 314,447 shares of common stock; writing off of $52,529 estimated employer payroll taxes on previously recorded on accrued salaries that were converted
(2) Adjustment of $938,310 consists of conversion of $487,545 employee net accrued salaries into 1,083,434 shares of common stock; conversion of $264,986 in 12% Note accrued interest into 588,859 shares of common stock; conversion of $142,969 accrued director fees into 317,708 shares of common stock; and forgiveness of $42,810 accounts payable related parties and employee net accrued salaries
(3) Adjustment of $250,000 consists of conversion of $250,000 related party 12% Note principal into 555,556 shares of common stock
(4) Adjustment represents the fair value of the current portion and long term portion of the $550,100 related party production revenue payable that was converted into 1,222,444 shares of common stock
(5) Adjustment of $4,082 reflecting 4,082,488 shares of common stock that will be issued for the conversion at par value $0.001
(6) Adjustment of $2,299,104 consists of $105,528 fair value of the 4,082,448 shares to be issued for related party debt conversion, based on $0.0268 share closing price on November 30, 2021 net of the $4,082 par value; $2,193,776 forgiveness of liabilities to related parties for the difference of the fair value of the shares converted and the related party debt amount forgiven or converted.
An aggregate of 4,082,448 shares of common stock valued at $0.45 per share will be issued to satisfy certain related party debt as detailed in the table below:
| Common Stock Activity | ||
| Share issuances for accrued salaries to employees | 1,397,881 | |
| Share issuances for accrued director fees | 317,708 | |
| Share issuances for related party 12% Subordinated Note and interest | 1,144,415 | |
| Share issuances for related party production revenue payable program | 1,222,444 | |
| Common stock increase | 4,082,448 |
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Cash Flows
Changes in the net funds provided by and (used in) our operating, investing and financing activities are set forth in the table below:
Nine Months Ended November 30, 2021 | Nine Months Ended November 30, 2020 | Increase (Decrease) | Percentage Change | |||||||||||||
| Net cash provided by (used in) operating activities | $ | 31,984 | $ | (17,019 | ) | 49,003 | (287.9 | %) | ||||||||
| Net cash (used in) investing activities | $ | (14,673 | ) | $ | - | 14,673 | - | |||||||||
| Net cash used in financing activities | $ | (33,447 | ) | $ | (15,307 | ) | 18,140 | (118.5 | %) |
Cash Flow Provided By (Used In) Operating Activities
Cash flow from operating activities is derived from the production of our crude oil reserves and changes in the balances of non-cash accounts, receivables, payables or other non-energy property asset account balances. For the nine months ended November 30, 2021, cash flow provided by operating activities was $31,984 in comparison to cash flow used in operating activities of $17,019 for the nine months ended November 30, 2020. The increase in our cash flow provided by operating activities for the nine months ended November 30, 2021 was due to a reduction in our net loss, and a smaller increase in payables than in the comparative period. Variations in cash flow from operating activities may impact our level of exploration and development expenditures.
Cash Flow (Used In) Investing Activities
Cash flow from investing activities is derived from changes in crude oil property balances and any lending activities. Cash flow used in our investing activities for the nine months ended November 30, 2021 was $14,673 in comparison to cash flow used in our investing activities of $-0- for the nine months ended November 30, 2020.
Cash Flow (Used In) Provided By Financing Activities
Cash flow from financing activities is derived from changes in long-term liability account balances or in equity account balances, excluding retained earnings. Cash flow used in our financing activities was $33,447 for the nine months ended November 30, 2021 in comparison to cash flow used in our financing activities of $15,307 for the nine months ended November 30, 2020. This increase in cash provided by our cash flow activities was primarily due to insurance financing payments and payments on our line of credit offset by proceeds received from the Small Business Administration (SBA) second-draw paycheck protection program loan. For the nine months ended November 30, 2021, we made total payments of $45,000 to our line of credit with UBS Bank.
The following discussion is a summary of cash flows provided by, and used in, the Company's financing activities at November 30, 2021.
Current debt (Short-term borrowings)
Note Payable
In December 2018, the Company was able to settle an outstanding balance owed to one of its third-party vendors. This settlement resulted in a $120,000 note payable being issued to the vendor. Additionally, the Company agreed to issue 2,000,000 shares of the Company's common stock as a part of the settlement agreement. Based on the closing price of the Company's common stock on the date of the settlement agreement, the value of the common stock transaction was determined to be $6,000. The common stock shares were issued during the twelve months ended February 29, 2020. The note has a maturity date of January 1, 2022 and bears an interest rate of 10% rate per annum. Monthly interest is accrued and payable on January 1st of each anniversary date until maturity of the note. At February 28, 2021, the accrued interest had not been paid and was outstanding. The accrued interest on the Note was $35,000 and $26,000 at November 30, 2021 and February 28, 2021, respectively.
Note Payable - Related Party
On December 22, 2020, the Company entered into a Secured Promissory Note (the "Note"), as borrower, with James Forrest Westmoreland and Angela Marie Westmoreland, Co-Trustees of the James and Angela Westmoreland Revocable Trust, or its assigns (the "Noteholder"), as the lender. James F. Westmoreland is the Company's Chairman, President and Chief Executive Officer. Pursuant to the Note, the Noteholder loaned the Company an aggregate principal amount of $155,548. After the deduction of loan fees of $10,929 the net proceeds from the loan were $144,619. The loan fees are being amortized as original issue discount (OID) over the term of the loan. The interest rate of the loan is 2.25%. The Note requires monthly payments on the Note balance until repaid in full. The maturity date of the Note is December 21, 2035. For the three months ended November 30, 2021, the Company made principal payments of $6,427 and amortized debt discount of $546. The obligations under the Note are secured by a lien on and security interest in the Company's oil and gas assets located in Kern County, California, as described in a Deed of Trust entered into by the Company in favor of the Noteholder to secure the obligations under the Note. Such lien shall be a first priority lien, subject only to a pre-existing lien filed by a working interest partner of the Company.
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The Company may prepay the Note at any time. Upon the occurrence of any Event of Default and expiration of any applicable cure period, and at any time thereafter during the continuance of such Event of Default, the Noteholder may at its option, by written notice to the Company: (a) declare the entire principal amount of the Note, together with all accrued interest thereon and all other amounts payable hereunder, immediately due and payable; (b) exercise any of its remedies with respect to the collateral set forth in the Deed of Trust; and/or (c) exercise any or all of its other rights, powers or remedies under applicable law.
Current portion of note payable -related party balances at November 30, 2021 and February 28, 2021 are set forth in the table below:
| November 30, 2021 | February 28, 2021 | |||||||
| Note payable -related party, current portion | $ | 8,772 | $ | 8,598 | ||||
| Unamortized debt issuance expenses | (730 | ) | (728 | ) | ||||
| Note payable - related party, current portion, net | $ | 8,042 | $ | 7,870 |
Note payable -related party long-term balances at November 30, 2021 and February 28, 2021 are set forth in the table below:
| November 30, 2021 | February 28, 2021 | |||||||
| Note payable - related party, non-current | $ | 138,939 | $ | 145,540 | ||||
| Unamortized debt issuance expenses | (9,532 | ) | (10,080 | ) | ||||
| Note payable - related party, non-current, net | $ | 129,407 | $ | 135,460 |
Future estimated payments on the outstanding note payable - related party are set forth in the table below:
| Twelve month periods ending November 30, | |||
| 2022 | $ | 8,771 | |
| 2023 | 9,006 | ||
| 2024 | 9,247 | ||
| 2025 | 9,495 | ||
| 2026 | 9,750 | ||
| Thereafter | 101,442 | ||
| Total | $ | 147,711 |
12% Subordinated Notes
The Company's 12% Subordinated Notes ("the Notes") issued pursuant to a January 2010 private placement offering to accredited investors, resulted in $595,000 in gross proceeds (of which $250,000 was from a related party) to the Company and accrue interest at 12% per annum, payable semi-annually on January 29th and July 29th. On January 29, 2015, the Company and 12 of the 13 holders of the Notes agreed to extend the maturity date of the Notes for an additional two years to January 29, 2017. Effective January 29, 2017, the maturity date of the Notes and the expiration date of the warrants that were issued in conjunction with the Notes were extended for an additional two years to January 29, 2019.
The Company has informed the Note holders that the payment of principal and final interest will be late and is subject to future financing being completed. The Notes principal of $565,000 was payable in full at the amended maturity date of the Notes, January 29, 2019, and has not been paid. The terms of the Notes, state that should the Board of Directors decide that the payment of the principal and any unpaid interest would impair the financial condition or operations of the Company, the Company may then elect a mandatory conversion of the unpaid principal and interest into the Company's common stock at a conversion rate equal to 75% of the average closing price of the Company's common stock over the 20 consecutive trading days preceding December 31, 2018. As of May 31, 2021, no conversion of the unpaid principal and interest into the Company's common stock has occurred. The accrued interest on the 12% Notes at November 30, 2021 and February 28, 2021 was $391,124 and $340,042, respectively.
12% Note balances at November 30, 2021 and February 28, 2021 are set forth in the table below:
| November 30, 2021 | February 28, 2021 | |||||||
| 12% Subordinated Notes | $ | 315,000 | $ | 315,000 | ||||
| 12% Subordinated Notes - related party | 250,000 | 250,000 | ||||||
| Total 12% Subordinated Note balance | $ | 565,000 | $ | 565,000 |
The accrued interest owed on the 12% Subordinated Note to the related party is presented on the Company's Balance Sheets at February 28, 2021 under the caption Accounts payable - related party rather than under the caption Accrued interest.
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Production Revenue Payable
Beginning in December 2018, the Company conducted a fundraising program to fund the drilling of future wells in California and Michigan and to settle some of its historical debt. The purchaser(s) of a production revenue payment interest would receive a production revenue payment on future wells to be drilled in California and Michigan in exchange for their purchase. The production revenue payment program balance as of November 30, 2021 was $950,100 of which $550,100 was owed to a related party - the Company's Chairman, President and Chief Executive officer.
The production revenue payment program balance as of November 30, 2021 was $400,000. The production payment interest entitles the purchasers to receive production payments equal to twice their original amount paid, payable from a percentage of the Company's future net production payments from wells drilled after the date of the purchase and until the Production Payment Target (as described below) is met. The Company shall pay fifty percent of its net production payments from the relevant wells to the purchasers until each purchaser has received two times the purchase price (the "Production Payment Target"). Once the Company pays the purchasers amounts equal to the Production Payment Target, it shall thereafter pay a pro-rated eight percent (8%) of $1.3 million on its net production payments from the relevant wells to each of the purchasers. However, if the total raised is less than the target $1.3 million, then the payment will be a proportionate amount of the eight percent (8%). Additionally, if the Production Payment Target is not met within the first three years, the Company shall pay seventy-five percent of its production payments from the relevant wells to the purchasers until the Production Payment Target is met.
The Company accounted for the amounts received from these sales in accordance with ASC 470-10-25 and 470-10-35 which require amounts recorded as debt to be amortized under the interest method as described in ASC 835-30, Interest Method. Consequently, the program balance of $950,100 has been recognized as a production revenue payable. The Company determined an effective interest rate based on future expected cash flows to be paid to the holders of the production payment interests. This rate represents the discount rate that equates estimated cash flows with the initial proceeds received from the sales and is used to compute the amount of interest to be recognized each period. Estimating the future cash outflows under this agreement requires the Company to make certain estimates and assumptions about future revenues and payments and such estimates are subject to significant variability. Therefore, the estimates are likely to change which may result in future adjustments to the accretion of the interest expense and the amortized cost based carrying value of the related payables.
Accordingly, the Company has estimated the cash flows associated with the production revenue payments and determined a discount of $1,430,648 asof November 30, 2021, which is being accounted as interest expense over the estimated period over which payments will be made based on expected future revenue streams. For the three months ended November 30, 2021 and 2020, amortization of the debt discount on these payables amounted to $87,008 and $88,786, respectively, which has been included in interest expense in the statements of operations.
Production revenue payable balances at November 30, 2021 and February 28, 2021 are set forth in the table below:
| November 30, 2021 | February 28, 2021 | |||||||
| Estimated payments of production revenue payable | $ | 2,380,748 | $ | 2,000,258 | ||||
| Less: unamortized discount | (790,318 | ) | (496,836 | ) | ||||
| 1,590,430 | 1,503,422 | |||||||
| Less: current portion | (85,759 | ) | (111,753 | ) | ||||
| Net production revenue payable - long-term | $ | 1,504,671 | $ | 1,391,669 |
Line of Credit
The Company has an existing $890,000 line of credit for working capital purposes with UBS Bank USA ("UBS"), established pursuant to a Credit Line Agreement dated October 24, 2011 that is secured by the personal guarantee of its Chairman, President and Chief Executive Officer. On July 10, 2017, a $700,000 portion of the outstanding line of credit balance was converted to a 24 month fixed term annual interest rate of 3.244% with interest payable monthly. On July 10, 2021, the fixed term loan amount of $700,000 was renewed at an annual percentage interest rate of 3.20%. The Company has been notified that effective January 1, 2022 a new interest rate benchmark will be used for fixed rate interest calculations. The new rate will use the UBS Bank USA Fixed Funding Rate (UBSFFR), which is based on the Chicago Mercantile Exchange (CME) Term SOFR Rate or US Treasury Rate, plus a liquidity premium depending on the duration of the contract. The remaining principal balance of the line of credit has a stated reference rate of 0.249% + 337.5 basis points with interest payable monthly. The reference rate is based on the 30 day LIBOR ("London Interbank Offered Rate") and is subject to change from UBS. The Company has been notified that effective January 1, 2022 a new interest rate benchmark will be used for interest calculations. The new rate will be the UBS Variable Rate (UBSVR), which is comprised of the 30-day average of the Secured Overnight Financing Rate (SOFR) plus a fixed spread of 0.110%.
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During the nine months ended November 30, 2021 and 2020, the Company did not receive any advances on the line of credit. During the nine months ended November 30, 2021 and 2020, the Company made payments to the line of credit of $45,000 and $45,000, respectively. Interest converted to principal for the nine months ended November 30, 2021 and 2020 was $20,679 and $21,744, respectively. At November 30, 2021 and February 28, 2021, the line of credit had an outstanding balance of $816,583 and $840,904, respectively.
Paycheck Protection Program (PPP) Loans
In March 2020, the Coronavirus Aid, Relief, and Economic Security Act commonly referred to as the CARES Act became law. One component of the CARES Act was the paycheck protection program ("PPP") which provides small business with the resources needed to maintain their payroll and cover applicable overhead. The PPP is implemented by the Small Business Administration ("SBA") with support from the Department of the Treasury. The Company applied for, and was accepted to participate in this program. On May 11, 2020, the Company received funding for approximately $74,355. On February 12, 2021, the Company applied for loan forgiveness under the provisions of Section 1106 of the CARES Act. Loan forgiveness was subject to the sole approval of the SBA. On February 23, 2021, the SBA notified our lender that the loan was forgiven and repaid the loan in full.
On March 4, 2021, the Company applied for, and was accepted to participate in the SBA PPP Second Draw program with funding pursuant to the Economic Aid Act that was passed in December, 2020. On March 15, 2021, Daybreak received funding for $72,800. The Company applied for full loan forgiveness for the PPP Second Draw PPP loan and on October 6, 2021, the SBA notified our lender that the loan was forgiven and repaid the loan in full.
Encumbrances
On October 17, 2018, a working interest partner in California filed a UCC financing statement in regards to payable amounts owed to the partner by the Company. As of November 30, 2021, we had no encumbrances on our crude oil project in Michigan.
Operating Leases
The Company leases approximately 988 rentable square feet of office space from an unaffiliated third party for our corporate office located in Spokane Valley, Washington. Additionally, we lease approximately 416 and 695 rentable square feet from unaffiliated third parties for our regional operations office in Friendswood, Texas and storage and auxiliary office space in Wallace, Idaho, respectively. The lease in Friendswood is a 12 month lease that expires in October 2022. The Spokane Valley and Wallace leases are currently on a month-to-month basis. The Company's lease agreements do not contain any residual value guarantees, restrictive covenants or variable lease payments. The Company has not entered into any financing leases.
The Company determines if an arrangement is a lease at inception. Operating leases are recorded in operating lease right of use assets, net, operating lease liability - current, and operating lease liability - long-term on its balance sheet.
Rent expense for the nine months ended November 30, 2021 and 2020 was $17,542 and $17,642, respectively.
Related Party Transactions
In California at the East Slopes Project, two of the vendors that the Company uses for services are partially owned by a related party, the Company's Chief Operating Officer. The Company's Chief Operating Officer is a 50% owner in both Great Earth Power and ABPlus Net Holdings. Great Earth Power began providing a portion of the solar power electrical service for production operations in July 2020. ABPlus Net Holdings began providing portable tank rentals to the Company as a part of its water treatment and disposal operations in September 2020. The services provided by Great Earth Power and ABPlus Net Holdings are competitive with other vendors and save the Company significant expense. For the nine months ended November 30, 2021 and 2020, Great Earth Power was paid $20,038 and $1,925, respectively. For the nine months ended November 30, 2021 and 2020, ABPlus Net holdings was paid $10,560 and $-0-, respectively.
Capital Commitments
Daybreak has ongoing capital commitments to develop certain leases pursuant to their underlying terms. Failure to meet such ongoing commitments may result in the loss of the right to participate in future drilling on certain leases or the loss of the lease itself. These ongoing capital commitments may also cause us to seek additional capital from sources outside of the Company.
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Management Plans to Continue as a Going Concern
We continue to implement plans to enhance Daybreak's ability to continue as a going concern. The Company currently has a net revenue interest in 20 producing crude oil wells in our East Slopes Project located in Kern County, California. The revenue from these wells has created a steady and reliable source of revenue for the Company. Our average working interest in these wells is 36.6% and the average net revenue interest is 28.4%.
On October 20, 2021, we entered into an Equity Exchange Agreement (the "Exchange Agreement") by and between Daybreak, Reabold California LLC, a California limited liability company ("Reabold"), and Gaelic Resources Ltd., a private company incorporated in the Isle of Man and the 100% owner of Reabold ("Gaelic"), pursuant to which the parties propose for (i) Daybreak to acquire 100% ownership of Reabold, in exchange for (ii) Daybreak issuing 160,964,489 shares of its common stock, par value $0.0001 ("Common Stock") to Gaelic (the "Exchange Shares"), which will result in Reabold becoming a wholly-owned subsidiary of Daybreak named "Daybreak, LLC" and Gaelic becoming the owner of the Exchange Shares and a major shareholder of Daybreak (the foregoing transaction and the transactions contemplated thereby, the "Equity Exchange").
In connection with the Equity Exchange, and as conditions to closing the Equity Exchange, among other things we also propose to enter into agreements to sell a minimum of $2,500,000 of shares of Daybreak's Common Stock, and a minimum of 125,000,000 shares of Common Stock, to one or more investors in a private placement expected to close promptly following the closing of the Equity Exchange (the "Capital Raise"), with the proceeds of the Capital Raise to be used to repay in full the Company's line of credit with UBS Bank and for drilling and exploration activities and other working capital purposes.
As of November 30, 2021, all of the conditions for the closing of the Exchange Agreement have not yet been met. The Company is continuing to work towards satisfying all of the Exchange Agreement conditions including having certain conditions of the Exchange Agreement approved by the Company's shareholders.
We anticipate revenues will continue to increase as the Company participates in the drilling of more wells in the East Slopes Project in California and as our drilling operations begin in Michigan.
Our liquidity is improving with the increase in hydrocarbon prices. Our sources of funds in the past have included the debt or equity markets and the sale of assets. While the Company does have positive cash flow from its crude oil properties, it has not yet established a positive cash flow on a company-wide basis. It will be necessary for the Company to obtain additional funding from the private or public debt or equity markets in the future. However, we cannot offer any assurance that we will be successful in executing the aforementioned plans to continue as a going concern.
Our financial statements as of November 30, 2021 do not include any adjustments that might result from the inability to implement or execute Daybreak's plans to improve our ability to continue as a going concern.
Critical Accounting Policies
Refer to Daybreak's Annual Report on Form 10-K for the fiscal year ended February 28, 2021.
Off-Balance Sheet Arrangements
As of November 30, 2021, we did not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partners that have been, or are reasonably likely to have, a material effect on our financial position or results of operations.
| 31 |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide the information otherwise required by this Item.
ITEM 4. CONTROLS AND PROCEDURES
Management's Evaluation of Disclosure Controls and Procedures
As of the end of the reporting period, November 30, 2021, an evaluation was conducted by Daybreak management, including our President and Chief Executive Officer, who is also serving as our interim principal finance and accounting officer, as to the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) of the Exchange Act. Such disclosure controls and procedures are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods specified by the SEC rules and forms. Additionally, it is vital that such information is accumulated and communicated to our management, including our President and Chief Executive Officer, in a manner to allow timely decisions regarding required disclosures. Based on that evaluation, our management concluded that our disclosure controls were effective as of November 30, 2021.
Changes in Internal Control over Financial Reporting
During the three months ended November 30, 2021, there have not been any changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Limitations
Our management does not expect that our disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions.
Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
| 32 |
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Form 10-Q Report, you should carefully consider the various factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended February 28, 2021, which could materially affect our business, financial condition or future results. Our Annual Report is available from the SEC at www.sec.gov. The risks described in this report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial could have a material adverse effect on our business, financial condition or future results of operations.
| 33 |
ITEM 6. EXHIBITS
The following Exhibits are filed as part of the report:
Exhibit Number | Description | |
| 2.1 | Equity Exchange Agreement dated October 20, 2021 by and between Daybreak Oil and Gas, Inc., Reabold California LLC, and Gaelic Resources Ltd. (incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K dated October 26, 2021, and filed on October 27, 2021). | |
| 10.1(1) | Form of letter agreement regarding conversion of accrued director fees. | |
| 10.2(1) | Form of letter agreement regarding conversion of accrued salary. | |
| 10.3(1) | ||
| 31.1(1) | Certification of principal executive and principal financial officer as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1(1) | Certification of principal executive and principal financial officer as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.SCH | Inline XBRL Taxonomy Schema | |
| 101.CAL | Inline XBRL Taxonomy Calculation Linkbase | |
| 101.DEF | Inline XBRL Taxonomy Definition Linkbase | |
| 101.LAB | Inline XBRL Taxonomy Label Linkbase | |
| 101.PRE | Inline XBRL Taxonomy Presentation Linkbase | |
| 101 | The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 2021, were formatted in Inline XBRL (Extensible Business Reporting Language): (i) Balance Sheets, (ii) Statements of Operations, (iii) Statements of Changes in Stockholders' Deficit, (iv) Statements of Cash Flows, and (v) Notes to Financial Statements. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
(1) Filed herewith.
| 34 |
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, thereunto duly authorized.
| DAYBREAK OIL AND GAS, INC. | |
| By: | /s/ JAMES F. WESTMORELAND |
| James F. Westmoreland, its | |
| President, Chief Executive Officer and interim | |
| principal finance and accounting officer | |
| (Principal Executive Officer, Principal Financial | |
| Officer and Principal Accounting Officer) | |
| Date: | January 14,2022 |
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Daybreak Oil and Gas Inc. published this content on 18 January 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 18 January 2022 11:44:07 UTC.
