UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB
(Mark
One)
[X]
|
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the
fiscal year ended February 28, 2007
[ ]
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the
transition period ______ to _______
Commission
file number 000-50107
DAYBREAK
OIL AND GAS, INC.
(Name
of
small business issuer in its charter)
Washington
|
|
91-0626366
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
601
W. Main Ave., Suite 1012, Spokane, WA
|
99201
|
(Address
of principal executive offices)
|
(Zip
code)
|
Issuer’s
telephone number, including area code: (509) 232-7674
Securities
registered under Section 12(b) of the Exchange Act: None
Securities
registered under Section 12(g) of the Exchange Act: Common Stock, par
value $0.001 per share
Check
whether issuer is not required to file reports pursuant to Section 13 or 15(d)
of the Exchange Act.
¨
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 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. Yes
þ
No
¨
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form and no disclosure will be contained,
to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act:
Large
accelerated filer
¨
Accelerated
filer
¨
Non-accelerated
filer
þ
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
¨
No
þ
The
registrant’s revenues for its most recent fiscal year were
$629,345.
The
aggregate market value of the voting and non-voting stock held by non-affiliates
of the registrant, based on the closing price of $0.50 on September 14,
2007, as reported by the Over the Counter Bulletin Board was $
16,576,211
.
At
September 14, 2007, the registrant had
41,171,299
outstanding shares of $0.001 par value common stock.
TABLE
OF CONTENTS
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PAGE
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PART I
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4
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ITEM
1.
|
DESCRIPTION
OF BUSINESS
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4
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ITEM
2.
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DESCRIPTION
OF PROPERTIES
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22
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ITEM
3.
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LEGAL
PROCEEDINGS
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29
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ITEM
4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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29
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PART II
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30
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ITEM
5.
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MARKET
FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
SMALL
BUSINESS ISSUER PURCHASE OF EQUITY SECURITIES
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30
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ITEM
6.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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51
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ITEM
7.
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FINANCIAL
INFORMATION
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62
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ITEM
8.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND
FINANCIAL DISCLOSURE
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109
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ITEM
8A.
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CONTROLS
AND PROCEDURES
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110
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ITEM
8B.
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OTHER
INFORMATION
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112
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PART III
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113
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ITEM
9.
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DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
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113
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ITEM
10.
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EXECUTIVE
COMPENSATION
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118
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ITEM
11.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
|
122
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ITEM
12.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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124
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ITEM
13.
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EXHIBITS
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134
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ITEM
14.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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136
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SIGNATURES
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137
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CAUTIONARY
STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
We
believe that some statements contained in this Prospectus relate to results
or
developments that we anticipate will or may occur in the future and 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 statements
about the following:
-
Our
future operating results,
-
Our
future capital expenditures,
-
Our
expansion and growth of operations, and
-
Our
future investments in and acquisitions of oil and natural gas
properties.
We
have
based these forward-looking statements on assumptions and analyses made in
light
of our experience and our perception of historical trends, current conditions,
and expected future developments. However, you should be aware that
these forward-looking statements are only our predictions and we cannot
guarantee any such outcomes. Future events and actual results may
differ materially from the results set forth in or implied in the
forward-looking statements. Factors that might cause such a
difference include:
-
General
economic and business conditions,
-
Exposure
to market risks in our financial instruments,
-
Fluctuations
in worldwide prices and demand for oil and natural gas,
-
Fluctuations
in the levels of our oil and natural gas exploration and development
activities,
-
Risks
associated with oil and natural gas exploration and development
activities,
-
Competition
for raw materials and customers in the oil and natural gas
industry,
-
Technological
changes and developments in the oil and natural gas industry,
-
Regulatory
uncertainties and potential environmental liabilities,
-
Additional
matters discussed under “Risk Factors.”
PART I
ITEM
1. DESCRIPTION OF BUSINESS
Background
Daybreak
Oil and Gas, Inc. (referred to herein as “we,” “our,” “Daybreak,” or the
“Company”) was originally incorporated in the State of Washington on March 11,
1955 as Daybreak Uranium, Inc. The Company was established for the purpose
of
mineral exploration and development on claims or leased lands throughout the
western United States. In August 1955, we acquired the assets of Morning Sun
Uranium, Inc. By the late 1950s, the Company had ceased to be a producing mining
company and thereafter engaged in mineral exploration. In May 1964, to reflect
the diversity of its mineral holdings, the Company changed its name to Daybreak
Mines, Inc. The trading symbol for the Company became DBRM.
Our
subsequent efforts in the acquisition, exploration and development of
potentially viable commercial properties were unsuccessful. By February 1967,
we
had ceased active operations. After that time, our activities were confined
to
annual assessment and maintenance work on our Idaho mineral properties and
other
general and administrative functions. In November 2004, we sold our mineral
rights in approximately 340 acres in Shoshone County, Idaho.
Overview
Effective
March 1, 2005, we undertook a new business direction for the Company as an
exploration and development company in the oil and gas industry. As of this
date, we have become an early stage energy company. Currently, we are
developing prospects in Alabama, California, Louisiana and Texas. In October
of
2005, to better reflect this new direction of the Company, our shareholders
approved changing our name to Daybreak Oil and Gas, Inc. Our trading symbol
continues to be DBRM.
We
are
actively pursuing oil and gas opportunities through joint ventures with industry
partners as a means of limiting our drilling risk. Our prospects are
generally brought to us by other oil and gas companies or
individuals. We identify and evaluate prospective oil and gas
properties to determine both the degree of risk and the commercial potential
of
the project. We are currently developing projects that have a mix of
low risk with a potential of steady reliable revenue as well as projects with
a
higher risk of success, but that may also have a large return. We
seek to maximize the value of our asset base by exploring and developing
properties that have both production and reserve growth potential.
In
November 2006, we became the operator of our Tuscaloosa project located in
northeast Louisiana. In June 2007, we became the operator of the East Gilbertown
Field in Choctaw County, Alabama. By being the operator on oil and gas projects,
we are more directly in control of the costs of drilling, completion and
production on our projects. Additionally, by being the operator, we are
increasing the expertise of Daybreak personnel in the oil and gas industry.
In
the past, we have always relied on others for drilling, delivering any gas
or
oil we discover, and negotiating all sales contracts.
To
date,
we have drilled seven “exploratory wells” (wells drilled to discover new oil or
gas reservoirs in an unproved area); one developmental well (a well drilled
within the proved area of an oil or gas reservoir to a depth known to be
productive); and five “re-entry wells” (wells that were previously plugged or
abandoned, but will now have the cement abandonment plugs drilled out of the
original borehole to test potential zones of production). One exploratory well
in northeast Louisiana was successfully completed and commenced production
on
June 17, 2006. This is the Tensas Farms et al “F-1”
well.
Two
other
exploratory wells, (the Tensas Farms et al “F-3” and the Tensas Farms et al
“B-1”) located in Louisiana on the Tuscaloosa Project were
drilled in November and December of 2006. The “F-3” well has been
completed and has been producing since March 2007. An initial completion was
attempted on the “B-1” well, but the well has not been placed into
production. The B-1 log information is being reviewed and the well
may require stimulation to achieve acceptable flow rates.
The
development well was drilled in the Krotz Springs Field and commercial
production began in May of 2007. The other four exploratory wells were drilled
in Texas (1) in December of 2005; in Alberta, Canada (1) in June 2006, and
in
central Louisiana (2) in December 2006 and May 2007, were dry holes (a well
that
does not encounter commercial amounts of gas or oil).
We
purchased our interest in the Saxet Field in Corpus Christi, Texas in November
2005 and commenced activities to re-enter five of the existing wells on this
property in May 2006. Of the five re-entry wells, three have been
successful and are currently producing oil and/or natural gas. The
other two re-entry wells are being used as salt water disposal
wells.
We
acquired our interest in the East Gilbertown Field in Alabama in December 2006,
and have participated in the workover of three wells, resulting in an increase
in the average daily production of this field.
During
the fiscal year ended February 28, 2007, we have received net production revenue
of $477,224 from our Louisiana wells in the Tuscaloosa Project; $150,910 from
our Texas wells in the Saxet Field; and $1,211 from our wells in Alabama at
the
Gilbertown Field. Funding for these activities has been primarily accomplished
through (1) loans from our directors, shareholders and others and (2) the sales
of our common and preferred stock through Rule 506 Regulation D private
placement offerings. Net positive cash flow from completed producing
wells is expected to increase in the current fiscal year.
Historical
Business Development
In
September 2001, the Board of Directors authorized a private placement of the
Company’s common stock to raise $55,000. Additionally, our shareholders approved
increasing the authorized common stock of the Company to 200,000,000 shares
and
also authorized the creation of 10,000,000 shares of preferred
stock.
In
July
of 2003, a private placement was conducted to raise an additional $25,000.
The
proceeds of the offering were utilized to pay expenses relating to the Company’s
ongoing reporting requirements under the Securities Exchange Act of
1934.
In
May of
2004, the Company’s stock moved from being quoted on the “pink sheet” market to
the “OTC” (over-the-counter) bulletin board market.
Effective
March 1, 2005, we undertook a new business direction for the Company as an
exploration and development company in the oil and gas industry. As of this
date, we became an exploration stage energy company.
Between
March 22, 2005 and August 31, 2005, we borrowed a total of $168,821 from six
officers, directors or shareholders to fund operating capital
needs.
In
April
of 2005, we signed two oil and gas exploration and development agreements for
exploration projects located in Texas (Ginny South and Pearl
Projects).
From
June
through December 2005, we conducted a private placement of our common stock.
The
proceeds were used to pay for lease, exploration and drilling expenses of the
Company as well as working capital. Net proceeds to the Company were
$1,087,500.
In
July
2005, we entered into an exploration agreement with an industry partner and
three Geotechnical professionals to jointly develop an AMI (Area of Mutual
Interest) located in the San Joaquin Basin of California (East Slopes
Project).
In
September 2005, we entered into an exploration agreement to jointly develop
an
AMI located in northeast Louisiana (Tuscaloosa Project).
In
November 2005, we agreed to participate in a five well re-entry program in
the
Saxet Deep Field in Corpus Christi, Texas.
In
December 2005, drilling equipment for our first well finally moved onsite in
San
Patricio County, Texas. We had encountered many delays in the start of this
project including the arrival of both Hurricanes Katrina and Rita.
In
December 2005, we borrowed $60,000 to help finance exploration activities as
well as increase operating capital.
In
January 2006, drilling equipment moved onsite at our second drilling project.
This was the Tensas Farms et al “F-1” location on the Tuscaloosa Project in NE
Louisiana. Additionally in January, a seventh director was appointed to the
Board of Directors. This individual was Terrence Dunne, an existing shareholder
and 10% control person at the time.
Between
January 25, 2006 and February 8, 2006, we borrowed a total of $806,700 from
seven shareholders to help finance exploration activities as well as increase
operating capital.
Between
February 24, 2006 and March 6, 2006, we borrowed $325,001 from four shareholders
to meet operating capital needs.
On
March
8, 2006, we and our partners purchased a 50% mineral right interest in 28,000
acres that were located within the original AMI of the Tuscaloosa Project
located in NE Louisiana.
From
March through May 2006, we conducted a private placement of our common stock
that raised net proceeds of $5,188,257 for use in lease, exploration, drilling
and to meet working capital needs.
On
March
30, 2006, we agreed to jointly participate in an exploration project at the
Krotz Springs Field located in St. Landry Parish, Louisiana.
In
May
2006, we started the first re-entry of five wells in the Saxet Deep Field near
the Corpus Christi, Texas airport. We also agreed to jointly participate in
an
exploration projects located in St. Landry Parish, Louisiana (North Shuteston)
and in Alberta, Canada (40 Mile Coulee). In an effort to conserve cash flow,
we
financed our 40% ownership in the pipeline that is connected to the “F-1” well
on the Tuscaloosa Project in NE Louisiana.
In
July
2006, we conducted a private placement of our preferred stock that raised net
proceeds of $3,626,204 for use in lease, exploration, drilling and to meet
working capital needs.
In
August
2006, we finalized an agreement with Green River Drilling of Venus, Texas,
for
the refurbishment of a drilling rig that Daybreak would have a right for the
exclusive use of the drilling rig for a three year period. From August through
November 2006, we advanced Green River $800,000 for the refurbishment of the
rig. In May 2007, Green River sold the drilling rig and the advanced funds
plus
interest were returned to Daybreak. Additionally in August, an eighth director
was appointed to the Board of Directors. This individual was Eric Moe, our
Chief
Executive Officer.
In
December 2006, we agreed to jointly participate in an oilfield re-entry project
in East Gilbertown Field located in Choctaw County, Alabama. Additionally,
we
drilled two more exploratory wells located in Tensas and Franklin Parishes,
Louisiana. The “F-3” well (Tensas Parish) has been completed and has been
producing since March 2007. The “B-1” well (Franklin Parish) was completed, but
has not yet been placed into production. The well log information is
being reviewed and the well may require stimulation to achieve acceptable flow
rates.
In
January 2007, we commenced drilling of the Haas-Hirsch No. 1 well located in
the
Krotz Springs Field in St. Landry Parish, Louisiana. This well was perforated
and opened to testing in May 2007. Additionally in January, a ninth director
was
appointed to the Board of Directors. This individual was Tim Lindsey, who has
over thirty years experience in global oil and gas exploration, production,
technology and business development.
In
May
2007, we commenced procedures to attempt to resolve mechanical problems
associated with the Tuscaloosa Project “F-1” well. Our efforts
resulted in the successful re-establishment of production from this well in
mid-July 2007. However, as a result of an issue encountered with the
gas sales agreement covering this well, the F-3 well and the pipeline connected
to both of these wells, both the F-1 well and the F-3 well were, in late July
2007, temporarily shut in pending resolution of the sales contract
issues and/or the securing of an alternative market for the natural gas produced
by these two wells.
Competition
We
compete with independent oil and gas companies for property acquisitions and
for
the equipment and labor required to operate and develop these
properties. Most of our competitors have substantially greater
financial and other resources than we have. These competitors may be
able to pay more for exploratory prospects and may be able to define, evaluate,
bid for and purchase a greater number of properties and prospects than we
can.
In
addition, larger competitors may be able to absorb the burden of any changes
in
federal, state and local laws and regulations more easily than we can, which
could adversely affect our competitive position.
Further,
our competitors may have technological advantages and may be able to implement
new technologies more rapidly than we can. Our ability to explore for
natural gas and oil prospects and to acquire additional properties in the future
will depend on our ability to conduct operations, to evaluate and select
suitable properties and to consummate transactions in this highly competitive
environment. In addition, most of our competitors have operated for a
much longer time than we have and have demonstrated the ability to operate
through industry cycles.
Significant
Customers
At
each
of our property locations in Alabama, Louisiana and Texas, we have oil and
gas
sales contracts with one dominant purchaser in each respective
area. Due to the availability of distribution pipelines or sole
distributors, we do not have the option of choosing to whom we will sell our
oil
and gas products. If these purchasers should not be able to resell their
products or if they lose a sales contract then we might not have a market for
our products.
In
the
case of the Tuscaloosa project, both the F-1 well and the F-3 well have
previously supplied gas to a single customer pursuant to a gas supply
agreement. As a result of an issue encountered with the gas sales
agreement covering the F-1 well, the F-3 well and the pipeline connected to
these wells, both the F-1 well and the F-3 well were, in August 2007,
temporarily shut-in pending resolution of the sales contract issues and/or
the
securing of an alternative market for the natural gas produced by these two
wells. In combination, these two wells contributed approximately 75%
of total revenues during the fiscal year ended February 28, 2007.
Title
to Properties
As
is
customary in the oil and natural gas industry, we make only a cursory review
of
title to undeveloped oil and natural gas leases at the time we acquire
them. However, before drilling commences, we search the title, and
remedy any material defects before we actually begin drilling the
well. To the extent title opinions or other investigations reflect
title defects, we (rather than the seller or lessor of the undeveloped property)
typically are obligated to cure any such title defects at our
expense. If we are unable to remedy or cure any title defects so that
it would not be prudent for us to commence drilling operations on the property,
we could suffer a loss of our entire investment in the property. We
believe that we have good title to our oil and natural gas properties, some
of
which are subject to immaterial encumbrances, easements, and
restrictions.
Long
Term Success
Our
success depends on (1) the successful acquisition, drilling and development
of
commercial grade oil and gas properties and (2) the prevailing prices for oil
and natural gas to generate future revenues and operating cash
flow. Oil and natural gas prices have been extremely volatile in
recent years and are affected by many factors outside our
control. This volatile nature of the energy markets makes it
difficult to estimate future prices of oil and natural gas; however, any
prolonged period of depressed prices would have a material adverse effect on
our
results of operations and financial condition. Such pricing factors
are largely beyond our control, and may result in fluctuations in our
earnings. We believe significant opportunities are available to us in
the oil and gas exploration and development industry.
Regulation
The
exploration and development of oil and gas properties are subject to various
types of federal, state and local laws and regulations. These laws and
regulations govern a wide range of matters, including the drilling and spacing
of wells, allowable rates of production, restoration of surface areas, plugging
and abandonment of wells and requirements for the operation of
wells.
Laws
and
regulations relating to our business frequently change, and future laws and
regulations, including changes to existing laws and regulations, could adversely
affect our business.
RISK
FACTORS
The
following risk factors together with other information set forth in this Form
10-KSB, should be carefully considered by current and future investors in our
securities. An investment in these securities involves substantial
risks. If any of the following risks actually occur, our financial
condition and our results of operations could be materially and adversely
affected. Additional risks and uncertainties not presently known to
us may also impair our business operations. In any such case, the
trading price of our common stock could decline, and you could lose all, or
a
part, of your investment.
Risks
related to investment in our Company
Our
auditors have expressed an opinion that our significant operating losses raise
substantial doubt about our ability to continue as a going
concern
The
Company’s financial statements for the year ended February 28, 2007 and 2006,
have been audited by our current independent registered public accountant.
Both
of these reports include an explanatory paragraph stating that the financial
statements have been prepared assuming the Company will continue as a going
concern. The report also states that the Company has incurred
significant operating losses that raise substantial doubt about its ability
to
continue as a going concern. The accompanying financial statements do not
include any adjustments that might result from this uncertainty. If
the Company cannot continue as a going concern, your investment in the Company
could become devalued or worthless.
The
Company reported a net loss of $8,392,030 for the fiscal year ended February
28,
2007, and a cumulative net loss from inception through February 28, 2007 of
$12,864,071.
We
are an early stage oil and gas exploration company with a limited operating
history on which to base an investment decision
We
have a
limited history of oil and gas production and have minimal proven
reserves. To date, we have had limited revenues and have not yet
generated positive earnings. The Company cannot provide any
assurances that we will ever operate profitability. As a result of
our limited operating history, we are more susceptible to business
risks. These risks include unforeseen capital requirements, failure
to establish business relationships, and competitive disadvantages against
larger and more established companies.
The
resale of shares offered in private placements could depress the value of the
shares.
Shares
of
the Company’s Common Stock have been offered and sold in private placements at
significant discounts to the trading price of the common stock at the time
of
the offering. Sales of substantial amounts of common stock eligible
for future sale in the public market, or the availability of shares for sale,
including shares issued upon exercise of outstanding warrants, could adversely
affect the prevailing market price of our common stock and our ability to raise
capital by an offering of equity securities.
If
we are unable to obtain additional capital we will not be able to fund all
drilling projects that we have committed to for the next twelve
months
Although
our first well commenced production on June 17, 2006, we have generated limited
revenue from operations. We are dependent upon our ability to raise
additional capital over the next twelve months to meet future drilling
commitments. There is no guarantee that we will be successful in our
efforts in the debt and equity markets to raise the funds necessary to fund
these commitments. If we are unable to raise the additional funds, we
will be unable to proceed with these planned drilling projects.
We
have paid our officers and directors significant amounts in the form of
salaries, consulting fees, and stock which could have an adverse affect on
our
net operating results and earnings per share
In
our
fiscal year ending February 28, 2006, we paid our officers and directors a
total
of $60,050 in cash for services. During this same period, we granted
these individuals 2,783,000 shares of unregistered common stock with
a fair value of $2,010,730 at the grant date for services.
For
the
fiscal year ended February 28, 2007, we paid our officers and director a total
of $553,941 in cash for services. During this same period, we granted
these individuals 1,050,000 shares of unregistered common stock with a fair
value of $2,206,500 at the grant date for services.
These
payments were all approved by the Compensation Committee of the Board of
Directors. The Compensation Committee approved these payments and
salaries after conducting an analysis of salaries paid to individuals who
perform similar functions in comparably-sized companies. The Board of
Directors has the power to approve the payment of salaries and bonuses without
receiving approval of the shareholders. All compensation payments are
accounted for as administrative expenses. These compensation payments
have had, and may continue to have, an adverse impact on our net results from
operations, and earnings (or losses) per share.
We
are an exploration stage company implementing a new business plan making it
difficult to evaluate our chance for success
We
are an
exploration stage company with a limited operating history upon which to base
an
evaluation of our current business and future prospects. We started
in the oil and gas exploration and development industry in March of
2005. We are in the early stages of the implementation of our
business plan. Based on this limited history, investors do not have a
proven basis to determine the probability of our business success.
The
oil and gas business is highly competitive placing us at an operating
disadvantage
We
expect
to be at a competitive disadvantage in (a) seeking to acquire suitable oil
and
or gas drilling prospects; (b) undertaking exploration and development; and
(c)
seeking additional financing. We base our preliminary decisions
regarding the acquisition of any oil and or gas prospect and undertaking
drilling ventures upon general and inferred geology. This public
information is also available to our competitors.
In
addition, we compete with large oil and gas companies which have longer
operating histories and greater financial resources than we do. These
larger competitors, by reason of their size and greater financial strength,
can
more easily:
-
access
capital markets;
-
recruit
more qualified personnel;
-
absorb
the burden of any changes in laws and regulation in applicable
jurisdictions;
-
handle
longer periods of reduced prices of gas and oil.
These
disadvantages could create negative results for our business plan and future
operations.
We
cannot guarantee financial results, making it more difficult to raise additional
capital
Since
our
inception, we have suffered recurring losses from operations and have depended
on external financing to sustain our operations. During the year
ended February 28, 2007, we reported a net loss of $8,392,030. If exploration
efforts are unsuccessful in establishing proved reserves and exploration
activities cease, the amounts accumulated as unproved costs will be charged
against earnings as impairments. Potential investors may be dissuaded
from investing in the Company based on historical results.
Our
ability to reach and maintain profitable operating results is dependant on
our
ability to find, acquire, and develop oil and gas
properties
Our
future performance depends upon our ability to find, acquire, and develop oil
and gas reserves that are economically recoverable. Without
successful exploration and acquisition activities, we will not be able to
develop reserves or generate revenues to achieve and maintain profitable
operating results. No assurance can be given that we will be able to
find, acquire or develop these reserves on acceptable terms. We also
cannot assure that commercial quantities of oil and gas deposits will be
discovered that are sufficient to enable us to recover our exploration and
development costs. Although our Company’s President has significant
experience in the oil and gas industry, we do not have an established history
of
locating and developing properties that have economically feasible oil and
gas
reserves.
To
execute our business plan we will need to develop current projects and expand
our operations requiring significant capital expenditures which we may be unable
to fund
We
have a
history of net losses and expect that our operating expenses will increase
substantially over the next 12 months as we continue to implement our business
plan. Our business plan contemplates the development of our current
exploration projects and the expansion of our business by identifying,
acquiring, and developing additional oil and gas properties.
We
need
to rely on external sources of financing to meet the capital requirements
associated with the development of our current properties and the expansion
of
our oil and gas operations. We plan to obtain the funding we need
through debt and equity markets. There is no assurance that we will
be able to obtain additional funding when it is required or that it will be
available to us on commercially acceptable terms.
We
also
intend to make offers to acquire oil and gas properties in the ordinary course
of our business. If these offers are accepted, our capital needs will
increase substantially. If we fail to obtain the funding that we need
when it is required, we may have to forego or delay potentially valuable
opportunities to acquire new oil and gas properties. In addition,
without the necessary funding, we may default on existing funding commitments
to
third parties and forfeit or dilute our rights in existing oil and gas property
interests.
When
we make the determination to invest in oil or gas properties we rely upon
geological and engineering estimates which involve a high level of
uncertainty
Geologic
and engineering data are used to determine the probability that a reservoir
of
oil and natural gas exists at a particular location. This data is
also used to determine whether oil and natural gas are recoverable from a
reservoir. Recoverability is ultimately subject to the accuracy of
data including, but not limited to, geological characteristics of the reservoir,
structure, reservoir fluid properties, the size and boundaries of the drainage
area, reservoir pressure, and the anticipated rate of pressure
depletion.
The
evaluation of these and other factors is based upon available seismic data,
computer modeling, well tests and information obtained from production of oil
and natural gas from adjacent or similar properties. The probability
of the existence and recoverability of reserves is less than 100% and actual
recoveries of proved reserves can differ materially from
estimates. Accordingly, reserve estimates may be subject to downward
adjustment. Actual production, revenue and expenditures will likely
vary from estimates, and such variances may be material.
Our
financial condition will deteriorate if we are unable to retain our interests
in
our leased oil and gas properties
All
of
our properties are held under interests in oil and gas mineral
leases. If we fail to meet the specific requirements of each lease,
the lease may be terminated or otherwise expire. We cannot assure you
that we will be able to meet our obligations under each lease. The
termination or expiration of our “working interests” (Interests created by the
execution of an oil and gas lease) relating to these leases would impair our
financial condition and results of operations.
We
will
need significant additional funds to meet capital calls, drilling and other
production costs in our effort to explore, produce, develop and sell the natural
gas and oil produced by our leases. We may not be able to obtain any
such additional funds on terms acceptable to us, or at all.
Title
deficiencies could render our oil and gas leases worthless; thus damaging the
financial condition of the business
The
existence of a material title deficiency can render a lease worthless, resulting
in a large expense to our business. We rely upon the judgment of oil
and gas lease brokers who perform the field work in examining records in the
appropriate governmental office before attempting to place under lease a
specific mineral interest. This is a customary practice in the oil
and gas industry.
We
anticipate that we, or the person or company acting as “operator” (the
individual or company responsible for the exploration, exploitation and
production of an oil or natural gas well or lease, usually pursuant to the
terms
of a joint operating agreement among the various parties owning the working
interest in the well) on the properties that we lease, will examine title prior
to any well being drilled. Even after taking these precautions,
deficiencies in the marketability of the title to the leases may still
arise. Such deficiencies may render some leases worthless, negatively
impacting the financial condition of the Company.
Reliance
on certain third party vendors for outsourced services could be detrimental
to
our business plan
To
maximize the use of our otherwise limited capital and human resources, we intend
to rely on third party vendors for outsourced drilling, exploration and other
operational services. This practice could allow us to achieve cost
savings and operational efficiencies. However, the use of outsourced
resources could expose us to greater risk should we be unable to source critical
vendors on a cost budgeted and timely basis.
Furthermore,
the use of outsourced resources could minimize our ability to control the work
product and accountability of such vendors. If any of these
relationships with third-party service providers are terminated or are
unavailable on commercially acceptable terms, our business plan will be
adversely affected.
If
we as operators, or our operators of our oil and gas projects fail to maintain
adequate insurance, our business could be exposed to significant
losses
Our
oil
and gas projects are subject to risks inherent in the oil and gas
industry. These risks involve explosions, uncontrollable flows of
oil, gas or well fluids, fires, pollution, earthquakes and other environmental
issues. These risks could result in substantial losses due to injury
and loss of life, severe damage to and destruction of property and equipment,
pollution and other environmental damage. As protection against these
operating hazards we maintain insurance coverage to include physical damage
and
comprehensive general liability. However, we are not fully insured in
all aspects of our business. For projects in which we function as the
operator, the occurrence of a significant event against which we are not
adequately covered by insurance could have a material adverse effect on our
financial position.
In
the
projects in which we are not the operator, we require the operator to maintain
insurance of various types to cover our operations with policy limits and
retention liability customary in the industry. The occurrence of a
significant adverse event on any of these projects if they are not fully covered
by insurance could result in the loss of all or part of our
investment. The loss of this project investment could have a material
adverse effect on our financial condition and results of
operations.
We
have limited control over the activities on properties we do not operate, which
could reduce or negate the expected returns on these
investments
We
conduct our oil and gas exploration and development activities in joint ventures
with others. We have reserved the right to participate in management
decisions, but do not have ultimate decision-making authority.
In
many
cases, success in the operation of our properties will be dependent on the
expertise and financial resources of our joint venture partners and third-party
operators. Our dependence on the operator and other working interest
owners resulting in our limited ability to control the operation could adversely
affect the realization of our expected returns and lead to unexpected future
costs.
We
are not in control of our own oil and gas distribution systems and are therefore
dependent on the sales contracts of oil and gas resellers to provide a market
for us, which could result in our not being able to produce from our
wells
In
each
of our producing projects, there is only one distributor available to purchase
our oil and gas production. If that reseller were to lose a sales contract
or
customer then we might not be able to produce an otherwise productive well
because of a lack of a market in which to sell oil or gas. Additionally, we
are
subject to the traditional seasonal energy demands that are found in the oil and
gas industry.
We
may lose key management personnel which could endanger the future success of
our
oil and gas operations
Our
Company President and one Director have substantial experience in the oil and
gas business. The rest of the management team has little or no
experience in managing or conducting oil and gas operations. The loss
of any of these individuals, particularly our President or this Director could
adversely affect our business. If one or more members of our
management team dies, becomes disabled or voluntarily terminates employment
with
us, there is no assurance that a suitable or comparable substitute will be
found.
Our
cash on deposit exceeds the FDIC insurance limits exposing the uninsured
balances to possible loss
Some
of
our bank accounts periodically exceed the $100,000 limit of FDIC insurance
for
deposits. In the unlikely event that our bank should fail, it is
possible that we will lose some of our funds on deposit.
We
have disclosed material weakness in our disclosure controls and procedures
which
could erode investor confidence, jeopardize our ability to obtain insurance,
and
limit our ability to attract qualified persons to serve the
Company
In
our
fiscal 2006 and 2007 annual and quarterly SEC filings, we have disclosed
material weaknesses in our disclosure controls and
procedures. Predicated by the identification of these weaknesses, we
have carried out an evaluation of the effectiveness of the design and operation
of our disclosure controls and procedures.
Based
upon those evaluations, we concluded that our disclosure controls and procedures
need improvement and were not adequately effective to ensure timely reporting
under the Exchange Act. We are working to correct this situation as
quickly and effectively as possible.
We
will
be required to evaluate our internal controls under Section 404 of the
Sarbanes-Oxley Act of 2002 (“SOX”), and any adverse results from such evaluation
could result in a loss of investor confidence in our financial reports and
have
an adverse effect on the price of our shares of common stock.
Pursuant
to Section 404 of SOX, beginning with our annual report on Form 10-KSB for
the
fiscal year ended February 29, 2008, we will be required to furnish a report
by
management on our internal controls over financial reporting. This
report will contain among other matters, an assessment of the effectiveness
of
our internal control over financial reporting, including a statement as to
whether or not our internal control over financial reporting is
effective. This assessment must include disclosure of any material
weaknesses in our internal control over financial reporting identified by our
management. This report must also contain a statement that our
auditors have issued an attestation report on our management’s assessment of
these internal controls. Public Company Accounting Oversight Board
Auditing Standard No. 2 provides the professional standards for auditors to
attest to, and report on, our management’s assessment of the effectiveness of
internal control over financial reporting under Section 404.
We
cannot
be certain that we will be able to complete our assessment, testing and any
required remediation in a timely fashion. During the evaluation and
testing process, if we identify one or more material weaknesses in our internal
control over financial reporting, we will be unable to assert that such internal
control is effective. If we are unable to assert that our internal
control over financial reporting is effective (or if our auditors are unable
to
attest that our management’s report is fairly stated or they are unable to
express an opinion on the effectiveness of our internal controls), we could
lose
investor confidence in the accuracy and completeness of our financial reports,
which could have a material adverse effect on our stock price.
Failure
to comply with the new rules may make it more difficult for us to obtain certain
types of insurance, including director and officer liability
insurance. We may be forced to accept reduced policy limits and
coverage and/or incur substantially higher costs to obtain the same or similar
coverage. The impact of these events could also make it more
difficult for us to attract and retain qualified persons to serve on our board
of directors, on committees of our board of directors, or as executive
officers.
The
market price of our common stock could be volatile, which may cause the
investment value of our stock to decline
Our
common stock is generally quoted on the OTC Bulletin Board, however since July
2007, our stock has been quoted in the OTC pink sheet market because of SEC
filing delinquencies. Both the pink sheet market and the bulletin board market
are characterized by low trading volume. Because of this limited
liquidity, stockholders may be unable to sell their shares at or above the
cost
of their purchase prices. The trading price of our shares has
experienced wide fluctuations and these shares may be subject to similar
fluctuations in the future.
The
trading price of our common stock may be affected by a number of factors
including events described in the risk factors set forth in this 10-KSB report,
as well as our operating results, financial condition, announcements of drilling
activities, general conditions in the oil and gas exploration and development
industry, and other events or factors.
In
recent
years, broad stock market indices, in general, and smaller capitalization
companies, in particular, have experienced substantial price
fluctuations. In a volatile market, we may experience wide
fluctuations in the market price of our common stock. These
fluctuations may have a negative effect on the market price of our common
stock.
Privately
placed issuances of our common stock have and may continue to dilute ownership
interests which could have an adverse effect on our stock
prices
Our
authorized capital stock consists of 200,000,000 shares of common stock and
10,000,000 shares of preferred stock. As of
September
14
, 2007, there were
41,171,299
shares of common stock outstanding. On May 19, 2006, the Company
closed on a private placement sale of 4,013,602 units at $1.50 per unit
resulting in gross proceeds of $6,020,404. Each unit sold was
comprised of two shares of common stock and one common stock purchase
warrant. The 118 investors in this private placement were issued
8,027,206 shares of common stock and 4,013,602 common stock warrants. The
placement agent for the offering earned an additional 1,204,082 common stock
warrants. At the time of the offering, the common stock component prices of
the
private placement units were significantly lower than the trading price of
our
common stock. As of February 28, 2007, the Company’s authorized equity allows
for 159,122,770 shares of authorized and unissued common stock. In
addition to the completed private placement, we may in the future, issue
additional previously authorized and unissued common stock. These
events may result in the further dilution of the ownership interests of our
present shareholders and purchasers of common stock offered in this
prospectus.
Historically
we have, and likely will continue to issue additional shares of our common
stock
in connection with the compensation of personnel, future acquisitions, private
placements, or for other business purposes. Future issuances of
substantial amounts of these equity securities could have a material adverse
effect on the market price of our common stock, and would result in further
dilution of existing stock ownership.
Preferred
stock has been issued with greater rights than the common stock issued which
may
dilute and depress the investment value of the common stock
investments
Our
articles of incorporation currently authorize the issuance of 10,000,000 shares
of $0.001 par value preferred stock. In June 2006, the Board of
Directors authorized 2,400,000 shares of preferred stock to be designated as
Series A Convertible Preferred stock. The Board of Directors has the power
to
issue shares without shareholder approval, and such shares can be issued with
such rights, preferences, and limitations as may be determined by our Board
of
Directors. On July 18, 2006, the Company closed on a private
placement sale of 1,399,765 units at $3.00 per unit resulting in gross proceeds
of $4,199,291. Each unit sold was comprised of one Series A
Convertible Preferred share and two common stock purchase
warrants. Each Series A Convertible Preferred share can be converted
to three common stock shares at any time. The 100 investors in this private
placement were issued a total of 1,399,765 Series A Convertible Preferred shares
and 2,799,527 common stock warrants. The placement agent for the offering earned
an additional 419,930 common stock warrants. As of February 28, 2007, 1,399,765
shares of Series A Convertible preferred stock were issued and outstanding.
The
rights of the holders of common stock are subject to and may be adversely
affected by the rights and preferences afforded to the holders of these
preferred shares. The rights and preferences of the issued preferred
shares include:
-
conversion
into common stock of the Company anytime the preferred shareholder may
wish;
-
automatic
convertibility into common stock if after the effective date of the
registration statement the Company’s common stock closes at or above $3.00 per
share for twenty (20) out of thirty trading days (30) days;
-
cumulative
dividends in the amount of 6% of the original purchase price per annum,
payable upon declaration by the board of directors;
-
the
ability to vote together with the common stock with a number of votes equal
to
the number of shares of common stock to be issued upon conversion of the
preferred stock.
The
issuance of the Series A Convertible Preferred shares could delay, discourage,
hinder or preclude an unsolicited acquisition of our Company. In
addition, the issuance of these preferred shares could make it less likely
that
shareholders receive a premium for their shares as a result of any such attempt
to acquire the Company. Further, this issuance could adversely affect
the market price of, and the voting and other rights, of the holders of
outstanding shares of common stock.
Although
we have no current plans to issue any additional preferred stock, future
issuances of preferred stock may also have more advantageous features than
our
common stock in terms of dividends, liquidation and voting rights.
We
may seek to raise additional funds in the future through debt financing which
may impose operational restrictions and may further dilute existing ownership
interests
We
expect
to seek to raise additional capital in the future to help fund our acquisition,
development, and production of oil and natural gas reserves. Debt
financing, if available, may require restrictive covenants which may limit
our
operating flexibility. Future debt financing may also involve debt
instruments that are convertible into or exercisable for common
stock. As mentioned above, the conversion of the debt to equity
financing may dilute the equity position of our shareholders.
Principal
stockholders and directors control the Company through substantial voting
power
Our
two
largest principal beneficial stockholders, along with the ten directors or
officers of the Company own and control about 37% percent of our outstanding
common stock. There are a large number (over 2,000) of stockholders
who own less than 50,000 shares each and there are over 1,600 stockholders
with
invalid addresses (owning approximately 3,000,000 shares).
Our
stockholders do not have the right to cumulative voting in the election of
our
directors. Cumulative voting could allow a minority group to elect at
least one director to our board. Because there is no provision for
cumulative voting, a minority group will not be able to elect any
directors. Conversely, if our principal beneficial stockholders and
directors wish to act in concert, they would be able to vote to appoint
directors of their choice, and otherwise directly or indirectly, control the
direction and operation of the Company.
We
do not anticipate paying dividends on our common stock which could devalue
the
market value of these securities
We
have
not paid any cash dividends on our common stock since our
inception. We do not anticipate paying cash dividends in the
foreseeable future. Any dividends paid in the future will be at the
complete discretion of our board of directors. For the foreseeable
future, we anticipate that we will retain any revenues which we may generate
from our operations. These retained revenues will be used to finance
and develop the growth of the Company. Prospective investors should
be aware that the absence of dividend payments could negatively affect the
market value of our common stock.
Pursuant
to SEC Rules our common stock is classified as a “penny stock’ increasing the
risk of investment in these shares
Our
common stock is designated as “penny stock” and thus may be more illiquid than
shares traded on an exchange or on NASDAQ. The SEC has adopted rules
(Rules 15g-2 through l5g-6 of the Exchange Act) which define “penny stocks” and
regulate broker-dealer practices in connection with transactions with these
stocks. Penny stocks generally are any non-NASDAQ or non-exchange
listed equity securities with a price of less than $5.00, subject to certain
exceptions. The “penny stock rules” require a broker-dealer
to:
-
deliver
a standardized risk disclosure document prepared by the SEC;
-
provide
the customer with current bid and offer quotations for the penny
stock;
-
include
the compensation of the broker-dealer and its salesperson in the
transaction;
-
provide
monthly account statements showing the market value of each penny stock
held
in the customers account;
-
make
a
special written determination that the penny stock is a suitable investment
for the purchaser and receive the purchaser’s written agreement to the
transaction.
The
“penny stock” reporting and disclosure requirements may have the effect of
reducing the level of trading activity in the secondary market for a stock
that
is subject to these rules. The market liquidity for the shares could
be severely and adversely affected by limiting the ability of broker-dealers
to
sell these shares. In addition, the ability of purchasers in this
offering to sell their stock in any secondary market could be adversely
restricted.
Due
to limited and sporadic trading volume, investors may not be able to resell
their shares of common stock at favorable times and
prices
Although
our common stock has been quoted on the OTC Bulletin Board for several years,
the trading in our stock has been limited and sporadic. In the fiscal
year ended February 28, 2007, the average weekly volume of trading was less
than
400,000 shares. Although trading volume has increased over the past
fiscal year, it has still been sporadic. The trading volume during
this period has ranged from several hundred thousand shares to as few as no
shares traded on certain days. A consistently active trading market
for our common stock may never be developed, or sustained if it
emerges. In addition, the price of our common stock on the OTC
Bulletin Board has been extremely volatile. For example, in the past
fiscal year, the closing sale price has fluctuated between a low of $0.94 and
a
high of $2.95. Low volume or lack of demand for these securities may
make it more difficult for you to sell such shares at a price or at a time
that
would be favorable. We cannot assure you that you will be able to
sell your shares at an attractive price relative to the price you are paying
or
that you will be able to sell these securities in a timely fashion.
An
investment in the common stock of our Company will not provide any federal
income tax benefits for the shareholders
Investors
should be aware that they will not receive any of the federal income tax
benefits available to individuals investing as limited partners in oil and
gas
partnership programs. Any income tax advantages will inure solely to
the benefit of the Company and will not be passed through to any
stockholders.
Risks
Related to Our Industry
We
are subject to complex laws and regulations that can negatively impact the
cost,
manner and feasibility of conducting our business
Our
business is governed by numerous laws and regulations at various levels of
government. These laws and regulations govern the operation and
maintenance of our facilities, the discharge of materials into the environment
and other environmental protection issues. These laws and regulations
may, among other potential consequences, require that we:
-
acquire
permits before the commencement of drilling;
-
restrict
the substances that can be released into the environment with drilling
and
production activities;
-
limit
or prohibit drilling activities on protected areas;
-
require
that reclamation measures be taken to prevent pollution from former
operations;
-
require
remedial measures to be taken with respect to contaminated
property.
The
costs
of complying with environmental laws and regulations could negatively impact
our
financial condition and results of operations. Future changes in
environmental laws and regulations could occur that may result in stricter
standards and enforcement which could further negatively impact our
business.
The
volatility of oil and natural gas prices could adversely affect our
business
Our
future revenues, profitability and growth of our investments in oil and gas
properties depend to a large degree on prevailing oil and gas
prices. These prices tend to fluctuate significantly in response to
factors beyond our control. These factors include, but are not
limited to, the continued threat of escalating war in the Middle East and
actions of the Organization of Petroleum Exporting Countries and its maintenance
of production constraints. Additional factors include, the U.S.
economic environment, weather conditions, the availability of alternate fuel
sources, transportation interruption, the impact of drilling levels on crude
oil
and natural gas supply, and environmental issues. The prices for oil
and natural gas have varied substantially over time and may in the future
decline. These prices have been and are likely to remain
unstable. Significant declines in these prices owing to this
instability will adversely affect our business and consequently our
stockholders.
The
success of our business is dependent on our ability to produce sufficient
quantities of oil and gas which may be adversely affected by a number of factors
outside of our control
The
business of exploring for and producing oil and gas involves a substantial
risk
of investment loss. Drilling oil and gas wells involves the risk that
the wells may be unproductive or that, although productive, that the wells
may
not produce oil and/or gas in economic quantities.
Other
hazards, such as unusual or unexpected geological formations, pressures, fires,
blowouts, loss of circulation of drilling fluids may substantially delay or
prevent completion of any well. Adverse weather conditions can also
hinder drilling operations. In addition, a “productive well” (a well
that is producing oil or gas or that is capable of production) may become
uneconomic due to pressure depletion, water encroachment, mechanical
difficulties, etc, which impair or prevent the production of oil and/or gas
from
the well.
There
can
be no assurance that oil and gas will be produced from the properties in which
we have interests. Further, the marketability of any oil or gas that
we acquire or discover may be influenced by numerous factors beyond our
control. We cannot predict how these factors may affect our
business.
The
unavailability or high cost of drilling rigs and related equipment could
adversely affect our ability to execute our exploration and exploitation plans
on a timely and economic basis
Increased
oil and natural gas prices have stimulated increased demand and resulted in
escalated prices for drilling rigs, crews, and associated equipment, supplies
and services. This demand has created a shortage of drilling rigs and
crews as the number of wells being drilled have vastly increased. The
inability to secure drilling rigs and crews may delay development of properties
in which we acquire an interest, resulting in the untimely and costly expiration
of certain leases. Drilling delays and the loss of leases could have
a material negative effect on our business operations and financial
condition.
Employees
and Consultants
As
of
March 1, 2006, we had employment contracts with three individuals. These
employees are: Eric Moe, Chief Executive Officer; Bennett Anderson, Chief
Operating Officer; and Thomas Kilbourne, Controller/Treasurer. We had a
management contract with a private consulting firm, 413294 Alberta, Ltd., that
supplies the services of our company President, Robert Martin.
As
of
March 1, 2007, these employment and consulting contracts became written
contracts. Additionally, we have consulting contracts with two Daybreak
Directors; Tim R. Lindsey and Jeffrey Dworkin. We also have a consulting
contract with Michael Hooper for outside accounting services. These employment
and consulting contracts are annual contracts that coincide with our fiscal
year.
On
June
1, 2007, we became the operator of the Gilbertown Field in Alabama and hired
three employees for that field. On June 18, 2007, we hired an administrative
staff person for the corporate office. We may hire more employees in the next
fiscal year as needed. All other services are currently contracted for with
independent contractors. The Company has not obtained key man life insurance
on
any of its officers or directors.
The
Daybreak Oil and Gas, Inc. corporate office is located at 601 W. Main Ave.,
Suite 1012, Spokane, Washington 99201-0613. Our telephone number
is (509) 232-7674.
Our
regional operations office is located at 16225 Park Ten Place, Suite 500,
Houston, Texas 77084. The telephone number of our office in Houston is
(281) 994-4021.
Availability
of SEC Filings
You
may
read and copy any materials we file with the SEC at the SEC’s Public Reference
Room at 100 F Street, NE, Room 1580, Washington, DC 20549. You can
obtain information on the operation of the Public Reference Room by calling
the
SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC. The address of that site is
(
http://www.sec.gov
).
Website
Our
website can be found at www.daybreakoilandgas.com. Our Annual Report on Form
10-KSB, Quarterly Reports on Form 10-QSB, Current Reports on Form 8-K and
amendments to those reports filed or furnished with the U.S. Securities and
Exchange Commission, or SEC, pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, or the Exchange Act, can be accessed free
of
charge by linking directly from our website under the “SEC Filings” button to
the SEC’s Edgar Database. These filings will be available as soon as reasonably
practicable after we electronically file such material with, or furnish it
to
the SEC. Information contained on our website is not part of this
report.
Successful
Efforts Accounting
We
utilize the successful efforts method to account for our crude oil and natural
gas operations. Under this method of accounting, all costs associated with
oil
and gas lease acquisition costs, successful exploratory wells and all
development wells are capitalized and amortized on a unit-of-production basis
over the remaining life of proved developed reserves and proved reserves on
a
field basis. Unproved leasehold costs are capitalized pending the results of
exploration efforts. Exploration costs, including geological and geophysical
expenses, exploratory dry holes and delay rentals, are charged to expense when
incurred.
ITEM
2. DESCRIPTION OF PROPERTIES
We
have
onshore oil and gas projects underway throughout the United States. We have
not
filed any estimates of total, proved net oil or gas reserves with any Federal
agency for the fiscal year ended February 28, 2007. These project areas that
we
are involved in are as follows:
Louisiana
Franklin
and Tensas Parishes
. Known as the Tuscaloosa Project, this
exploration project is targeting the Tuscaloosa Basal Sand at depths between
8,000 and 9,500 feet. We and our partners have access to a 3-D
seismic survey covering an “Area of Mutual Interest” (AMI; an area outlined on a
map, that may accompany an exploration, or drilling agreement) of 55 square
miles. We have identified eight potential drilling locations, some
having the potential to produce at multiple depths. Through seven
different transactions, we have jointly acquired leases on approximately 20,288
net undeveloped acres within the AMI. This project is considered to
be primarily a gas “play” (a term applied to a portion of the exploration and
production cycle following the identification by geologists and geophysicists
of
areas with potential oil and gas reservoirs) with some “condensate” ( a
hydrocarbon mixture that is transparent and is a liquid at surface pressure)
production.
Project
Development
In
September 2006, we successfully completed the acquisition of an additional
eight
percent (8%) working interest (an obligation to pay a certain percentage of
the
costs of drilling, completing and producing any oil or gas found) in the
Tuscaloosa Project.
On
July
5, 2007, Daybreak and its partners entered into a Joint Development
Participation Agreement (“JDPA”) with three companies for a drilling program in
the Tuscaloosa project area in Louisiana. The JDPA does not effect any prior
agreement for well ownership or production revenue and infrastructure that
is
already in place. Daybreak will have a 29.5% interest in all future lease
rentals.
Field
Development
“F-1” Well
In
January 2006, Daybreak and our partners drilled the Tensas Farms et al F-1
well. The well was completed and placed into production on June 17,
2006. The “F” Prospect has up to three additional locations we
anticipate drilling to fully develop the property. We paid 88% of the
working interest costs of drilling and completion for this well. To date, we
have contributed $1,432,169 to this project in drilling, completion, pipeline,
production and workover costs.
In
May
2006, we financed our working interest in the gas pipeline that is connected
to
the F-1 well. This financing agreement was with Hooper Oil and Gas
Partners, LLC, a company controlled by
Keith
Hooper, a Daybreak shareholder
(greater
than 5% at the time).
In
January 2007, we and our partners started a “squeeze job” (process of pumping
cement into space in the well bore around the production casing so that the
cement will form a seal) of the F-1 well to correct the technical issues we
had
with water production. The squeeze was not successful in controlling water
production. We have now secured a permit for water disposal down the
annulus.
In
May
2007, we commenced implementation of an alternative plan to re-establish
production from this well. We believe that we successfully
implemented this plan and re-established production by mid-July
2007. However, as described above, in August, production from this
well was halted once again, pending resolution of certain gas contract
issues.
“F-3”
Well
In
December 2006, Daybreak and our partners drilled the Tensas Farms et al F-3
well. The well was completed and placed into production in February
2007. We paid 48% of the working interest costs of drilling and
completion for this well. We have a 36% net revenue interest (NRI) in this
well.
To date, we have contributed $984,629 to this project in drilling, completion
and flowline costs.
“B-1”Well
In
December 2006, Daybreak and our partners drilled the Tensas Farms et al B-1
well. Production casing was set and an initial completion attempted
with no flow achieved in February 2007. The well log information is being
reviewed and the well may require stimulation to achieve acceptable flow rates.
Production infrastructure and facilities have not been installed at this
location. We paid 88% of the working interest costs of drilling and completion
for this well. To date, we have contributed $1,190,001 to this project in
drilling and completion costs.
“A-1”
and “F-2” Wells
In
June
2007, we received permits to drill our next two wells in the Tuscaloosa Project.
We started drilling the A-1 prospect on August 27, 2007. The second prospect,
the F-2 will be drilled immediately after the first well is completed. We also
have plans to extend our exploration activities by drilling one Paluxy and
one
Chalk exploration well respectively. These last two wells will be drilled
contingent upon final technical and commercial analysis. We will again be the
operator of these projects.
Reserves
In
accordance with standard SEC pricing guidelines, net proved developed
non-producing reserves for the F-1 well have been estimated at 58.8 MMcf
(million cubic feet) and 10,284 Bbl (barrels). Net proved developed
non-producing reserves for the F-3 well have been estimated at 103.7 MMcf and
13,158 Barrels.
Outlook
In
November 2006, Daybreak became the operator of record for the Tuscaloosa
Project. We are planning on drilling additional wells within both the
AMI area and new prospect areas. This will allow us to develop the entire
project. In the current fiscal year, we are planning for as many as
six more wells to be drilled. These wells will allow us to continue exploration
of the Basal Tuscaloosa Sands as well as both Selma Chalk and Paluxy areas
of
interest. We are considering funding our share of the drilling costs through
the
use of an outside drilling fund; by farming out part of our interest in future
wells; and, from operating capital.
St.
Landry Parish.
The Krotz Springs Prospect is primarily a deep gas
play with reservoirs located at approximately 11,000 feet. We and our
partners have jointly leased 9,600 acres in this prospect area. We have limited
access to a 3-D interpretation that shows potential gas reservoirs primarily
in
the Cockfield Sands. Daybreak was the operator on this project during the
drilling and completion phases. Since production started in May of 2007, the
unit operator of the Krotz Springs Field has now become the operator for this
well. Total project drilling and completion costs were approximately $9.2
Million.
Daybreak
has a 12.5% working interest in this project. Our NRI is 9.125%. As of February
28, 2007, we had spent $532,108 in leasehold, drilling and completion costs
associated with this project. We have the option of participating in the
drilling of an additional five wells in the Krotz Springs Field. Each succeeding
well must be drilled within six months of the completion of the prior well.
Current production is being evaluated prior to committing to further
drilling.
In
the
North Shuteston prospect, we have leased 318 acres. We plan to drill
a low risk 3-D seismic supported shallow amplitude anomaly at a depth of 2,300
feet. This anomaly is related to a Miocene Age
Sand. Drilling and land costs are estimated to be about $563,000 with
completion and well site facilities estimated at $502,000. As of May
1, 2007, we have assumed the full (100%) working interest in this project.
We
will be looking for an industry partner to farmout part of our working interest
in this project. As of February 28, 2007, we spent $73,395 in
leasehold costs associated with this project. We intend to secure a drilling
partner for this project in the current fiscal year.
Avoyelles
Parish.
This Prospect is a Cretaceous target positioned beneath
an existing oilfield that has produced over 28 million barrels of
oil. The project will initially focus on the broad northeast flank of
the Cretaceous structure, targeting the Massive Sand of the Lower Tuscaloosa
and
the Fractured Lower (Austin) Chalk. Plans call for a 3-D seismic
survey covering about 36 square miles. Assuming an industry partner
is secured, we plan to acquire the 3-D seismic before the end of the current
fiscal year. This is primarily a deep gas play. Gross project costs
are estimated to be $1,000,000 for land, $3,000,000 for 3-D Seismic and
$6,000,000 for drilling the first well. Drilling will probably take
place in 2008. We have jointly acquired leases or permits on approximately
2,002
gross undeveloped acres within the AMI. Daybreak has a 35% working interest
in
this project. We plan to secure one or more joint venture partners to
help in funding this project. As of February 28, 2007, we had spent $404,484
(net) in leasehold, seismic and project management costs associated with this
project.
Winn
Parish.
In the North Colgrade Prospect we have drilled two exploratory wells
targeting the Wilcox gas sands at a depth of approximately 3,000 feet. In
October 2006, we paid $71,060 for a 19% working interest and 14.25% NRI in
the
first well the, Weyerhaeuser No. 1. In December 2006, drilling began on this
well. Total drilling costs were estimated to be $374,000. Target depth was
achieved and logging took place in early December. It was decided by the joint
venture participants to not complete this well because of water encroachment.
Accordingly, we have recognized $71,060 of dry hole expense in our financial
statements in the fourth quarter of the fiscal year ended February 28,
2007.
By
participating in this project, we earned the right to participate for the same
working interest and net revenue interest in additional wells on this prospect.
On April 20, 2007, we paid $33,233 for a 19% working interest in the
Weyerhaeuser No. 2 well, which was drilled as an offset to gas shows encountered
on the Weyerhaeuser No. 1. Drilling commenced on May 9, 2007, total depth was
reached on May 11, 2007. After logging it was decided by the joint venture
participants to not complete this well. Accordingly, we will recognize $33,233
of dry hole expense in our financial statements in the first quarter of the
current fiscal year ending February 28, 2008.
Texas
Nueces
County. In November 2005, we agreed to jointly participate in a five
well re-entry project in the Saxet Deep Field on a developed 320 acre
lease. The Saxet Deep Field has previously been produced as an oil
field. The project is within the city limits of Corpus Christi,
Texas. Daybreak has a 19% working interest in all wells in this project. Our
NRI
is 14.25% on production from these wells.
In
May
2006, we started the re-work of the first well, the Weil 8-C well. This well
was
successfully reworked and placed into production in August 2006. In August
and
September 2006, we re-entered and started to produce from both the Weil 3-C
and
Weil 7-C wells. Two other wells the Weil 2-C and Weil 6-C were re-entered in
September and October and are now being used as salt water disposal
wells.
As
of
February 28, 2007, we have spent $496,708 in leasehold, workover, pipeline
and
production facility costs associated with this project.
Reserves
Net
proved developed producing reserves for the Saxet Field have conservatively
been
estimated at 49.3MMcf and 596 Bbl in accordance with standard SEC pricing
guidelines.
Caldwell
County
. In January 2006, we agreed to jointly redevelop an
existing oilfield in the Upper Gulf Coast of Texas. The target was
the Edwards Limestone area. We anticipated having three horizontal
wells and one salt water disposal well in the first set of wells. The re-entry
cost for the four wells was estimated to be approximately $5,000,000. Our
drilling plans were contingent on securing one or more joint venture partners
to
complete funding of this project. We have been unable to complete funding for
this project and our option on the project has expired as of December 31, 2006.
To date, we have expended $13,210 in consulting and travel expenses for this
project.
Other
Areas
. In April 2005, we joined a land bank, whose funds were
used to acquire leases for the Pearl Prospect. The Pearl Prospect is
an onshore site located on the Texas Gulf Coast. As a member of the
land bank, Daybreak is entitled to a one-third of one percent (.333333 of 1%)
of
8/8ths “overriding royalty interest” (a revenue interest created out of the
working interest. Like the royalty interest it entitles the owner to
a portion of the gross oil and gas revenue free and clear of all costs of
drilling, completion and production except severance taxes) in an anticipated
747.14 acre lease on the Pearl Prospect. Our option to participate in
the working interest in the Prospect expired in January 2006. We have
contributed $100,000 in cash and $37,000 in unregistered common stock, based
on
the grant date of the stock, to meet our contractual
agreements.
California
Kern
and Tulare Counties
. In May 2005, we agreed to jointly explore an
Area of Mutual Interest (“AMI”) in the southeastern part of the San
Joaquin Basin. We initially paid a $12,500 fee to secure the project
and the geological concepts. Our agreement calls for us to also pay
another $5,000 fee upon the completion of each sub-regional lead that is
developed for 3-D seismic survey. Additionally, we will pay another
$5,000 fee upon the spud of the first well in each prospect area.
Eight
prospect areas have been identified and we are actively leasing lands in six
of
those areas. We have now jointly leased about 25,633 undeveloped
acres. We anticipate running a seismic survey before year end in the
Kern County prospect area. We are also planning to drill at least
three wells in Kern County before the fiscal year end. Drilling costs
are estimated to be about $250,000 per well with an estimated depth of 3,500
feet. Daybreak has a 50% of the working interest in this
project. As of February 28, 2007, we have spent $378,616 in leasehold
and seismic costs associated with this project.
On
July
12, 2007, we announced that a seismic option farmout agreement had been signed
between Chevron U.S.A. Inc., (“Chevron”) and Daybreak and its partners
(“Daybreak et al”) covering part of the Kern County area in the East Slopes
project. This agreement requires Chevron to pay for the cost of a seismic
program on the Chevron and Daybreak et al lands. After the seismic is shot
and
interpreted, Chevron will have earned a fifty percent (50%) interest in the
Daybreak et al lands. After Daybreak et al pay for the costs of the first three
wells; they will have earned a fifty percent (50%) interest in the Chevron
lands
in the same project area. The seismic and drilling are expected to be completed
before the end of the 2007 calendar year.
Alabama
(East Gilbertown Field)
Choctaw
County.
In December 2006, we became involved in an existing oil field
project, the East Gilbertown Field (“Gilbertown”) that produces heavy oil (oil
that has a high sulfur content). This field has nineteen wellbores which are
capable of production. Since joining this project, the average daily production
increased to about 60 BOPD (Barrels of Oil per Day). This has been accomplished
through a series of workovers on the producing wellbores.
Working
Interest Participation
From
December 2006 through March 2007, we incrementally increased our working
interest in this project from 2.5% to 12.5%.
Reserves
Net
Proved developed producing reserves for the East Gilbertown Field have
conservatively been estimated at 5,289 Bbl in accordance with standard SEC
pricing guidelines.
Outlook
Immediate
plans are to continue the workovers on nonproducing wellbores and build
production to over 100 BOPD. On June 1, 2007, we became the operator of the
East
Gilbertown Field. Future plans are to continue to increase production in the
field by bringing more non-producing wellbores back into production.
Additionally, we are developing an expanded drilling plan for this field to
take
advantage of unexplored geological areas.
Canada
Alberta,
Province
. In June 2006, we acquired an interest in the Forty Mile Coulee
project located in South Central Alberta, Canada, near the Alberta Badlands.
The
target was the Sunburst formation. We paid 150,000 shares of unregistered common
stock (with a restated value of $420,000) for our interest. We paid $61,960
in
additional drilling costs for this project. This well was logged and
then abandoned because of water encroachment. Accordingly, we recognized
$481,960 of dry hole expense in our financial statements in the fourth quarter
of the current fiscal year.
In
December 2006, we repurchased the 150,000 shares that had been issued to Big
Sky
Western Canada for $150,000, which was the issued value and paid an additional
$10,000 in plug and abandon (P&A) costs. We did this as part of an agreement
whereby we were released from any future plug and abandon or environmental
liability related to this project.
Summary
Operating Data
The
production and revenue shown in the following table is Daybreak’s net share of
production and revenue based on the Net Revenue Interest (NRI) in each project
as of February 28, 2007. Oil is shown in barrels (“Bbl”), and of natural gas is
shown in thousands of cubic feet (“Mcf”).
|
|
|
|
Oil
|
|
|
Gas
|
|
State
|
|
Field
|
|
Net
Barrels
|
|
|
Net
Revenue
|
|
|
Net
Mcf
|
|
|
Net
Revenue
|
|
Louisiana
|
|
Tuscaloosa
|
|
|
3,602
|
|
|
$
|
237,434
|
|
|
|
36,283
|
|
|
$
|
237,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas
|
|
Saxet
|
|
|
246
|
|
|
$
|
13,187
|
|
|
|
22,082
|
|
|
$
|
139,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alabama
|
|
Gilbertown
|
|
|
55
|
|
|
$
|
1,971
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
|
|
3,903
|
|
|
$
|
252,592
|
|
|
|
58,365
|
|
|
$
|
376,619
|
|
The
following table shows the average sales price per unit of oil and natural gas
as
well as the average cost of production in barrels of oil equivalent (“BOE”), for
the past three fiscal years.. One barrel of oil is roughly equivalent to 6,000
cubic feet of natural gas. Oil is shown in barrels (“Bbl”), and of natural gas
is shown in thousands of cubic feet (“Mcf”).
|
|
Years
Ended February 28,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Average
Sales Price:
|
|
|
|
|
|
|
|
|
|
Gas
(per Mcf)
|
|
$
|
5.68
|
|
|
$
|
-
|
|
|
$
|
|
|
Oil (per
Bbl)
|
|
$
|
63.01
|
|
|
$
|
-
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Cost of Production:
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (per
Bbl)
|
|
$
|
24.81
|
|
|
$
|
|
|
|
$
|
|
|
The
following table shows the developed and undeveloped oil and gas lease acreage
held by us as of February 28, 2007. Undeveloped acres are acres on which wells
have not been drilled or completed to a point that would permit the production
of commercial quantities of oil and gas. Gross acres are the total
number of acres in which we have an interest. Net acres are the sum of our
fractional interests owned in the gross acres.
|
|
Developed
Acres
|
|
|
Undeveloped
Acres
|
|
Location
|
|
Gross
|
|
|
Net
|
|
|
Gross
|
|
|
Net
|
|
Alabama
|
|
|
2,025
|
|
|
|
51
|
|
|
|
|
|
|
|
Texas
|
|
|
320
|
|
|
|
46
|
|
|
|
2,586
|
|
|
|
143
|
|
Louisiana
|
|
|
2,000
|
|
|
|
960
|
|
|
|
30,096
|
|
|
|
19,328
|
|
California
|
|
|
|
|
|
|
|
|
|
|
25,633
|
|
|
|
12,817
|
|
Total
|
|
|
4,345
|
|
|
|
1,057
|
|
|
|
58,315
|
|
|
|
32,288
|
|
The
following table summarizes our productive oil and gas wells as of February
28,
2007. Productive wells are producing wells and wells capable of production.
Gross wells are the total number of wells in which we have an interest. Net
wells are the sum of our fractional interests owned in the gross
wells.
State
|
|
Field
|
|
Gross
|
|
|
Net
|
|
Louisiana
|
|
Tuscaloosa
|
|
|
3
|
|
|
|
2.23
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas
|
|
Saxet
|
|
|
3
|
|
|
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
Alabama
|
|
Gilbertown
|
|
|
14
|
|
|
|
0.26
|
|
Total
|
|
|
|
|
20
|
|
|
|
2.92
|
|
The
following table shows our exploratory well drilling activity for fiscal years
ended February 28, 2006 and February 28, 2007.
|
|
Fiscal
Year 2007
|
|
Fiscal
Year 2006
|
|
State
|
|
Productive
|
|
|
Dry
|
|
Productive
|
|
Dry
|
|
Louisiana
|
|
|
3
|
|
|
|
1
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas
|
|
|
-
|
|
|
|
-
|
|
-
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
-
|
|
|
|
1
|
|
-
|
|
-
|
|
ITEM
3. LEGAL PROCEEDINGS
We
are
not the subject of any pending legal claims or litigation.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
During
the fourth quarter of the fiscal year ended February 28, 2007, we did not have
any matters submitted to a vote of our security holders of the
Company.
PART II
ITEM
5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASE OF EQUITY SECURITIES
In
the
past our stock has been quoted in the NASDAQ over the counter OTC.BB market
under the symbol “DBRM.” However since July 2007, our stock has been
quoted in the OTC pink sheet market, due to SEC filing delinquencies. The
following table shows the high and low closing sales prices for the Common
Stock
for the three most recent fiscal years. The quotations reflect inter-dealer
prices, without retail mark-up, markdown or commission and may not represent
actual transactions. The information is derived from information received
from
online stock quotation services.
Fiscal
Year Ending
February 28, 2005
|
|
High
Closing
|
|
|
Low
Closing
|
|
First
Quarter
|
$
|
0.15
|
|
|
$
|
0.08
|
|
Second
Quarter
|
|
$
|
0.14
|
|
|
$
|
0.12
|
|
Third
Quarter
|
|
$
|
0.16
|
|
|
$
|
0.12
|
|
Fourth
Quarter
|
|
$
|
0.95
|
|
|
$
|
0.12
|
|
Fiscal
Year Ending
February 28, 2006
|
|
High
Closing
|
|
|
Low
Closing
|
|
First
Quarter
|
|
$
|
0.83
|
|
|
$
|
0.25
|
|
Second
Quarter
|
|
$
|
0.34
|
|
|
$
|
0.23
|
|
Third
Quarter
|
|
$
|
0.65
|
|
|
$
|
0.27
|
|
Fourth
Quarter
|
|
$
|
3.03
|
|
|
$
|
0.45
|
|
Fiscal
Year Ending
February 28, 2007
|
|
High
Closing
|
|
|
Low
Closing
|
|
First
Quarter
|
|
$
|
2.95
|
|
|
$
|
1.66
|
|
Second
Quarter
|
|
$
|
2.77
|
|
|
$
|
1.85
|
|
Third
Quarter
|
|
$
|
1.92
|
|
|
$
|
1.02
|
|
Fourth
Quarter
|
|
$
|
1.30
|
|
|
$
|
0.94
|
|
Fiscal
Year Ending
February 28, 2008
|
|
High
Closing
|
|
|
Low
Closing
|
|
First
Quarter
|
|
$
|
0.95
|
|
|
$
|
0.48
|
|
Second
Quarter
|
|
$
|
0.70
|
|
|
$
|
0.39
|
|
Dividend
Policy
The
Company has not declared or paid cash dividends or made distributions in the
past, and the Company does not anticipate that it will pay cash dividends or
make distributions in the foreseeable future.
As
of
February 28, 2007, the Company had 2,365 shareholders of record. This number
does not include an indeterminate number of shareholders whose shares are held
by brokers in street name.
Recent
Sales of Unregistered Securities
Convertible
Debentures
|
●
|
From
March 19, 2005 through August 31, 2005, we borrowed $168,821 from
six
shareholders, officers or directors through a series of twenty-seven
convertible debentures to finance our operating
activities. These convertible debentures had the following
features: one year term, six percent interest rate and the notes
were
convertible after six months to unregistered common
stock.
|
A
conversion rate of $0.25 per share was selected because a private placement
offering of our common stock was being planned at the same time for that price.
Both the principal and the accrued interest were eligible for conversion to
unregistered common stock.
During
the fiscal year ended February 28, 2006, twenty-four of the convertible
debentures representing $136,821 in principal were converted resulting in
566,135 shares of unregistered common stock being issued to satisfy the
principal and interest obligations. By February 28, 2007, all twenty-seven
of
the debentures were converted resulting in a total of 703,675 shares of
unregistered common stock being issued to satisfy principal and interest
obligations. The convertible debenture, shares issued upon conversion of the
debenture and shares issued for interest were issued pursuant to a Section
4(2)
exemption from registration under the Securities Act of 1933, as
amended.
In
accordance with EITF 00-27 and 98-5, the Company determined that the debentures
issued integrated a beneficial conversion feature (BCF). The Company recorded
a
discount of $73,511 to reflect the BCF feature on the debentures at the date
of
issuance. Utilizing the effective interest method, these discounts have been
amortized over the period commencing from the issuance date to the date of
stated redemption (i.e. maturity) of the debt in accordance with EITF
00-27. The discount of $73,511 was fully amortized at February 28,
2007.
The
Company has evaluated the application of SFAS No. 133 and EITF 00-19 for the
consideration of embedded derivatives with respect to the conversion feature
of
the convertible debentures relative to the guidance of these pronouncements,
the
Company has concluded that these debentures did not contain embedded
derivatives.
The
following is a listing of the twenty-seven convertible debentures that
occurred:
1)
On
March 19, 2005, Terrence Dunne (appointed a director in January 2006 and CFO
in
April 2006), a shareholder and 10% control person (at the time), loaned the
Company $623 to finance ongoing operating expenses. On the day of the
loan, the closing price of our stock was $0.47. On November 28, 2005,
Mr. Dunne converted the note plus interest into unregistered common
stock. He was issued 2,593 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $0.52. Based on the closing price, the value of the
principal in the conversion was $1,296.
2)
On
March 22, 2005, Terrence Dunne (appointed a director in January 2006 and CFO
in
April 2006), a shareholder and 10% control person (at the time), loaned the
Company $10,216 to finance ongoing operating expenses. On the day of the loan,
the closing price of our stock was $0.50. On November 28, 2005, Mr.
Dunne converted the note plus interest into unregistered common
stock. He was issued 42,503 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $0.52. Based on the closing price, the value of the
principal in the conversion was $21,249.
3)
On
March 23, 2005, Dale Lavigne, a director and shareholder, loaned the Company
$15,000 to finance ongoing operating expenses. On the day of the loan, the
closing price of our stock was $0.48. On November 28, 2005, Mr.
Lavigne converted the note plus interest into unregistered common
stock. He was issued 62,397 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $0.52. Based on the closing price, the value of the
principal in the conversion was $31,200.
4)
On
March 23, 2005, Ronald Lavigne, a director and shareholder, loaned the Company
$3,000 to finance ongoing operating expenses. On the day of the loan, the
closing price of our stock was $0.48. On November 28, 2005, Mr.
Lavigne converted the note plus interest into unregistered common
stock. He was issued 12,479 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $0.52. Based on the closing price, the value of the
principal in the conversion was $6,240.
5)
On
March 25, 2005, Thomas Kilbourne, a director, Treasurer and shareholder loaned
the Company $3,000 to finance ongoing operating expenses. On the day of the
loan, the closing price of our stock was $0.37. On November 28, 2005,
Mr. Kilbourne converted the note plus interest into unregistered common
stock. He was issued 12,475 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $0.52. Based on the closing price, the value of the
principal in the conversion was $6,240.
6)
On
March 25, 2005, Robert O’Brien, a shareholder and ten percent (10%) control
person (at the time), loaned the Company $15,000 to finance ongoing operating
expenses. On the day of the loan, the closing price of our stock was
$0.37. On August 31, 2006, Mr. O’Brien converted the note plus
interest into unregistered common stock. He was issued 65,168 shares
of stock from this conversion. On the day of the conversion, the
closing price of our stock was $1.92. Based on the closing price, the
value of the principal in the conversion was $125,123.
7)
On
April 25, 2005, Terrence Dunne (appointed a director in January 2006 and CFO
in
April 2006), a shareholder and 10% control person (at the time), loaned the
Company $8,000 to finance ongoing operating expenses. On the day of the loan,
the closing price of our stock was $0.35.
On
November 28, 2005, Mr. Dunne converted the note plus interest into unregistered
common stock. He was issued 33,105 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $0.52. Based on the closing price, the value of the
principal in the conversion was $16,640.
8)
On
April 25, 2005, Dale Lavigne, a director and shareholder, loaned the Company
$8,000 to finance ongoing operating expenses. On the day of the loan, the
closing price of our stock was $0.35. On November 28, 2005, Mr.
Lavigne converted the note plus interest into unregistered common
stock. He was issued 33,105 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $0.52. Based on the closing price, the value of the
principal in the conversion was $16,640.
9)
On
April 26, 2005, Ronald Lavigne, a director and shareholder, loaned the Company
$3,000 to finance ongoing operating expenses. On the day of the loan, the
closing price of our stock was $0.35. On November 28, 2005, Mr.
Lavigne converted the note plus interest into unregistered common
stock. He was issued 12,412 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $0.52. Based on the closing price, the value of the
principal in the conversion was $6,240.
10)
On
April 26, 2005, Thomas Kilbourne, a director, Treasurer and shareholder, loaned
the Company $3,000 to finance ongoing operating expenses. On the day of the
loan, the closing price of our stock was $0.35. On November 28, 2005,
Mr. Kilbourne converted the note plus interest into unregistered common
stock. He was issued 12,412 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $0.52. Based on the closing price, the value of the
principal in the conversion was $6,240.
11)
On
May 26, 2005, Terrence Dunne (appointed a director in January 2006 and CFO
in
April 2006), a shareholder and 10% control person (at the time), loaned the
Company $3,982 to finance ongoing operating expenses. On the day of the loan,
the closing price of our stock was $0.33. On November 30, 2005, Mr.
Dunne converted the note plus interest into unregistered common
stock. He was issued 16,418 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $0.52. Based on the closing price, the value of the
principal in the conversion was $8,283.
12)
On
May 31, 2005, Thomas Kilbourne, a director, Treasurer and shareholder, loaned
the Company $3,000 to finance ongoing operating expenses. On the day of the
loan, the closing price of our stock was $0.32. On November 30, 2005,
Mr. Kilbourne converted the note plus interest into unregistered common
stock. He was issued 12,361 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $0.52. Based on the closing price, the value of the
principal in the conversion was $6,240.
13)
On
June 16, 2005, Terrence Dunne (appointed a director in January 2006 and CFO
in
April 2006), a shareholder and 10% control person (at the time), loaned the
Company $10,000 to finance ongoing operating expenses. On the day of the loan,
the closing price of our stock was $0.33. On February 10, 2006, Mr.
Dunne converted the note plus interest into unregistered common
stock. He was issued 41,558 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $1.70. Based on the closing price, the value of the
principal in the conversion was $68,000.
14)
On
July 8, 2005, Golconda Mining Company, a shareholder, loaned the Company $10,000
to finance ongoing operating expenses. On the day of the loan, the closing
price
of our stock was $0.32. On January 25, 2006, Golconda Mining Company
converted the note plus interest into unregistered common stock. They
were issued 41,315 shares of stock from this conversion. On the day
of the conversion, the closing price of our stock was $1.54. Based on
the closing price, the value of the principal in the conversion was
$61,600.
15)
On
July 27, 2005, Terrence Dunne (appointed a director in January 2006 and CFO
in
April 2006), a shareholder and 10% control person (at the time), loaned the
Company $13,000 to finance ongoing operating expenses. On the day of the loan,
the closing price of our stock was $0.25. On February 10, 2006, Mr.
Dunne converted the note plus interest into unregistered common
stock. He was issued 53,675 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $1.70. Based on the closing price, the value of the
principal in the conversion was $88,400.
16)
On
July 27, 2005, Thomas Kilbourne, a director, Treasurer and shareholder, loaned
the Company $6,500 to finance ongoing operating expenses. On the day of the
loan, the closing price of our stock was $0.25. On February 10, 2006,
Mr. Kilbourne converted the note plus interest into unregistered common
stock. He was issued 26,838 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $1.70. Based on the closing price, the value of the
principal in the conversion was $44,200.
17)
On
July 27, 2005, Robert O’Brien, a shareholder and ten percent (10%) control
person (at the time), loaned the company $12,000 to finance ongoing operating
expenses. On the day of the loan, the closing price of our stock was
$0.25. On August 31, 2006, Mr. O’Brien converted the note plus
interest into unregistered common stock. He was issued 51,156 shares
of stock from this conversion. On the day of the conversion, the
closing price of our stock was $1.92. Based on the closing price, the
value of the principal in the conversion was $98,220.
18)
On
August 1, 2005, Dale Lavigne, a director and shareholder, loaned the Company
$5,000 to finance ongoing operating expenses. On the day of the loan, the
closing price of our stock was $0.30. On February 10,
2006, Mr. Lavigne converted the note plus interest into unregistered common
stock. He was issued 20,628 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $1.70. Based on the closing price, the value of the
principal in the conversion was $34,000.
19)
On
August 1, 2005, Thomas Kilbourne, a director, Treasurer and shareholder, loaned
the Company $500 to finance ongoing operating expenses. On the day of the loan,
the closing price of our stock was $0.30. On February 10, 2006,
Mr. Kilbourne converted the note plus interest into unregistered common
stock. He was issued 2,063 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $1.70. Based on the closing price, the value of the
principal in the conversion was $3,400.
20)
On
August 2, 2005, Ronald Lavigne, a director and shareholder, loaned the Company
$5,000 to finance ongoing operating expenses. On the day of the loan, the
closing price of our stock was $0.28. On February 10, 2006, Mr.
Lavigne converted the note plus interest into unregistered common
stock. He was issued 20,625 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $1.70. Based on the closing price, the value of the
principal in the conversion was $34,000.
21)
On
August 22, 2005, Thomas Kilbourne, a director, Treasurer and shareholder, loaned
the Company $5,000 to finance ongoing operating expenses. On the day of the
loan, the closing price of our stock was $0.44. On February 28,
2006, Mr. Kilbourne converted the note plus interest into unregistered common
stock. He was issued 20,625 shares of stock from this
conversion. On the day of the conversion the closing price of our
stock was $2.25. Based on the closing price, the value of the
principal in the conversion was $45,000.
22)
On
August 24, 2005, Terrence Dunne (appointed a director in January 2006 and CFO
in
April 2006), a shareholder and 10% control person (at the time), loaned the
Company $6,000 to finance ongoing operating expenses. On the day of the loan,
the closing price of our stock was $0.42. On February 28, 2006, Mr. Dunne
converted the note plus interest into unregistered common stock. He
was issued 24,742 shares of stock from this conversion. On the day of
the conversion, the closing price of our stock was $2.25. Based on
the closing price, the value of the principal in the conversion was
$54,000.
23)
On
August 26, 2005, Terrence Dunne (appointed a director in January 2006 and CFO
in
April 2006), a shareholder and 10% control person (at the time), loaned the
Company $6,000 to finance ongoing operating expenses. On the day of the loan,
the closing price of our stock was $0.40. On February 28, 2006, Mr. Dunne
converted the note plus interest into unregistered common stock. He
was issued 24,734 shares of stock from this conversion. On the day of
the conversion, the closing price of our stock was $2.25. Based on the closing
price, the value of the principal in the conversion was $54,000.
24)
On
August 26, 2005, Robert O’Brien, a shareholder and ten percent (10%) control
person (at the time), loaned the Company $5,000 to finance ongoing operating
expenses. On the day of the loan, the closing price of our stock was $0.40.
On
August 31, 2006, Mr. O’Brien converted the note plus interest into unregistered
common stock. He was issued 21,216 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $1.92. Based on the closing price, the value of the
principal in the conversion was $40,735.
25)
On
August 31, 2005, Ronald Lavigne, a director and shareholder, loaned the Company
$2,500 to finance ongoing operating expenses. On the day of the loan, the
closing price of our stock was $0.37. On February 28, 2006, Mr. Lavigne
converted the note plus interest into unregistered common stock. He was issued
10,298 shares of stock from this conversion. On the day of the conversion,
the
closing price of our stock was $2.25. Based on the closing price, the
value of the principal in the conversion was $22,500.
26)
On
August 31, 2005, Thomas Kilbourne, a director, Treasurer and shareholder, loaned
the Company $2,500 to finance ongoing operating expenses. On the day of the
loan, the closing price of our stock was $0.37. On February 28, 2006, Mr.
Kilbourne converted the note plus interest into unregistered common
stock. He was issued 10,298 shares of stock from this conversion. On
the day of the conversion, the closing price of our stock was
$2.25. Based on the closing price, the value of the principal in the
conversion was $22,500.
27)
On
August 31, 2005, Terrence Dunne (appointed a director in January 2006 and CFO
in
April 2006), a shareholder and 10% control person (at the time), loaned the
Company $4,000 to finance ongoing operating expenses. On the day of the loan,
the closing price of our stock was $0.37. On February 28, 2006, Mr. Dunne
converted the note plus interest into unregistered common stock. He
was issued 16,476 shares of stock from this conversion.
On
the
day of the conversion, the closing price of our stock was $2.25. Based on the
closing price, the value of the principal in the conversion was
$36,000.
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Between
January 25, 2006 and February 8, 2006, the Company borrowed a total
of
$806,700 from seven shareholders in eight loans to finance exploration
activities as well as increase operating capital. The term of these
convertible debentures was for one year at a 10% interest
rate. The debentures were convertible to unregistered common
stock after 61 days from the date of issuance. The conversion
rate was $0.50 per share.
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As
of
February 28, 2007, all of these debentures had been converted to unregistered
common stock. The convertible debenture, shares issued upon conversion of the
debenture and shares issued for interest were issued pursuant to a Section
4(2)
exemption from registration under the Securities Act of 1933, as
amended.
In
accordance with EITF 00-27 and 98-5, the Company determined that the debentures
issued integrated a beneficial conversion feature (BCF). The Company recorded
a
discount of $806,700 to reflect the BCF feature at the date of issuance.
Utilizing the effective interest method, these discounts have been amortized
over the period commencing on the issuance date to the date of stated redemption
(i.e. maturity) of the debt in accordance with EITF 00-27. The
discount of $806,700 was fully amortized at February 28, 2007.
The
Company has evaluated the application of SFAS No. 133 and EITF 00-19 for the
consideration of embedded derivatives with respect to the conversion feature
of
the convertible debentures relative to the guidance of these pronouncements,
the
Company has concluded that these debentures did not contain embedded
derivatives
The
following is a list of the eight convertible debentures that
occurred:
1)
On
January 25, 2006, Michael Schneider, a shareholder loaned the Company $50,000 to
finance ongoing operating expenses. The loan agreement term was for one year
at
a 10% interest rate. The loan could be converted to unregistered common stock
at
the end of the term. The conversion rate was $0.50 per share. On January 25,
2007, Mr. Schneider converted the debenture plus interest into unregistered
common stock. He was issued 102,055 shares of stock from this conversion. On
the
day of the conversion the closing price of our stock was $1.14. Based on the
closing price, the value of the principal in the conversion was
$114,000..
2)
On
January 27, 2006, Thomas Hallett, a shareholder loaned the Company $175,000
to
finance ongoing operating expenses. On the day of the loan, the closing price
of
our stock was $1.60. On February 27, 2007, Mr. Schneider converted
the debenture plus interest into unregistered common stock. He was
issued 385,000 shares of stock from this conversion. On the day of
the conversion, the closing price of our stock was $.95. Based on the
closing price, the value of the principal in the conversion was
$332,500.
3)
On
January 27, 2006, the Hooper Group, a shareholder and company controlled by
Keith Hooper a greater than 5% shareholder (at the time), loaned the Company
$200,000 to finance ongoing operating expenses. On the day of the loan, the
closing price of our stock was $1.60. On February 27, 2007, the
Hooper Group converted the debenture plus interest into unregistered common
stock. They were issued 440,000 shares of stock from this
conversion.
On
the
day of the conversion, the closing price of our stock was $.95. Based
on the closing price, the value of the principal in the conversion was
$380,000.
4)
On
January 30, 2006, W. Stanley Hooper, a shareholder loaned the Company $100,000
to finance ongoing operating expenses. On the day of the loan, the closing
price
of our stock was $1.63. On February 27, 2007, Mr. Hooper converted
the debenture plus interest into unregistered common stock. He was
issued 220,000 shares of stock from this conversion. On the day of
the conversion, the closing price of our stock was $.95. Based on the
closing price, the value of the principal in the conversion was
$190,000.
5)
On
February 1, 2006, Daniel McKinney, a shareholder loaned the Company $101,700
to
finance ongoing operating expenses. On the day of the loan, the closing price
of
our stock was $1.59. On February 27, 2007, Mr. Schneider converted the debenture
plus interest into unregistered common stock. He was issued 223,740 shares
of
stock from this conversion. On the day of the conversion, the closing
price of our stock was $.95. Based on the closing price, the value of
the principal in the conversion was $193,230.
6)
On
February 1, 2006, Moreland Properties, a shareholder and company controlled
by
W. Douglas Moreland loaned the Company $50,000 to finance ongoing operating
expenses. On the day of the loan, the closing price of our stock was
$1.59. On February 27, 2007, Moreland Properties converted the
debenture plus interest into unregistered common stock. They were
issued 110,000 shares of stock from this conversion. On the day of the
conversion, the closing price of our stock was $.95. Based on the
closing price, the value of the principal in the conversion was
$95,000.
7)
On
February 2, 2006, James McQuade, a shareholder loaned the Company $100,000
to
finance ongoing operating expenses. On the day of the loan, the closing price
of
our stock was $1.55. On February 27, 2007, James McQuade converted the debenture
plus interest into unregistered common stock. He was issued 220,000 shares
of
stock from this conversion. On the day of the conversion, the closing price
of
our stock was $.95. Based on the closing price, the value of the principal
in
the conversion was $190,000.
8)
On February 8, 2006, Michael Schneider, a shareholder loaned the Company $30,000
to finance ongoing operating expenses. On the day of the loan, the closing
price
of our stock was $1.52. On February 27, 2007, Mr. Schneider converted the
debenture plus interest into unregistered common stock. He was issued 66,000
shares of stock from this conversion. On the day of the conversion, the closing
price of our stock was $.95. Based on the closing price, the value of the
principal in the conversion was $57,000.
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In
February and March 2006, we borrowed $325,001 from four shareholders
to
finance operating capital needs. Three of the loans were in the form
of
convertible debentures. The fourth loan was in the form of a loan
agreement. The term of all four loans, was for one year at a 10%
interest
rate. They were convertible to unregistered common stock after 61
days
from the date of issuance. The conversion rate is $0.75 per
share.
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As
of
February 28, 2007, the loan agreement had been converted but none of the
convertible debentures had been converted to unregistered common stock. The
loan
agreement shares issued upon conversion of the loan and shares issued for
interest were issued pursuant to a Section 4(2) exemption from registration
under the Securities Act of 1933, as amended.
In
December 2006, the three convertible debenture holders agreed to extend the
term
of the debentures to August 31, 2007. In consideration of the term extension,
they were issued 150,001 warrants exercisable at $2.00 for a period of five
years. The warrants were valued at $119,283 using the Black-Scholes option
pricing model. The assumptions used in the Black-Scholes valuation model were:
a
risk fee interest rate of 4.7%; the current stock price at date of issuance
of
$1.04 per share; the exercise price of the warrants of $2.00; the term of five
years; volatility of 117%; and dividend yield of 0.0%. The value of the warrants
was recognized at the time of issuance as a discount against the existing
convertible debentures and is being amortized using the effective interest
method until maturity.
On
April
30, 2007, one of the convertible debenture holders converted to Daybreak
unregistered common stock. A total of 37,169 shares were issued to satisfy
the
principal and interest obligation.
On
August
31, 2007, the remaining two convertible debenture holders agreed to extend
the
term of the debentures to October 31, 2007. In consideration of the term
extension they received 112,000 warrants. The warrants were valued at $35,386
using the Black-Scholes option pricing model. The assumptions used in the
Black-Scholes valuation model were: a risk fee interest rate of 4.1 %; the
current stock price at date of issuance of $0.53 per share; the exercise price
of the warrants of $0.53; the term of two years; volatility of 114%; and
dividend yield of 0.0%.
In
accordance with EITF 00-27 and 98-5, the Company determined that the debentures
issued integrated a beneficial conversion feature (BCF). The Company has
recorded a discount of $325,001 to reflect the BCF feature over this period.
The
beneficial conversion features were recognized as discounts on the debentures
at
the date of issuance. Utilizing the effective interest method, these discounts
have been amortized over the period commencing on the issuance date to the
date
of stated redemption (i.e. maturity) of the debt in accordance with EITF 00-27
rather than EITF 98-5. The discount of $325,001 was fully amortized at February
28, 2007.
The
Company has evaluated the application of SFAS No. 133 and EITF 00-19 for the
consideration of embedded derivatives with respect to the conversion feature
of
the convertible debentures relative to the guidance of these pronouncements,
the
Company has concluded that these debentures did not contain embedded
derivatives
The
following is a list of the loan agreement and the three convertible debentures
that occurred:
1)
On
February 24, 2006, Genesis Financial, Inc., a shareholder loaned the Company
$100,000 in a Loan Agreement to finance ongoing operating expenses. On the
day
of the loan, the closing price of our stock was $2.50. On June 6, 2006, Genesis
Financial converted the note plus interest into unregistered common stock.
They
were issued 137,023 shares of stock from this conversion. On the day of the
conversion, the closing price of our stock was $2.30. Based on the
closing price, the value of the principal in the conversion was $306,666. The
convertible note, shares issued upon conversion of the loan agreement and shares
issued for interest were issued pursuant to a Section 4(2) exemption from
registration under the Securities Act of 1933, as amended.
2)
On
February 27, 2006, Daniel McKinney, a shareholder loaned the Company $125,001
in
a Convertible Debenture to finance ongoing operating expenses. On the day of
the
loan, the closing price of our stock was $2.21.
On
December 28, 2006, Mr. McKinney agreed to extend the term of the debenture
to
August 31, 2007. In consideration of this extension, he was issued 83,333
warrants. On August 31, 2007, Mr. KcKinney agreed to extend the term of the
debenture to October 31, 2007. In consideration of this extension, he was issued
70,000 warrants. The convertible note and warrants issued upon extension of
the
term of the note were issued pursuant to a Section 4(2) exemption from
registration under the Securities Act of 1933, as amended.
3)
On
February 28, 2006, James McQuade, a shareholder loaned the Company $75,000
in a
Convertible Debenture to finance ongoing operating expenses. On the day of
the
loan, the closing price of our stock was $2.25. On December 29, 2006, Mr.
McQuade agreed to extend the term of the debenture to August 31, 2007. In
consideration of this extension, he was issued 50,000 warrants. On August 31,
2007, Mr. McQuade agreed to extend the term of the debenture to October 31,
2007. In consideration of this extension, he was issued 42,000 warrants. The
convertible note and warrants issued upon extension of the term of the note
were
issued pursuant to a Section 4(2) exemption from registration under the
Securities Act of 1933, as amended.
4)
On
March 6, 2006, Michael Schneider, a shareholder loaned the Company $25,000
in a
Convertible Debenture to finance ongoing operating expenses. On the day of
the
loan, the closing price of our stock was $2.65. On January 16, 2007, Mr.
Schneider agreed to extend the term of the debenture to August 31, 2007. In
consideration of this extension, he was issued 16,668 warrants. On
April 30, 2007, Mr. Schneider converted the note plus interest into unregistered
common stock. He was issued 37,169 shares of stock from this
conversion. On the day of the conversion, the closing price of our stock was
$0.56. Based on the closing price, the value of the principal in the conversion
was $18,667. The convertible debenture, warrants, shares issued upon conversion
of the debenture and shares issued for interest were issued pursuant to a
Section 4(2) exemption from registration under the Securities Act of 1933,
as
amended.
Warehousing
Line of Credit and Convertible Promissory Note
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On
December 19, 2005, we received an advance of $60,000 on a warehousing
line
of credit from Genesis Financial Inc., to finance operating activities.
This warehousing line of credit for $180,000 was set up to fund the
completion costs of the Ginny South Prospect in Texas. When the
exploratory well was plugged and abandoned, the remaining balance
of this
line of credit was not utilized and was therefore
cancelled.
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The
$60,000 advance, in the form of a Convertible Promissory Note, had no stated
interest and had the option to convert the note into Daybreak’s common stock at
any time until the June 30, 2006 maturity date of the note. In February 2006,
the $60,000 advance on the line of credit, as secured by the Convertible
Promissory Note, was converted into unregistered common stock of Daybreak which
resulted in 240,000 shares of stock being issued. The shares issued upon
conversion of the line of credit were issued pursuant to a Section 4(2)
exemption from registration under the Securities Act of 1933, as
amended.
No
discount was recorded for the imputed interest rate on the Convertible
Promissory Note as a beneficial conversion feature of $60,000 was recognized
upon issuance in accordance with EITF 00-27 and 98-5. The beneficial conversion
feature was recognized as a discount on the Convertible Promissory Note and
amortized utilizing the effective interest method, over the period commencing
on
the issuance date to the date of stated redemption (i.e. maturity) of the debt
in accordance with EITF 00-27.
Upon
conversion, the remaining discount was recognized as interest and the
Convertible Promissory Note was cancelled. Financing costs for the Convertible
Promissory Note were paid by issuing 66,000 shares of unregistered common stock
to Genesis Financial and the director who guaranteed Convertible Promissory
Note
as explained below. The common stock fair value of $38,380 was recognized as
interest expense on the date of grant and the fair value was determined using
Daybreak’s trading price on the date of grant.
|
|
On
December 19, 2005, we issued 30,000 shares of unregistered common
stock to
Terrence Dunne (appointed CFO in April 2006) for his personal guarantee
on
the Genesis Financial Convertible Promissory Note. The fair value
of the
common stock shares was determined using our trading price on the
date of
grant and were recorded as interest expense. The shares issued
for services were issued pursuant to a Section 4(2) exemption from
registration under the Securities Act of 1933, as
amended.
|
Private
Placements
|
|
Commencing
on June 7, 2005 and closing on December 19, 2005, we conducted a
private
placement offering of our common stock for $0.25 per share. Gross
proceeds
of $1,100,000 were raised from the sale and generated net proceeds
of
$1,087,500. A total of forty-three (43) investors participated in
this
private placement. From this offering, 4,400,000 shares of unregistered
common stock were issued. We did not engage a placement agent for
this
offering, instead all the shares were sold directly by the Company.
The
trading prices of the common stock during the private placement period
ranged from a low of $ 0.23 per share to a high of $ 0.65 per share.
The
proceeds from this offering were allocated to the following
expenditures:
|
Mineral
rights acquisition;
Drilling
wells;
Seismic
exploration;
General
and administrative expenses;
Legal
and
accounting expenses.
The
shares were offered and sold pursuant to a Regulation D exemption from the
registration requirements of the Securities Act of 1933, as amended. The shares
were offered and sold only to accredited investors.
|
|
Commencing
on March 3, 2006 and closing on May 19, 2006, we conducted a private
placement offering of our common stock. Bathgate Capital Partners
LLC, of
Denver, Colorado was the placement agent. We offered “units” for sale,
which were comprised of two shares of common stock and one common
stock
purchase warrant (warrant). The units sold for $1.50 per unit, gross
proceeds from the sale were $6,020,404, which equated to 4,013,602
units.
Our net proceeds were $5,188,257 and the placement agent’s commission and
other expenses equaled $832,147.
|
A
total
of 118 investors participated in this private placement. From the offering,
8,027,206 shares of unregistered common stock and 4,013,602 warrants were
issued. The warrants were valued at $1,779,172 using the Black-Scholes option
pricing model. The assumptions used in the Black-Scholes valuation model were:
a
risk fee interest rate of 4.99%; the current stock price at date of issuance
of
$2.70 per share; the exercise price of $2.00; an expected term of five (5)
years; volatility of 112%; and dividend yield of 0.0%.
The
Warrants were exercisable for a period of five (5) years after the closing
date
at an exercise price of $2.00 per share. Daybreak may call the warrants for
redemption if (a) the average of the closing sale price of the common stock
is
at or above $3.00 for twenty (20) out of thirty (30) trading days prior to
the
date the warrants are called, and (b) the warrant shares are registered under
the Securities Act. The Warrants were valued using the Black-Scholes option
pricing model. The assumptions used in the Black-Scholes valuation model were:
a
risk fee interest rate of 4.99%; the current stock price at date of issuance
of
$2.70 per share; the exercise price of the warrants; an expected term of five
(5) years; volatility of 112%; and dividend yield of 0.0%. As of February 28,
2007, no subscriber warrants had been exercised.
Bathgate
Capital Partners, of Denver, Colorado was the placement agent. A son of Dale
Lavigne (the Chairman and a director of Daybreak) is an employee of Bathgate
Capital Partners. The Placement Agent was paid a sales commission of 10% of
the
gross proceeds of the private placement and a non-accountable expense allowance
of 3% of the gross proceeds totaling $790,402. Additionally, the Placement
Agent
was paid a due diligence fee of $15,000. For every ten (10) units sold, the
Placement Agent earned three (3) common stock warrants, two of which are
exercisable at $0.75 per share and one of which is exercisable at $2.00 per
share. The Placement Agent warrants are exercisable for a period of seven (7)
years. The placement agent earned 1,204,082 warrants, of which 802,721 are
exercisable at $0.75 per share and were determined to have a fair value of
$2,043,752. The remaining 401,361 warrant shares are exercisable at $2.00 per
share and were determined to have a fair value of $973,970. The placement agent
warrants were valued using the Black-Scholes option pricing model. The
assumptions used in the Black-Scholes valuation model were: a risk fee interest
rate of 4.99%; the current stock price at date of issuance of $2.70 per share;
the exercise price of the warrants; an expected term of seven years; volatility
of 112%; and dividend yield of 0.0%. As of February 28, 2007, no placement
agent
warrants had been exercised.
Both
the
subscriber warrants and the placement agent warrants have a cashless exercise
provision and contain customary anti-dilution provisions. The cashless exercise
provision allows for the holder of the warrants to receive a number shares
equal
to the quotient of a) the product of the number warrants held and the amount
by
which Daybreaks market traded stock price exceeds the exercise price of the
warrants on the date of exercise, divided by b) the market traded stock price.
The anti-dilution provisions permit the adjustment of the number of shares
issuable upon exercise of the warrants in the event of stock splits, stock
dividends, stock reversals and sales of substantially all of the Company’s
assets.
Daybreak
agreed to register the shares on a “best efforts” basis. If Daybreak
was unable to file the registration statement within the filing timeline,
Daybreak would have had to issue 4,013,602 additional warrants at an exercise
price of the lower of (a) the average closing sale price of its common stock
for
twenty of the thirty trading days immediately preceding the date the
registration statement should have been filed, or (b) $1.50 per common share.
Daybreak did file the registration statement within the filing timeline. No
additional warrants were required to be issued.
Daybreak
evaluated the application of SFAS No. 133 and EITF 00-19 with respect to the
conversion feature and the registration rights for consideration of embedded
derivatives and concluded that the preferred stock and registration rights
instruments did not have embedded derivatives.
The
relative fair value of the Common Stock and the Common Stock Purchase Warrants
was as follows:
Description
|
|
Shares
|
|
|
Relative
Fair
Value
Amount
|
|
Common
Stock
|
|
|
8,027,206
|
|
|
$
|
4,241,232
|
|
Common
Stock Purchase Warrants
|
|
|
4,013,602
|
|
|
|
1,779,172
|
|
Total
Proceeds
|
|
|
|
|
|
|
6,020,404
|
|
Placement
fees
|
|
|
|
|
|
|
(832,147
|
)
|
Net
Proceeds
|
|
|
|
|
|
$
|
5,188,257
|
|
The
trading prices of our common stock during the private placement period ranged
from a low of $ 1.66 per share to a high of $ 2.80 per share. The
proceeds from this offering were allocated to the following
expenditures:
Land
acquisition;
Drilling
additional wells;
Connecting
well to pipeline;
Seismic
exploration;
General
and administrative expenses;
Legal
and
accounting expenses.
This
private placement offering was made pursuant to a Rule 506 exemption from
registration promulgated under Regulation D of the Securities Act of 1933,
as
amended. All offerees and purchasers in this private placement were accredited
investors.
|
|
Commencing
on July 7, 2006 and closing on July 18, 2006, we conducted a private
placement of our Series A Convertible Preferred Stock. Bathgate Capital
Partners LLC, of Denver, Colorado was the placement agent. We offered
“units” for sale which were comprised of one share of our Series A
Convertible Preferred stock and two common stock purchase warrants
for
$3.00 per unit. Gross proceeds from the sale were $4,199,291 which
equated
to 1,399,765 units. Our net proceeds were $3,626,204 and the placement
agent’s commission and other expenses equaled
$573,091.
|
A
total
of 100 investors participated in this private placement. From the offering,
1,399,765 shares of Series A Convertible Preferred stock and
2,799,527 common stock warrant shares were issued. Holders of Series A
Convertible Preferred stock earn a dividend, in the amount of 6% of the original
purchase price per year. Accumulated dividends do not bear
interest. Dividends are payable upon declaration by the Board of
Directors and none have been declared. The Series A Preferred can be converted
by the shareholder at any time into three shares of Daybreak’s common stock. If
Daybreak’s common stock is registered under the Securities Act of 1933, the
Series A Preferred shall be automatically converted into common stock at any
time after the effective date of the registration statement if Daybreak’s common
stock closes at or above $3.00 per share for twenty (20) out of thirty trading
days (30) days.
The
Warrants included in the private placement, are exercisable for a period of
five
(5) years after the closing date at an exercise price of $2.00 per share. In
accordance with EITF 98-5, Daybreak valued the warrants and the beneficial
conversion feature of the preferred stock. Accordingly, Daybreak
recorded a discount for the warrants and beneficial conversion feature (BCF),
of
$4,199,295. The discount is attributable to the fair value of the Warrants
and
the intrinsic value of the conversion feature of the preferred stock. The
value of the BCF was recognized and measured separately by allocating to
additional paid-in capital the proceeds equal to the $1,489,222 relative fair
value of the Warrants and the $2,710,073 intrinsic value of the conversion
feature. Daybreak also recorded a deemed dividend to reflect the full
amortization of the discount of the value of the Warrants and conversion
features of $4,199,295. The fair value of each Warrant granted was estimated
using the Black-Scholes pricing model. The assumptions used in the
Black-Scholes valuation model were: a risk fee interest rate of 4.99%; the
current stock price at date of issuance of $2.20 per share; the exercise price
of the warrants at $1.00; an expected term of five years; volatility of 113%;
and dividend yield of 0.0%. As of February 28, 2007, no warrants had been
exercised.
Bathgate
Capital Partners, of Denver, Colorado (Bathgate) was the placement
agent. A son of Dale Lavigne (the Chairman and a director of
Daybreak) is an employee of Bathgate. Bathgate was paid a sales commission
of
10% of the gross proceeds of the private placement and a non-accountable expense
allowance of 3% of the gross proceeds totaling $547,589. For every $30.00
invested, Bathgate earned three (3) common stock purchase warrants exercisable
at $1.00 per share. The warrants are exercisable for a period of five (5) years.
A total of 419,930 warrants were issued to Bathgate from this private placement
and were valued at $816,374. The placement agent warrants were valued using
the
Black-Scholes option pricing model. The assumptions used in the Black-Scholes
valuation model were: a risk fee interest rate of 4.99%; the current stock
price
at date of issuance of $2.20 per share; the exercise price of the warrants
at
$1.00; an expected term of five years; volatility of 113%; and dividend yield
of
0.0%. As of February 28, 2007, no placement agent warrants had been
exercised.
Both
the
subscriber warrants and the placement agent warrants contain anti-dilution
provisions. The anti-dilution provisions permit the adjustment of the number
of
shares issuable upon exercise of the warrants in the event of stock splits,
stock dividends, stock reversals and sales of substantially all of the Company’s
assets. The placement agent warrants contain a cashless exercise provision.
The
cashless exercise provision allows for the holder of the warrants to receive
a
number shares equal to the quotient of a) the product of the number warrants
held and the amount by which Daybreaks market traded stock price exceeds the
exercise price of the warrants on the date of exercise, divided by b) the market
traded stock price.
Daybreak has
agreed to register the Series A Preferred shares on a “best efforts”
basis. If Daybreak is unable to file the registration statement
within the filing timeline, Daybreak will have to issue 1,399,765 additional
warrants at an exercise price of $2.00 per share. Daybreak is required
to file the Series A Preferred shares registration statement within sixty
(60)
days of the effective date of the registration statement required for the
May of
2006 common stock private placement.
Daybreak
evaluated the application of SFAS No. 133 and EITF 00-19 with respect to the
conversion feature and the registration rights for consideration of embedded
derivatives and concluded that the preferred stock and registration rights
instruments did not have embedded derivatives.
The
relative fair values of the Series A Convertible Preferred Shares and the Common
Stock Purchase Warrants were as follows:
Description
|
|
Shares
|
|
|
Relative
Fair
Value
Amount
|
|
Series
A Convertible Preferred
|
|
|
1,399,765
|
|
|
$
|
2,710,073
|
|
Common
Stock Purchase Warrants
|
|
|
2,799,530
|
|
|
|
1,489,222
|
|
Total
Proceeds
|
|
|
|
|
|
|
4,199,295
|
|
Offering
Costs
|
|
|
|
|
|
|
(573,091
|
)
|
Net
Proceeds
|
|
|
|
|
|
$
|
3,626,204
|
|
A
son of
Dale Lavigne (the Chairman and a director of the Company) is an employee of
Bathgate Capital Partners. The trading prices of the common stock during the
private placement period ranged from a low of $2.20 per share to a high of
$2.35
per share The proceeds from this offering were allocated to the following
expenditures:
Completions
of wells;
Connecting
wells to pipelines;
Drilling
additional wells;
Working
capital.
This
offering was made pursuant to a Rule 506 exemption from registration promulgated
under Regulation D of the Securities Act of 1933, as amended. All offerees
and
purchasers in this private placement were accredited investors.
Stock
for Services
In
accordance with the current interpretation of FAS 123(R) the value of the below
listed transaction has been expensed as of the grant date of each transaction
as
reflected in our restated financial statements. The shares issued for services
were issued pursuant to a Section 4(2) exemption from registration under the
Securities Act of 1933, as amended.
On
April
27, 2005, we issued 350,000 shares of unregistered common stock to AnMac
Enterprises (a company owned by Michael McIntyre) for Investor Relations (“IR”)
consulting services from March 1, 2005 through February 28, 2006. On the grant
date of March 1, 2005, the closing price of our stock was $0.79. Based on the
closing price the value of this stock issuance was $276,500.
On
April
27, 2005, we issued 500,000 shares of unregistered common stock to Eric Moe
(appointed CEO in March 2006) for Investor Relations (“IR”) consulting
services from March 1, 2005 through February 28, 2006. On the grant date of
March 1, 2005, the closing price of our stock was $0.79. Based on the closing
price the value of this stock issuance was $395,000.
On
May
11, 2005, we issued 1,100,000 shares of unregistered common stock to 413294
Alberta, Ltd., of Calgary, Alberta to supply the services of Robert Martin,
as
our Company President. On the grant date of March 1, 2005, the closing price
of
our stock was $0.79. Based on the closing price the value of this stock issuance
was $869,000.
On
May
25, 2005, we issued 300,000 shares of unregistered common stock to Irwin
Renneisen for IR consulting services. On the grant date of May 18, 2005, the
closing price of our stock was $0.38. Based on the closing price the value
of
this stock issuance was $114,000. In August 2005, the 300,000 shares were
returned to us and on August 25, 2005, we issued Irwin Renneisen 30,000 shares
of restricted common stock. On the revised grant date of August 25, 2005, the
closing price of our stock was $0.44. Based on the closing price the value
of
this stock issuance was $13,200.
On
October 5, 2005, we issued 1,000,000 shares of unregistered common stock to
Eric
Moe (appointed CEO in March 2006) for IR consulting services. On the grant
date
of September 27, 2005, the closing price of our stock was $0.56. Based on the
closing price the value of this stock issuance was $560,000.
On
October 27, 2005, we issued 1,667 shares of unregistered common stock to Laura
Crist as partial payment for marketing services for our web site.
On
October 27, 2005, we issued 10,000 shares of unregistered common stock to
Gregory Lipsker as payment for legal services.
On
November 30, 2005, we issued 400,000 shares of unregistered common stock to
Terrence Dunne, (appointed a director in January 2006 and CFO in April 2006),
a
shareholder and 10% control person (at the time), for management services.
On
the grant date of September 27, 2005, the closing price of our stock was $0.56.
Based on the closing price the value of this stock issuance was
$224,000.
On
January 17, 2006, we issued 300,000 shares of unregistered common stock to
Dale
Lavigne (Chairman), for management services. On the grant date of September
27,
2005, the closing price of our stock was $0.56. Based on the closing price
the
value of this stock issuance was $168,000.
On
January 17, 2006, we issued 300,000 shares of unregistered common stock to
Ronald Lavigne (director) for management services. On the grant date of
September 27, 2005, the closing price of our stock was $0.56. Based on the
closing price the value of this stock issuance was $168,000.
On
January 17, 2006, we issued 400,000 shares of unregistered common stock to
Thomas Kilbourne (Treasurer) for management services. On the grant date of
September 27, 2005, the closing price of our stock was $0.56. Based on the
closing price the value of this stock issuance was $224,000.
On
January 17, 2006, we issued 600,000 shares of unregistered common stock to
Kirby
Cochran, a shareholder for IR consulting services. On the grant date of January
13, 2006, the closing price of our stock was $0.55. Based on the closing price
the value of this stock issuance was $330,000.
On
February 17, 2006, we issued 100,000 shares of unregistered common stock to
Bennett Anderson, a shareholder for consulting services. On the grant date
of
February 17, 2006, the closing price of our stock was $2.23. Based on the
closing price the value of this stock issuance was $223,000.
On
May 3,
2006, we issued 70,000 shares of unregistered common stock to Gregory Donelson
for consulting services. On the grant date of December 14, 2005, the closing
price of our stock was $0.61. Based on the closing price the value of this
stock
issuance was $42,700.
On
May
10, 2006, we issued 150,000 shares of unregistered common stock to AnMac
Enterprises (a company owned by Michael McIntyre) for Investor Relations (“IR”)
consulting work from March 1, 2006 through February 28, 2007. On the grant
date
of March 1, 2006, the closing price of our stock was $2.39. Based on the closing
price the value of this stock issuance was $358,500.
On
May
26, 2006, we issued 250,000 shares of unregistered common stock to 413294
Alberta, Ltd., of Calgary, Alberta to supply the services of Robert Martin,
as
our Company President. On the grant date of March 1, 2006, the closing price
of
our stock was $2.39. Based on the closing price the value of this stock issuance
was $597,500.
On
May
26, 2006, we issued 250,000 shares of unregistered common stock to Eric Moe,
CEO, for management services from March 1, 2006 through February 28, 2007.
On
the grant date of March 1, 2006, the closing price of our stock was $2.39.
Based
on the closing price the value of this stock issuance was $597,500.
On
May
26, 2006, we issued 100,000 shares of unregistered common stock to Thomas
Kilbourne, Treasurer and a director for management services from March 1, 2006
through February 28, 2007. On the grant date of March 1, 2006, the closing
price
of our stock was $2.39. Based on the closing price the value of this stock
issuance was $239,000.
On
August
31, 2006, we issued another 250,000 shares of unregistered common stock to
Eric
Moe, CEO and a director. The shares were issued as additional compensation.
On
the grant date of August 3, 2006, the closing price of our stock was $2.05.
Based on the closing price the value of this stock issuance was
$512,500.
On
February 23, 2007, we issued 200,000 shares of unregistered common stock to
Tim
Lindsey, a director for consulting services from January 2, 2007, through
February 28, 2008. On the grant date of January 2, 2007, the closing price
of
our stock was $1.30. Based on the closing price the value of this stock issuance
was $260,000.
Stock
for Directors Services
In
accordance with the current interpretation of FAS 123(R) the value of the below
listed transaction has been expensed as of the grant date of each transaction
as
reflected in our restated financial statements. The shares issued for services
were issued pursuant to a Section 4(2) exemption from registration under the
Securities Act of 1933, as amended.
On
November 30, 2005, we issued 18,000 shares of unregistered common stock to
each
of the six members of the Board of Directors. These directors were 413295
Alberta Ltd. (Robert Martin), Mike Curtis, Dale Lavigne, Jeff Dworkin, Ronald
Lavigne and Thomas Kilbourne. On the grant date of October 25, 2005, the closing
price of our stock was $0.55. Based on the closing price the value of each
stock
issuance was $9,900.
On
November 30, 2005, we issued 9,000 shares of unregistered common stock worth
to
each of the six members of the Board of Directors for director’s fees for the
third quarter of the current fiscal year. These directors were 413295 Alberta
Ltd. (Robert Martin), Mike Curtis, Dale Lavigne, Jeff Dworkin, Ronald Lavigne
and Thomas Kilbourne. On the grant date of November 30, 2005, the closing
price of our stock was $0.52. Based on the closing price the value of each
stock
issuance was $4,680.
On
February 28, 2006, we issued 3,000 shares of unregistered common stock worth
to
each of the seven members of the Board of Directors for director’s fees for the
fourth quarter of the current fiscal year. These directors were 413295 Alberta
Ltd. (Robert Martin), Mike Curtis, Dale Lavigne, Jeff Dworkin, Ronald Lavigne,
Terrence Dunne and Thomas Kilbourne. On the grant date of February 28, 2006,
the
closing price of our stock was $2.25. Based on the closing price the value
of
each stock issuance was $6,750.
Stock
for Oil and Gas Properties
In
accordance with the current interpretation of FAS 123(R) the value of the below
listed transaction has been expensed as of the grant date of each transaction
as
reflected in our restated financial statements. The shares issued for services
were issued pursuant to a Section 4(2) exemption from registration under the
Securities Act of 1933, as amended.
On
August
31, 2005, we issued 100,000 shares of unregistered common stock to Margaret
Perales of MPG Petroleum as consideration for participation in the Pearl
Prospect located in Texas. On the grant date of August 31, 2005, the
closing price of our stock was $0.37. Based on the closing price the value
of this stock issuance was $37,000.
On
October 27, 2005, we issued 600,000 shares of unregistered common stock to
Sam
Pfiester, Trustee for the Chicago Mill Joint Venture (CMJV) in the
Tuscaloosa project in Louisiana. On the grant date of September 29, 2005,
the closing price of our stock was $0.63. Based on the closing price the
value of this stock issuance was $378,000.
On
May
31, 2006, we issued 150,000 shares of unregistered common stock to Big Sky
Western Canada of Calgary, Alberta, Canada as consideration for our
participation in the 40 Mile Coulee project in Alberta, Canada. On the
grant date of May 30, 2006, the closing price of our stock was $2.80. Based
on the closing price the value of this stock issuance was $420,000. On December
8, 2006, we repurchased the original 150,000 shares from Big Sky Western Canada
for the original book value of $1.00 per share as part of the settlement of
the
plug and abandonment negotiations on the 40 Mile Coulee project. The shares
were
consequently cancelled.
On
September 22, 2006, we issued 72,500 shares of unregistered common stock to
Strike Oil & Minerals, Corp., as part of our purchase of an additional eight
percent (8%) working interest in the Tuscaloosa project in Louisiana. On the
grant date of September 22, 2006, the closing price of our stock was
$1.50. Based on the closing price the value of this stock issuance was
$108,750.
Subsequent
Issuances
On
March
through August, 2007, eight shareholders, owning a total of 82,000 shares of
our
Series A Convertible Preferred Stock, from our July 2006 private placement,
chose to convert their preferred shares to common stock. In accordance with
the
terms of the private placement agreement under which the preferred stock was
purchased, each preferred share was converted to three shares of common stock
resulting in 246,000 shares of common stock being issued.
On
March
6, 2006, Michael Schneider, a shareholder loaned the Company $25,000 to finance
ongoing operating expenses. The convertible debenture agreement term was for
one
year at a 10% interest rate. The debenture could be converted to unregistered
common stock at the end of the term. The conversion rate was set at $0.75
per share. On April 30, 2007, Mr. Schneider converted the debenture plus
interest into unregistered common stock. He was issued 37,169 shares of common
stock from this conversion. On the day of the conversion the closing price
of
our stock was $0.56. Based on the closing price the value of the principal
in
the conversion was $18,667. The convertible notes, shares issued upon conversion
of the notes and shares issued in consideration of services were issued pursuant
to a Section 4(2) exemption from registration under the Securities Act of 1933,
as amended.
Securities
Authorized for Issuance under Equity Compensation Plan
We
have
no agreements with any employees or consultants for issuing options, warrants
or
rights on our stock. We have however, issued unregistered restricted common
stock in the past as a part of our employment and consulting contracts. These
instances are explained in the detail immediately above.
Common
Stock
The
Company is authorized 200,000,000 shares of Common Stock with a par value of
$0.001 of which 29,458,221 were issued as of February 28, 2006. At February
28,
2007, a total of 40,877,230 shares were issued and outstanding. All shares
of
Common Stock are equal to each other with respect to voting, liquidation,
dividend and other rights. Owners of shares of Common Stock are
entitled to one vote for each share of Common Stock owned at any shareholders'
meeting. Holders of shares of Common Stock are entitled to receive
such dividends as may be declared by the Board of Directors out of funds legally
available therefore; and upon liquidation, are entitled to participate pro
rata
in a distribution of assets available for such a distribution to
shareholders.
There
are
no conversion, preemptive, or other subscription rights or privileges with
respect to any shares of our Common Stock. Our stock does not have
cumulative voting rights, which means that the holders of more than fifty
percent (50%) of the shares voting in an election of directors may elect all
of
the directors if they choose to do so. In such event, the holders of
the remaining shares aggregating less than fifty percent (50%) would not be
able
to elect any directors.
Preferred
Stock
The
Company is authorized 10,000,000 shares of Preferred Stock with a par value
of
$0.001 of which none had been issued as of February 28, 2006. Our 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.
On
June
30, 2006, in action by the Board of Directors, 2,400,000 of theses preferred
shares were designated as Series A Convertible Preferred. In July 2006, we
completed a private placement of the Series A Convertible Preferred that
resulted in the issuance of 1,399,765 shares.
Series
A Convertible Preferred Stock
The
following is a summary of the rights and preferences of the Series A Convertible
Preferred Stock
Conversion:
The
preferred shareholder shall have the right to convert the Series A Convertible
Preferred Stock into the Company’s Common Stock at any time. Each
share of Preferred Stock is convertible into three (3) shares of Common
Stock.
Automatic
Conversion:
The
Series A Convertible Preferred Stock shall be automatically converted into
Common Stock if the Common Stock into which the Series A Convertible Preferred
Stock are convertible are registered with the Securities and Exchange Commission
and at any time after the effective date of the registration statement the
Company’s Common Stock closes at or above $3.00 per share for twenty (20) out of
thirty trading days (30) days.
Dividend:
Holders
of Series A Convertible Preferred Stock shall be paid 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 from
the
date of the Final Closing, whether or not in any dividend period or periods
we
have assets legally available for the payment of such dividends. Accumulations
of dividends on shares of Series A Convertible Preferred Stock do not bear
interest. Dividends are payable upon declaration by the Board of
Directors.
Voting
Rights:
The
holders of the Series A Convertible Preferred Stock will vote together with
the
common stock and not as a separate class except as specifically provided herein
or as otherwise required by law. Each share of the Series A
Convertible Preferred Stock shall have a number of votes equal to the number
of
shares of Common Stock then issuable upon conversion of such shares of Series
A
Convertible Preferred Stock.
Debt
Securities
From
March 23, 2005 through August 31, 2005, in a series of twenty-seven loans,
we
borrowed from six officers, directors or shareholders, a total of $168,821
to
finance ongoing operations. These convertible debentures were for a term of
one
year; had a 6% interest rate and both the principal and interest could be
converted to unregistered common stock after a minimum period of six months.
The
conversion rate was $0.25 per share. During the fiscal year ended February
28,
2006, twenty-four of the twenty-seven loans were converted to unregistered
common stock resulting in 566,134 unregistered shares being issued. During
the
fiscal year ended February 28, 2007, the remaining three convertible debentures
were converted to unregistered common stock resulting in 137,541 unregistered
shares being issued.
From
January 25, 2006 through February 8, 2006, in a series of eight loans, we
borrowed from seven shareholders a total of $806,700 to finance ongoing
operations. These convertible debentures were for a term of one year; had a
10%
interest rate and both the principal and interest could be converted to
unregistered common stock after a minimum period of sixty-one days. The
conversion rate was $0.50 per share. During the fiscal year ended February
28,
2007, all eight loans were converted to unregistered common stock resulting
in
468,592 unregistered shares being issued.
From
February 24, 2006 through March 6, 2006, in a series of four loans, we borrowed
from four existing shareholders a total of $325,001 to finance ongoing
operations. These loans were in the form of convertible debentures (3) and
a
loan agreement with the following features. The term was for a period of one
year; the interest rate was 10%; the notes could be converted to our common
stock after a holding period of 61 days; and the conversion rate is $0.75 per
share. The loan agreement balance of $100,000 plus interest was converted to
unregistered common stock on June 6, 2006. In December 2006, all three
convertible debenture holders agreed to extend the term of the notes to August
31, 2007. This agreement for the term extension did not affect the debenture
holders rights to convert to common stock at any time. We issued 150,001
warrants to these debenture holders as consideration for extending the term
of
the notes. The fair market value of these warrants was $119,283. On April 30,
2007, one debenture holder chose to convert his note to unregistered common
stock. He was issued 37,169 shares of stock from this conversion. On August
31,
2007, the remaining two convertible debenture holders agreed to extend the
term
of the debentures to October 31, 2007. We issued 112,000 warrants to these
debenture holders as consideration for extending the term of the notes. The
warrants were valued at $35,386 using the Black-Scholes option pricing
model. The assumptions used in the Black-Scholes valuation model
were: a risk fee interest rate of 4.1 %; the current stock price at date of
issuance of $0.53 per share; the exercise price of the warrants of $0.53; the
term of two years; volatility of 114%; and dividend yield of 0.0%.
The
following table shows that convertible debentures that were outstanding as
of
February 28, 2007.
Interest
Rate
|
Conversion
Price
|
Redeemable
After
|
Loans
Outstanding
|
Outstanding
Principal
|
10%
|
0.75
|
61
Days
|
3
|
$ 225,001
|
ITEM
6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
The
following management’s discussion and analysis (“MD&A”) is management’s
assessment of the historical financial and operating results of Daybreak Oil
and
Gas, Inc. (the “Company” or “Daybreak”) during the period covered by the
financial statements. This MD&A should be read in conjunction with the
audited financial statements and the related notes and other information
included elsewhere in this 10-KSB report.
Additional
information relating to Daybreak is available on EDGAR at
www.edgar-online.com
or our web site at
www.daybreakoilandgas.com
.
Our stock is quoted on the NASDAQ over the counter (OTC.BB) market under the
symbol DBRM.OB.
Safe Harbor
Provision
Certain
statements contained in our Management’s Discussion and Analysis of Financial
Condition or Plan of Operation 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 Securities Exchange Act of 1934, as amended. All statements
other than statements of historical facts contained in this report, including
statements regarding our current expectations and projections about future
results, business strategy, performance, prospects and opportunities, are
forward-looking statements. To understand about forward looking statements,
please refer the section labeled forward looking statements at the beginning
of
this 10-KSB report.
Overview
As
an
early stage energy company concentrating on oil and gas exploration and
development; our expenditures consist primarily of geological and engineering
services, acquiring mineral leases, exploration and drilling costs and travel.
Our expenses also consist of consulting and professional services, compensation,
legal and accounting and general and administrative expenses which we have
incurred in order to address necessary organizational activities.
Our
operations are focused on identifying and evaluating prospective oil and gas
properties and funding projects that we believe have the potential to produce
oil or gas in commercial quantities. We are currently developing projects in
Alabama, California, Louisiana and Texas. Since November of 2006, we have been
involved as the operator of two project areas in Louisiana and in June of 2007,
we became the operator of the Gilbertown project in Alabama. In the past we
have
relied on our working interest partners to negotiate all drilling, and sales
contracts. Over the last fiscal year, we have been involved in the
drilling/workover and/or completion of thirteen (13) wells in Alabama,
Louisiana, Texas and in Alberta, Canada. We have achieved or increased
commercial production in eight (8) of these wellbores.
Long
Term Success
Our
success depends on the acquisition and drilling of commercial grade oil and
gas
properties and the prevailing prices for oil and natural gas. Oil and natural
gas prices have been extremely volatile in recent years and are affected by
many
factors outside our control. This volatile nature of the energy markets makes
it
difficult to estimate future prices of oil and natural gas; however, any
prolonged period of depressed prices would have a material adverse effect on
our
results of operations and financial condition.
Restated
Financial Statements
In
the
process of responding to comments from the SEC (Securities and Exchange
Commission) in regards to the SB-2 registration statement that we filed for
the
Spring 2006 private placement, we determined that it would be necessary to
restate previously filed financial statements. The restated financial statements
are included as a footnote to the financial statements that are included in
this
10-KSB report. The four (4) quarters for the fiscal year ended February 28,
2006; the twelve months ended February 28, 2006; and the first three (3)
quarters for the fiscal year ended February 28, 2007 (the "Restated Periods")
are being restated. The determination to restate the financial statements for
the Restated Periods is based on a reassessment of the following non-cash
transactions:
-
Pursuant
to SFAS No. 123(R), an adjustment was recorded utilizing the market trading
price on the date of grant as the more readily determinable fair value
of
stock issued for compensation to management and directors during the Restated
Periods; and
-
Pursuant
to SFAS No. 123(R), an adjustment was recorded utilizing the market trading
price on the date of grant as the more readily determinable fair value
of
stock issued for investor relations services during the Restated Periods;
and
-
Pursuant
to SFAS No. 123(R), an adjustment was recorded utilizing the market trading
price on the date of grant as the more readily determinable fair value
of
stock issued for oil and gas properties during the Restated Periods;
and
-
Pursuant
to EITF 00-27 and 98-5, the recognition of a beneficial conversion feature
(BCF) inherent in the convertible debentures issued during the Restated
Periods. The recognition results in the recording of a discount to
reflect the BCF and the recording of interest expense related to the
discount.
Pursuant
to SFAS No. 123R the guidelines for recording stock based compensation issued
to
officers and directors support that the more readily determinable fair value
of
these shares should be based on the publicly traded share price of our shares
at
the grant date. The valuation of stock based compensation has been further
addressed by the recent issuance of SFAS No. 157. This latest pronouncement
also
implies that shares issued to officers and directors for compensation should
be
valued at the publicly traded share price. Both of these pronouncements state
that the valuation method can be applied even when, as in our case, compensation
was issued to officers and directors in the form of unregistered shares which
cannot be sold by the recipients until a full year has elapsed from their
issuance. Accordingly, we have restated the impact of these share based payments
to reflect the use of the publicly traded share price.
Again
pursuant to SFAS No. 123(R), the guidelines for recording common stock issued
for investor relations services and the acquisition of interests in oil and
gas
properties suggest that the more readily determinable fair value of these shares
should be based on the publicly traded share price of our shares at the grant
or
acquisition date. SFAS No. 157 also suggests that when shares are issued for
services or properties, they should be valued at the publicly traded share
price. Accordingly, we have restated the impact of the share based payments
for
services and oil and gas properties to reflect the use of the publicly traded
share price.
We
also
reviewed our prior determination of the fair value of shares resulting from
the
potential conversion of debt and concluded that we did not appropriately
accounted for discounts in accordance with SFAS 123(R) and EITF 98-05. We have
calculated the intrinsic value of the embedded beneficial conversion feature
present in the convertible debt using quoted closing market prices on the date
of each of the transactions.
This
calculation has determined that $1,138,701 in discounts should have been
assigned to the convertible debt issuances at their respective inception. These
discounts will be amortized over the period commencing on the issuance date
to
the earliest conversion date of the debt.
The
accompanying financial statements for the twelve month period ended February
28,
2006, have been restated to effect the changes described above.
Selected
Financial Information
Since
our
inception, we have incurred recurring losses from operations with negative
cash
flow and have depended on external financing to sustain our operations. During
the fiscal year ended February 28, 2007, we reported losses of $8,392,030.
There
is no assurance that we will be able to achieve profitability.
Our
balance sheet on February 28, 2007, shows total assets of $9,211,466 comprised
primarily of oil and gas properties (net of Depreciation, Depletion,
Amortization and Impairment) of $4,552,850, cash and marketable securities
for
$2,356,213, note receivable (including interest) for $828,336 and accounts
receivable (including trade, related parties and joint interest participants)
of
$799,970. This compares with the February 28, 2006 balances for oil and gas
properties of $1,132,400; cash and marketable securities for $814,360 and
deposits on equipment of $250,000.
At
February 28, 2007, we had total liabilities of $2,544,884, comprised mainly
of
$2,110,458 in accounts payable, $134,999 in notes payable (net of discount),
$200,000 in pipeline financing obligation as compared with the February 28,
2006
balances for accounts payable of $28,646 and notes payable (net of discount)
of
$89,468.
Our
common stock issued and outstanding has increased by 11,419,009 shares during
the last fiscal year primarily as a result of the private placement from the
spring of 2006. Preferred stock changed from zero at February 28, 2006, because
of the July private placement of our Series A Convertible Preferred stock.
The
issued and outstanding shares increased to 1,399,765 at February 28, 2007,
from
the private placement.
Accumulated
Deficit
The
increase in the restated accumulated deficit during the exploration stage from
$4,472,041 to $12,864,071 was due to the $8,392,030 operating loss from the
fiscal year ended February 28, 2007. This included $1,196,640 of exploration
and
drilling expenses.
Cash
Flows
|
1)
|
Cash
flow from
operating activities
for the fiscal year ended February
28, 2007, was ($531,274) compared to ($393,185) for the same period
ending
February 28, 2006. This was primarily caused by our operating loss
of
$8,392,030 as compared to $4,472,041 from the prior year. Principal
operating activities in 2007 included a $1.6 million impairment
of oil and
gas properties related to the Tensas Farms F-1 and F-3 wells in
Louisiana
and $1.2 million of interest expense related primarily to accretion
of
debt discount.
|
|
2)
|
Cash
flow from
investing activities
for the fiscal year ended February
28, 2007, was ($8,936,257) compared to ($1,223,900) for the same
period
ending February 28, 2006. This difference was due to an increase
in our
investments in oil and gas properties of ($5,904,956) compared with
($973,900) from the prior fiscal year. Additional increases came
from the
deposits in money market funds ($2,356,213) and additions to notes
receivable ($800,000).
|
|
3)
|
Cash
flow from
financing activities
for the fiscal year ended February
28, 2007, was $9,039,461 compared to $2,423,022 for the same period
ending
February 28, 2006. This difference was due to proceeds from the sale
of
our common stock of $5,188,257 as compared to the sale of common
stock
from the prior year of 1,087,500. Another $3,626,204 was received
from
proceeds of the convertible preferred stock in July 2006. Additionally,
for the fiscal year ended February 28, 2007, the pipeline cost for
the F-1
well in Louisiana was financed for
$200,000.
|
Liquidity
and Capital Resources
Liquidity
and Working Capital
Liquidity
is defined as the ability to convert assets into cash or to obtain cash.
Short-term liquidity refers to the ability to meet short-term obligations of
12
months or less. Liquidity is a matter of degree and is expressed in terms of
a
ratio. Two common liquidity ratios in financial statement analysis are: Current
Ratio and Working Capital.
Current
ratio is defined as current assets divided by current liabilities. Working
capital is defined as current assets minus current liabilities.
|
|
February
28,
|
|
|
February
28,
|
|
|
|
2007
|
|
|
2006
|
|
Current
Assets
|
|
$
|
4,537,634
|
|
|
$
|
1,074,610
|
|
Current
Liabilities
|
|
$
|
2,445,457
|
|
|
$
|
118,114
|
|
Working
Capital
|
|
$
|
2,092,177
|
|
|
$
|
956,496
|
|
|
|
|
|
|
|
|
|
|
Current
Ratio
|
|
|
1.86
|
|
|
|
9.10
|
|
While
these two ratios are important, numerous other factors may also affect the
liquidity and capital resources of the Company. Working capital did increase
from $956,496 as of February 28, 2006, to $2,292,177 as of February 28, 2007.
This increase was principally due to the two private placements of our stock
that were held during the fiscal year ended February 28, 2007.
Our
business is capital intensive. Our ability to grow is dependent upon our ability
to obtain outside capital and generate cash flows from operating activities
to
necessary to fund our investment activities. As of February 28, 2007, we have
not yet demonstrated the ability to generate significant and sustainable cash
flow from producing wells developed as a result of our prior exploration and
development activities. Our independent registered auditors have expressed
a
substantial doubt regarding our ability to continue as a going
concern.
Our
only
source of funds in the past has been through the debt or equity markets. Since
we have not yet established profitable operations, this is also expected to
be
our source of funds in the foreseeable future. Our business model is
focused on acquiring developmental properties and also existing production.
Our
ability to generate future revenues and operating cash flow will depend on
successful exploration, and/or acquisition of oil and gas producing properties,
which will very likely require the Company to continue to raise equity or debt
capital from sources outside of the Company.
The
Company 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 certain leases. These ongoing capital
commitments may also cause the Company to seek additional capital from sources
outside of the Company.
Since
our
future operations will continue to be heavily dependent on our ability to seek
and secure capital from exterior sources, should we be unable to continue to
find new capital from such sources, the Company may not be able to survive
as a
going concern, and any equity investment in the
Company
could become worthless or substantially impaired in value.
Since
our
inception, we have suffered recurring losses from operations with negative
cash
flow and have depended on external financing to sustain our operations. During
the fiscal year ended February 28, 2007, we reported losses of $8.1 million.
There is no assurance that the Company can ever achieve sustainable
profitability. Failure to achieve sustainable profitability could
prevent the Company from continuing as a going concern, and could cause any
equity investment in the Company to become worthless.
Critical
Accounting Policies
Management’s
discussion and analysis of our financial condition and results of operations
are
based on our financial statements, which have been prepared in conformity with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires management to make estimates,
judgments and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.
On
an
ongoing basis, we evaluate our estimates, including those related to revenue
recognition, bad debt, cancellations costs associated with long term
commitments, investments, intangible assets, assets subject to disposal, income
taxes, service contracts, contingencies and litigation. We base our estimates
on
historical experience and on various other assumptions that are believed to
be
reasonable under the circumstances, the results of which form the basis for
making estimates and judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Estimates, by
their nature, are based on judgment and available information. Therefore, actual
results could differ from those estimates and could have a material impact
on
our financial statements, and it is possible that such changes could occur
in
the near term.
Oil
and Gas Properties
We
use
the successful efforts method of accounting for oil and gas property
acquisition, exploration, development, and production
activities. Costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that find proved reserves,
and
to drill and equip development wells are capitalized as
incurred. Costs to drill exploratory wells that are unsuccessful in
finding proved reserves are expensed as incurred. In addition, the
geological and geophysical costs, and costs of carrying and retaining unproved
properties are expensed as incurred. Costs to operate and maintain
wells and field equipment are expensed as incurred.
Capitalized
proved property acquisition costs are amortized by field using the
unit-of-production method based on proved reserves. Capitalized
exploration well costs and development costs (plus estimated future
dismantlement, surface restoration, and property abandonment costs, net of
equipment salvage values) are amortized in a similar fashion (by field) based
on
their proved developed reserves. Support equipment and other property
and equipment are depreciated over their estimated useful lives.
Pursuant
to SFAS No. 144, “Impairment or Disposal of Long-Lived Assets”, we review proved
oil and natural gas properties and other long-lived assets for impairment.
These
reviews are predicated by events and circumstances, (such as downward revision
of the reserve estimates or commodity prices), that indicate a decline in
the
recoverability of the carrying value of such properties. We estimate the
future
cash flows expected in connection with the properties and compare such future
cash flows to the carrying amount of the properties to determine if the carrying
amount is recoverable. When the carrying amounts of the properties exceed
their
estimated undiscounted future cash flows, the carrying amounts of the properties
are reduced to their estimated fair value. The factors used to
determine fair value include, but are not limited to, estimates of proved
reserves, future commodity prices, the timing of future production, future
capital expenditures and a risk-adjusted discount rate. Asset impairments
of
$1,606,292 and $-0- were recorded for the years ended February 28, 2007 and
February 28, 2006, respectively. The charge is included in depreciation,
depletion and amortization.
Unproved
oil and gas properties that are individually significant are also periodically
assessed for impairment of value. An impairment loss for unproved oil and
gas
properties is recognized at the time of impairment by providing an impairment
allowance.
On
the
retirement or sale of a partial unit of proved property, the cost is charged
to
accumulated depreciation, depletion, and amortization with a resulting gain
or
loss recognized in income.
Deposits
and advances for services expected to be provided for exploration and
development or for the acquisition of oil and gas properties are classified
as
long term other assets. As of February 28, 2007 $70,266 had been
advanced for services.
Revenue
Recognition
We
use
the sales method to account for sales of crude oil and natural
gas. Under this method, revenues are recognized based on actual
volumes of oil and gas sold to purchasers. The volumes sold may
differ from the volumes to which we are entitled based on its interests in
the
properties. These differences create imbalances which are recognized
as a liability only when the imbalance exceeds the estimate of remaining
reserves. We had no significant imbalances as of February 28, 2007 and February
28, 2006.
Suspended
Well Costs
On
April
4, 2005, the Financial Accounting Standards Board, (FASB) issued FASB Staff
Position No. 19-1,"Accounting for Suspended Well Costs" (FSP No. 19-1). This
staff position amends SFAS No. 19, "Financial Accounting and Reporting by
Oil
and Gas Producing Companies" and provides guidance concerning exploratory
well
costs for companies that use the successful efforts method of accounting.
Daybreak adopted FSP No. 19-1 for the fiscal years ended February 28, 2007
and
2006.
The
FSP
states that exploratory well costs should continue to be capitalized if:
(1) a
sufficient quantity of reserves are discovered in the well to justify its
completion as a producing well and (2) sufficient progress is made in assessing
the reserves and the economic and operating feasibility of the well. If the
exploratory well costs do not meet both of these criteria, these costs should
be
expensed, net of any salvage value. Additional annual disclosures are required
to provide information about management's evaluation of capitalized exploratory
well costs.
In
addition, the FSP requires annual disclosure of: (1) net changes from period
to
period of capitalized exploratory well costs for wells that are pending the
determination of proved reserves, (2) the amount of exploratory well costs
that
have been capitalized for a period greater than one year after the completion
of
drilling and (3) an aging of exploratory well costs suspended for greater
than
one year, designating the number of wells the aging is related to. Further,
the
disclosures should describe the activities undertaken to evaluate the reserves
and the projects, the information still required to classify the associated
reserves as proved and the estimated timing for completing the
evaluation.
Share
Based Payments
Prior
to
February 28, 2005, we accounted for opur stock based compensation plans under
the recognition and measurement provisions of APB Opinion No. 25, “Accounting
for Stock Issued to Employees” and related Interpretations, (“APB 25”) as
permitted by SFAS No. 123, “Accounting for Stock Based Compensation” (“SFAS
123”).
Effective
March 1, 2005, we adopted the fair value recognition provisions of SFAS No.
123,
“Accounting for Stock-Based Compensation” (“SFAS 123”) for our stock based
compensation plans under the recognition and measurement provisions of SFAS
123. No awards granted prior to March 1, 2005 were modified or
settled in cash during fiscal 2006.
Effective
March 1, 2006, we adopted the fair value recognition provisions of SFAS No.
123R, “Share Based Payment” and related Interpretations (“SFAS
123R”).
Under
both SFAS 123 and SFAS 123R, compensation cost for all share based payments
granted on or subsequent to March 1, 2005 are based on the grant date fair
value
estimated in accordance with the provisions of SFAS 123 and SFAS 123R, for
the
respective fiscal years. Compensation cost is recognized on a straight line
basis over the requisite service period for the entire award in accordance
with
the provisions of SFAS 123R. If at any date the portion of the
grant-date fair value of the award that is vested is greater than that amount
recognized on a straight line basis, the amount of the vested grant date
fair
value is recognized.
We
account for transactions in which we issue equity instruments to acquire
goods
or services from non-employees in accordance with the provisions of SFAS
No.
123R (as amended). These transactions are accounted for based on the
fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
Restatements
We
have
restated our financial statements in accordance with SFAS No. 154, “Accounting
Changes and Error Corrections”
.
The financial statements were restated
for the first three (3) quarters for the fiscal year ended February 28, 2006,
for the twelve months ended February 28, 2006 and for the first three (3)
quarters for the fiscal year ended February 28, 2007 (the “restated periods”).
The
financial statements were restated to reflect adjustments to non-cash
transactions involving (1) the valuation of common stock issued for management
and director compensation, (2) the valuation of common stock issued for investor
relations services, (3) the valuation of common stock issued for the acquisition
of oil and gas properties, and (4) the recognition of beneficial conversion
features inherent in the convertible debentures issued during the restated
periods.
In
addition, the financial statements included herein were prepared as if the
Company will continue as a going concern. An assumption otherwise may
materially change the information included in the financial statements as well
as the information included in the Management’s discussion and analysis of our
financial condition and results of operations.
Fiscal
Year 2007 compared to Fiscal Year 2006
Revenues.
Our
revenues are derived entirely from the sale of our share of oil and gas
production from our producing wells. The Company realized its first
revenues from producing wells in August 2006. Prior to that date, the
Company had no revenues. Accordingly, fiscal year 2007 revenues of
$629,346 compares favorably to no revenues in the fiscal year
2006. During the fiscal year 2007,
the
Company recorded revenues from its interest in nineteen (19) producing
wells. While these results are encouraging, the Company continues to
experience mechanical and technical production problems with certain major
wells, particularly the F-1 well in the Tuscaloosa Prospect in
Louisiana. This well contributed approximately 75% of total revenues
in the fiscal year 2007.
The
F-1
well was shut in pending the resolution of certain technical issues in November,
2006. Production on this property was re-established for a short
period of time in February, 2007. The F-1 well was shut in again in
late February 2007, pending resolution of certain gas sales and sales contract
issues. The Company believes that these issues can be resolved and
the production from this property can be re-established during the current
year.
However, there is no assurance that these efforts will be
successful.
Cost
and Expenses:
A
table
of our costs and expenses for the fiscal year 2007 compared to the fiscal year
2006 follows:
|
|
Fiscal
Year
|
|
|
Fiscal
Year
|
|
|
|
2007
|
|
|
2006
|
|
Production
Costs
|
|
$
|
373,766
|
|
|
$
|
-
|
|
Exploration
Costs
|
|
|
1,196,640
|
|
|
|
327,469
|
|
Depreciation,
Depletion,
|
|
|
|
|
|
|
|
|
Amortization
& Impairment
|
|
|
2,398,048
|
|
|
|
-
|
|
General
& Administrative
|
|
|
3,936,868
|
|
|
|
3,902,872
|
|
Total
Operating Expenses
|
|
$
|
7,905,322
|
|
|
$
|
4,230,341
|
|
Expenses
incurred by the Company include production costs associated directly with
the
generation of oil and gas revenues, exploration and drilling costs related
to
the development of oil and gas properties and general and administrative
expenses, including legal and accounting expenses, management and director
fees,
investor relations expenses, and other general and administrative
costs.
The
increase in production costs from $0 in the fiscal year 2006 to $373,766
in the
fiscal year 2007 relates entirely to the existence of revenues in fiscal
year of
2007.
Exploration
and drilling expenses increased substantially from $327,469 in fiscal year
2006
to $1,196,640 in fiscal year 2007 due primarily to an increase in the number
of
wells in progress. The Company participated in the development of 11
wells during the fiscal year 2007, compared to 2 wells in the comparable
period
of the prior year.
The
increase in depreciation, depletion, amortization and impairment to $2,398,048
in the fiscal year 2007 from $0 for the fiscal year 2006, relates mainly
to
$787,401 for oil and gas properties as a result of production, and
an impairment of proved oil and gas properties of
$1,606,292.
Legal
and
accounting fees increased in fiscal year 2007 compared to the prior year period
primarily as a result of the two private placements conducted by the Company
as
well as the preparation of the registration on the common stock from the private
placement.
Other
administrative expenses, including management and directors fees, investor
relations fees and other general and administrative expenses were basically
unchanged in fiscal year 2007 compared to fiscal year 2006.
Interest
income was $101,697 in fiscal year 2007 compared to $362 in fiscal year 2006
due
primarily to higher average cash and investment balances.
Interest
expense increased substantially to $1,223,298 in fiscal year 2007 compared
to
$242,062 in fiscal year 2006. This was a result of an increase in debt to
fund
operations and related amortization of debt discounts using the effective
interest method. The discounts were recorded on convertible promissory notes
as
a result of intrinsic beneficial conversion features.
Due
to
the nature of its business, as well as the relative immaturity of the business,
the Company expects that revenues, as well as all categories of expenses, will
continue to fluctuate substantially quarter to quarter and year to year.
Production
costs will fluctuate according to the number and percentage ownership of
producing wells, as well as the amount of revenues being contributed by such
wells. Exploration and drilling expenses will be dependant the amount of capital
that the Company has to invest in future development projects, as well as the
success or failure of such projects. Likewise, the amount of depreciation,
depletion, amortization expense and impairment costs will depend upon the
factors cited in the prior sentence, as well as numerous other factors including
general market conditions.
Other
Liquidity Factors
The
Company has certain convertible debentures in the amount of $200,001 that,
along
within accrued interest, were due on August 31, 2007. On August 31, we paid
the
accrued interest and the debenture holders agreed to extend the term of the
debentures until October 31, 2007. In addition, the Company has
current notes payable to a related party in the amount of $200,000 that can
be
accelerated under certain conditions. By August 31, 2007, we had reduced the
balance of the note payable by $158,245.
Our
ability to continue as a going concern depends in large part on our ability
to
raise substantial funds for use in our planned exploration and development
activities, and upon the success of our fundraising activities.
We
intend
to obtain the funds for our planned exploration and development activities
by
various methods, which might include the issuance of equity securities or
obtaining joint venture partners. No assurance can be given that we will be
able
to obtain any additional financing on favorable terms, if at all.
Raising
additional funds by issuing common or preferred stock will further dilute our
existing stockholders. Currently, this is the only method that has been
available to create the cash resources necessary to fund the growth of our
company.
Off-Balance
Sheet Arrangements
As
of
February 28, 2007, we did not have any relationships with unconsolidated
entities or financial partners, such as entities often referred to as structured
finance or special purpose entities, which have been established for the purpose
of facilitating off-balance sheet arrangements or other contractually narrow
or
limited purposes. As such, we are not materially exposed to any financing,
liquidity, market or credit risk that could arise if we had engaged in such
relationships.
Exploration
and Drilling
In
December 2006, we became involved in the Gilbertown Field in Gilbertown,
Alabama, an existing oil field that produces heavy or “sour” oil. Immediate
plans are to continue the workovers on nonproducing wellbores and build
production to over 100 BOPD. On June 1, 2007, we became the operator of the
East
Gilbertown Field.
In
California we have now jointly leased about 25,633 undeveloped
acres. We are looking for potential fields in the 1MMBbl range based
upon size and analogous production. Production in the region is typically from
shallow depths of 1,000 feet to 3,000 feet. The oil is generally of low to
medium gravity. On June 21, 2007, Daybreak and our partners (“Daybreak”),
entered into a Seismic Option Farmout Agreement with Chevron U.S.A. Inc.
(“Chevron”), for a seismic and drilling program in the East Slopes (Kern County)
project area in California. By paying the full cost of the seismic program
Chevron will earn a 50% interest in the lands and a 50% working interest for
the
drilling of future wells in the project area. Daybreak will earn a 50% interest
in the Chevron lands located in the same project area, by paying 100% of the
cost of the first three initial test wells to be drilled on the jointly held
lands. The three initial test wells must be drilled within nine months of the
seismic data interpretation being completed. Current plans are to have the
seismic program completed and three wells drilled before the end of this year.
Well costs are estimated to be $250,000 each at a depth of 2,500 to 3,000
feet.
In
the
Tuscaloosa project in Louisiana, we are currently proceeding with a
multi-well (4) drilling program. This program commenced in August 2007. We
are drilling two Tuscaloosa wells back to back. We then will be drilling a
Chalk
and a Paluxy play based upon results of the Tuscaloosa drilling. Our F-1 well
has had the technical issues resolved and will return to production in the
third
quarter of the year. The F-3 well has been producing since March and has been
performing as anticipated. In August 2007, the F-3 well was shut-in due to
downstream gas distributor issues, but has returned to production in
September.
In
the
Krotz Springs Field, in central Louisiana, we completed the Haas-Hirsch No.
1
well in May and commenced production. As part of the farm-out agreement,
Daybreak was no longer the operator of this well once production began.
Consequentially the well has been renamed the KSU #59. Production levels have
been consistent since production began.
In
the
Saxet Field in Texas, we have had three wells producing since August 2006.
These
rework wells continue to perform at levels that we anticipated. We are working
with our partners to lower the monthly operating costs to increase the overall
productivity of the field.
Drilling
Rig
In
August
2006, we entered into an agreement with Green River Drilling for a drilling
rig.
Daybreak advanced funds to refurbish the rig and then would have first right
on
use of the rig for three years. We felt it was necessary to enter this
arrangement because of the shortage of available rigs for drilling in Louisiana.
We advanced a total of $800,000 to Green River for the refurbishing of the
rig.
In
March
2007, Green River Drilling commenced drilling its first well with the drilling
rig that the Company had contributed in the refurbishing of. In May 2007,
Daybreak was informed by Green River Drilling that they intended to sell the
drilling rig to a third party. The sale was completed and on June 11, 2007,
Daybreak received a total of $846,668 which included the principal of $800,000
and accrued interest in the amount of $46,668 in satisfaction of the note
receivable.
Summary
We
continue to be excited about the future outlook for Daybreak Oil and Gas. We
have two premier properties that are currently being developed one in California
and the Tuscaloosa project in Louisiana. Additionally, we have several projects
in the planning stages that should enhance shareholder value within the next
fiscal year. We will continue to build on our goal of becoming cash flow
positive in this fiscal year.
We
intend
to obtain the funds for our planned exploration and development activities
by
various methods, which might include the issuance of equity securities or
obtaining joint venture partners. No assurance can be given that we will be
able
to obtain any additional financing on favorable terms, if at all. Raising
additional funds by issuing common or preferred stock will further dilute our
existing stockholders. Currently, this is the only method that has been
available to create the cash flow necessary to fund the growth of our
company.
ITEM
7. FINANCIAL INFORMATION
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and
Stockholders
of Daybreak Oil and Gas, Inc.
(An
Exploration Stage Company)
We
have
audited the accompanying balance sheets of Daybreak Oil and Gas, Inc. (an
exploration stage company) as of February 28, 2007 and 2006 and the related
statements of operations, stockholders’ equity, and cash flows for each of the
two years then ended and for the period from March 1, 2005 (inception) to
February 28, 2007. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits. The financial statements for
the
period from March 1, 2005 (inception) through February 28, 2007 include total
revenues of $629,346 and a net loss of $12,864,071.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform an audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Daybreak Oil and Gas, Inc. as
of
February 28, 2007 and 2006 and the results of operations and cash flows for
the
for the periods described above, in conformity with accounting principles
generally accepted in the United States of America.
We
also
have audited the adjustments described in Note 10 that were applied to restate
the February 28, 2006 financial statements to correct an error. In our opinion,
such adjustments are appropriate and have been properly applied.
The
accompanying financial statements have been prepared assuming that Daybreak
Oil
and Gas, Inc. will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has incurred losses since inception, which
raises substantial doubt about its ability to continue as a going concern.
Management’s plans regarding those matters also are described in Note
3. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Malone
& Bailey PC
www.malone-bailey.com
Houston,
Texas
September
20, 2007
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
|
|
Balance
Sheets
As
of February 28, 2007 and 2006
|
|
|
|
|
|
|
|
|
ASSETS
|
|
2007
|
|
|
2006
(Restated)
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
|
|
$
|
377,957
|
|
|
$
|
806,027
|
|
Restricted
cash
|
|
|
-
|
|
|
|
8,333
|
|
Investment
in marketable securities, at market, cost of
$2,356,213
|
|
|
2,356,213
|
|
|
|
-
|
|
Accounts
receivable:
|
|
|
|
|
|
|
|
|
Oil
and gas sales
|
|
|
56,906
|
|
|
|
-
|
|
Related
party participants
|
|
|
41,357
|
|
|
|
-
|
|
Joint
interest participants
|
|
|
799,970
|
|
|
|
-
|
|
Notes
receivable (including accrued interest of $28,336)
|
|
|
828,336
|
|
|
|
-
|
|
Prepaid
expenses and other current assets
|
|
|
76,895
|
|
|
|
250
|
|
Deposit
on equipment
|
|
|
-
|
|
|
|
250,000
|
|
Deferred
financing costs, net of amortization
|
|
|
-
|
|
|
|
10,000
|
|
Total
current assets
|
|
|
4,537,634
|
|
|
|
1,074,610
|
|
|
|
|
|
|
|
|
|
|
OIL
AND GAS PROPERTIES, net of accumulated depletion, depreciation,
amortization
and impairment, successful efforts method
|
|
|
4,552,850
|
|
|
|
1,132,400
|
|
VEHICLES
AND EQUIPMENT, net of accumulated depreciation
of
$4,355
|
|
|
18,556
|
|
|
|
-
|
|
OTHER
ASSETS
|
|
|
102,426
|
|
|
|
-
|
|
Total
assets
|
|
$
|
9,211,466
|
|
|
$
|
2,207,010
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Account
payable and other accrued liabilities
|
|
$
|
2,110,458
|
|
|
$
|
28,646
|
|
Notes
payable – related party
|
|
|
200,000
|
|
|
|
-
|
|
Convertible
debentures, net of discount of $ 90,002 and $1,049,233
respectively
|
|
|
134,999
|
|
|
|
89,468
|
|
Total
current liabilities
|
|
|
2,445,457
|
|
|
|
118,114
|
|
OTHER
LIABILITIES:
|
|
|
|
|
|
|
|
|
Asset
retirement obligation
|
|
|
99,427
|
|
|
|
-
|
|
Total
liabilities
|
|
|
2,544,884
|
|
|
|
118,114
|
|
COMMITMENTS
|
|
|
-
|
|
|
|
-
|
|
STOCKHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
|
Preferred
stock – 10,000,000 shares authorized, $0.001 par value
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred stock – 2,400,000 shares authorized; $0.001
par
value; 6% cumulative dividends, authorized; 1,399,765 and -0-
shares
issued and outstanding, respectively
|
|
|
1,400
|
|
|
|
-
|
|
Common
stock – 200,000,000 shares authorized, $0.001 par value;
40,877,230
and 29,458,221 shares issued and outstanding, respectively
|
|
|
40,877
|
|
|
|
29,458
|
|
Additional
paid-in capital
|
|
|
20,224,411
|
|
|
|
7,267,514
|
|
Accumulated
deficit
|
|
|
(736,035
|
)
|
|
|
(736,035
|
)
|
Deficit
accumulated during the exploration stage
|
|
|
(12,864,071
|
)
|
|
|
(4,472,041
|
)
|
Total
stockholders’ equity
|
|
|
6,666,582
|
|
|
|
2,088,896
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
9,211,466
|
|
|
$
|
2,207,010
|
|
The
accompanying notes are an integral part of these financial
statements.
DAYBREAK
OIL AND GAS, INC.
(An
Exploration Stage Company)
Statements
of Operations
For
the Years ended February 28, 2007 and 2006 and for the
Period
from
Inception (March 1, 2005) to February 28, 2007
|
|
|
|
|
|
|
|
|
|
Year
Ended
|
|
|
From
Inception
|
|
|
|
February
28,
|
|
|
Through
February 28,
|
|
|
|
2007
|
|
|
2006
(Restated)
|
|
|
2007
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
Oil
and gas sales
|
|
$
|
629,346
|
|
|
$
|
-
|
|
|
$
|
629,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
costs
|
|
|
373,766
|
|
|
|
-
|
|
|
|
373,766
|
|
Exploration
expenses
|
|
|
1,196,640
|
|
|
|
327,469
|
|
|
|
1,524,109
|
|
Depreciation,
depletion, amortization and impairment
|
|
|
2,398,048
|
|
|
|
-
|
|
|
|
2,398,048
|
|
General
and administrative
|
|
|
3,936,868
|
|
|
|
3,902,872
|
|
|
|
7,839,740
|
|
Total
operating expenses
|
|
|
7,905,322
|
|
|
|
4,230,341
|
|
|
|
12,135,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(7,275,976
|
)
|
|
|
(4,230,341
|
)
|
|
|
(11,506,317
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
101,697
|
|
|
|
362
|
|
|
|
102,059
|
|
Dividend
income
|
|
|
5,547
|
|
|
|
-
|
|
|
|
5,547
|
|
Interest
expense
|
|
|
(1,223,298
|
)
|
|
|
(242,062
|
)
|
|
|
(1,465,360
|
)
|
Total
other income (expense)
|
|
|
(1,116,054
|
)
|
|
|
(241,700
|
)
|
|
|
(1,357,754
|
)
|
NET
LOSS
|
|
$
|
(8,392,030
|
)
|
|
$
|
(4,472,041
|
)
|
|
$
|
(12,864,071
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
dividend
requirement
|
|
|
(155,316
|
)
|
|
|
-
|
|
|
|
(155,316
|
)
|
|
|
|
(4,199,295
|
)
|
|
|
-
|
|
|
|
(4,199,295
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS AVAILABLE TO COMMON
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS
|
|
$
|
(12,746,641
|
)
|
|
$
|
(4,472,041
|
)
|
|
$
|
(17,218,682
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS PER COMMON SHARE – Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
and
diluted
|
|
$
|
(0.34
|
)
|
|
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON
SHARES OUTSTANDING –
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
37,045,509
|
|
|
|
23,175,905
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
DAYBREAK
OIL AND GAS, INC.
(An
Exploration Stage Company)
Statement
of Changes in Stockholders' Equity
For
the Period from Inception (March 1, 2005) through February 28,
2007
|
|
|
|
Series
A Convertible
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
Accumulated
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Additional
|
|
|
|
|
|
During
Exploration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Exploration
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Stage
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
March 1, 2005
|
|
|
-
|
|
|
$
|
-
|
|
|
|
18,199,419
|
|
|
$
|
18,199
|
|
|
$
|
709,997
|
|
|
$
|
(736,035
|
)
|
|
$
|
-
|
|
|
$
|
(7,839
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
-
|
|
|
|
-
|
|
|
|
4,400,000
|
|
|
|
4,400
|
|
|
|
1,083,100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,087,500
|
|
Services
|
|
|
|
|
|
|
|
|
|
|
5,352,667
|
|
|
|
5,353
|
|
|
|
3,622,176
|
|
|
|
|
|
|
|
|
|
|
|
3,627,529
|
|
Oil
and gas properties
|
|
|
-
|
|
|
|
-
|
|
|
|
700,000
|
|
|
|
700
|
|
|
|
411,300
|
|
|
|
-
|
|
|
|
-
|
|
|
|
412,000
|
|
Conversion
of convertible
debentures
and interest
payable
|
|
|
-
|
|
|
|
-
|
|
|
|
806,135
|
|
|
|
806
|
|
|
|
200,728
|
|
|
|
-
|
|
|
|
-
|
|
|
|
201,534
|
|
Discount
on convertible
notes
payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,240,213
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,240,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,472,041
|
)
|
|
|
(4,472,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
FEBRUARY 28, 2006
(Restated)
|
|
|
-
|
|
|
|
-
|
|
|
|
29,458,221
|
|
|
|
29,458
|
|
|
|
7,267,514
|
|
|
|
(736,035
|
)
|
|
|
(4,472,041
|
)
|
|
|
2,088,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
-
|
|
|
|
-
|
|
|
|
8,027,206
|
|
|
|
8,027
|
|
|
|
5,180,230
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,188,257
|
|
Services
|
|
|
-
|
|
|
|
-
|
|
|
|
1,270,000
|
|
|
|
1,270
|
|
|
|
2,606,430
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,607,700
|
|
Oil
and gas properties
|
|
|
-
|
|
|
|
-
|
|
|
|
222,500
|
|
|
|
223
|
|
|
|
528,527
|
|
|
|
-
|
|
|
|
-
|
|
|
|
528,750
|
|
Conversion
of convertible debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
2,049,303
|
|
|
|
2,049
|
|
|
|
1,022,473
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,024,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
and cancellation of common stock:
|
|
|
|
|
|
|
|
|
|
|
(150,000
|
)
|
|
|
(150
|
)
|
|
|
(149,850
|
)
|
|
|
|
|
|
|
|
|
|
|
(150,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of preferred stock for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
1,399,765
|
|
|
|
1,400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,624,804
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,626,204
|
|
Discount
on convertible notes payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,000
|
|
Extension
warrants on convertible notes
payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
119,283
|
|
|
|
-
|
|
|
|
-
|
|
|
|
119,283
|
|
Discount
on preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,199,295
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,199,295
|
|
Deemed
dividend on preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,199,295
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,199,295
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,392,030
|
)
|
|
|
(8,392,030
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
FEBRUARY 28, 2007
|
|
|
1,399,765
|
|
|
$
|
1,400
|
|
|
|
40,877,230
|
|
|
$
|
40,877
|
|
|
$
|
20,224,411
|
|
|
$
|
(736,035
|
)
|
|
$
|
(12,864,071
|
)
|
|
$
|
6,666,582
|
|
The
accompanying notes are an integral part of these financial
statements.
DAYBREAK
OIL AND GAS, INC.
(An
Exploration Stage Company)
Statements
of Cash Flows
For
the Years ended February 28, 2007 and 2006 and for the
Period
from
Inception (March 1, 2005) through February 28,
2007
|
|
|
|
Year
Ended
|
|
|
From
Inception
|
|
|
|
February
28,
|
|
|
Through
February 28,
|
|
|
|
2007
|
|
|
2006
(Restated)
|
|
|
2007
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(8,392,030
|
)
|
|
$
|
(4,472,041
|
)
|
|
$
|
(12,864,071
|
)
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
used
in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for services
|
|
|
2,607,700
|
|
|
|
3,627,529
|
|
|
|
6,235,229
|
|
Depreciation,
Depletion, Amortization and Impairment
expense
|
|
|
2,398,048
|
|
|
|
-
|
|
|
|
2,398,048
|
|
Exploration
expense – dry wells
|
|
|
563,020
|
|
|
|
253,500
|
|
|
|
816,520
|
|
Non
cash interest expense and accretion
|
|
|
1,109,484
|
|
|
|
195,694
|
|
|
|
1,305,178
|
|
Non
cash interest income
|
|
|
(28,585
|
)
|
|
|
-
|
|
|
|
(28,585
|
)
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
8,333
|
|
|
|
(8,333
|
)
|
|
|
-
|
|
Accounts
receivable - oil and gas sales
|
|
|
(56,906
|
)
|
|
|
-
|
|
|
|
(56,906
|
)
|
Accounts
receivable – related party participants
|
|
|
(41,357
|
)
|
|
|
|
|
|
|
(41,357
|
)
|
Accounts
receivable – joint interest participants
|
|
|
(799,970
|
)
|
|
|
|
|
|
|
(799,970
|
)
|
Prepaid
expenses and other current assets
|
|
|
(76,645
|
)
|
|
|
191
|
|
|
|
(76,454
|
)
|
Deferred
financing costs
|
|
|
10,000
|
|
|
|
(10,000
|
)
|
|
|
-
|
|
Accounts
payable and other accrued liabilities
|
|
|
2,167,634
|
|
|
|
20,275
|
|
|
|
2,187,909
|
|
Other
assets
|
|
|
(77,177
|
)
|
|
|
-
|
|
|
|
(77,177
|
)
|
Net
cash used in operating activities
|
|
|
(608,451
|
)
|
|
|
(393,185
|
)
|
|
|
(1,001,636
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in marketable securities
|
|
|
(2,356,213
|
)
|
|
|
-
|
|
|
|
(2,356,213
|
)
|
Purchase
of reclamation bond
|
|
|
(25,000
|
)
|
|
|
-
|
|
|
|
(25,000
|
)
|
The
accompanying notes are an integral part of these financial
statements.
Refund
(deposit) on equipment
|
|
|
250,000
|
|
|
|
(250,000
|
)
|
|
|
-
|
|
Additions
to note receivable
|
|
|
(800,000
|
)
|
|
|
-
|
|
|
|
(800,000
|
)
|
Purchase
of oil and gas properties
|
|
|
(5,904,956
|
)
|
|
|
(973,900
|
)
|
|
|
(6,878,856
|
)
|
Purchase
of fixed assets
|
|
|
(22,911
|
)
|
|
|
-
|
|
|
|
(22,911
|
)
|
Net
cash used in investing activities
|
|
|
(8,859,080
|
)
|
|
|
(1,223,900
|
)
|
|
|
(10,082,980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sales of preferred stock, net
|
|
|
3,626,204
|
|
|
|
-
|
|
|
|
3,626,204
|
|
Proceeds
from sales of common stock, net
|
|
|
5,188,257
|
|
|
|
1,087,500
|
|
|
|
6,275,757
|
|
Proceeds
from related party notes payable
|
|
|
200,000
|
|
|
|
-
|
|
|
|
200,000
|
|
Proceeds
from borrowings
|
|
|
25,000
|
|
|
|
1,335,521
|
|
|
|
1,360,521
|
|
Net
cash provided by financing activities
|
|
|
9,039,461
|
|
|
|
2,423,021
|
|
|
|
11,462,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH AND EQUIVALENTS
|
|
|
(428,070
|
)
|
|
|
805,936
|
|
|
|
377,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AT BEGINNING OF PERIOD
|
|
|
806,027
|
|
|
|
91
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AT END OF PERIOD
|
|
$
|
377,957
|
|
|
$
|
806,027
|
|
|
$
|
377,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
PAID FOR:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
13,769
|
|
|
|
-
|
|
|
$
|
13,769
|
|
Income
Taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
The
accompanying notes are an integral part of these financial
statements.
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for services
|
|
$
|
2,607,700
|
|
|
$
|
3,627,529
|
|
|
$
|
6,235,229
|
|
Common
stock issued for oil and gas properties
|
|
|
528,750
|
|
|
|
412,000
|
|
|
|
940,750
|
|
Common
stock repurchased and cancelled
|
|
|
(150,000
|
)
|
|
|
-
|
|
|
|
(150,000
|
)
|
Common
stock issued on conversion of convertible debentures and
interest
|
|
|
1,024,522
|
|
|
|
201,534
|
|
|
|
1,226,056
|
|
Discount
on convertible notes payable
|
|
|
25,000
|
|
|
|
1,240,213
|
|
|
|
1,265,213
|
|
Extension
warrants on convertible notes payable
|
|
$
|
119,283
|
|
|
$
|
-
|
|
|
$
|
119,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
NOTE
1 — ORGANIZATION AND BASIS OF PRESENTATION:
Organization
Originally
incorporated as Daybreak Uranium, Inc., (the “Company”), under the laws of the
State of Washington on March 11, 1955, the Company was organized to explore
for,
acquire, and develop mineral properties in the Western United
States. During 2005, management of the Company decided to enter the
oil and gas exploration industry. On October 25, 2005, the shareholders approved
a name change to Daybreak Oil and Gas, Inc. (“Daybreak”), to better reflect the
business of the Company.
Basis
of Presentation
The
accompanying audited financial statements of Daybreak have been prepared in
accordance with accounting principles generally accepted in the United States
of
America and the rules of the Securities and Exchange Commission.
Exploration
Stage Company
On
March
1, 2005 (the inception date), Daybreak commenced oil and gas exploration
activities. As of February 28, 2007, Daybreak has not produced significant
revenues from its oil and gas operations. Accordingly, Daybreak’s activities
have been accounted for as those of an “Exploration Stage Enterprise” as set
forth in SFAS No. 7, “Accounting for Development Stage Entities.” Among the
disclosures required by SFAS No. 7 are that Daybreak’s financial statements be
identified as those of an exploration stage company. In addition, the statements
of operations, stockholders equity (deficit) and cash flows are required to
disclose all activity since Daybreak’s date of inception.
Daybreak
will continue to prepare its financial statements and related disclosures in
accordance with SFAS No. 7 until such time that Daybreak’s oil and gas
properties have generated significant revenues.
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
from those estimates.
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash
and Cash Equivalents
Cash
equivalents include demand deposits with banks and all highly liquid investments
with original maturities of three months or less. For the fiscal years ending
February 28, 2007 and February 28, 2006, Daybreak’s cash deposits exceeded the
Federal Deposit Insurance Corporation insurance limits by $277,957 and $706,027
respectively.
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
Restricted
Cash
Daybreak
classifies cash balances as “restricted cash” when cash is restricted as to
withdrawal or usage. Daybreak did not have any cash balances designated as
restricted at February 28, 2007. The restricted cash balance at February 28,
2006, was composed of a total of $8,333 which had been deposited into a joint
venture account. The funds were designated to be utilized in connection with
a
joint venture agreement with Oracle Operating, LLC.
Investment
in Marketable Securities
Daybreak
determines the appropriate classification of its investments in debt securities
at the time of purchase and reevaluates such determinations at each
balance-sheet date. Daybreak classifies all investments in marketable debt
securities as trading securities as they are bought and held principally for
the
purpose of selling them in the near term. These securities are
reported at fair value, with realized and unrealized gains and losses recognized
in earnings. The fair value of all securities is determined by quoted market
prices. These investments are not insured by the Federal Deposit
Insurance Corporation.
Accounts
and Notes Receivable
Daybreak
routinely assesses the recoverability of all material trade and other
receivables. Daybreak accrues a reserve on a receivable when, based on the
judgment of management, it is probable that a receivable will not be collected
and the amount of any reserve may be reasonably estimated. Actual
write-offs may exceed the recorded allowance. No allowance for
doubtful accounts was considered necessary at February 28, 2007 and February
28,
2006.
Oil
and Gas Properties
Daybreak
uses the successful efforts method of accounting for oil and gas property
acquisition, exploration, development, and production
activities. Costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that find proved reserves,
and
to drill and equip development wells are capitalized as
incurred. Costs to drill exploratory wells that are unsuccessful in
finding proved reserves are expensed as incurred. In addition, the
geological and geophysical costs, and costs of carrying and retaining unproved
properties are expensed as incurred. Costs to operate and maintain
wells and field equipment are expensed as incurred.
Capitalized
proved property acquisition costs are amortized by field using the
unit-of-production method based on proved reserves. Capitalized
exploration well costs and development costs (plus estimated future
dismantlement, surface restoration, and property abandonment costs, net of
equipment salvage values) are amortized in a similar fashion (by field) based
on
their proved developed reserves. Support equipment and other property
and equipment are depreciated over their estimated useful lives.
Pursuant
to SFAS No. 144, “Impairment or Disposal of Long-Lived Assets”, Daybreak reviews
proved oil and natural gas properties and other long-lived assets for
impairment. These reviews are predicated by events and circumstances, (such
as
downward revision of the reserve estimates or commodity prices), that indicate
a
decline in the recoverability of the carrying value of such properties. Daybreak
estimates the future cash flows expected in connection with the properties
and
compares such future cash flows to the carrying amount of the properties to
determine if the carrying amount is recoverable.
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
When
the
carrying amounts of the properties exceed their estimated undiscounted future
cash flows, the carrying amounts of the properties are reduced to their
estimated fair value. The factors used to determine fair value
include, but are not limited to, estimates of proved reserves, future commodity
prices, the timing of future production, future capital expenditures and a
risk-adjusted discount rate. Asset impairments of $1,606,292 and $-0- were
recorded for the years ended February 28, 2007 and February 28, 2006,
respectively. The charge is included in depreciation, depletion and
amortization.
Unproved
oil and gas properties that are individually significant are also periodically
assessed for impairment of value. An impairment loss for unproved oil and gas
properties is recognized at the time of impairment by providing an impairment
allowance.
On
the
retirement or sale of a partial unit of proved property, the cost is charged
to
accumulated depreciation, depletion, and amortization with a resulting gain
or
loss recognized in income.
Deposits
and advances for services expected to be provided for exploration and
development or for the acquisition of oil and gas properties are classified
as
long term other assets. As of February 28, 2007 $70,266 had been
advanced for services.
Property
and Equipment
Fixed
assets are stated at cost. Depreciation on vehicles is provided using the
straight line method over expected useful lives of thee years. Depreciation
on
machinery and equipment is provided using the straight line method over expected
useful lives of three years.
Long
Lived Assets
Daybreak
reviews long-lived assets and identifiable intangibles whenever events or
circumstances indicate that the carrying amounts of such assets may not be
fully
recoverable. Daybreak evaluates the recoverability of long-lived assets by
measuring the carrying amounts of the assets against the estimated undiscounted
cash flows associated with these assets. If this evaluation indicates that
the
future undiscounted cash flows of certain long-lived assets are not sufficient
to recover the assets' carrying value, the assets are adjusted to their fair
values.
Debt
Daybreak
accounts for debt at fair value and recognizes interest expense for accrued
interest payable under the terms of the debt. Principal and interest
payments due within one year are classified as current, whereas principal and
interest payments for periods beyond one year are classified as long
term. Beneficial conversion features of debt are valued and the
related amounts recorded as discounts on the debt. Discounts are
amortized to interest expense using the effective interest method to the
earliest date of conversion of the debt.
Fair
Value of Financial Instruments
The
amounts of financial instruments including cash, deposits, deferred financing
costs, prepaid expenses, accounts payable, convertible debentures, notes payable
and interest payable approximated their fair values as of February 28, 2007
and
February 28, 2006.
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
Share−Based
Payments
Prior
to
February 28, 2005, Daybreak accounted for its stock−based compensation plans
under the recognition and measurement provisions of APB Opinion No. 25,
“Accounting for Stock Issued to Employees” and related Interpretations, (“APB
25”) as permitted by SFAS No. 123, “Accounting for Stock−Based Compensation”
(“SFAS 123”).
Effective
March 1, 2005, Daybreak adopted the fair value recognition provisions of SFAS
No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) for its
stock−based compensation plans under the recognition and measurement provisions
of SFAS 123. No awards granted prior to March 1, 2005 were modified
or settled in cash during fiscal 2006.
Effective
March 1, 2006, Daybreak adopted the fair value recognition provisions of SFAS
No. 123R, “Share−Based Payment” and related Interpretations (“SFAS
123R”).
Under
both SFAS 123 and SFAS 123R, compensation cost for all share−based payments
granted on or subsequent to March 1, 2005 are based on the grant−date fair value
estimated in accordance with the provisions of SFAS 123 and SFAS 123R, for
the
respective fiscal years. Compensation cost is recognized on a straight−line
basis over the requisite service period for the entire award in accordance
with
the provisions of SFAS 123R. If at any date the portion of the
grant-date fair value of the award that is vested is greater than that amount
recognized on a straight line basis, the amount of the vested grant-date fair
value is recognized.
Daybreak
accounts for transactions in which it issues equity instruments to acquire
goods
or services from non employees in accordance with the provisions of SFAS No.
123R (as amended). These transactions are accounted for based on the
fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
Loss
per Share of Common Stock
Basic
loss per share of common stock is calculated by dividing net loss available
to
common stockholders by the weighted average number of common shares issued
and
outstanding during the year. Common stock equivalents, including common stock
issuable upon the conversion of loans and interest payable, are excluded from
the calculations when their effect is anti-dilutive. At February 28, 2007 and
February 28, 2006, the potential dilutive effect of converting notes payable
and
related interest to shares was determined to be anti-dilutive, and therefore
their effect is excluded from the calculation of diluted weighted average
shares.
Concentration
of Credit Risk
Substantially
all of Daybreak’s accounts receivable result from natural gas and crude oil
sales or joint interest billings to third parties in the oil and gas industry,
operating in the United States. This concentration of customers and joint
interest owners may impact Daybreak’s overall credit risk as these entities
could be affected by similar changes in economic conditions as well as other
related factors.
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
Accounts
receivable are generally not collateralized. Historically, Daybreak
has not experienced credit losses on its accounts receivable. At each of
Daybreak’s three producing projects, there is only one customer for the purchase
of oil or gas production. At the Tuscaloosa project in Louisiana, both the
F-1
well and the F-3 well have previously supplied gas to a single customer pursuant
to a gas supply agreement. As a result of an issue encountered with
the gas sales agreement covering the F-1 well, the F-3 well and the pipeline
connected to these wells, both the F-1 well and the F-3 well were, in August
2007, temporarily shut-in pending resolution of the sales contract issues and/or
the securing of an alternative market for the natural gas produced by these
two
wells. In combination, these two wells contributed approximately 75%
of total revenues during the fiscal year ended February 28, 2007. At February
28, 2007, three customers represented 100% of crude oil and natural gas sales
receivable.
Revenue
Recognition
Daybreak
uses the sales method to account for sales of crude oil and natural
gas. Under this method, revenues are recognized based on actual
volumes of oil and gas sold to purchasers. The volumes sold may
differ from the volumes to which Daybreak is entitled based on its interests
in
the properties. These differences create imbalances which are
recognized as a liability only when the imbalance exceeds the estimate of
remaining reserves. Daybreak had no significant imbalances as of February 28,
2007 and February 28, 2006.
Reclamation
Bonds
Included
in other assets at February 28, 2007, is a $25,000 certificate of deposit which
has been pledged to the State of Louisiana in connection with asset retirement
obligations for future plugging, abandonment and site remediation. The pledging
of this bond was necessitated by Daybreak’s emerging status as an oil and gas
property operator in the State of Louisiana.
Environmental
Matters and Asset Retirement Obligation
Daybreak
owns and has previously owned mineral property interests (which it has explored
for commercial mineral deposits) on public and private lands in various states
in the western United States. Daybreak and its properties are subject to a
variety of federal and state regulations governing land use and environmental
matters. Management believes it has been in substantial compliance with all
such
regulations. Management is also unaware of any pending action or proceeding
relating to regulatory matters that would effect the financial position of
Daybreak.
SFAS
No.
143, “Accounting for Asset Retirement Obligations,” addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement
costs. This statement requires that Daybreak recognizes the fair
value of a liability for an asset retirement obligation (ARO) in the period
in
which it is incurred. The ARO is capitalized as part of the carrying
value of the assets to which it is associated, and depreciated over the useful
life of the asset. An ARO and the related asset retirement cost are
recorded when an asset is first drilled, constructed or
purchased. The asset retirement cost is determined and discounted to
present value using a credit-adjusted risk-free rate. After initial
recording, the liability is increased for the passage of time, with the increase
being reflected as interest accretion expense in the statements of
operations.
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
Subsequent
adjustments in the cost estimate are reflected in the ARO liability and the
amounts continue to be amortized over the useful life of the related long-lived
asset.
Suspended
Well Costs
On
April
4, 2005, the Financial Accounting Standards Board, (FASB) issued FASB Staff
Position No. 19-1,"Accounting for Suspended Well Costs" (FSP No. 19-1). This
staff position amends SFAS No. 19, "Financial Accounting and Reporting by Oil
and Gas Producing Companies" and provides guidance concerning exploratory well
costs for companies that use the successful efforts method of accounting.
Daybreak adopted FSP No. 19-1 for the fiscal years ended February 28, 2007
and
2006.
The
position states that exploratory well costs should continue to be capitalized
if: (1) a sufficient quantity of reserves are discovered in the well to justify
its completion as a producing well and (2) sufficient progress is made in
assessing the reserves and the economic and operating feasibility of the well.
If the exploratory well costs do not meet both of these criteria, these costs
should be expensed, net of any salvage value. Additional annual disclosures
are
required to provide information about management's evaluation of capitalized
exploratory well costs.
In
addition, the FSP requires annual disclosure of: (1) net changes from period
to
period of capitalized exploratory well costs for wells that are pending the
determination of proved reserves, (2) the amount of exploratory well costs
that
have been capitalized for a period greater than one year after the completion
of
drilling and (3) an aging of exploratory well costs suspended for greater than
one year, designating the number of wells the aging is related to. Further,
the
disclosures should describe the activities undertaken to evaluate the reserves
and the projects, the information still required to classify the associated
reserves as proved and the estimated timing for completing the
evaluation.
Provisions
for Taxes
Daybreak
has adopted SFAS No. 109 “Accounting for Income Taxes”. Pursuant to this
pronouncement, income taxes are accounted for using an asset and liability
approach. SFAS No. 109 requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the financial statements and tax bases of assets and liabilities at
the
applicable tax rates. A valuation allowance is utilized when it is more likely
than not, that some portion of, or all of the deferred tax assets will not
be
realized. Deferred tax assets and liabilities are adjusted for the effects
of changes in tax laws and rates on the date of enactment.
Recent
Accounting Pronouncements
Daybreak
does not expect the adoption of any recently issued accounting pronouncements
to
have a significant effect on its material position or results of
operation.
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
Reclassifications
Certain
reclassifications have been made to conform to prior period’s financial
information to the current period’s presentation. These
reclassifications had no effect on previously reported net loss or accumulated
deficit.
Restatements
Daybreak
has restated its financial statements in accordance with SFAS No. 154,
“Accounting Changes and Error Corrections”
.
The financial statements
were restated for the first three (3) quarters for the fiscal year ended
February 28, 2006, for the twelve months ended February 28, 2006 and for the
first three (3) quarters for the fiscal year ended February 28, 2007 (the
“restated periods”). The financial statements were restated to reflect
adjustments to non-cash transactions involving (1) the valuation of common
stock
issued for management and director compensation, (2) the valuation of common
stock issued for investor relations services, (3) the valuation of common stock
issued for the acquisition of oil and gas properties, and (4) the recognition
of
beneficial conversion features inherent in the convertible debentures issued
during the restated periods.
NOTE
3 — GOING CONCERN:
Financial
Condition
Daybreak's
financial statements for the year ended February 28, 2007, 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.
Daybreak has incurred net losses since inception and has accumulated a deficit
during the exploration stage of $12,864,071. Daybreak had a working capital
surplus of $2,292,177 at February 28, 2007.
Management
Plans to Continue as a Going Concern
Daybreak
intends to implement plans to enhance Daybreak’s ability to continue as a going
concern. Daybreak received the proceeds and interest from the
$800,000 note receivable after February 28, 2007. Daybreak intends to
market a Joint Development Program in the Tuscaloosa project which should ensure
Daybreak’s continuation of that drilling program. The potential of increased
revenue from production will create positive operational cash flows for the
wells in Alabama, Louisiana and Texas. The partnership with Chevron U.S.A.,
Inc.
will limit the financial risk and enhance Daybreak’s ability to pursue
potentially profitable seismic and drilling programs on the California oil
and
gas properties. In addition, Daybreak believes it has the ability to secure
additional debt and equity funding, if necessary.
Daybreak
cannot offer any assurances that it will be successful in executing the
aforementioned plans to continue as a going concern. Daybreak’s financial
statements at February 28, 2007 do not include any adjustments that might result
from the inability to implement or execute Daybreak’s plans to continue as a
going concern.
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
NOTE
4 – INVESTMENTS IN MARKETABLE SECURITIES:
Daybreak
periodically invests excess cash on hand in marketable securities with the
intent to sell the securities in the near term as cash requirements
determine. At February 28, 2007, Daybreak held $2,356,213 in a
brokerage account which was invested in mutual funds that invested in fixed
income securities with relatively low market risk. These securities
are classified as trading securities under the provisions of SFAS No. 115
“
Accounting for Certain Investments in Debt and Equity
Securities”.
During the year ended February 28, 2007, Daybreak
earned $57,503 in interest income from these investments. The market
value of the securities as at February 28, 2007 was equal to their book value
and no trading gains or losses occurred during the year.
NOTE
5 - NOTES RECEIVABLE - DRILLING RIG AGREEMENT:
On
August
24, 2006 and November 14, 2006, Daybreak executed promissory note agreements
(“Note Agreements”) with Green River Drilling, LLC (“Green River”) to advance
funds for the refurbishment of a drilling rig. As set forth in the Note
Agreements, Daybreak would have a preferred use of the drilling rig on its
projects for a three year period. Daybreak advanced a total of $800,000 to
Green
River through November 30, 2006. The $600,000 Note Agreement dated
August 24, 2006, provides for annual interest of 8% and payments of $46,000.
These payments are to commence on the latter of December 2006 or the second
full
month following initial operation. These payments are to continue until the
note
is fully paid. As of February 28, 2007, operations had not commenced
and no payments had been received. The $200,000 Note Agreement dated
November 14, 2006, provides for annual interest of 8% and is due on May 15,
2007. Additionally, Daybreak would have the option to purchase a
forty-nine percent (49%) interest in Green River for a total of $800,000 under
the Note Agreements.
NOTE
6 — OIL AND GAS PROPERTIES:
Oil
and
gas properties, at cost:
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
February
28, 2007
|
|
|
February
28, 2006
|
|
Proved
leasehold costs
|
|
$
|
2,092,107
|
|
|
$
|
-
|
|
Unproved
leasehold costs
|
|
|
902,420
|
|
|
|
1,082,400
|
|
Costs
of wells and development
|
|
|
2,035,943
|
|
|
|
50,000
|
|
Unevaluated
capitalized exploratory well costs
|
|
|
1,822,619
|
|
|
|
-
|
|
Capitalized
asset retirement costs
|
|
|
93,457
|
|
|
|
-
|
|
Total
cost of oil and gas properties
|
|
|
6,946,546
|
|
|
|
1,132,400
|
|
Accumulated
depletion, depreciation,
amortization
and impairment
|
|
|
(2,393,693
|
)
|
|
|
-
|
|
Oil
and gas properties, net
|
|
$
|
4,552,853
|
|
|
$
|
1,132,400
|
|
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
Suspended
Well Costs
As
of
March 1, 2005, the Company adopted FASB Staff Position FAS 19-1, "Accounting
for
Suspended Well Costs." Upon adoption of the FSP, the Company evaluated all
existing capitalized exploratory well costs under the provisions of the FSP.
The
Company had no capitalized exploratory wells costs at the time of adoption
of
FAS 19-1 or as of February 28, 2006. The following table reflects the
net changes in capitalized exploratory well costs during 2007, and does not
include amounts that were capitalized and subsequently expensed in the same
period.
|
|
2007
|
|
|
2006
|
|
Beginning
balance at March 1 of fiscal year
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
Exploration Well Additions
|
|
|
3,608,297
|
|
|
|
253,500
|
|
Reclassifications
to wells, facilities, and equipment based on the determination of
proved
reserves
|
|
|
(1,222,658
|
)
|
|
|
|
|
Capitalized
exploratory well costs charged to expense
|
|
|
(563,020
|
)
|
|
|
(253,500
|
)
|
Ending
Balance at February 28 of fiscal year
|
|
$
|
1,822,619
|
|
|
$
|
-
|
|
The
following table provides an aging of capitalized exploratory well costs based
on
the date the
drilling
was completed and the number of projects for which exploratory well costs have
been
capitalized
for a period greater than one year since the completion of
drilling:
Fiscal
year
|
|
2007
|
|
Capitalized
exploratory well costs that have been capitalized for a period of
one year
or less
|
|
$
|
1,822,619
|
|
Balance
at February 28 of fiscal year
|
|
$
|
1,822,619
|
|
Impairment
of oil and gas properties
In
accordance with Statement of Financial Accounting Standards No. 144, “Accounting
for Impairment or Disposal of Long-Lived Assets”
,
if impairment is
necessary, the asset carrying value is written down to fair
value. Cash flow pricing estimates are based on existing proved
reserve and production information and pricing assumptions that management
believes are reasonable. Unproved oil and gas properties that are
individually significant are periodically assessed for impairment by providing
an impairment allowance if the net book value of the property is not
fully recoverable. During the fiscal year ended February 28,
2007, Daybreak expensed $1,606,292 as impairment on proved
properties.
Asset
Retirement Obligation
Daybreak’s
financial statements reflect the provisions of Statement of Financial Accounting
Standards No. 143, “Accounting for Asset Retirement Obligations”. Our asset
retirement obligation (“ARO”) primarily represents the estimated present value
of the amount Daybreak will incur to plug, abandon and remediate its producing
properties at the end of their productive lives, in accordance with applicable
state laws. Daybreak determines the ARO on its oil and gas properties by
calculating the present value of estimated cash flows related to the
liability. At February 28, 2007, the liability for ARO was $99,427,
all of which is considered long term.
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
The
asset
retirement obligations are recorded as current or non-current liabilities based
on the estimated timing of the anticipated cash flows. For the year
ended February 28, 2007 and 2006, Daybreak has recognized accretion expense
of
$5,970 and $0, respectively.
The
following table describes the changes in the asset retirement obligations for
the year ended February 28, 2007.
Asset
retirement obligations, beginning of period
|
|
$
|
-
|
|
Fair
value of liabilities assumed in acquisitions
|
|
|
103,457
|
|
Liabilities
contributed at formation
|
|
|
-
|
|
Liabilities
related to property sales
|
|
|
-
|
|
Adjustment
due abandonment in year
|
|
|
(10,000
|
)
|
Accretion
expense
|
|
|
5,970
|
|
Asset
retirement obligations, end of period
|
|
$
|
99,427
|
|
NOTE
7 — CONVERTIBLE DEBENTURES:
During
the fiscal years ended February 28, 2006 and February 28, 2007, there were
three
issuances of Convertible Debentures to various accredited individual investors
by Daybreak. The convertible debentures had a one year maturity date
and were convertible into shares of Daybreak’s unregistered common stock at
conversion prices of $0.25, $0.50 and $0.75, respectively. In
December of 2005, Daybreak issued a convertible promissory note (“Convertible
Promissory Note”) to an accredited investor pursuant to a warehousing line of
credit arrangement with a related party. The Convertible Promissory
Note was convertible into unregistered common stock at a conversion price of
$0.25.
The
following table summarizes the activity related to the Convertible Debentures
and the Convertible Promissory Note:
Description
|
|
Interest
Rate
|
|
Dates
of Maturity
|
|
2007
|
|
|
2006
|
|
Principal
balance, beginning of year
|
|
|
|
|
|
$
|
1,138,701
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
issuances
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.25
Convertible Debentures
|
|
|
6%
|
|
03/22/06
to 08/31/06
|
|
|
-
|
|
|
|
168,821
|
|
$0.50
Convertible Debentures
|
|
|
10%
|
|
01/26/07
to 02/26/07
|
|
|
-
|
|
|
|
806,700
|
|
$0.75
Convertible Debentures
|
|
|
10%
|
|
02/26/07
to 10/31/07
|
|
|
25,000
|
|
|
|
300,001
|
|
$0.25
Convertible Promissory Note
|
|
|
0%
|
|
06/30/06
|
|
|
-
|
|
|
|
60,000
|
|
Total
issuances during the year ended
|
|
|
|
|
|
|
|
1,163,701
|
|
|
|
1,335,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
converted during the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.25
Convertible Debentures
|
|
|
|
|
|
|
|
(32,000
|
)
|
|
|
(136,821
|
)
|
$0.50
Convertible Debentures
|
|
|
|
|
|
|
|
(806,700
|
)
|
|
|
|
|
$0.75
Convertible Debentures
|
|
|
|
|
|
|
|
(100,000
|
)
|
|
|
|
|
$0.25
Convertible Promissory Note
|
|
|
|
|
|
|
|
|
|
|
|
(60,000
|
)
|
Principal
balance, end of year
|
|
|
|
|
|
|
|
225,001
|
|
|
|
1,138,701
|
|
Unamortized
discount, end of year
|
|
|
|
|
|
|
|
(90,002
|
)
|
|
|
(1,049,233
|
)
|
Total
debt, net of discount
|
|
|
|
|
|
|
$
|
134,999
|
|
|
$
|
89,468
|
|
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
Twenty-Six
(26) of the 6% interest $0.25 convertible debentures for a total of $158,821
were with related parties.
One
(1)
of the 10% interest $0.50 convertible debentures for a total of $200,000 was
with Hooper Group, LLC, an entity controlled Keith Hooper a Daybreak shareholder
(greater than 5%).
Under
the
warehousing line of credit Convertible Promissory Note, Daybreak was advanced
$60,000 and had the option to request an additional $120,000 upon completion
of
the Ginny South prospect. The Convertible Promissory Note was
guaranteed by a director of the company. The Convertible Promissory
Note had no stated interest and had the option to convert the note into
Daybreak’s common stock. All advances under the Convertible
Promissory Note could be converted into common stock of the Company at or prior
to the maturity date.
No
discount was recorded for the imputed interest rate on the Convertible
Promissory Note as a beneficial conversion feature of $60,000 was recognized
upon issuance in accordance with EITF 00-27 and 98-5. The beneficial conversion
feature was recognized as a discount on the Convertible Promissory Note and
amortized utilizing the effective interest method, over the period commencing
on
the issuance date to the date of stated redemption of the debt in accordance
with EITF 00-27.
In
February 2006, the $60,000 advance on the line of credit, as secured by the
Convertible Promissory Note, was converted into common stock of
Daybreak. Upon conversion the remaining discount was recognized as
interest and the Convertible Promissory Note was cancelled. Financing
costs for the Convertible Promissory Note were paid by issuing 66,000 shares
of
unregistered common stock to the issuer and another related
party. The common stock fair value of $38,380 was recognized as
interest expense on the date of grant and the fair value was determined using
Daybreak’s trading price on the date of grant.
The
holders of the $0.25 Convertible Debentures had the option to convert their
debentures (including accrued interest of 6%) into Daybreak’s common stock at
any time after six months had elapsed from the date of issuance. In accordance
with EITF 00-27 and 98-5, beneficial conversion features of $73,511 were
recognized upon issuance of the debentures. The beneficial conversion features
were recognized as discounts on the debentures at the date of issuance and
amortized using the effective interest method to the earliest of the maturity
date or the date conversion. As of February 28, 2007, the entire
issuance of the $0.25 convertible debentures had been converted into
unregistered common stock and the $73,511 discount had been
recognized.
The
holders of the $0.50 Convertible Debentures had the option to convert their
debentures (including accrued interest of 10%) into Daybreak’s common stock at
any time after sixty-one (61) days had elapsed from the date of issuance. In
accordance with EITF 00-27 and 98-5, beneficial conversion features of $806,700
were recognized upon issuance of the debentures. The beneficial conversion
features were recognized as discounts on the debentures at the date of issuance
and amortized using the effective interest method to the earliest of the
maturity date or the date of conversion. As of February 28, 2007, the entire
issuance of the $0.50 convertible debentures had been converted into
unregistered common stock and the $806,700 discount had been
recognized.
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
The
holders of the $0.75 Convertible Debentures had the option to convert their
debentures (including accrued interest of 10%) into Daybreak’s common stock at
any time after sixty-one (61) days had elapsed from the date of issuance. In
accordance with EITF 00-27 and 98-5, beneficial conversion features of $325,001
were recognized upon issuance of the debentures. The beneficial conversion
features were recognized as discounts on the debentures at the date of issuance
and amortized using the effective interest method to the earliest of the
maturity date or the date of conversion. As of February 28, 2007, $100,000
of
the $0.75 convertible debentures, including accrued interest of 10%, had been
converted into unregistered common stock and the $325,001 discount had been
recognized.
In
December 2006, the three remaining holders of the $0.75 convertible debentures,
agreed to extend the due date of the debentures to August 31, 2007. In
consideration of the term extension the debenture holders were issued a total
of
150,001 warrants. The warrants were valued at $119,283 using the Black-Scholes
option pricing model. The assumptions used in the Black-Scholes valuation model
were: a risk fee interest rate of 4.7%; the current stock price at date of
issuance of $1.04 per share; the exercise price of the warrants of $2.00; the
term of five years; volatility of 117%; and dividend yield of 0.0%. The value
of
the warrants was recognized at the time of issuance as a discount against the
existing convertible debentures and is being amortized using the effective
interest method until maturity.
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
On
April
30, 2007, one of the convertible debenture holders converted to Daybreak
unregistered common stock. A total of 37,169 shares were issued to satisfy
the
debt. On August 31, 2007, the remaining two debenture holders agreed to extend
the term of the debentures to October 31, 2007. In consideration of this
extension they received 112,000 warrants. The warrants were valued at $35,386
using the Black-Scholes option pricing model. The assumptions used in the
Black-Scholes valuation model were: a risk fee interest rate of 4.1 %; the
current stock price at date of issuance of $0.53 per share; the exercise price
of the warrants of $0.53; the term of two years; volatility of 114%; and
dividend yield of 0.0%. The value of the warrants was recognized at the time
of
issuance as a discount against the existing convertible debentures and is being
amortized using the effective interest method until maturity.
Daybreak
has evaluated the application of SFAS No. 133 and EITF 00-19 for the
consideration of embedded derivatives with respect to the conversion features
for each of the Convertible Debentures and the Convertible Promissory
Note. Daybreak has concluded that the instruments did not contain
embedded derivatives.
NOTE
8 — RELATED PARTY TRANSACTIONS:
Office
Lease
On
August
3, 2006, the Board of Directors approved the rental of office space for Daybreak
offices from Terrence Dunne & Associates, a company owned by Terrence Dunne
(CFO and a director). Originally, Daybreak occupied approximately 700 square
feet and paid $600 per month. In October 2006, the rent increased to $700
per month. In March 2007, to accommodate an increase in the
administrative staff size Daybreak expanded the amount of office space
rented to approximately 850 square feet. This increase in space resulted in
a monthly rent of $1,000. In May 2007, Daybreak again increased their office
size and is now paying $1,250 per month for approximately 1,000 square feet.
This office lease is currently on a month to month basis.
Financing
of Gas Pipeline
On
May
24, 2006, Daybreak financed its forty percent (40%) working interest in the
Tuscaloosa project gas pipeline through a financing arrangement with Hooper
Oil
& Gas Partners, LLC (“Hooper O&G”). This pipeline services the Tensas
Farms et al F-1 well in Tensas Parish, Louisiana. Hooper O&G is a company
controlled by Keith A. Hooper (a greater than 5% shareholder).
Daybreak
has accounted for this agreement as a financing arrangement in the form of
a
note payable. The principal of the note is $200,000. Daybreak is obligated
to
pay $5,000 per quarter in interest until the principal is paid in full. Daybreak
is also required to pay an additional 1% interest fee based on Daybreak’s
original net revenue interest (“NRI”) on the production revenue of the F-1 well
for the life of the project. Daybreak is obligated to repay the note between
the
sixth (6th) and the thirtieth (30th) month after the operation of the pipeline
has commenced. Under the agreement, title transferred to Hooper O & G,
however Hooper O&G is obligated to sell the interest and title back to
Daybreak and cannot sell the interest to any other party.
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
Daybreak
is required to commence repayment of the loan if production from the F-1
well
should cease for any cause for a period exceeding sixty days. From June 14,
2007
through September 7, 2007, Daybreak made principal payments totaling
$170,000. The balance of the loan is now past due. The accelerated repayment
schedule was triggered by the temporary shut-in status of the F-1 well, due
to
technical issues with water production. Daybreak and Hooper O& G
have agreed to make final payment on the note by November 30,
2007.
Common
Stock and Cash for Services
Under
SFAS No. 123R the guidelines for recording stock issued for goods or services
require the fair value of the shares granted be based on the fair value of
the
goods or services received or the publicly traded share price of Daybreak’s
registered shares on the date the shares were granted (irrespective of the
fact
that the shares granted were unregistered), whichever is more readily
determinable. This position has been further clarified by the recent issuance
of
SFAS No. 157. Accordingly, Daybreak has elected an early application of these
newly enacted guidelines. Daybreak has determined that the fair value of all
common stock issued for goods or services is more readily determinable based
on
the publicly traded share price on the date of grant.
From
March 1, 2005 through February 28, 2007, Daybreak had contracts with 413294
Alberta, Ltd. to compensate Robert Martin as President of Daybreak. In the
fiscal year ended February 28, 2006, 413294 Alberta, Ltd. was paid a total
of
$40,050 and 1,100,000 shares of unregistered common stock valued at $869,000.
For the fiscal year ended February 28, 2007, 413294 Alberta, Ltd. was paid
a
total of $161,500 and 250,000 shares of unregistered common stock valued
at
$597,500. The shares of common stock were expensed at the grant
date.
From
March 1, 2005 through February 28, 2007, Daybreak had contracts with Jeffrey
Dworkin (Director) for services in regards to public company corporate
governance and oil and gas mineral rights and leases. In the fiscal year ended
February 28, 2006, Mr. Dworkin was paid a total of $12,000. For the fiscal
ended
February 28, 2007, Mr. Dworkin was paid a total of $36,191.
From
March 1, 2005 through February 28, 2006, Bennett Anderson (COO) was compensated
for consulting services with 100,000 shares of unregistered common stock valued
at $223,000. For the fiscal year ended February 28, 2007, Mr. Anderson was
paid
$98,500 in cash for services.
From
January 2, 2007 through February 28, 2007, Daybreak had a contract with Tim
Lindsey (Director) to facilitate long range strategic planning and advise
Daybreak in business and exploration matters in the oil and gas industry. Under
the terms of his contract, Mr. Lindsey was granted 200,000 shares of
unregistered common stock valued at $260,000. The contract provides compensation
for services on a daily rate and no payments have been made under the contract
as of February 28, 2007.
During
the fiscal year ended February 28, 2006, Terrence Dunne (Director) was granted
30,000 shares of unregistered common stock valued at $17,400 for services
relating to the issuance of the Convertible Promissory Note.
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
During
the fiscal year ending February 28, 2006, Daybreak granted the following
officers and directors shares of unregistered common stock for services.
Terrence Dunne and Thomas Kilbourne each received 400,000 shares each valued
at
$224,000 respectively. Dale Lavigne and Ronald Lavigne each received 300,000
shares each valued at $168,000 respectively. A total of seven directors received
183,000 shares of unregistered common stock valued at $134,730 for directors’
fees.
During
the fiscal year ended February 28, 2007, Eric Moe (CEO) was compensated $103,500
in cash and granted 500,000 shares of unregistered common stock valued at
$1,100,000.
During
the fiscal year ended February 28, 2007, Thomas Kilbourne (Treasurer) was
compensated $84,500 in cash and granted 100,000 shares of unregistered common
stock valued at $239,000.
During
the fiscal year ending February 28, 2007, Daybreak paid nine directors a total
of $69,750 cash for directors’ fees.
Convertible
Debentures
Of
the
$168,821 $0.25 Convertible Debentures issued in the fiscal year ended February
28, 2006, $158,821 were issued to five individuals who were considered to be
related parties at the time. In the fiscal year ended February 28, 2006,
twenty-three of the related party convertible debentures representing $126,821
in principal were converted, resulting in 524,820 shares of unregistered common
stock being issued to satisfy the principal and interest obligations. By
February 28, 2007, all twenty-six of related party convertible debentures were
converted resulting in a total of 662,360 shares of unregistered common stock
being issued to satisfy principal and interest obligations.
Of
the
$806,700 in convertible debenture of the 10% interest $0.75 series, $200,000
was
from Hooper Group, LLC , an entity controlled by Keith Hooper a Daybreak
shareholder (greater than 5%). In the fiscal year ended February 28, 2007,
these
notes were converted for 440,000 shares of unregistered common stock to satisfy
the principal and interest obligations.
NOTE
9 — STOCKHOLDERS’ EQUITY:
Series
A Convertible Preferred Stock
Daybreak
is authorized to issue up to 10,000,000 shares of $0.001 par value preferred
stock. Daybreak has designated 2,400,000 shares of the 10,000,000 total
preferred shares as “Series A Convertible Preferred Stock” (“Series A
Preferred”), with a $0.001 par value. During the year ended February 28, 2007,
Daybreak conducted a private placement sale of Series A Preferred (the “July
2006 Preferred Stock Private Placement”). Each sale unit consisted of one share
of Series A Preferred and two common stock purchase warrants. The units were
sold for $3.00 per unit, with a total of 1,399,765 units sold; resulting in
gross proceeds of $4,199,295. Daybreak received net proceeds of $3,626,204
after
placement agent fees, commissions and other offering costs of
$573,091.
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
The
Series A Preferred can be converted by the shareholder at any time into three
shares of Daybreak’s common stock. If Daybreak’s common stock is registered
under the Securities Act of 1933, the Series A Preferred shall be automatically
converted into common stock at any time after the effective date of the
registration statement if Daybreak’s common stock closes at or above $3.00 per
share for twenty (20) out of thirty trading days (30) days. Holders
of Series A Convertible Preferred stock earn a dividend, in the amount of 6%
of
the original purchase price per year. Accumulated dividends do not bear
interest. Dividends are payable upon declaration by the Board of
Directors and none have been declared.
The
Warrants included in the private placement, are exercisable for a period of
five
(5) years after the closing date at an exercise price of $2.00 per share. In
accordance with EITF 98-5, Daybreak valued the warrants and the beneficial
conversion feature of the preferred stock. Accordingly, Daybreak
recorded a discount for the warrants and beneficial conversion feature (BCF),
of
$4,199,295. The discount is attributable to the fair value of the Warrants
and
the intrinsic value of the conversion feature of the preferred stock. The
value of the BCF was recognized and measured separately by allocating to
additional paid-in capital the proceeds equal to the $1,489,222 relative fair
value of the Warrants and the $2,710,073 intrinsic value of the conversion
feature. Daybreak also recorded a deemed dividend to reflect the full
amortization of the discount of the value of the Warrants and conversion
features of $4,199,295. The fair value of each Warrant granted
was estimated using the Black-Scholes pricing model. The assumptions used
in the Black-Scholes valuation model were: a risk fee interest rate of 4.99%;
the current stock price at date of issuance of $2.20 per share; the exercise
price of the warrants at $1.00; an expected term of five years; volatility
of
113%; and dividend yield of 0.0%. As of February 28, 2007, no
subscriber warrants had been exercised.
Bathgate
Capital Partners, of Denver, Colorado (Bathgate) was the placement
agent. A son of Dale Lavigne (the Chairman and a director of
Daybreak) is an employee of Bathgate. Bathgate was paid a sales commission
of
10% of the gross proceeds of the private placement and a non-accountable expense
allowance of 3% of the gross proceeds totaling $547,589. For every $30.00
invested, Bathgate earned three (3) common stock purchase warrants exercisable
at $1.00 per share. The warrants are exercisable for a period of five (5) years.
A total of 419,930 warrants were issued to Bathgate from this private placement
and were valued at $816,374. The placement agent warrants were valued using
the
Black-Scholes option pricing model. The assumptions used in the Black-Scholes
valuation model were: a risk fee interest rate of 4.99%; the current stock
price
at date of issuance of $2.20 per share; the exercise price of the warrants
at
$1.00; an expected term of five years; volatility of 113%; and dividend yield
of
0.0%. As of February 28, 2007, no placement agent warrants had been
exercised.
Both
the
subscriber warrants and the placement agent warrants contain customary
anti-dilution provisions. The anti-dilution provisions permit the adjustment
of
the number of shares issuable upon exercise of the warrants in the event of
stock splits, stock dividends, stock reversals and sales of substantially all
of
the Company’s assets. The placement agent warrants also contain a cashless
exercise provision. The cashless exercise provision allows for the holder of
the
warrants to receive a number shares equal to the quotient of a) the product
of
the number of warrants held and the amount by which Daybreaks market traded
stock price exceeds the exercise price of the warrants on the date of exercise,
divided by b) the market traded stock price.
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
Daybreak has
agreed to register the Series A Preferred shares on a “best efforts”
basis. If Daybreak is unable to file the registration statement
within the filing timeline, Daybreak will have to issue 1,399,765 additional
warrants at an exercise price of $2.00 per share. Daybreak is required
to file the Series A Preferred shares registration statement within sixty (60)
days of the effective date of the registration statement required for the May
2006 common stock private placement.
Daybreak
evaluated the application of SFAS No. 133 and EITF 00-19 with respect to the
conversion feature and the registration rights for consideration of embedded
derivatives and concluded that the preferred stock and registration rights
instruments did not have embedded derivatives.
The
relative fair values of the Series A Convertible Preferred Shares and the Common
Stock Purchase Warrants were as follows:
Description
|
|
Shares
|
|
|
Relative
Fair
Value
Amount
|
|
Series
A Convertible Preferred
|
|
|
1,399,765
|
|
|
$
|
2,710,073
|
|
Common
Stock Purchase Warrants
|
|
|
2,799,530
|
|
|
|
1,489,222
|
|
Total
Proceeds
|
|
|
|
|
|
|
4,199,295
|
|
Offering
Costs
|
|
|
|
|
|
|
(573,091
|
)
|
Net
Proceeds
|
|
|
|
|
|
$
|
3,626,204
|
|
Common
Stock
Daybreak
is authorized to issue up to 200,000,000 shares of $0.001 par value common
stock. During the year ended February 28, 2007, Daybreak conducted a private
placement sale of common stock from March 3, 2006 to May 19, 2006 (the “May 2006
Common Stock Private Placement”). Each sale unit consisted of two shares of
common stock and one common stock purchase warrant (warrant). The units sold
for
$1.50 per unit, with a total of 4,013,602 units sold; resulting in gross
proceeds of $6,020,404 (net proceeds of $5,188,257 after placement
costs).
The
Warrants are exercisable for a period of five (5) years after the closing date
at an exercise price of $2.00 per share. Daybreak may call the warrants for
redemption if (a) the average of the closing sale price of the common stock
is
at or above $3.00 for twenty (20) out of thirty (30) trading days prior to
the
date the warrants are called, and (b) the warrant shares are registered under
the Securities Act. The Warrants were valued using the Black-Scholes
option pricing model. The assumptions used in the Black-Scholes valuation model
were: a risk fee interest rate of 4.99%; the current stock price at date of
issuance of $2.70 per share; the exercise price of the warrants; an expected
term of five (5) years; volatility of 112%; and dividend yield of
0.0%.
Bathgate
Capital Partners, of Denver, Colorado was the placement agent. A son
of Dale Lavigne (the Chairman and a director of Daybreak) is an employee of
Bathgate Capital Partners. The Placement Agent was paid a sales commission
of
10% of the gross proceeds of the private placement and a non-accountable expense
allowance of 3% of the gross proceeds totaling $790,402.
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
Additionally,
the Placement Agent was paid a due diligence fee of $15,000. For every ten
(10)
units sold, the Placement Agent earned three (3) common stock warrants, two
of
which are exercisable at $0.75 per share and one of which is exercisable at
$2.00 per share. The Placement Agent warrants are exercisable for a period
of
seven (7) years. The placement agent earned 1,204,082 warrants, of which 802,721
are exercisable at $0.75 per share and were determined to have a fair value
of
$2,043,752. The remaining 401,361 warrant shares are exercisable at $2.00 per
share and were determined to have a fair value of $973,970. The
placement agent warrants were valued using the Black-Scholes option pricing
model. The assumptions used in the Black-Scholes valuation model were: a risk
fee interest rate of 4.99%; the current stock price at date of issuance of
$2.70
per share; the exercise price of the warrants; an expected term of seven years;
volatility of 112%; and dividend yield of 0.0%. As of February 28,
2007, no placement agent warrants had been exercised.
Both
the
subscriber warrants and the placement agent warrants have a cashless exercise
provision and contain customary anti-dilution provisions. The cashless exercise
provision allows for the holder of the warrants to receive a number shares
equal
to the quotient of a) the product of the number of warrants held and the amount
by which the market traded stock price exceeds the exercise price of the
warrants on the date of exercise, divided by b) the market traded stock price.
The anti-dilution provisions permit the adjustment of the number of shares
issuable upon exercise of the warrants in the event of stock splits, stock
dividends, stock reversals and sales of substantially all of the Company’s
assets.
Daybreak
agreed to register the shares on a “best efforts” basis. If Daybreak
was unable to file the registration statement within the filing timeline,
Daybreak would have had to issue 4,013,602 additional warrants at an exercise
price of the lower of (a) the average closing sale price of its common stock
for
twenty of the thirty trading days immediately preceding the date the
registration statement should have been filed, or (b) $1.50 per common share.
Daybreak did file the registration statement within the filing timeline. No
additional warrants were required to be issued.
Daybreak
evaluated the application of SFAS No. 133 and EITF 00-19 with respect to the
conversion feature and the registration rights for consideration of embedded
derivatives and concluded that the common stock and registration rights
instruments did not have embedded derivatives.
The
relative fair value of the Common Stock and the Common Stock Purchase Warrants
was as follows:
Description
|
|
Shares
|
|
|
Relative
Fair
Value
Amount
|
|
Common
Stock
|
|
|
8,027,206
|
|
|
$
|
4,241,232
|
|
Common
Stock Purchase Warrants
|
|
|
4,013,602
|
|
|
|
1,779,172
|
|
Total
Proceeds
|
|
|
|
|
|
|
6,020,404
|
|
Placement
fees
|
|
|
|
|
|
|
(832,147
|
)
|
Net
Proceeds
|
|
|
|
|
|
$
|
5,188,257
|
|
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
During
the fiscal year ended February 28, 2005, Daybreak conducted a private placement
sale of common stock from June 7, 2005 through December 19, 2005 (the “December
2005 Common Stock Private Placement”). The shares were sold directly by
Daybreak and were offered at $0.25 per share to accredited investors only.
Gross
proceeds were $1,100,000, with net proceeds of $1,087,500. A total of
forty-three (43) investors participated in this private placement. From this
offering, 4,400,000 shares of unregistered common stock were
issued.
Common
Stock for Services
Under
SFAS No. 123R the guidelines for recording stock issued for goods or services
require the fair value of the shares granted be based on the fair value of
the
goods or services received or the publicly traded share price of Daybreak’s
registered shares on the date the shares were granted (irrespective of the
fact
that the shares granted were unregistered), whichever is more readily
determinable. This position has been further clarified by the recent issuance
of
SFAS No. 157. Accordingly, Daybreak has elected an early application of these
newly enacted guidelines. Daybreak has determined that the fair value of all
common stock issued for goods or services is more readily determinable based
on
the publicly traded share price on the date of grant.
During
the fiscal year ended February 28, 2007, Daybreak paid for investor relations
and consulting services with 220,000 shares of unregistered common stock valued
at $401,200.
During
the fiscal year ended February 28, 2006, Daybreak paid for investor relations
services with 2,539,667 shares of unregistered common stock valued at
$1,599,400.
Common
Stock Issued for Convertible Debentures and Interest Payable
During
the fiscal year ended February 28, 2007, non-related parties converted
debentures representing $770,139 in principal, resulting in 1,471,763 shares
of
unregistered common stock being issued to satisfy the principal and interest
obligations.
During
the fiscal year ended February 28, 2006, non-related parties converted
debentures representing $74,713 in principal, resulting in 281,315 shares of
unregistered common stock being issued to satisfy the principal and interest
obligations
Common
Stock Issued for Oil and Gas Property Interests
Under
SFAS No. 123R the guidelines for recording stock issued for goods or services
require the fair value of the shares granted be based on the fair value of
the
goods or services received or the publicly traded share price of Daybreak’s
registered shares on the date the shares were granted (irrespective of the
fact
that the shares granted were unregistered), whichever is more readily
determinable. This position has been further clarified by the recent issuance
of
SFAS No. 157. Accordingly, Daybreak has elected an early application of these
newly enacted guidelines. Daybreak has determined that the fair value of all
common stock issued for goods or services is more readily determinable based
on
the publicly traded share price on the date of grant.
During
the fiscal year ended February 28, 2007, Daybreak purchased oil and gas
properties valued at $420,000 by issuing 150,000 shares of its unregistered
common for the 40 Mile Coulee project in Alberta, Canada. On December
8, 2006, Daybreak repurchased these same 150,000 shares for an agreed amount
of
$150,000 as part of an agreement to release Daybreak from any further plugging
and abandonment liabilities related to this project.
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
During
the fiscal year ended February 28, 2007, Daybreak purchased an additional eight
percent (8%) working interest in the Tuscaloosa project in Louisiana from Strike
Oil & Minerals, Corp. for $205,883 in cash and 72,500 shares of unregistered
common stock valued at $108,750.
During
the fiscal year ended February 28, 2006, Daybreak issued 100,000 shares of
unregistered common stock valued at $37,000 to Margaret Perales of MPG Petroleum
for oil and gas property acquisition costs in the Pearl Prospect, located in
Texas.
During
the fiscal year ended February 28 2006, Daybreak issued 600,000 shares of
unregistered common stock valued at $375,000 to Sam Pfiester (Trustee, Chicago
Mill Joint Venture), for oil and gas property acquisition in the
Tuscaloosa project in Louisiana.
NOTE
10 – WARRANTS:
For
the
year ended February 28, 2006 there were no warrants issued or
outstanding.
Warrants
outstanding and exercisable as of February 28, 2007 are:
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Exercisable
Warrants
|
|
Description
|
|
Warrants
|
|
|
Price
|
|
|
Life
(Years)
|
|
|
Remaining
|
|
May 2006
Common Stock Private Placement
|
|
|
4,013,602
|
|
|
$
|
2.00
|
|
|
|
4.25
|
|
|
|
4,013,602
|
|
Placement
Agent Warrants May 2006 PP
|
|
|
802,721
|
|
|
$
|
0.75
|
|
|
|
6.25
|
|
|
|
802,721
|
|
Placement
Agent Warrants May 2006 PP
|
|
|
401,361
|
|
|
$
|
2.00
|
|
|
|
6.25
|
|
|
|
401,361
|
|
July
2006 Preferred Stock Private Placement
|
|
|
2,799,530
|
|
|
$
|
2.00
|
|
|
|
4.50
|
|
|
|
2,799,530
|
|
Placement
Agent Warrants July 2006 Preferred Stock PP
|
|
|
419,930
|
|
|
$
|
1.00
|
|
|
|
4.50
|
|
|
|
419,930
|
|
Convertible
Debenture Term Extension
|
|
|
150,001
|
|
|
$
|
2.00
|
|
|
|
4.75
|
|
|
|
150,001
|
|
|
|
|
8,587,145
|
|
|
|
|
|
|
|
|
|
|
|
8,587,145
|
|
During
the year ended February 28, 2007, no warrants were exercised. For the year
ended
February 28, 2006 there were no warrants issued or outstanding. The intrinsic
value of the warrants at February 28, 2007 were $152,517.
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
NOTE
11 – RESTATEMENT:
Daybreak
has determined that it is necessary to restate previously filed financial
statements. The restated financial statements will include the four (4) quarters
for the fiscal year ended February 28, 2006, the 12 months ended February 28,
2006, and the first three (3) quarters for the fiscal year ended February 28,
2007 (the "Restated Periods"). The determination to restate the financial
statements for the Restated Periods is based on a reassessment of the following
non-cash transactions:
-
Pursuant
to SFAS No. 123(R), an adjustment was recorded utilizing the market trading
price on the date of grant as the more readily determinable fair value
of
stock issued for compensation to management and directors during the Restated
Periods; and
-
Pursuant
to SFAS No. 123(R), an adjustment was recorded utilizing the market trading
price on the date of grant as the more readily determinable fair value
of
stock issued for investor relations services during the Restated Periods;
and
-
Pursuant
to SFAS No. 123(R), an adjustment was recorded utilizing the market trading
price on the date of grant as the more readily determinable fair value
of
stock issued for oil and gas properties during the Restated Periods;
and
-
Pursuant
to EITF 00-27 and 98-5, the recognition of a beneficial conversion feature
(BCF) inherent in the convertible debentures issued during the Restated
Periods. The recognition results in the recording of a discount to
reflect the BCF and the recording of interest expense related to the
discount.
Pursuant
to SFAS No. 123R the guidelines for recording stock based compensation issued
to
officers and directors support that the more readily determinable fair value
of
these shares should be based on the publicly traded share price of Daybreak’s
registered shares at the grant date. The valuation of stock based compensation
has been further addressed by the recent issuance of SFAS No. 157. This latest
pronouncement also implies that shares issued to officers and directors for
compensation should be valued at the publicly traded share price. Both of these
pronouncements forward that the aforementioned valuation method can be applied
even when, as in Daybreak’s case, compensation was issued to officers and
directors in the form of unregistered shares which cannot be sold by the
recipients until a full year has elapsed from their issuance. Accordingly,
Daybreak has restated the impact of these share based payments to reflect the
use of the publicly traded share price.
Again
pursuant to SFAS No. 123(R), the guidelines for recording common stock issued
for investor relations services and the acquisition of interests in oil and
gas
properties suggest that the more readily determinable fair value of these shares
should be based on the publicly traded share price of Daybreak’s registered
shares at the grant or acquisition date. SFAS No. 157 also suggests that when
shares are issued for services or properties, they should be valued at the
publicly traded share price. Accordingly, Daybreak has restated the impact
of
the share based payments for services and oil and gas properties to reflect
the
use of the publicly traded share price.
Daybreak
has reviewed its prior determination of the fair value of shares resulting
from
the potential conversion of debt and concluded that it has not appropriately
accounted for discounts in accordance with SFAS 123(R) and EITF
98-05. Daybreak has calculated the intrinsic value of the embedded
beneficial conversion feature present in the convertible debt using quoted
closing market prices on the date of each of the transactions.
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
This
calculation has determined that $1,138,701 in discounts should have been
assigned to the convertible debt issuances at their respective inception. These
discounts will be amortized over the period commencing on the issuance date
to
the earliest conversion date of the debt.
The
accompanying financial statements for the twelve month period February 28,
2006,
have been restated to effect the changes described above. The impact of those
adjustments for the following periods is summarized as
follows:
-
The
three months ended May 31, 2006 and May 31, 2005; and
-
The
six
months ended August 31, 2006 and August 31, 2005; and
-
The
nine months ended November 30, 2006 and November 30, 2005; and
-
The
twelve months ended February 28, 2006.
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
As
of May 31, 2005 (Unaudited):
|
|
As
Originally
Reported
|
|
|
Adjustments
|
|
|
|
As
Restated
|
|
Total
current assets
|
|
$
|
401,521
|
|
|
$
|
(365,623
|
)
|
1)
|
|
$
|
35,898
|
|
Oil
and gas properties, net of accumulated
depletion,
successful efforts method
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
Total
assets
|
|
|
401,521
|
|
|
|
(365,623
|
)
|
|
|
|
35,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
$
|
101,244
|
|
|
$
|
(39,064
|
)
|
2)
|
|
$
|
62,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
Common
stock
|
|
|
20,149
|
|
|
|
-
|
|
|
|
|
20,149
|
|
Additional
paid-in capital
|
|
|
1,195,547
|
|
|
|
1,053,000
|
|
1)
|
|
|
|
|
|
|
|
|
|
|
|
46,611
|
|
2)
|
|
|
2,295,158
|
|
Accumulated
deficit
|
|
|
(915,419
|
)
|
|
|
179,384
|
|
3)
|
|
|
(736,035
|
)
|
Deficit
accumulated during the exploration stage
|
|
|
-
|
|
|
|
(1,426,170
|
)
|
|
|
|
-
|
|
|
|
|
|
|
|
|
(179,384
|
)
|
3)
|
|
|
(1,605,554
|
)
|
Total
stockholders’ equity
|
|
|
300,277
|
|
|
|
(326,559
|
)
|
|
|
|
(26,282
|
)
|
Total
liabilities and stockholders’ equity
|
|
$
|
401,521
|
|
|
$
|
(365,623
|
)
|
|
|
$
|
35,898
|
|
|
|
THREE
MONTHS ENDED
|
|
For
the three months ended May 31, 2005 (Unaudited):
|
|
As
Originally
Reported
|
|
|
Adjustments
|
|
|
|
As
Restated
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
179,383
|
|
|
|
1,418,623
|
|
1)
|
|
|
1,598,006
|
|
Total
expenses
|
|
|
179,383
|
|
|
|
1,418,623
|
|
|
|
|
1,598,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(179,383
|
)
|
|
|
(1,418,623
|
)
|
|
|
|
(1,598,006
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
-
|
|
|
|
(7,547
|
)
|
2)
|
|
|
(7,547
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(179,383
|
)
|
|
$
|
(1,426,170
|
)
|
|
|
$
|
(1,605,553
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss available to common shareholders
|
|
$
|
(179,383
|
)
|
|
$
|
(1,426,170
|
)
|
|
|
$
|
(1,605,553
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.07
|
)
|
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding
|
|
$
|
18,969,528
|
|
|
$
|
1,196,130
|
|
4)
|
|
$
|
20,165,658
|
|
1)
|
To
recognize previously deferred expense for stock based compensation
and
adjust the valuation of stock based compensation and services provided
by
third parties utilizing the market price on the date of
grant.
|
2)
|
To
record discount related to the beneficial conversion feature and
record
the amortization of discount on convertible debt using the effective
interest rate method.
|
3)
|
To
reclassify deficit accumulated during exploration
stage.
|
4)
|
To
adjust weighted average shares outstanding and earnings per share
as a
result of recognizing certain issuances as of the date of satisfaction
of
all necessary conditions to
issuance.
|
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
As
of August 31, 2005 (Unaudited):
|
|
As
Originally
Reported
|
|
|
Adjustments
|
|
|
|
As
Restated
|
|
Total
current assets
|
|
$
|
244,671
|
|
|
$
|
(243,747
|
)
|
1)
|
|
$
|
924
|
|
Oil
and gas properties, net of accumulated
depletion,
successful efforts method
|
|
|
378,500
|
|
|
|
12,000
|
|
4)
|
|
|
390,500
|
|
Total
assets
|
|
$
|
623,171
|
|
|
$
|
(231,747
|
)
|
|
|
$
|
391,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
$
|
224,787
|
|
|
$
|
(52,722
|
)
|
2)
|
|
$
|
172,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
Common
stock
|
|
|
21,295
|
|
|
|
-
|
|
|
|
|
21,295
|
|
Additional
paid-in capital
|
|
|
1,480,901
|
|
|
|
1,058,700
|
|
1)
|
|
|
-
|
|
|
|
|
|
|
|
|
73,511
|
|
2)
|
|
|
|
|
|
|
|
|
|
|
|
12,000
|
|
4)
|
|
|
2,625,112
|
|
Accumulated
deficit
|
|
|
(1,103,812
|
)
|
|
|
367,777
|
|
3)
|
|
|
(736,035
|
)
|
Deficit
accumulated during the exploration
stage
|
|
|
-
|
|
|
|
(1,323,236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(367,777
|
)
|
3)
|
|
|
(1,691,013
|
)
|
Total
stockholders’ equity
|
|
|
398,384
|
|
|
|
(179,025
|
)
|
|
|
|
219,359
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
623,171
|
|
|
$
|
(231,747
|
)
|
|
|
$
|
391,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
For
the three and six months ended August 31, 2005
(Unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
THREE
MONTHS ENDED
|
|
|
SIX
MONTHS ENDED
|
|
|
|
As
Originally
Reported
|
|
|
Adjustments
|
|
|
|
As
Restated
|
|
|
As
Originally
Reported
|
|
|
Adjustments
|
|
|
|
As
Restated
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
188,393
|
|
|
|
(116,176
|
)
|
1)
|
|
|
72,217
|
|
|
|
367,776
|
|
|
|
1,302,447
|
|
1)
|
|
|
1,670,223
|
|
Total
expenses
|
|
|
188,393
|
|
|
|
(116,176
|
)
|
|
|
|
72,217
|
|
|
|
367,776
|
|
|
|
1,302,447
|
|
|
|
|
1,670,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(188,393
|
)
|
|
|
116,716
|
|
|
|
|
(72,217
|
)
|
|
|
(367,776
|
)
|
|
|
(1,302,447
|
)
|
|
|
|
(1,670,223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
Interest
expense
|
|
|
-
|
|
|
|
(13,242
|
)
|
2)
|
|
|
(13,242
|
)
|
|
|
-
|
|
|
|
(20,789
|
)
|
2)
|
|
|
(20,789
|
)
|
Total
other income and
expenses
|
|
|
-
|
|
|
|
(13,242
|
)
|
|
|
|
(13,242
|
)
|
|
|
-
|
|
|
|
(20,789
|
)
|
|
|
|
(20,789
|
)
|
Net
loss
|
|
$
|
(188,393
|
)
|
|
$
|
102,934
|
|
|
|
$
|
(85,459
|
)
|
|
$
|
(367,776
|
)
|
|
$
|
(1,323,236
|
)
|
|
|
$
|
(1,691,012
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss available to common
shareholders
|
|
$
|
(188,393
|
)
|
|
$
|
102,934
|
|
|
|
$
|
(85,459
|
)
|
|
$
|
(367,776
|
)
|
|
$
|
(1,323,236
|
)
|
|
|
$
|
(1,691,012
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
|
$
|
(0.00
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.06
|
)
|
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common
shares
outstanding
|
|
|
20,553,897
|
|
|
$
|
(361,391
|
)
|
5)
|
|
|
20,192,506
|
|
|
|
19,772,310
|
|
|
|
406,772
|
|
5)
|
|
|
20,179,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1)
|
To
recognize previously deferred expense for stock based compensation
and
adjust the valuation of stock based compensation and services provided
by
third parties utilizing the market price on the date of
grant.
|
2)
|
To
record discount related to the beneficial conversion feature and
record
the amortization of discount on convertible debt using the effective
interest rate method.
|
3)
|
To
reclassify deficit accumulated during exploration
stage.
|
4)
|
To
adjust the valuation of the stock based acquisition of oil and gas
properties utilizing the market trading price on the date of
grant.
|
5)
|
To
adjust weighted average shares outstanding and earnings per share
as a
result of recognizing certain issuances as of the date of satisfaction
of
all necessary conditions to
issuance.
|
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
As
of November 30, 2005 (Unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
As
Originally
Reported
|
|
|
Adjustments
|
|
|
|
As
Restated
|
|
Total
current assets
|
|
$
|
683,539
|
|
|
$
|
(171,875
|
)
|
1)
|
|
$
|
511,664
|
|
Oil
and gas properties, net of accumulated
depletion,
successful efforts method
|
|
|
586,833
|
|
|
|
237,000
|
|
4)
|
|
|
823,833
|
|
Total
assets
|
|
$
|
1,270,372
|
|
|
$
|
65,125
|
|
|
|
$
|
1,335,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
$
|
248,172
|
|
|
|
(20,941
|
)
|
2)
|
|
|
227,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
Common
stock
|
|
|
26,755
|
|
|
|
|
|
|
|
|
26,755
|
|
Additional
paid-in capital
|
|
|
2,838,506
|
|
|
|
1,849,680
|
|
1)
|
|
|
|
|
|
|
|
|
|
|
|
73,511
|
|
2)
|
|
|
|
|
|
|
|
|
|
|
|
237,000
|
|
4)
|
|
|
4,988,697
|
|
Accumulated
deficit
|
|
|
(1,843,061
|
)
|
|
|
1,107,026
|
|
3)
|
|
|
(736,035
|
)
|
Deficit
accumulated during the exploration
stage
|
|
|
-
|
|
|
|
(2,074,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,107,026
|
)
|
3)
|
|
|
(3,181,151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
$
|
1,022,200
|
|
|
$
|
86,066
|
|
|
|
$
|
1,108,266
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
1,270,372
|
|
|
$
|
65,125
|
|
|
|
$
|
1,335,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
For
the three and nine months ended November 30, 2005
(Unaudited):
|
|
|
|
|
|
|
THREE
MONTHS ENDED
|
|
|
NINE
MONTHS ENDED
|
|
|
|
As
Originally
Reported
|
|
|
Adjustments
|
|
|
|
As
Restated
|
|
|
As
Originally
Reported
|
|
|
Adjustments
|
|
|
|
As
Restated
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exploration
and drilling
|
|
|
58,400
|
|
|
|
-
|
|
|
|
|
58,400
|
|
|
|
70,900
|
|
|
|
-
|
|
|
|
|
70,900
|
|
General
and administrative
|
|
|
681,170
|
|
|
|
719,108
|
|
1)
|
|
|
1,400,278
|
|
|
|
1,036,446
|
|
|
|
2,021,555
|
|
1)
|
|
|
3,058,001
|
|
Total
expenses
|
|
|
739,570
|
|
|
|
719,108
|
|
|
|
|
1,458,678
|
|
|
|
1,107,346
|
|
|
|
2,021,555
|
|
|
|
|
3,128,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(739,570
|
)
|
|
|
(719,108
|
)
|
|
|
|
(1,458,678
|
)
|
|
|
(1,107,346
|
)
|
|
|
(2,021,555
|
)
|
|
|
|
(3,128,901
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
321
|
|
|
|
-
|
|
|
|
|
321
|
|
|
|
321
|
|
|
|
-
|
|
|
|
|
321
|
|
Interest
expense
|
|
|
-
|
|
|
|
(31,781
|
)
|
2)
|
|
|
(31,781
|
)
|
|
|
-
|
|
|
|
(52,570
|
)
|
2)
|
|
|
(52,570
|
)
|
|
|
|
321
|
|
|
|
(31,781
|
)
|
|
|
|
(31,781
|
)
|
|
|
321
|
|
|
|
(52,570
|
)
|
|
|
|
(52,249
|
)
|
Net
loss
|
|
$
|
(739,249
|
)
|
|
$
|
(750,889
|
)
|
|
|
$
|
(1,490,138
|
)
|
|
$
|
(1,107,025
|
)
|
|
$
|
(2,074,125
|
)
|
|
|
$
|
(3,181,150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss available to common
shareholders
|
|
$
|
(739,249
|
)
|
|
$
|
(750,889
|
)
|
|
|
$
|
(1,490,138
|
)
|
|
$
|
(1,107,025
|
)
|
|
$
|
(2,074,125
|
)
|
|
|
$
|
(3,181,150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.10
|
)
|
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common
shares
outstanding
|
|
|
23,471,326
|
|
|
|
446,149
|
|
5)
|
|
|
23,917,475
|
|
|
|
20,997,432
|
|
|
|
418,718
|
|
5)
|
|
|
21,416,150
|
|
1)
|
To
recognize previously deferred expense for stock based compensation
and
adjust the valuation of stock based compensation and services provided
by
third parties utilizing the market trading price on the day of
grant
|
2)
|
To
record discount related to the beneficial conversion feature and
record
the amortization of discount on convertible debt using the effective
interest rate method.
|
3)
|
To
reclassify deficit accumulated during exploration
stage.
|
4)
|
To
adjust the valuation of the stock based acquisition of oil and gas
properties utilizing the market trading price on the date of
grant.
|
5)
|
To
adjust weighted average shares outstanding and earnings per share
as a
result of recognizing certain issuances as of the date of satisfaction
of
all necessary conditions to
issuance.
|
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
As
of February 28, 2006 (Unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
As
Originally
Reported
|
|
|
Adjustments
|
|
|
|
As
Restated
|
|
Total
current assets
|
|
$
|
1,074,610
|
|
|
$
|
-
|
|
|
|
$
|
1,074,610
|
|
Oil
and gas properties, net of accumulated
depletion,
successful efforts method
|
|
|
895,400
|
|
|
|
237,000
|
|
3)
|
|
|
1,132,400
|
|
Total
assets
|
|
$
|
1,970,010
|
|
|
$
|
237,000
|
|
|
|
$
|
2,207,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
$
|
1,167,347
|
|
|
$
|
(1,049,233
|
)
|
2)
|
|
$
|
118,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
Common
stock
|
|
|
29,458
|
|
|
|
-
|
|
|
|
|
29,458
|
|
Additional
paid-in capital
|
|
|
3,534,522
|
|
|
|
2,234,180
|
|
1)
|
|
|
|
|
|
|
|
|
|
|
|
1,261,812
|
|
2)
|
|
|
|
|
|
|
|
|
|
|
|
237,000
|
|
3)
|
|
|
7,267,514
|
|
Accumulated
deficit
|
|
|
(736,035
|
)
|
|
|
-
|
|
|
|
|
(736,035
|
)
|
Deficit
accumulated during the exploration
stage
|
|
|
(2,025,282
|
)
|
|
|
(2,446,759
|
)
|
|
|
|
(4,472,041
|
)
|
Total
stockholders’ equity
|
|
$
|
802,663
|
|
|
$
|
1,286,233
|
|
|
|
$
|
2,088,896
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
1,970,010
|
|
|
$
|
237,000
|
|
|
|
$
|
2,207,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
For
the three and twelve months ended February 28, 2006
(Unaudited):
|
|
|
|
|
|
|
THREE
MONTHS ENDED
|
|
|
TWELVE MONTHS
ENDED
|
|
|
|
As
Originally
Reported
|
|
|
Adjustments
|
|
|
|
As
Restated
|
|
|
As
Originally
Reported
|
|
|
Adjustments
|
|
|
|
As
Restated
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exploration
and drilling
|
|
|
256,569
|
|
|
|
-
|
|
|
|
|
256,569
|
|
|
|
327,469
|
|
|
|
-
|
|
|
|
|
327,469
|
|
General
and administrative
|
|
|
632,246
|
|
|
|
212,625
|
|
1)
|
|
|
844,871
|
|
|
|
1,688,692
|
|
|
|
2,234,180
|
|
1)
|
|
|
3,902,872
|
|
Total
expenses
|
|
|
888,815
|
|
|
|
212,625
|
|
|
|
|
1,101,440
|
|
|
|
1,996,161
|
|
|
|
2,234,180
|
|
|
|
|
4,230,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(888,815
|
)
|
|
|
(212,625
|
)
|
|
|
|
(1,101,440
|
)
|
|
|
(1,996,161
|
)
|
|
|
(2,234,180
|
)
|
|
|
|
(4,230,341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
41
|
|
|
|
-
|
|
|
|
|
41
|
|
|
|
362
|
|
|
|
-
|
|
|
|
|
362
|
|
Interest
expense
|
|
|
(29,483
|
)
|
|
|
(160,009
|
)
|
2)
|
|
|
(189,492
|
)
|
|
|
(29,483
|
)
|
|
|
(212,579
|
)
|
2)
|
|
|
(242,062
|
)
|
|
|
|
(29,442
|
)
|
|
|
(160,009
|
)
|
|
|
|
(189,451
|
)
|
|
|
(29,121
|
)
|
|
|
(212,579
|
)
|
|
|
|
(241,700
|
)
|
Net
loss
|
|
|
(918,257
|
)
|
|
$
|
(372,634
|
)
|
|
|
$
|
(1,290,891
|
)
|
|
$
|
(2,025,282
|
)
|
|
$
|
(2,446,759
|
)
|
|
|
$
|
(4,472,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss available to common
shareholders
|
|
$
|
(918,257
|
)
|
|
$
|
(372,634
|
)
|
|
|
$
|
(1,290,891
|
)
|
|
$
|
(2,025,282
|
)
|
|
$
|
(2,446,759
|
)
|
|
|
$
|
(4,472,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.10
|
)
|
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common
shares
outstanding
|
|
|
28,767,159
|
|
|
|
(214,226
|
)
|
4)
|
|
|
28,552,933
|
|
|
|
22,709,564
|
|
|
|
466,341
|
|
4)
|
|
|
23,175,905
|
|
1)
|
To
recognize previously deferred expense for stock based compensation
and
adjust the valuation of stock based compensation and services provided
by
third parties utilizing the market trading price on the day of
grant.
|
2)
|
To
record discount related to the beneficial conversion feature and
record
the amortization of discount on convertible debt using the effective
interest rate method.
|
3)
|
To
adjust the valuation of the stock based acquisition of oil and gas
properties utilizing the market trading price on the date of
grant.
|
4)
|
To
adjust weighted average shares outstanding and earnings per share
as a
result of recognizing certain issuances as of the date of satisfaction
of
all necessary conditions to
issuance.
|
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
As
of May 31, 2006 (Unaudited):
|
|
As
Originally
Reported
|
|
|
Adjustments
|
|
|
|
As
Restated
|
|
Total
current assets
|
|
$
|
5,187,468
|
|
|
$
|
(421,875
|
)
|
1)
|
|
$
|
4,765,593
|
|
Oil
and gas properties, net of accumulated
depletion,
successful efforts method
|
|
|
2,507,310
|
|
|
|
507,000
|
|
3)
|
|
|
3,014,310
|
|
Total
assets
|
|
$
|
7,694,778
|
|
|
$
|
85,125
|
|
|
|
$
|
7,779,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
$
|
1,263,583
|
|
|
$
|
(787,704
|
)
|
2)
|
|
$
|
475,879
|
|
Other
liabilities
|
|
|
207,519
|
|
|
|
-
|
|
|
|
|
207,519
|
|
Total
liabilities
|
|
|
1,471,102
|
|
|
|
(787,704
|
)
|
|
|
|
683,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
-
|
|
|
|
|
|
|
|
|
-
|
|
Common
stock
|
|
|
38,456
|
|
|
|
-
|
|
|
|
|
38,456
|
|
Additional
paid-in capital
|
|
|
9,468,280
|
|
|
|
3,464,880
|
|
1)
|
|
|
|
|
|
|
|
|
|
|
|
1,286,812
|
|
2)
|
|
|
|
|
|
|
|
|
|
|
|
507,000
|
|
3)
|
|
|
14,726,972
|
|
Accumulated
deficit
|
|
|
(736,035
|
)
|
|
|
-
|
|
|
|
|
(736,035
|
)
|
Deficit
accumulated during the exploration stage
|
|
|
(2,547,025
|
)
|
|
|
(2,234,180
|
)
|
1)
|
|
|
|
|
|
|
|
|
|
|
|
(212,579
|
)
|
2)
|
|
|
|
|
|
|
|
|
|
|
|
(1,939,104
|
)
|
|
|
|
(6,932,888
|
)
|
Total
stockholders’ equity
|
|
|
6,223,676
|
|
|
|
872,829
|
|
|
|
|
7,096,505
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
7,694,778
|
|
|
$
|
85,125
|
|
|
|
$
|
7,779,903
|
|
|
|
THREE
MONTHS ENDED
|
|
For
the three months ended May 31, 2006 (Unaudited):
|
|
As
Originally
Reported
|
|
|
Adjustments
|
|
|
|
As
Restated
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
495,044
|
|
|
|
1,652,575
|
|
1)
|
|
|
2,147,619
|
|
Total
expenses
|
|
|
495,044
|
|
|
|
1,652,575
|
|
|
|
|
2,147,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(495,044
|
)
|
|
|
(1,652,575
|
)
|
|
|
|
(2,147,619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(26,699
|
)
|
|
|
(286,529
|
)
|
2)
|
|
|
(313,228
|
)
|
Total
other expenses
|
|
|
(26,699
|
)
|
|
|
(286,529
|
)
|
|
|
|
(313,228
|
)
|
Net
loss
|
|
$
|
(521,743
|
)
|
|
$
|
(1,939,104
|
)
|
|
|
$
|
(2,460,847
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss available to common shareholders
|
|
$
|
(521,743
|
)
|
|
$
|
(1,939,104
|
)
|
|
|
$
|
(2,460,847
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.06
|
)
|
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding
|
|
|
30,684,522
|
|
|
|
731,239
|
|
4)
|
|
|
31,415,761
|
|
1)
|
To
recognize previously deferred expense for stock based compensation
and
adjust the valuation of stock based compensation and services provided
by
utilizing the market trading price on the day of
grant.
|
2)
|
To
record discount related to the beneficial conversion feature and
record
the amortization of discount on convertible debt using the effective
interest rate method.
|
3)
|
To
adjust the valuation of the stock based acquisition of oil and gas
properties utilizing the market trading price on the date of
grant.
|
4)
|
To
adjust weighted average shares outstanding and earnings per share
as a
result of recognizing certain issuances as of the date of satisfaction
of
all necessary conditions to
issuance.
|
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial
Statements
As
of August 31, 2006 (Unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
As
Originally
Reported
|
|
|
Adjustments
|
|
|
|
As
Restated
|
|
Total
current assets
|
|
$
|
7,934,597
|
|
|
$
|
(495,535
|
)
|
1)
|
|
$
|
7,439,062
|
|
Oil
and gas properties, net of accumulated
depletion,
successful efforts method
|
|
|
3,369,678
|
|
|
|
550,500
|
|
3)
|
|
|
3,920,178
|
|
Vehicles
and equipment, net of accumulated
depreciation
|
|
|
21,670
|
|
|
|
-
|
|
|
|
|
21,670
|
|
Total
assets
|
|
$
|
11,325,945
|
|
|
$
|
54,965
|
|
|
|
$
|
11,380,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
$
|
1,161,146
|
|
|
$
|
(452,245
|
)
|
|
|
$
|
708,901
|
|
Other
liabilities
|
|
|
207,519
|
|
|
|
-
|
|
|
|
|
207,519
|
|
Total
liabilities
|
|
|
1,368,665
|
|
|
|
(452,245
|
)
|
|
|
|
916,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
1,400
|
|
|
|
-
|
|
|
|
|
1,400
|
|
Common
stock
|
|
|
38,980
|
|
|
|
-
|
|
|
|
|
38,980
|
|
Additional
paid-in capital
|
|
|
13,492,210
|
|
|
|
3,727,381
|
|
1)
|
|
|
|
|
|
|
|
|
|
|
|
1,286,812
|
|
2)
|
|
|
|
|
|
|
|
|
|
|
|
550,500
|
|
3)
|
|
|
19,056,903
|
|
Accumulated
deficit
|
|
|
(736,035
|
)
|
|
|
-
|
|
|
|
|
(736,035
|
)
|
Deficit
accumulated during the exploration
stage
|
|
|
(2,839,275
|
)
|
|
|
(2,234,180
|
)
|
1)
|
|
|
|
|
|
|
|
|
|
|
|
(212,579
|
)
|
2)
|
|
|
|
|
|
|
|
|
|
|
|
(2,610,724
|
)
|
|
|
|
(7,896,758
|
)
|
Total
stockholders’ equity
|
|
|
9,957,280
|
|
|
|
507,210
|
|
|
|
|
10,464,490
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
11,325,945
|
|
|
$
|
54,965
|
|
|
|
$
|
11,380,910
|
|
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial
Statements
For
the three and six months ended August 31, 2006
(Unaudited):
|
|
|
|
|
|
|
THREE
MONTHS ENDED
|
|
|
SIX
MONTHS ENDED
|
|
|
|
As
Originally
Reported
|
|
|
Adjustments
|
|
|
|
As
Restated
|
|
|
As
Originally
Reported
|
|
|
Adjustments
|
|
|
|
As
Restated
|
|
Revenue
|
|
$
|
270,099
|
|
|
$
|
-
|
|
|
|
$
|
270,099
|
|
|
$
|
270,099
|
|
|
$
|
-
|
|
|
|
$
|
270,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exploration
and drilling
|
|
|
72,338
|
|
|
|
-
|
|
|
|
|
72,338
|
|
|
|
72,338
|
|
|
|
-
|
|
|
|
|
72,338
|
|
General
and administrative
|
|
|
467,716
|
|
|
|
336,161
|
|
1)
|
|
|
803,877
|
|
|
|
962,760
|
|
|
|
1,988,736
|
|
1)
|
|
|
2,951,496
|
|
Total
expenses
|
|
|
540,054
|
|
|
|
336,161
|
|
|
|
|
876,215
|
|
|
|
1,035,098
|
|
|
|
1,988,736
|
|
|
|
|
3,023,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(269,955
|
)
|
|
|
(336,161
|
)
|
|
|
|
(606,116
|
)
|
|
|
(764,999
|
)
|
|
|
(1,988,736
|
)
|
|
|
|
(2,753,735
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
5,590
|
|
|
|
|
|
|
|
|
5,590
|
|
|
|
5,590
|
|
|
|
-
|
|
|
|
|
5,590
|
|
Interest
expense
|
|
|
(27,886
|
)
|
|
|
(335,459
|
)
|
2)
|
|
|
(363,345
|
)
|
|
|
(54,585
|
)
|
|
|
(621,988
|
)
|
2)
|
|
|
(676,573
|
)
|
|
|
|
(22,296
|
)
|
|
|
(335,459
|
)
|
|
|
|
(357,755
|
)
|
|
|
(48,995
|
)
|
|
|
(621,988
|
)
|
|
|
|
(670,983
|
)
|
Net
loss
|
|
|
(292,251
|
)
|
|
$
|
(671,620
|
)
|
|
|
$
|
(963,871
|
)
|
|
$
|
(813,994
|
)
|
|
$
|
(2,610,724
|
)
|
|
|
$
|
(3,424,718
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed
dividend – Beneficial conversion feature
|
|
|
-
|
|
|
|
(4,199,295
|
)
|
|
|
|
(4,199,295
|
)
|
|
|
-
|
|
|
|
(4,199,295
|
)
|
|
|
|
(4,199,295
|
)
|
Net
loss available to common
shareholders
|
|
$
|
(292,251
|
)
|
|
$
|
(4,870,915
|
)
|
|
|
$
|
(5,163,166
|
)
|
|
$
|
(813,994
|
)
|
|
$
|
(6,810,019
|
)
|
|
|
$
|
(7,624,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.12
|
)
|
|
|
$
|
(0.13
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.20
|
)
|
|
|
$
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common
shares
outstanding
|
|
|
38,583,519
|
|
|
|
81,789
|
|
4)
|
|
|
38,665,308
|
|
|
|
34,634,021
|
|
|
|
354,475
|
|
4)
|
|
|
34,988,496
|
|
1)
|
To
recognize previously deferred expense for stock based compensation
and
adjust the valuation of stock based compensation and services provided
by
third parties utilizing the market trading price on the day of
grant.
|
2)
|
To
record discount related to the beneficial conversion feature and
record
the amortization of discount on convertible debt using the effective
interest rate method.
|
3)
|
To
adjust the valuation of the stock based acquisition of oil and gas
properties utilizing the market trading price on the date of
grant.
|
4)
|
To
adjust weighted average shares outstanding and earnings per share
as a
result of recognizing certain issuances as of the date of satisfaction
of
all necessary conditions to
issuance.
|
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
As
of November 30, 2006 (Unaudited):
|
|
As
Originally
Reported
|
|
|
Adjustments
|
|
|
|
As
Restated
|
|
Total
current assets
|
|
$
|
4,407,286
|
|
|
$
|
-
|
|
|
|
$
|
4,407,286
|
|
Oil
and gas properties, net of accumulated
depletion,
successful efforts method
|
|
|
4,195,434
|
|
|
|
273,250
|
|
3)
|
|
|
4,468,684
|
|
Note
receivable – non current portion
|
|
|
533,298
|
|
|
|
-
|
|
|
|
|
533,298
|
|
Vehicles
and equipment, net of accumulated
depreciation
|
|
|
20,422
|
|
|
|
-
|
|
|
|
|
20,422
|
|
Other
assets
|
|
|
1,442,310
|
|
|
|
-
|
|
|
|
|
1,442,310
|
|
Total
assets
|
|
$
|
10,598,750
|
|
|
$
|
273,250
|
|
|
|
$
|
10,872,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
$
|
863,062
|
|
|
$
|
464,178
|
|
2)
|
|
$
|
1,521,559
|
|
Other
liabilities
|
|
|
207,518
|
|
|
|
-
|
|
|
|
|
207,518
|
|
Total
liabilities
|
|
|
1,070,580
|
|
|
|
464,178
|
|
|
|
|
1,729,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
1,400
|
|
|
|
-
|
|
|
|
|
1,400
|
|
Common
stock
|
|
|
39,052
|
|
|
|
-
|
|
|
|
|
39,052
|
|
Additional
paid-in capital
|
|
|
15,686,343
|
|
|
|
2,624,880
|
|
1)
|
|
|
|
|
|
|
|
|
|
|
|
255,111
|
|
2)
|
|
|
|
|
|
|
|
|
|
|
|
543,250
|
|
3)
|
|
|
19,109,584
|
|
Accumulated
deficit
|
|
|
(736,035
|
)
|
|
|
-
|
|
|
|
|
(736,035
|
)
|
Deficit
accumulated during the exploration stage
|
|
|
(5,462,590
|
)
|
|
|
(2,234,180
|
)
|
1)
|
|
|
(9,271,078
|
)
|
|
|
|
|
|
|
|
(212,579
|
)
|
2)
|
|
|
|
|
|
|
|
|
|
|
|
(1,167,410
|
)
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
9,528,170
|
|
|
|
(385,247
|
)
|
|
|
|
9,142,923
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
10,598,750
|
|
|
$
|
273,250
|
|
|
|
$
|
10,872,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
For
the three and nine months ended November 30, 2006
(Unaudited):
|
|
|
|
|
|
THREE
MONTHS ENDED
|
|
|
NINE
MONTHS ENDED
|
|
|
|
As
Originally
Reported
|
|
|
Adjustments
|
|
|
|
As
Restated
|
|
|
As
Originally
Reported
|
|
|
Adjustments
|
|
|
|
As
Restated
|
|
Revenue
|
|
$
|
218,590
|
|
|
$
|
-
|
|
|
|
$
|
218,590
|
|
|
$
|
488,689
|
|
|
$
|
-
|
|
|
|
$
|
488,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
costs
|
|
|
59,736
|
|
|
|
-
|
|
|
|
|
59,736
|
|
|
|
91,669
|
|
|
|
-
|
|
|
|
|
91,669
|
|
Exploration
and drilling
|
|
|
452,239
|
|
|
|
270,000
|
|
3)
|
|
|
722,239
|
|
|
|
492,644
|
|
|
|
270,000
|
|
3)
|
|
|
762,644
|
|
Depreciation
and depletion
|
|
|
19,884
|
|
|
|
-
|
|
|
|
|
19,884
|
|
|
|
20,920
|
|
|
|
-
|
|
|
|
|
20,920
|
|
General
and administrative
|
|
|
478,725
|
|
|
|
(122,656
|
)
|
1)
|
|
|
356,069
|
|
|
|
2,915,828
|
|
|
|
390,700
|
|
1)
|
|
|
3,306,528
|
|
Total
expenses
|
|
|
1,010,584
|
|
|
|
147,344
|
|
|
|
|
1,157,928
|
|
|
|
3,521,061
|
|
|
|
660,700
|
|
|
|
|
4,181,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(791,994
|
)
|
|
|
(147,344
|
)
|
|
|
|
(939,338
|
)
|
|
|
(3,032,372
|
)
|
|
|
(660,700
|
)
|
|
|
|
(3,693,072
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
36,517
|
|
|
|
-
|
|
|
|
|
36,517
|
|
|
|
42,107
|
|
|
|
-
|
|
|
|
|
42,107
|
|
Dividend
income
|
|
|
5,208
|
|
|
|
-
|
|
|
|
|
5,208
|
|
|
|
5,208
|
|
|
|
-
|
|
|
|
|
5,208
|
|
Interest
expense
|
|
|
(250,881
|
)
|
|
|
(31,506
|
)
|
2)
|
|
|
(282,387
|
)
|
|
|
(452,251
|
)
|
|
|
(506,710
|
)
|
2)
|
|
|
(958,961
|
)
|
|
|
|
(209,156
|
)
|
|
|
(31,506
|
)
|
|
|
|
(240,662
|
)
|
|
|
(404,936
|
)
|
|
|
(506,710
|
)
|
|
|
|
(911,646
|
)
|
Net
loss
|
|
$
|
(1,001,150
|
)
|
|
$
|
(178,850
|
)
|
|
|
$
|
(1,180,000
|
)
|
|
$
|
(3,437,308
|
)
|
|
$
|
(1,167,410
|
)
|
|
|
$
|
(4,604,718
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
convertible preferred
stock
dividend requirement
|
|
|
(93,142
|
)
|
|
|
-
|
|
|
|
|
(93,142
|
)
|
|
|
(93,142
|
)
|
|
|
-
|
|
|
|
|
(93,142
|
)
|
Deemed
dividend – beneficial
conversion
feature
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
(4,199,295
|
)
|
|
|
-
|
|
|
|
|
(4,199,295
|
)
|
Net
loss available to common
shareholders
|
|
$
|
(1,094,292
|
)
|
|
$
|
(178,850
|
)
|
|
|
$
|
(1,273,142
|
)
|
|
$
|
(7,729,745
|
)
|
|
$
|
(1,167,410
|
)
|
|
|
$
|
(8,897,155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share
|
|
$
|
(0.03
|
)
|
|
$
|
-
|
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.04
|
)
|
|
|
$
|
(0.25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common
shares
outstanding
|
|
|
39,031,776
|
|
|
|
3,983
|
|
4)
|
|
|
39,035,759
|
|
|
|
36,082,883
|
|
|
|
(215,043
|
)
|
4)
|
|
|
36,297,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1)
|
To
recognize previously deferred expense for stock based compensation
and
adjust the valuation of stock based compensation and services provide
by
third parties utilizing the market trading price on the day of
grant.
|
2)
|
To
record discount related to the beneficial conversion feature and
record
the amortization of discount on the convertible debt using the effective
interest rate method.
|
3)
|
To
adjust the valuation of the stock based acquisition of oil and gas
properties utilizing the market trading price on the date of
grant.
|
4)
|
To
adjust weighted average shares outstanding and earnings per share
as a
result of recognizing certain issuances as of the date of satisfaction
of
all necessary conditions to
issuance.
|
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial
Statements
NOTE
12 - INCOME TAXES
Reconciliation
between actual tax expense (benefit) and income taxes computed by applying
the
U.S. federal income tax rate and state income tax rate to income from continuing
operations before income taxes is as follows:
|
|
2007
|
|
Computed
at U.S. and State statutory rates (40%)
|
|
$
|
(3,356,800
|
)
|
Permanent
differences
|
|
|
1,500,200
|
|
Changes
in valuation allowance
|
|
|
1,856,600
|
|
Total
|
|
$
|
-
|
|
Tax
effects of temporary differences that give rise to significant portions of
the
deferred tax assets and deferred liabilities are presented below:
Deferred
tax assets:
|
|
2007
|
|
|
2006
(Restated)
|
|
Net
operating loss carryforwards
|
|
$
|
1,734,000
|
|
|
$
|
825,200
|
|
Oil
and gas properties
|
|
|
947,
800
|
|
|
|
-
|
|
Less
valuation allowance
|
|
|
(2,681,800
|
)
|
|
|
(825,200
|
)
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
At
February 28, 2007, Daybreak had a net operating loss carryforwards for federal
and state income tax purposes of approximately $4,335,000, which will begin
to
expire, if unused, beginning in 2024. The valuation allowance
increased by approximately $1,856,600 and $810,000 for the years ended February
28, 2007 and 2006, respectively. Section 382 Rule will place annual
limitations on Daybreak’s net operating loss (NOL) carryforward.
The
above
estimates are based upon management’s decisions concerning certain elections
which could change the relationship between net income and taxable income.
Management decisions are made annually and could cause the estimates to vary
significantly.
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
NOTE
13 – SUBSEQUENT EVENTS
In
May
2007, Daybreak was informed by Green River Drilling that they intended to sell
the drilling rig to a third party. The sale was completed and on June 11, 2007,
Daybreak received a total of $846,668 which included the principal of $800,000
and accrued interest in the amount of $46,668 in satisfaction of the note
receivable.
On
June
4, 2007, Daybreak as Operator for the drilling and completion of the Haas-Hirsch
No. 1 well, located in the Krotz Springs Field in St. Landry Parish, Louisiana,
sent a notice of default to one of the working interest participants for
delinquency in meeting their financial commitments in the drilling and
completion of the Haas-Hirsch No. 1 well. As of May 31, 2007, this working
interest participant was delinquent $743,469. On August 9, 2007, the Company
received a $100,000 payment on this delinquency. If the working interest
participant is unable to meet its commitments, their working interest percentage
will be offered to the other participants in the well. If the other working
interest participants decline to increase their ownership Daybreak will become
liable for this delinquency and will assume a larger working interest in the
project. As of February 28, 2007, there was no delinquency from this working
interest participant. Daybreak has been informed by this participant of their
intention to meet all financial commitments.
On
June
21, 2007, Daybreak and its partners (“Daybreak et al”), entered into a Seismic
Option Farmout Agreement with Chevron U.S.A. Inc. (“Chevron”), for a seismic and
drilling program in the East Slopes (Kern County) project area in California.
By
paying the full cost of the seismic program Chevron will earn a 50% interest
in
the lands and a 50% working interest for the drilling of future wells in the
project area. Daybreak et al will earn a 50% interest in the Chevron lands
located in the same project area, by paying 100% of the cost of the first three
initial test wells to be drilled on the jointly held lands. The three initial
test wells must be drilled within nine months of the seismic data interpretation
being completed.
On
July
5, 2007, Daybreak and its partners (“Daybreak et al”), entered into a Joint
Development Participation Agreement (“JDPA”) with three companies for a drilling
program in the Tuscaloosa project area in Louisiana. This JDPA plans on four
wells being drilled within the next year. The Daybreak working interest will
range from 24.5% to 29.5% on each well. The JDPA does not effect any prior
agreement for wells and production infrastructure that is already in place.
Daybreak will have a 29.5% interest in all future lease rentals.
On
August
31, 2007, the remaining two debenture holders of the $0.75 convertible
debentures agreed to extend the term of the debentures to October 31, 2007.
In
consideration of this extension they received 112,000 warrants. The warrants
were valued at $35,386 using the Black-Scholes option pricing
model. The assumptions used in the Black-Scholes valuation model
were: a risk fee interest rate of 4.1 %; the current stock price at date of
issuance of $0.53 per share; the exercise price of the warrants of $0.53; the
term of two years; volatility of 114%; and dividend yield of 0.0%.
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial
Statements
SUPPLEMENTARY
INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
All
of
the Company’s operations are directly related to oil and natural gas producing
activities located in Louisiana, Texas and Alabama.
Capitalized
Costs Relating to Oil and Gas Producing Activities
|
|
As
of February 28,
|
|
|
|
2007
|
|
|
2006
|
|
Proved
properties
|
|
|
|
|
|
|
Mineral
interests
|
|
$
|
2,092,107
|
|
|
$
|
-
|
|
Wells,
equipment and facilities
|
|
|
2,129,400
|
|
|
|
-
|
|
Total
proved properties
|
|
|
4,221,507
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Unproved
properties
|
|
|
|
|
|
|
|
|
Mineral
interests
|
|
|
902,420
|
|
|
|
1,132,400
|
|
Uncompleted
wells, equipment and facilities
|
|
|
1,822,619
|
|
|
|
-
|
|
Total
unproved properties
|
|
|
2,725,038
|
|
|
|
1,132,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation, depletion, amortization and
impairment
|
|
|
(2,393,693
|
)
|
|
|
-
|
|
Net
Capitalized Costs
|
|
$
|
4,552,852
|
|
|
$
|
1,132,400
|
|
Costs
Incurred in Oil and Gas Producing Activities
|
|
TWELVE
MONTHS ENDED
FEBRUARY
28,
|
|
|
|
2007
|
|
|
2006
|
|
Acquisition
of proved properties
|
|
$
|
428,669
|
|
|
$
|
-
|
|
Acquisition
of unproved properties
|
|
|
1,486,901
|
|
|
|
1,132,400
|
|
Development
costs
|
|
|
859,688
|
|
|
|
-
|
|
Exploration
costs
|
|
|
4,241,917
|
|
|
|
327,469
|
|
Total
Costs Incurred
|
|
$
|
7,017,175
|
|
|
$
|
1,459,869
|
|
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial
Statements
Results
of Operations from Oil and Gas Producing Activities
|
|
TWELVE
MONTHS ENDED
FEBRUARY
28,
|
|
|
|
2007
|
|
|
2006
|
|
Oil
and gas revenues
|
|
$
|
629,346
|
|
|
$
|
-
|
|
Production
costs
|
|
|
(373,766
|
)
|
|
|
-
|
|
Exploration
expenses
|
|
|
(1,196,640
|
)
|
|
|
(327,469
|
)
|
Depletion,
depreciation, and impairment
|
|
|
(2,393,693
|
)
|
|
|
-
|
|
Result
of oil and gas producing operations before income taxes
|
|
|
(3,334,753
|
)
|
|
|
(327,469
|
)
|
Provision
for income taxes
|
|
|
-
|
|
|
|
-
|
|
Results
of Oil and Gas Producing Operations
|
|
$
|
(3,334,753
|
)
|
|
$
|
(327,469
|
)
|
Proved
Reserves
The
Company’s proved oil and natural gas reserves have been estimated by independent
petroleum engineers. Proved reserves are the estimated quantities
that geologic and engineering data demonstrate with reasonable certainty to
be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are the quantities expected
to
be recovered through existing wells with existing equipment and operating
methods. Due to the inherent uncertainties and the limited nature of
reservoir data, such estimates are subject to change as addition information
becomes available. The reserves actually recovered and the timing of
production of these reserves may be substantially different from the original
estimate. Revisions result primarily from new information obtained from
development drilling and production history; acquisitions of oil and natural
gas
properties; and changes in economic factors. The Company had no
proved reserves in fiscal 2006. The fiscal 2007 proved reserves are
summarized in the table below:
|
|
Crude
Oil and Natural Gas Liquid
Bbls
|
|
|
Natural
Gas
Mcf
|
|
Proved
reserves as of February 28, 2007:
|
|
|
|
|
|
|
Beginning
of the period
|
|
|
-
|
|
|
|
-
|
|
Revisions
of previous estimates
|
|
|
-
|
|
|
|
-
|
|
Improved
recovery
|
|
|
-
|
|
|
|
-
|
|
Purchase
of minerals in place
|
|
|
6,390
|
|
|
|
78,171
|
|
Extensions
and discoveries
|
|
|
27,044
|
|
|
|
199,976
|
|
Production
|
|
|
(4,009
|
)
|
|
|
(66,347
|
)
|
Sale
of minerals in place
|
|
|
-
|
|
|
|
-
|
|
End
of the period
|
|
|
29,425
|
|
|
|
211,800
|
|
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial
Statements
Standardized
Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas
Reserves
The
following information is based on the Company’s best estimate of the required
data for the Standardized Measure of Discounted Future Net Cash Flows as of
February 28, 2007 and 2006 in accordance with SFAS No. 69, “Disclosures
About Oil and Gas Producing Activities” which requires the use of a 10% discount
rate. This information is not the fair market value, nor does it represent
the
expected present value of future cash flows of the Company’s proved oil and gas
reserves.
|
|
February
28,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Future
cash inflows
|
|
$
|
3,270,219
|
|
|
$
|
-
|
|
Future
production costs
(1)
|
|
|
(889,817
|
)
|
|
|
-
|
|
Future
development costs
|
|
|
(170,762
|
)
|
|
|
-
|
|
Future
income tax expenses
(2)
|
|
|
-
|
|
|
|
-
|
|
Future
net cash flows
|
|
|
2,209,640
|
|
|
|
-
|
|
10%
annual discount for estimated timing of cash flows
|
|
|
(269,273
|
)
|
|
|
-
|
|
Standardized
measure of discounted future net cash flows at the end of the
year
|
|
$
|
1,940,367
|
|
|
$
|
-
|
|
(1)
|
Production
costs include oil and gas operations expense, production ad valorem
taxes,
transportation costs and general and administrative expense supporting
the
Company’s oil and gas operations.
|
(2)
|
The
Company has sufficient tax deductions and allowances related to proved
oil
and gas reserves to offset future net
revenues.
|
Future
cash inflows are computed by applying year-end prices, adjusted for location
and
quality differentials on a property-by-property basis, to year-end quantities
of
proved reserves, except in those instances where fixed and determinable price
changes are provided by contractual arrangements at year-end. The discounted
future cash flow estimates do not include the effects of the Company’s
derivative instruments, if any. See the following table for average
prices.
|
|
February
28,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Average
crude oil price per Bbl
|
|
$
|
56.71
|
|
|
|
n/a
|
|
Average
natural gas price per Mcf
|
|
$
|
7.56
|
|
|
|
n/a
|
|
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial
Statements
Future
production and development costs, which include dismantlement and restoration
expense, are computed by estimating the expenditures to be incurred in
developing and producing the Company’s proved crude oil and natural gas reserves
at the end of the year, based on year-end costs, and assuming continuation
of
existing economic conditions.
Future
income tax expenses are computed by applying the appropriate year-end statutory
tax rates to the estimated future pretax net cash flows relating to the
Company’s proved crude oil and natural gas reserves, less the tax bases of the
properties involved. The future income tax expenses give effect to tax credits
and allowances, but do not reflect the impact of general and administrative
costs and exploration expenses of ongoing operations relating to the Company’s
proved crude oil and natural gas reserves.
Sources
of Changes in Discounted Future Net Cash Flows
Principal
changes in the aggregate standardized measure of discounted future net cash
flows attributable to the Company’s proved crude oil and natural gas reserves,
as required by SFAS No. 69, at year end are set forth in the table
below.
|
|
Twelve
months ended February 28,
|
|
|
|
2007
|
|
|
2006
|
|
Standardized
measure of discounted future net cash flows at the beginning of the
year
|
|
$
|
-
|
|
|
$
|
-
|
|
Extensions,
discoveries and improved recovery, less related costs
|
|
|
1,806,060
|
|
|
|
-
|
|
Revisions
of previous quantity estimates
|
|
|
-
|
|
|
|
-
|
|
Changes
in estimated future development costs
|
|
|
-
|
|
|
|
-
|
|
Purchases
(sales) of minerals in place
|
|
|
389,887
|
|
|
|
-
|
|
Net
changes in prices and production costs
|
|
|
-
|
|
|
|
-
|
|
Accretion
of discount
|
|
|
-
|
|
|
|
-
|
|
Sales
of oil and gas produced, net of production costs
|
|
|
(255,580
|
)
|
|
|
-
|
|
Development
costs incurred during the period
|
|
|
-
|
|
|
|
-
|
|
Change
in timing of estimated future production and other
|
|
|
-
|
|
|
|
-
|
|
Net
change in income taxes
|
|
|
|
|
|
|
-
|
|
Standardized
measure of discounted future net cash flows at the end of the
year
|
|
$
|
1,940,367
|
|
|
$
|
-
|
|
ITEM
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
During
the fiscal years ended February 28, 2003 and February 29, 2004, the Board of
Directors of the Company engaged the firm of DeCoria, Maichel & Teague PS
(DMT) as our independent registered public accounting firm to perform annual
audits. In those reports there were no adverse opinions or disclaimers of
opinion nor were they modified as to uncertainty, audit scope or accounting
principles, with the exception of a statement regarding the uncertainty of
our
Company’s ability to continue as a going concern.
Because
of a pending merger with a company in California, the firm of DMT resigned
on
January 7, 2005 as our independent accountant. On January 12, 2005 we engaged
the firm of Kabani & Company, as our independent auditors to provide the
requisite audit services for the Company.
On
April
20, 2005, the Board of Directors dismissed the firm of Kabani & Company as
our independent auditors. Since the pending merger in California did not occur,
the Board of Directors felt that it was important to have a local independent
auditor to perform our annual audits. The firm of Kabani & Company did not
report on any financial statements for the Company. While they were engaged
by
us, they did review our Quarterly Report on Form 10-QSB for the period ending
November 30, 2004.
On
May
24, 2005, Daybreak reported that we had again engaged the firm of DeCoria,
Maichel & Teague PS (DMT) to act as our independent auditor and perform the
requisite audit services for the fiscal years ended February 28, 2005. DMT
performed the annual audit for the fiscal years ended February 28, 2005 and
February 28, 2006. In those reports there were no adverse opinions or
disclaimers of opinion nor were they modified as to uncertainty, audit scope
or
accounting principles, with the exception of a statement regarding the
uncertainty of our Company’s ability to continue as a going
concern.
On
November 8, 2006, the Registrant’s independent auditor, DeCoria, Maichel &
Teague PS (DMT) was dismissed based on a recommendation from the Audit
Committee. There were no disagreements with DMT on any matter of accounting
principals, financial statement disclosure, or auditing scope or procedures,
however the Audit Committee recognized a need to engage an independent
registered public accounting firm with more specific expertise with the oil
and
gas industry.
On
November 8, 2006, the Board of Directors, engaged the firm of Malone &
Bailey, PC of Houston, Texas, as the Company’s independent registered public
accountants to perform annual audits for the Company. In the process of
responding to comments from the Securities and Exchange Commission in regards
to
the SB-2 registration statement that we filed for the Spring 2006 private
placement, Daybreak determined that it would be necessary to restate previously
filed financial statements for the fiscal year ended February 28, 2006. The
restatement of financial statements involved transactions of a non-cash nature
for the determination of the fair value of common stock issuances and the
recognition and accounting treatment of a beneficial conversion feature in
regards to the convertible debentures that Daybreak had issued. As a consequence
of the need for the restatement, Malone & Bailey was also engaged to conduct
an audit of the fiscal year ended February 28, 2006 as well as February 28,
2007.
ITEM
8A. CONTROLS AND PROCEDURES
(a) Evaluation
of Disclosure Controls and Procedures
As
of the
end of the reporting period, February 28, 2007, an evaluation was conducted
by
Daybreak management of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-15(e) of the
Securities Exchange Act of 1934 (the "Exchange Act"). Such
disclosure controls and procedures
are designed to insure 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 Securities & Exchange Commission rules and forms.
Additionally, it is vital that such information is accumulated and communicated
to our management in a manner to allow timely decisions regarding required
disclosure.
Based
upon that evaluation, our management concluded that our disclosure controls
needed improvement and were not adequately effective as of February 28, 2007,
to
ensure timely reporting with the Securities and Exchange
Commission.
Material
weakness identified included:
The
Company’s corporate governance and disclosure controls and procedures do not
provide reasonable assurance that material transactions are timely and
accurately reported in our Periodic Reports that we file with the Securities
and
Exchange Commission.
We
have
restated previously filed financial statements for the four (4) quarters
for the
fiscal year ended February 28, 2006, the 12 months ended February 28, 2006,
and
the first three (3) quarters for the fiscal year ended February 28, 2007.
The nature of the restatements is disclosed in this 10-K filing as Note 11
to
the financial statements. The material weaknesses giving rise to the
restatements were due to errors in applying GAAP in regards to a) properly
valuing and recording share based payments, and b) properly valuing and
recognizing beneficial conversion features, relative fair value of warrants
and
related discounts on convertible debt and preferred stock issuances. These
deficiencies were identified as a result of comment letters received from
the
Securities and Exchange Commission (SEC) in response to our previously filed
SB-2 Registration Statement. Our Independent Registered Accountants also
noted these deficiencies during the audit of our financials statements for
the
fiscal years ended February 28, 2007 and February 28, 2006,
respectively.
In
particular, the Company does not have adequate controls over the timely filing
of our required quarterly 10-QSB and year end 10-KSB reports. For the fiscal
year ended February 28, 2007, we were forced to file a 12b-25 “Notification of
Late Filing” report for the quarters ended August 31, 2006 and November 30,
2006.
Additionally,
the filing of our third quarter 10-QSB was delayed beyond the extended due
date
and this resulted in an “E” being placed behind our trading symbol until the
delinquent report was filed. For the fiscal year end 10-KSB report, the filing
of the 12b-25 report itself was delinquent. This resulted in a second “E” in
less than 12 months being placed behind our trading symbol.
Our
10-KSB report for the fiscal year ended February 28, 2007, should have been
filed on May 29, 2007. We were unable to complete the 10-KSB in the time
allotted because the restatement of our previously filed financial statements
was not completed. Consequently we filed a 12b-25 “Notification of Late Filing”
report, believing that we would complete the restatement and audit process
within the filing extension period.
We
were
not successful in meeting that goal. On July 2, 2007, our stock was dropped
from
being quoted on the OTC Bulletin Board market to the OTC pink sheet market.
We
will be eligible to apply to return to the OTC bulletin Board market when we
become current in our SEC filings.
Our
first
quarter 10-QSB report for the fiscal year ending February 29, 2008 should have
been filed on July 16, 2007. We were not successful in making this filing
deadline because the audit of our prior fiscal year ended February 28, 2006
was
not completed.
Due
to
the amount of administrative staff of the Company, certain beneficial control
methods are not available for our implementation. This is especially true when
evaluating an effective separation of duties and responsibilities in the
corporate office.
(b) Changes
in Internal Control.
As
required by Rule 13a-15(d), the Company’s management also conducted evaluations
of our internal controls over financial reporting to determine whether any
changes occurred during the fiscal quarter that have materially affected, or
are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
The
Company’s control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principals. Because of the inherent limitations
due to, for example, the potential for human error or circumvention of controls,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because
of
changes in conditions, or that the degree of compliance with policies or
procedures may deteriorate.
During
the preparation of the Company’s financial statements, as of February 28, 2007,
the Company concluded that the current system of disclosure controls and
procedures are still not effective. A material weakness is a control deficiency,
or combination of control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected.
Controls
failed to ensure that common stock transactions were disclosed in a timely
manner on Form 8-K, Current Reports. On March 10, 2006, we commenced a
Regulation D Rule 506 common stock offering. The Securities and Exchange
Commission’s rules and regulations require that we report certain issuances of
unregistered equity securities on a Current Report Form 8-K. Our
Regulation D offering was an unregistered offering of equity securities. In
our
filings on April 5, 2006 and again May 26, 2006, of Form 8-K that reported
the
sales of our equity securities, we were late by one day in meeting the timely
filing requirements for 8-K reporting. In both instances, this was because
of
our internal control procedures for review and approvals of 8-K filings were
not
properly executed.
As
a
result of our evaluations, the Company has initiated the changes in internal
control described below. It should be noted that any system of controls, however
well designed and operated, can provide only reasonable, and not absolute,
assurance that the objectives of the system will be met. In addition, the design
of any control system is based in part upon certain assumptions about the
likelihood of future events.
Changes
Implemented to Correct Material
Weaknesses:
-
We
have
revised our operation procedures relating to management’s issuance of common
stock and the timely disclosure of unregistered equity
transactions.
-
We
have
increased administrative staff to assist in the more timely preparation
of all
required reporting documents
(c) 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.
ITEM
8B. OTHER INFORMATION
None
PART III
ITEM
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS
|
|
|
|
|
|
|
|
Name
|
Age
|
Position(s)
w/the Company
|
Director
Since
|
Dale
B. Lavigne
|
75
|
Director/Chairman
|
March
1965
|
Robert
N. Martin
|
52
|
Director/President
|
December
2004
|
Eric
L. Moe
|
43
|
Director
/ CEO
|
August
2006
|
Jeffrey
R. Dworkin
|
49
|
Director/Secretary
|
December
2004
|
Terrence
J. Dunne
|
58
|
Director/Chief
Financial Officer
|
January
2006
|
Thomas
C. Kilbourne
|
55
|
Director/Treasurer/Controller
|
January
2001
|
Michael
Curtis
|
52
|
Director
|
December
2004
|
Ronald
D. Lavigne
|
52
|
Director
|
July
1999
|
Tim
R. Lindsey
|
55
|
Director
|
January
2007
|
|
|
|
|
|
|
|
|
EXECUTIVE OFFICERS
|
|
|
|
|
|
|
|
Bennett
W. Anderson
|
46
|
Chief
Operating Officer
|
March
2006
|
Robert
N. Martin,
a Professional Geologist, is the President and a Director of the
Company. Mr. Martin graduated from McGill University with a Bachelor
of Science degree. Prior to becoming the President of the Company in December
2004, Mr. Martin was the President of LongBow Energy Corporation from October
2003 until October 2004. From September 2000 until November 2002, Mr.
Martin was the Vice President of Exploration for New Energy West LTD. of
Calgary, Alberta. Mr. Martin is a member of the Association of
Professional Geologists, Geophysicists and Engineers of Alberta and a member
of
the Canadian Society of Petroleum Geologists.
Eric
L. Moe
became the CEO of the Company on March 1, 2006 and was
appointed a director on August 1, 2006. Mr. Moe has over 21 years experience
in
the finance field. He has served as a registered representative with several
NASD member securities firms; and a Senior Partner, Vice President and branch
manager of a registered broker dealer. Since 1998, Mr. Moe has been consulting
to both private and public companies specializing in mergers and acquisitions
and is currently providing investor relationship services to several public
companies. During his career, Mr. Moe has assisted in helping over 20 private
companies become public companies. Additionally, he has assisted in raising
over
$100,000,000 in equity and debt financing. Mr. Moe attended Eastern Washington
University.
Dale
B. Lavigne
is Chairman of the Board and a Director of the Company. Mr.
Lavigne has been a director of the Company since 1965 and served as the
Company’s President from 1989 until December 2004. Mr. Lavigne graduated
from the University of Montana with a B. S. Degree in Pharmacy. For the past
47
years, Mr. Lavigne has been the Chairman and a Director of the Osburn Drug
Company, Inc., a 4-store chain of retail pharmacies in North Idaho. Mr.
Lavigne is also a Director and Officer of Metropolitan Mines, Inc., a reporting
publicly-held, inactive mineral exploration company. Mr. Lavigne is also a
director and officer of various other public non-reporting inactive mineral
exploration companies. Mr. Lavigne is the former Chairman of the First
National Bank of North Idaho; a former member of the Gonzaga University Board
of
Regents; former President of the Silver Valley Economic Development Corporation
and a former member of the Governor's Task Force on Rural Idaho. Mr. Lavigne
is
the father of Ronald B. Lavigne and the father-in-law of Thomas C.
Kilbourne.
Bennett
W. Anderson
serves as Chief Operating Officer. Mr. Anderson most recently
served as a Senior Vice President with Novell, Inc. from 1998-2002. His duties
included product direction, strategy and market direction, and training and
support for the field sales staff. He led 25 product managers in supporting
products and suites with revenues of $60,000,000 and an annual growth rate
of
80%. He also managed 300 engineers to develop more than 20 core technologies.
From 1978 to 1982 Mr. Anderson worked as a rig hand and was involved in drilling
over a dozen wells in North Dakota. He holds a B.S. degree from Brigham Young
University in Computer Science and graduated with University Honors of
Distinction.
Michael
Curtis
is a Director of the Company. Since January 1998, Mr. Curtis
has been the president of Cardwell Capital Corporation, a private investment
and
trading company that invests in private and public corporations in the North
American Markets.
Terrence
J. Dunne
serves as Chief Financial Officer and a Director of the Company.
For more than the past five years Mr. Dunne has operated Terrence J. Dunne
&
Associates, a sole proprietorship which provides bookkeeping, income tax return
preparation and business consulting services for small businesses. Mr. Dunne
received his BBA, MBA and Masters in Taxation degrees from Gonzaga
University.
Mr.
Dunne
is an officer and/or director of the following companies:
1)
Mr.
Dunne is currently both a Director and the President of Hanover Gold Company,
Inc. In 2006, Mr. Dunne purchased 2,200,000 shares of Hanover Gold for $0.25
per
share as part of a Regulation D-506 private placement. Hanover Gold currently
trades on the OTC Bulletin Board market.
2)
In
2006, Mr. Dunne, became a Director and Chief Financial Officer (CFO) of Gold
Crest Mines, Inc. formerly known as Silver Crest Mines, Inc. Mr. Dunne currently
owns approximately 8,000,000 shares of Gold Crest. Gold Crest is an
exploration stage gold mining company that currently trades on the OTC pink
sheet market.
3)
In
late 2006, Mr. Dunne became a director of Superior Silver Mines, Inc., an
inactive mining company that trades on the OTC pink sheet market. Mr. Dunne
currently owns approximately 177,000 shares in the company.
Jeffrey
R. Dworkin
is a Director and Corporate Secretary of the Company. Mr.
Dworkin graduated from Queens University with a Bachelor of Arts Degree and
the London School of Economics and Politics with a Bachelor of Laws degree.
Prior to becoming a the Secretary and a Director, Mr. Dworkin worked in
the oil and gas industry as a private consultant. He was previously employed
by
LongBow Energy Corp., a junior oil and gas company listed on the TSX Venture
Exchange, and assisted in the raising of approximately Cdn$3 MM. Mr.
Dworkin declared personal bankruptcy under Canadian law on September 3, 2003
and
was discharged on June 3, 2004.
Thomas
C. Kilbourne
is the Controller/Treasurer and a Director of the Company and
is formerly its Chief Financial Officer. Mr. Kilbourne has been an officer
and director of the Company since January 2001. He graduated from the University
of Montana with a BS Degree in Business Administration and
Finance.
Mr.
Kilbourne has been the Chief Financial Officer and a Director of the Osburn
Drug
Company since 1999. Prior to that time, he had been the General Manager of
Tabor’s/Modern Drug in Wallace, Idaho since 1980. Mr. Kilbourne is also a
director and officer of various other public non-reporting inactive mineral
exploration companies. Mr. Kilbourne is the son-in-law of Dale Lavigne and
the
brother-in-law of Ronald Lavigne.
Ronald
D. Lavigne
is a Director of the Company. Mr. Lavigne has served as a
Director of the Company since July of 1999. Mr. Lavigne graduated from the
University of Montana with a BS Degree in Pharmacy. Mr. Lavigne is the
President and a Director of the Osburn Drug Company. Mr. Lavigne is also a
director and officer of various other public non-reporting inactive mineral
exploration companies, and is the son of Dale Lavigne and the brother-in-law
of
Thomas Kilbourne.
Tim
R.
Lindsey
is a Director of the Company. Mr. Lindsey has over thirty
years of technical and executive leadership in exploration, production,
technology, and business development in the United States, Canada, Africa,
Europe, Latin America and Asia – Pacific.
From
March 2005 to the present, Mr. Lindsey has been a Principal of Lindsey Energy
and Natural Resources an independent consulting firm specializing in energy
and
mining industry issues. From September 2003 to March 2005, Mr. Lindsey held
the
positions of Vice-President, Exploration and Senior Vice-President, Exploration
with the Houston Exploration Company (NYSE:THX), a Houston-based independent
natural gas and oil company engaged in the exploration, development,
exploitation and acquisition of domestic natural gas and oil properties. From
October 1975 to February 2003, Mr. Lindsey was employed with Marathon Oil
Corporation (NYSE: MRO), a Houston-based company engaged in the worldwide
exploration and production of crude oil and natural gas, as well as the domestic
refining, marketing and transportation of petroleum products. During his 27
year
tenure with Marathon, Mr. Lindsey held a number of positions including senior
management roles in both domestic and international exploration and business
development. He also serves as a Director for Challenger Energy Corp., a
Calgary-based oil and gas company focused on projects offshore Trinidad and
Tobago; and, offshore Nova Scotia.
Mr.
Lindsey obtained his Bachelor of Science Degree in Geology from Eastern
Washington University in 1973, and completed his graduate studies in Economic
Geology from the University of Montana in 1975. In addition, he
completed the Advanced Executive Program from the Kellogg School of Management
at Northwestern University in 1990. Mr. Lindsey is a member of the American
Association of Petroleum Geologists and the Rocky Mountain Association of
Geologists.
Directors’
Term of Office
Directors
hold office until the next annual meeting of shareholders and the election
and
qualification of their successors. Officers are elected annually by our board
of
directors and serve at the discretion of the board of directors.
Board
Meetings
During
the fiscal year ended February 28, 2007, there were twelve regular meetings
of
the Board of Directors. All directors attended at least 75% of these meetings
with the exception of Michael Curtis.
Director
Compensation
For
the
fiscal year ended February 28, 2007, directors of the Company were compensated
for their services at a rate of $750 per month. Director fees were paid in
cash
on a quarterly basis.
Committees
of the Board of Directors
Audit
Committee
The
Audit
Committee is responsible for monitoring the integrity of the Company’s financial
reporting standards and practices and its financial statements, overseeing
the
Company’s compliance with ethics and compliance policies and legal and
regulatory requirements, and selecting, compensating, overseeing, and evaluating
the Company’s independent auditors.
The
members of the Audit Committee are Dale Lavigne, Terrence Dunne and Ronald
Lavigne. None of these Audit Committee members is independent as defined in
the
listing standards of the American Stock Exchange and the rules of the Securities
and Exchange Commission. The Board has determined that Terrence Dunne does
qualify as an “audit committee financial expert” on the Audit Committee, as that
term is defined in the rules of the Securities and Exchange
Commission.
In
forming our Board of Directors, we sought out individuals who would be able
to
guide our operations based on their business experience, both past and present,
or their education. Our business model is not complex and our accounting issues
are straightforward. Responsibility for our operations is centralized within
management. We rely on the assistance of others, such as our accountant, to
help
us with the preparation of our financial information. We recognize that having
a
person who possesses all of the attributes of an independent audit committee
financial expert would be a valuable addition to our Board of Directors,
however, we are not, at this time, able to compensate such a person therefore,
we may find it difficult to attract such a candidate.
Nominating
Committee
The
entire Board of Directors serves as the nominating committee. The nominating
committee does not have a charter.
Compensation
Committee
The
members of the Compensation Committee are Dale Lavigne, Terrence Dunne and
Michael Curtis. The compensation committee does not have a charter.
None
of
the foregoing Directors or Executive Officers has, during the past five
years:
(a)
Had
any bankruptcy petition filed by or against any business of which such person
was a general partner or executive officer either at the time of the bankruptcy
or within two years prior to that time. Mr. Jeffrey Dworkin declared personal
bankruptcy under Canadian law on September 3, 2003 and was discharged on June
3,
2004
(b)
Been
convicted in a criminal proceeding or subject to a pending criminal
proceeding;
(c)
Been
subject to any order, judgment, or decree, not subsequently reversed, suspended
or vacated, of any court of competent jurisdiction, permanently or temporarily
enjoining, barring, suspending or otherwise limiting his involvement in any
type
of business, securities or banking activities; and
(d)
Been
found by a court of competent jurisdiction (in a civil action), the Commission
or the Commodity Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed,
suspended, or vacated.
Compliance
with Section 16(a) of the Exchange Act
. Our officers, directors and persons
owning more than 10% of our common stock are obligated to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
under Section 16(a) of the Securities Exchange Act of 1934. To our knowledge,
based solely upon review of the copies of such reports received or written
representations from the reporting persons, we believe that during our fiscal
year ended February 28, 2007 our directors, executive officers and persons
who
own more than 10% of our common stock complied with all Section 16(a) filing
requirements with the exception of the following:
Ronald
Lavigne (1 Report, 1 Transaction)
Code
of Ethics
.
The Company has adopted a Code of Ethics that applies to
the Company's executive officers and directors. The Company will provide,
without charge, a copy of the Code of Ethics on the written request of any
person addressed to the Company at, Daybreak Oil and Gas, Inc. 601 W. Main
Ave.,
Suite 1012; Spokane, WA 99201. Our code of ethics can also be viewed on our
Company website.
ITEM
10. EXECUTIVE COMPENSATION
In
our
fiscal year ending February 28, 2005, we paid no compensation to any director
or
officer.
In
our
fiscal year ending February 28, 2006, we paid our officers and directors a
total
of $60,050 in cash for management and consulting services. During
this same period, we granted these individuals 2,783,000 shares of our
unregistered common stock for director, management and consulting
services. This stock had a restated fair value of $2,010,730 at the
grant date. During the period of these issuances the trading price of
this stock ranged from a low of $.33 per share to a high of $2.25 per
share.
In
our
fiscal year ending February 28, 2007, we paid our officers and director a total
of $553,941 in cash for director, management and consulting
services. During this same period, we granted these individuals
1,050,000 shares of our unregistered common stock for management and consulting
services. This stock had a restated fair value of $2,206,500 at the
grant date. During the period of these issuances, the trading price
of this stock ranged from a low of $1.66 per share to a high of $2.95 per
share.
Executive
Summary Compensation Table
Name
and Principal Position
|
Position
|
Fiscal
Year Ended February 28
|
|
Salary
|
|
|
Stock
Awards
|
|
|
Total
|
|
Robert
Martin
(1) (2)
(3)
|
President
|
2007
|
|
$
|
161,500
|
|
|
$
|
597,500
|
(3)
|
|
$
|
759,000
|
|
|
|
2006
|
|
$
|
40,050
|
|
|
$
|
869,000
|
(2)
|
|
$
|
909,050
|
|
|
|
2005
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Eric
Moe
(4) (5) (6)
(7)
|
Chief
Executive Officer
(4)
|
2007
|
|
$
|
103,500
|
|
|
$
|
1,110,000
|
(7)
|
|
$
|
1,213,500
|
|
|
|
2006
|
|
$
|
32,000
|
(5)
|
|
$
|
955,000
|
(6)
|
|
$
|
987,000
|
|
|
|
2005
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Dale
Lavigne
(8)
|
Chairman
|
2007
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
2006
|
|
$
|
-
|
|
|
|
168,000
|
(8)
|
|
$
|
168,000
|
|
|
|
2005
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Terrence
Dunne
(9)
|
Chief
Financial Officer
|
2007
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
2006
|
|
$
|
-
|
|
|
$
|
224,000
|
(9)
|
|
$
|
224,000
|
|
|
|
2005
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Bennett
Anderson
(10)
|
Chief
Operating Officer
|
2007
|
|
$
|
98,500
|
|
|
$
|
-
|
|
|
$
|
98,500
|
|
|
|
2006
|
|
$
|
5,000
|
|
|
|
223,000
|
(10)
|
|
$
|
228,000
|
|
|
|
2005
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Thomas
Kilbourne
(9)
(11)
|
Treasurer
and Controller
|
2007
|
|
$
|
84,500
|
|
|
$
|
239,000
|
(11)
|
|
$
|
323,500
|
|
|
|
2006
|
|
$
|
-
|
|
|
$
|
224,000
|
(9)
|
|
$
|
224,000
|
|
|
|
2005
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Jeffrey
Dworkin
|
Secretary
|
2007
|
|
$
|
36,191
|
|
|
$
|
-
|
|
|
$
|
36,191
|
|
|
|
2006
|
|
$
|
12,000
|
|
|
$
|
-
|
|
|
$
|
12,000
|
|
|
|
2005
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Ronald
Lavigne
(8)
|
Director
|
2007
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
2006
|
|
$
|
-
|
|
|
$
|
168,000
|
(8)
|
|
$
|
168,000
|
|
|
|
2005
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Tim
Lindsey
(12)
|
Director
|
2007
|
|
$
|
-
|
|
|
$
|
260,000
|
(12)
|
|
$
|
260,000
|
|
|
|
2006
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
2005
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Totals
|
|
2007
|
|
$
|
484,191
|
|
|
$
|
2,206,500
|
|
|
$
|
2,690,691
|
|
|
|
2006
|
|
$
|
89,050
|
(5)
|
|
$
|
2,831,000
|
(6)
|
|
$
|
2,920,050
|
|
|
|
2005
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
(1)
|
Payments
for Mr. Martin’s services are paid directly to 413294 Alberta Ltd., a
Canadian Company.
|
(2)
|
Includes
$869,000 that was paid with 1,100,000 shares of unregistered common
stock.
|
(3)
|
Includes
$597,500 that was paid with 250,000 shares of unregistered common
stock.
|
(4)
|
For
the fiscal year ended February 28, 2006, Mr. Moe was employed as
an
investor relations (IR) consultant to
Daybreak
|
(5)
|
Includes
$29,000 that was paid for investor relations (IR) consulting to Mr.
Moe in
fiscal year 2006.
|
(6)
|
Includes
$955,000 that was paid with 1,500,000 shares of unregistered common
stock
for IR consulting to Mr. Moe in fiscal year
2006.
|
(7)
|
Includes
$1,110,000 that was paid with 500,000 shares of unregistered common
stock.
|
(8)
|
Includes
$168,000 that was paid with 300,000 shares of unregistered common
stock.
|
(9)
|
Includes
$224,000 that was paid with 400,000 shares of unregistered common
stock.
|
(10)
|
Includes
$223,000 that was paid with 100,000 shares of unregistered common
stock.
|
(11)
|
Includes
$239,000 that was paid with 100,000 shares of unregistered common
stock.
|
(12)
|
Includes
$260,000 that was paid with 200,000 shares of unregistered common
stock.
|
Director
Summary Compensation Table
Name
and Principal Position
|
Position
|
Fiscal
Year Ended February 28
|
|
Fees
|
|
|
Stock
Awards
|
|
|
Total
|
|
Robert
Martin
(1) (2)
(4)
|
Director
|
2007
|
|
$
|
9,000
|
(4)
|
|
$
|
-
|
|
|
$
|
9,000
|
|
|
|
2006
|
|
$
|
-
|
|
|
$
|
21,330
|
(2)
|
|
|
21,330
|
|
|
|
2005
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Eric
Moe
(4)
|
Director
(9)
|
2007
|
|
$
|
5,250
|
(4)
|
|
$
|
-
|
|
|
$
|
5,250
|
|
|
|
2006
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
2005
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Dale
Lavigne
(2)
(4)
|
Chairman
and Director
|
2007
|
|
$
|
9,000
|
(4)
|
|
$
|
-
|
|
|
$
|
9,000
|
|
|
|
2006
|
|
$
|
-
|
|
|
$
|
21,330
|
(2)
|
|
$
|
21,330
|
|
|
|
2005
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Terrence
Dunne
(3)
(4)
|
Director
|
2007
|
|
$
|
9,000
|
(4)
|
|
$
|
-
|
|
|
$
|
9,000
|
|
|
|
2006
|
|
$
|
-
|
|
|
$
|
6,750
|
(3)
|
|
$
|
6,750
|
|
|
|
2005
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Thomas
Kilbourne
(2)
(4)
|
Director
|
2007
|
|
|
9,000
|
(4)
|
|
$
|
-
|
|
|
$
|
9,000
|
|
|
|
2006
|
|
$
|
-
|
|
|
$
|
21,330
|
(2)
|
|
$
|
21,330
|
|
|
|
2005
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Jeffrey
Dworkin
(2)
(4)
|
Director
|
2007
|
|
$
|
9,000
|
(4)
|
|
$
|
-
|
|
|
$
|
9.000
|
|
|
|
2006
|
|
$
|
-
|
|
|
$
|
21,330
|
(2)
|
|
$
|
21,330
|
|
|
|
2005
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Ronald
Lavigne
(2)
(4)
|
Director
|
2007
|
|
$
|
9,000
|
(4)
|
|
$
|
-
|
|
|
$
|
9,000
|
|
|
|
2006
|
|
$
|
-
|
|
|
$
|
21,330
|
(2)
|
|
$
|
21,330
|
|
|
|
2005
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Michael
Curtis
(2)
(4)
|
Director
|
2007
|
|
$
|
9,000
|
(4)
|
|
$
|
-
|
|
|
$
|
9,000
|
|
|
|
2006
|
|
$
|
-
|
|
|
$
|
21,330
|
(2)
|
|
$
|
21,330
|
|
|
|
2005
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Tim
Lindsey
(6)
|
Director
|
2007
|
|
$
|
1,500
|
(6)
|
|
$
|
-
|
|
|
$
|
1,500
|
|
|
|
2006
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
2005
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Totals
|
|
2007
|
|
$
|
69,750
|
|
|
$
|
-
|
|
|
$
|
69,750
|
|
|
|
2006
|
|
$
|
-
|
|
|
$
|
134,730
|
|
|
$
|
134,730
|
|
|
|
2005
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
(1)
|
Payments
for Mr. Martin’s services are paid directly to 413294 Alberta Ltd., a
Canadian Company.
|
(2)
|
Directors
fees of $21,330 that were paid with 30,000 shares of unregistered
common
stock.
|
(3)
|
Directors
fees of $6,750 that were paid with 3,000 shares of unregistered common
stock.
|
(4)
|
Directors
fees of $9,000 that were paid in
cash.
|
(5)
|
Directors
fees of $5,250 that were paid in
cash.
|
(6)
|
Directors
fees of $1,500 that were paid in
cash.
|
Employment
Contracts
In
the
fiscal year from March 1, 2006 through February 28, 2007, we had verbal
employment contracts with three individuals. These employees were: Eric Moe,
CEO
(Chief Executive Officer); Bennett Anderson, COO (Chief Operating Officer);
and
Thomas Kilbourne, Controller/Treasurer. Additionally, we had a verbal contract
with a private consulting firm, 413294 Alberta, Ltd., that supplies the services
of our company President, Robert Martin. These employment and consulting
contracts are annual contracts that coincide with our fiscal year. The terms
of
these contracts were basically the same as the written contracts from the
preceding fiscal year. All other services are currently contracted for with
independent contractors. The Company has not obtained key man life insurance
on
any of its officers or directors.
For
the
fiscal year from March 1, 2007 through February 28, 2008, we have written
employment contracts with Eric Moe, CEO; Bennett Anderson, COO; and Thomas
Kilbourne, Controller/Treasurer. Additionally, we have written consulting
contract with 413294 Alberta, Ltd. to provide the services of Robert Martin
as
President; Jeffrey Dworkin to provide assistance with oil and gas mineral leases
and corporate governance; and Tim Lindsey to provide assistance with developing
oil and gas properties and corporate development.
ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The
information on beneficial ownership in the table and the footnotes thereto
is
based upon the Company's records and, in the case of holders of more than 5%
of
the Company's stock, the most recent Forms 3 and 4 filed by each such person
or
entity and information supplied to the Company by such person or entity. Unless
otherwise indicated, to the Company’s knowledge each person has sole voting
power and sole investment power with respect to the shares shown.
Security
Ownership of Certain Beneficial Owners
As
of the
close of business on September 14, 2007, based on information available to
the
Company, the following persons own beneficially more than 5% of any class of
the
outstanding voting securities of Daybreak Oil and Gas, Inc.
Title
of Class
|
Name
and Address of Beneficial Owner
|
Amount
and Nature of Beneficial Ownership
|
Percent
of Class
(1)
|
Common
Stock
|
Terrence
J. Dunne
|
3,803,804
|
9.24
|
|
601
W. Main Ave
|
|
|
|
Suite 1017
|
|
|
|
Spokane,
WA 99201
|
|
|
Common
Stock
|
Keith
A. Hooper
(2)
|
3,176,077
|
7.71
|
|
1529
W. Adams St.
|
|
|
|
Chicago,
IL 60607
|
|
|
Common
Stock
|
Robert
O' Brien
|
2,878,953
|
6.99
|
|
1511
S. Riegel CT.
|
|
|
|
Spokane,
WA 99212
|
|
|
_________________________
(1)
|
Percent
of class is based upon 41,171,299 shares of common stock outstanding
on
September 14, 2007.
|
(2)
|
Includes
2,936,077 shares held directly or as a trustee by Mr. Hooper; 240,000
shares held indirectly by Hooper Group a Company controlled by Mr.
Hooper.
|
The
following table sets forth, as of September 14, 2007, information regarding
the
beneficial ownership of our common stock with respect to each of our executive
officers, each of our directors, known by us to own beneficially more than
5% of
the common stock, and all of our directors and executive officers as a group.
The term "executive officer" is defined as the President, Chief Executive
Officer, Chief Financial Officer, Secretary, Treasurer and the Chief Operating
Officer. Each individual or entity named has sole investment and voting power
with respect to shares of common stock indicated as beneficially owned by
them,
subject to community property laws, where applicable, except where otherwise
noted. The percentage of common stock beneficially owned is based on
41,171,299
shares of
common stock outstanding as of September 14, 2007.
|
Name
of
|
Title
or
|
Amount
and Nature
|
Percent
|
Title
of Class
|
Beneficial
Owner
|
Position
|
of
Beneficial Ownership
|
of
Class (1)
|
|
|
|
|
|
Common
Stock
|
Robert
N. Martin
|
President
& Director
|
1,380,000
|
3.35%
|
|
|
|
|
|
Common
Stock
|
Dale
B. Lavigne
|
Chairman
& Director
|
822,555
|
2.00%
|
|
|
|
|
|
Common
Stock
|
Eric
L. Moe
|
CEO
& Director
|
1,104,600
|
2.68%
|
|
|
|
|
|
Common
Stock
|
Bennett
W. Anderson
|
COO
|
300,000
|
0.73%
|
|
|
|
|
|
Common
Stock
|
Terrence
J. Dunne
|
CFO
& Director
|
3,803,804
|
9.24%
|
|
|
|
|
|
Common
Stock
|
Jeffrey
R. Dworkin
|
Secretary
& Director
|
30,000
|
0.07%
|
|
|
|
|
|
Common
Stock
|
Thomas
C. Kilbourne
|
Treasurer
& Director
|
930,072
|
2.26%
|
|
|
|
.
|
|
Common
Stock
|
Ronald
D. Lavigne
|
Director
|
688,814
|
1.67%
|
|
|
|
|
|
Common
Stock
|
Michael
Curtis
|
Director
|
30,000
|
0.07%
|
|
|
|
|
|
Common
Stock
|
Tim
R. Lindsey
|
Director
|
200,000
|
0.49%
|
Total
|
Ten
(10) individuals
|
|
9,289,845
|
22.56%
|
ITEM
12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
For
the
fiscal years ended February 28, 2005 and February 28, 2004 there were no related
party transactions.
During
the fiscal year ended February 28, 2006, we had the following related party
transactions:
Convertible
Debentures
From
March 19, 2005 until August 31, 2005, five shareholders of whom three were
directors and the other two were 10% control persons (at the time) made
twenty-six loans to the Company totaling $158,821 in convertible debentures
to
finance our operating activities. These convertible debentures had the following
features: one year term, six percent interest rate and the notes were
convertible after six months to unregistered common stock. The conversion rate
of $0.25 per share was selected because a private placement offering of our
common stock was being planned at the same time for that same price. Both the
principal and the accrued interest were eligible for conversion to unregistered
common stock.
In
the
fiscal year ended February 28, 2006, twenty-three of the convertible debentures
representing $126,821 in principal were converted resulting in 524,820 shares
of
unregistered common stock being issued to satisfy the principal and interest
obligations. By February 28, 2007, all twenty-six of the debentures were
converted resulting in a total of 662,360 shares of unregistered common stock
being issued to satisfy principal and interest obligations. The convertible
note, shares issued upon conversion of the note and shares issued for interest
were issued pursuant to a Section 4(2) exemption from registration under the
Securities Act of 1933, as amended.
In
accordance with EITF 00-27 and 98-5, the Company determined that the debentures
issued integrated a beneficial conversion feature (BCF). The Company has
recorded a discount of $73,511 to reflect the BCF feature over this period.
The
beneficial conversion features were recognized as discounts on the debentures
at
the date of issuance. Utilizing the effective interest method, these discounts
have been amortized over the period commencing on the issuance date to the
date
of stated redemption (i.e. maturity) of the debt in accordance with EITF 00-27
rather than EITF 98-5. The discount of $73,511 was fully amortized at February
28, 2007.
The
Company has evaluated the application of SFAS No. 133 and EITF 00-19 for the
consideration of embedded derivatives with respect to the conversion feature
of
the convertible debentures relative to the guidance of these pronouncements,
the
Company has concluded that these debentures did not contain embedded
derivatives.
The
following is a listing of the twenty-six loans from related parties that
occurred:
1)
On
March 19, 2005, Terrence Dunne (appointed a director in January 2006 and CFO
in
April 2006), a shareholder and 10% control person (at the time), loaned the
Company $623 to finance ongoing operating expenses. On the day of the
loan, the closing price of our stock was $0.47. On November 28, 2005,
Mr. Dunne converted the note plus interest into unregistered common
stock. He was issued 2,593 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $0.52. Based on this price the value of the principal in
the conversion was $1,296
2)
On
March 22, 2005, Terrence Dunne (appointed a director in January 2006 and CFO
in
April 2006), a shareholder and 10% control person (at the time), loaned the
Company $10,216 to finance ongoing operating expenses. On the day of the loan,
the closing price of our stock was $0.46. On November 28,
2005,
Mr.
Dunne converted the note plus interest into unregistered common
stock.
He
was
issued 42,503 shares of stock from this conversion. On the day of the
conversion, the closing price of our stock was $0.52. Based on this
price the value of the principal in the conversion was $21,249.
3)
On
March 23, 2005, Dale Lavigne, a director and shareholder, loaned the Company
$15,000 to finance ongoing operating expenses. On the day of the loan, the
closing price of our stock was $0.48. On November 28, 2005, Mr. Lavigne
converted the note plus interest into unregistered common stock. He was issued
62,397 shares of stock from this conversion. On the day of the
conversion, the closing price of our stock was $0.52. Based on this
price the value of the principal in the conversion was $31,200.
4)
On
March 23, 2005, Ronald Lavigne, a director and shareholder, loaned the Company
$3,000 to finance ongoing operating expenses. On the day of the loan, the
closing price of our stock was $0.48. On November 28, 2005, Mr. Lavigne
converted the note plus interest into unregistered common stock. He was issued
12,479 shares of stock from this conversion. On the day of the
conversion, the closing price of our stock was $0.52. Based on this
price the value of the principal in the conversion was $6,240.
5)
On
March 25, 2005, Thomas Kilbourne, a director, Treasurer and shareholder loaned
the Company $3,000 to finance ongoing operating expenses. On the day of the
loan, the closing price of our stock was $0.50. On November 28, 2005,
Mr. Kilbourne converted the note plus interest into unregistered common
stock. He was issued 12,475 shares of stock from this conversion. On
the day of the conversion, the closing price of our stock was
$0.52. Based on this price the value of the principal in the
conversion was $6,240.
6)
On
March 25, 2005, Robert O’Brien, a shareholder and ten percent (10%) control
person (at the time), loaned the Company $15,000 to finance ongoing operating
expenses. On the day of the loan, the closing price of our stock was $0.50.
On
August 31, 2006, Mr. O’Brien converted the note plus interest into unregistered
common stock. He was issued 65,168 shares of stock from this conversion. On
the
day of the conversion, the closing price of our stock was
$1.92. Based on this price the value of the principal in the
conversion was $125,123.
7)
On
April 25, 2005, Terrence Dunne (appointed a director in January 2006 and CFO
in
April 2006), a shareholder and 10% control person (at the time), loaned the
Company $8,000 to finance ongoing operating expenses. On the day of the loan,
the closing price of our stock was $0.35. On November 28, 2005, Mr.
Dunne converted the note plus interest into unregistered common
stock. He was issued 33,105 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $0.52. Based on this price the value of the principal in
the conversion was $16,640.
8)
On
April 25, 2005, Dale Lavigne, a director and shareholder, loaned the Company
$8,000 to finance ongoing operating expenses. On the day of the loan, the
closing price of our stock was $0.35. On November 28, 2005, Mr. Lavigne
converted the note plus interest into unregistered common stock. He was issued
33,105 shares of stock from this conversion. On the day of the
conversion, the closing price of our stock was $0.52. Based on this
price the value of the principal in the conversion was $16,640.
9)
On
April 26, 2005, Ronald Lavigne, a director and shareholder, loaned the Company
$3,000 to finance ongoing operating expenses. On the day of the loan, the
closing price of our stock was $0.35. On November 28, 2005, Mr. Lavigne
converted the note plus interest into unregistered common stock. He was issued
12,412 shares of stock from this conversion. On the day of the
conversion, the closing price of our stock was $0.52. Based on this
price the value of the principal in the conversion was
$6,240.
10)
On
April 26, 2005, Thomas Kilbourne, a director, Treasurer and shareholder, loaned
the Company $3,000 to finance ongoing operating expenses. On the day of the
loan, the closing price of our stock was $0.35. On November 28, 2005,
Mr. Kilbourne converted the note plus interest into unregistered common
stock. He was issued 12,412 shares of stock from this conversion. On
the day of the conversion, the closing price of our stock was
$0.52. Based on this price the value of the principal in the
conversion was $6,240.
11)
On
May 26, 2005, Terrence Dunne (appointed a director in January 2006 and CFO
in
April 2006), a shareholder and 10% control person (at the time), loaned the
Company $3,982 to finance ongoing operating expenses. On the day of the loan,
the closing price of our stock was $0.33. On November 30, 2005, Mr.
Dunne converted the note plus interest into unregistered common
stock. He was issued 16,418 shares of stock from this conversion. On
the day of the conversion, the closing price of our stock was
$0.52. Based on this price the value of the principal in the
conversion was $8,283.
12)
On
May 31, 2005, Thomas Kilbourne, a director, Treasurer and shareholder, loaned
the Company $3,000 to finance ongoing operating expenses. On the day of the
loan, the closing price of our stock was $0.32. On November 30, 2005,
Mr. Kilbourne converted the note plus interest into unregistered common
stock. He was issued 12,361 shares of stock from this conversion. On
the day of the conversion, the closing price of our stock was
$0.52. Based on this price the value of the principal in the
conversion was $6,240.
13)
On
June 16, 2005, Terrence Dunne (appointed a director in January 2006 and CFO
in
April 2006), a shareholder and 10% control person (at the time), loaned the
Company $10,000 to finance ongoing operating expenses. On the day of the loan,
the closing price of our stock was $0.33. On February 10, 2006, Mr. Dunne
converted the note plus interest into unregistered common stock. He was issued
41,558 shares of stock from this conversion. On the day of the conversion,
the
closing price of our stock was $1.70. Based on this price the value
of the principal in the conversion was $68,000.
14)
On
July 27, 2005, Terrence Dunne (appointed a director in January 2006 and CFO
in
April 2006), a shareholder and 10% control person (at the time), loaned the
Company $13,000 to finance ongoing operating expenses. On the day of the loan,
the closing price of our stock was $0.25. On February 10, 2006, Mr. Dunne
converted the note plus interest into unregistered common stock. He
was issued 53,675 shares of stock from this conversion. On the day of the
conversion, the closing price of our stock was $1.70. Based on this
price the value of the principal in the conversion was $88,400.
15)
On
July 27, 2005, Thomas Kilbourne, a director, Treasurer and shareholder, loaned
the Company $6,500 to finance ongoing operating expenses. On the day of the
loan, the closing price of our stock was $0.25. On February 10, 2006, Mr.
Kilbourne converted the note plus interest into unregistered common stock.
He
was issued 26,838 shares of stock from this conversion. On the day of the
conversion, the closing price of our stock was $1.70. Based on this
price the value of the principal in the conversion was $44,200.
16)
On
July 27, 2005, Robert O’Brien, a shareholder and ten percent (10%) control
person (at the time), loaned the Company $12,000 to finance ongoing operating
expenses. On the day of the loan, the closing price of our stock was
$0.25. On August 31, 2006, Mr. O’Brien converted the note plus
interest into unregistered common stock. He was issued 51,156 shares of stock
from this conversion. On the day of the conversion, the closing price
of our stock was $1.92. Based on this price the value of the
principal in the conversion was $98,220.
17)
On
August 1, 2005, Dale Lavigne, a director and shareholder, loaned the Company
$5,000 to finance ongoing operating expenses. On the day of the loan, the
closing price of our stock was $0.30. On February 10, 2006, Mr. Lavigne
converted the note plus interest into unregistered common stock. He
was issued 20,628 shares of stock from this conversion. On the day of
the conversion, the closing price of our stock was $1.70. Based on
this price the value of the principal in the conversion was
$34,000.
18)
On
August 1, 2005, Thomas Kilbourne, a director, Treasurer and shareholder, loaned
the Company $500 to finance ongoing operating expenses. On the day of the loan,
the closing price of our stock was $0.30. On February 10, 2006,
Mr. Kilbourne converted the note plus interest into unregistered common
stock. He was issued 2,063 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $1.70. Based on this price the value of the principal in
the conversion was $3,400.
19)
On
August 2, 2005, Ronald Lavigne, a director and shareholder, loaned the Company
$5,000 to finance ongoing operating expenses. On the day of the loan, the
closing price of our stock was $0.28. On February 10, 2006, Mr.
Lavigne converted the note plus interest into unregistered common
stock. He was issued 20,625 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $1.70. Based on this price the value of the principal in
the conversion was $34,000.
20)
On
August 22, 2005, Thomas Kilbourne, a director, Treasurer and shareholder, loaned
the Company $5,000 to finance ongoing operating expenses. On the day of the
loan, the closing price of our stock was $0.44. On February 28, 2006, Mr.
Kilbourne converted the note plus interest into unregistered common stock.
He
was issued 20,625 shares of stock from this conversion. On the day of the
conversion the closing price of our stock was $2.25. Based on this
price the value of the principal in the conversion was $45,000.
21)
On
August 24, 2005, Terrence Dunne (appointed a director in January 2006 and CFO
in
April 2006), a shareholder and 10% control person (at the time), loaned the
Company $6,000 to finance ongoing operating expenses. On the day of the loan,
the closing price of our stock was $0.42. On February 28, 2006, Mr. Dunne
converted the note plus interest into unregistered common stock. He
was issued 24,742 shares of stock from this conversion. On the day of the
conversion, the closing price of our stock was $2.25. Based on this
price the value of the principal in the conversion was $54,000.
22)
On
August 26, 2005, Terrence Dunne (appointed a director in January 2006 and CFO
in
April 2006), a shareholder and 10% control person (at the time), loaned the
Company $6,000 to finance ongoing operating expenses. On the day of the loan,
the closing price of our stock was $0.40. On February 28, 2006, Mr. Dunne
converted the note plus interest into unregistered common stock. He was issued
24,734 shares of stock from this conversion. On the day of the conversion,
the
closing price of our stock was $2.25. Based on this price the value
of the principal in the conversion was $54,000.
23)
On
August 26, 2005, Robert O’Brien, a shareholder and ten percent (10%) control
person (at the time), loaned the Company $5,000 to finance ongoing operating
expenses. On the day of the loan, the closing price of our stock was
$0.40. On August 31, 2006, Mr. O’Brien converted the note plus
interest into unregistered common stock. He was issued 21,216 shares
of stock from this conversion. On the day of the conversion, the closing price
of our stock was $1.92. Based on this price the value of the
principal in the conversion was $40,735.
24)
On
August 31, 2005, Ronald Lavigne, a director and shareholder, loaned the Company
$2,500 to finance ongoing operating expenses. On the day of the loan, the
closing price of our stock was $0.37. On February 28,
2006, Mr. Lavigne converted the note plus interest into unregistered common
stock.
He
was
issued 10,298 shares of stock from this conversion. On the day of the
conversion, the closing price of our stock was $2.25. Based on this
price the value of the principal in the conversion was $22,500
25)
On
August 31, 2005, Thomas Kilbourne, a director, Treasurer and shareholder, loaned
the Company $2,500 to finance ongoing operating expenses. On the day of the
loan, the closing price of our stock was $0.37. On February 28, 2006,
Mr. Kilbourne converted the note plus interest into unregistered common stock.
He was issued 10,298 shares of stock from this conversion. On the day of the
conversion, the closing price of our stock was $2.25. Based on this
price the value of the principal in the conversion was $22,500.
26)
On
August 31, 2005, Terrence Dunne (appointed a director in January 2006 and CFO
in
April 2006), a shareholder and 10% control person (at the time), loaned the
Company $4,000 to finance ongoing operating expenses. On the day of the loan,
the closing price of our stock was $0.37. On February 28, 2006, Mr. Dunne
converted the note plus interest into unregistered common stock. He
was issued 16,476 shares of stock from this conversion. On the day of the
conversion, the closing price of our stock was $2.25. Based on this
price the value of the principal in the conversion was $36,000.
Stock
for Services
On
May
11, 2005, we issued 1,100,000 shares of unregistered common stock to 413294
Alberta, Ltd., of Calgary, Alberta to supply the services of Robert Martin,
as
our Company President. On the grant date of March 1, 2005, the closing price
of
our stock was $0.79. Based on the closing price the value of this stock issuance
was $869,000. In conforming to the current interpretation of FAS 123(R) the
value of this transaction has now been expensed as of the grant date as
reflected in our restated financials. The shares issued for services were issued
pursuant to a Section 4(2) exemption from registration under the Securities
Act
of 1933, as amended.
On
November 30, 2005, we issued 400,000 shares of unregistered common stock to
Terrence Dunne, (appointed a director in January 2006 and CFO in April 2006),
a
shareholder and 10% control person (at the time), for management services.
On
the grant date of September 27, 2005, the closing price of our stock was $0.56.
Based on the closing price the value of this stock issuance was $224,000. In
conforming to the current interpretation of FAS 123(R) the value of this
transaction has now been expensed as of the grant date as reflected in our
restated financials. The shares issued for services were issued pursuant to
a
Section 4(2) exemption from registration under the Securities Act of 1933,
as
amended.
On
December 19, 2005, we issued 30,000 shares of unregistered common stock to
Terrence Dunne (appointed CFO in April 2006) for his personal guarantee on
the
Genesis Financial warehousing line of credit. On the grant date the closing
price of our stock was $0.58. In conforming to the current interpretation of
FAS
123(R) the value of this transaction has now been adjusted as reflected in
our
restated financials. The shares issued for services were issued pursuant to
a
Section 4(2) exemption from registration under the Securities Act of 1933,
as
amended
On
January 17, 2006, we issued 300,000 shares of unregistered common stock to
Dale
Lavigne (Chairman), a director and shareholder for management services. On
the
grant date of September 27, 2005, the closing price of our stock was $0.56.
Based on the closing price the value of this stock issuance was $168,000. In
conforming to the current interpretation of FAS 123(R) the value of this
transaction has now been expensed as of the grant date as reflected in our
restated financials. The shares issued for services were issued pursuant to
a
Section 4(2) exemption from registration under the Securities Act of 1933,
as
amended.
On
January 17, 2006, we issued 300,000 shares of unregistered common stock to
Ronald Lavigne, a director and shareholder for management services. On the
grant
date of September 27, 2005, the closing price of our stock was $0.56. Based
on
the closing price the value of this stock issuance was $168,000. In conforming
to the current interpretation of FAS 123(R) the value of this transaction has
now been expensed as of the grant date as reflected in our restated financials.
The shares issued for services were issued pursuant to a Section 4(2) exemption
from registration under the Securities Act of 1933, as amended.
On
January 17, 2006, we issued 400,000 shares of unregistered common stock to
Thomas Kilbourne (Treasurer), a director and shareholder for management
services. On the grant date of September 27, 2005, the closing price of our
stock was $0.56. Based on the closing price the value of this stock issuance
was
$224,000. In conforming to the current interpretation of FAS 123(R) the value
of
this transaction has now been expensed as of the grant date as reflected in
our
restated financials. The shares issued for services were issued pursuant to
a
Section 4(2) exemption from registration under the Securities Act of 1933,
as
amended.
On
February 17, 2006, we issued 100,000 shares of unregistered common stock to
Bennett Anderson, a shareholder for management fees. On the grant date of
February 17, 2006, the closing price of our stock was $2.23. Based on the
closing price the value of this stock issuance was $223,000. In conforming
to
the current interpretation of FAS 123(R) the value of this transaction has
now
been expensed as of the grant date as reflected in our restated financials.
The
shares issued for services were issued pursuant to a Section 4(2) exemption
from
registration under the Securities Act of 1933, as amended.
Stock
for Investor Relations Services
On
April
27, 2005, we issued 500,000 shares of unregistered common stock to Eric Moe
(appointed CEO in March 2006) for Investor Relations (“IR”) services. On
the grant date of March 1, 2005, the closing price of our stock was $0.79.
Based
on the closing price the value of this stock issuance was $395,000. In
conforming to the current interpretation of FAS 123(R) the value of this
transaction has now been expensed as of the grant date as reflected in our
restated financials. The shares issued for services were issued pursuant to
a
Section 4(2) exemption from registration under the Securities Act of 1933,
as
amended.
On
April
27, 2005, we issued 350,000 shares of unregistered common stock to AnMac
Enterprises (a company owned by Michael McIntyre) for Investor Relations (“IR”)
services. On the grant date of March 1, 2005, the closing price of our stock
was
$0.79. Based on the closing price the value of this stock issuance was $276,500.
In conforming to the current interpretation of FAS 123(R) the value of this
transaction has now been expensed as of the grant date as reflected in our
restated financials. The shares issued for services were issued pursuant to
a
Section 4(2) exemption from registration under the Securities Act of 1933,
as
amended.
On
May
25, 2005, we issued 300,000 shares of unregistered common stock to Irwin
Renneisen for IR consulting services. On the grant date of May 18, 2005, the
closing price of our stock was $0.38. Based on the closing price the value
of
this stock issuance was $114,000. In August 2005, the 300,000 shares were
returned to us and on August 25, 2005, we issued Irwin Renneisen 30,000 shares
of restricted common stock. On the revised grant date of August 25, 2005, the
closing price of our stock was $0.44. Based on the closing price the value
of
this stock issuance was $13,200. In conforming to the current interpretation
of
FAS 123(R) the value of this transaction has now been expensed as of the grant
date as reflected in our restated financials.
The
shares issued for services were issued pursuant to a Section 4(2) exemption
from
registration under the Securities Act of 1933, as amended.
On
October 5, 2005, we issued 1,000,000 shares of unregistered common stock to
Eric
Moe (appointed CEO in March 2006) for Investor Relations (IR) services. On
the grant date of September 27, 2005, the closing price of our stock was $0.56.
Based on the closing price the value of this stock issuance was $560,000. In
conforming to the current interpretation of FAS 123(R) the value of this
transaction has now been expensed as of the grant date as reflected in our
restated financials. The shares issued for services were issued pursuant to
a
Section 4(2) exemption from registration under the Securities Act of 1933,
as
amended.
On
January 17, 2006, we issued 600,000 shares of unregistered common stock to
Kirby
Cochran, a shareholder for IR consulting services. On the grant date of January
13, 2006, the closing price of our stock was $0.55. Based on the closing price
the value of this stock issuance was $330,000. In conforming to the current
interpretation of FAS 123(R) the value of this transaction has now been expensed
as of the grant date as reflected in our restated financials. The shares issued
for services were issued pursuant to a Section 4(2) exemption from registration
under the Securities Act of 1933, as amended.
Stock
for Directors Services
On
November 30, 2005, we issued 18,000 shares of unregistered common stock to
each
of the six members of the Board of Directors. These shares were issued for
work
that had been done beyond their regular director duties. These directors were
413295 Alberta Ltd. (Robert Martin), Mike Curtis, Dale Lavigne, Jeff Dworkin,
Ronald Lavigne and Thomas Kilbourne. On the grant date of October 25, 2005,
the
closing price of our stock was $0.55. Based on the closing price the value
of
each stock issuance was $9,900. In conforming to the current interpretation
of
FAS 123(R) the value of this transaction has now been adjusted as reflected
in
our restated financials. The shares issued for services were issued pursuant
to
a Section 4(2) exemption from registration under the Securities Act of 1933,
as
amended.
On
November 30, 2005, we issued 9,000 shares of unregistered common stock worth
to
each of the six members of the Board of Directors for director’s fees for the
third quarter of the current fiscal year. These directors were 413295 Alberta
Ltd. (Robert Martin), Mike Curtis, Dale Lavigne, Jeff Dworkin, Ronald Lavigne
and Thomas Kilbourne. On the grant date of November 30, 2005, the closing
price of our stock was $0.52. Based on the closing price the value of each
stock
issuance was $4,680. In conforming to the current interpretation of FAS 123(R)
the value of this transaction has now been adjusted as reflected in our restated
financials. The shares issued for services were issued pursuant to a Section
4(2) exemption from registration under the Securities Act of 1933, as
amended.
On
February 28, 2006, we issued 3,000 shares of unregistered common stock worth
to
each of the seven members of the Board of Directors for director’s fees for the
fourth quarter of the current fiscal year. These directors were 413295 Alberta
Ltd. (Robert Martin), Mike Curtis, Dale Lavigne, Jeff Dworkin, Ronald Lavigne,
Terrence Dunne and Thomas Kilbourne. On the grant date of February 28, 2006,
the
closing price of our stock was $2.25. Based on the closing price the value
of
each stock issuance was $6,750. In conforming to the current interpretation
of
FAS 123(R) the value of this transaction has now been adjusted as reflected
in
our restated financials. The shares issued for services were issued pursuant
to
a Section 4(2) exemption from registration under the Securities Act of 1933,
as
amended.
During
the fiscal year ended February 28, 2007, we had the following related party
transactions:
Stock
for Services
On
May
26, 2006, we issued 250,000 shares of unregistered common stock to 413294
Alberta, Ltd., of Calgary, Alberta to supply the services of Robert Martin,
as
our Company President. These shares were initially valued at $0.75 per share
and
expensed throughout the fiscal year as monthly management fee costs. On the
grant date of March 1, 2006, the closing price of our stock was $2.39. Based
on
the closing price the value of this stock issuance was $597,500. In conforming
to the current interpretation of FAS 123(R) the value of this transaction has
now been expensed as of the grant date as reflected in our restated financials.
The shares issued for services were issued pursuant to a Section 4(2) exemption
from registration under the Securities Act of 1933, as amended.
On
May
26, 2006, we issued 250,000 shares of unregistered common stock to Eric Moe,
CEO, for management services from March 1, 2006 through February 28, 2007.
These
shares were initially valued at $0.75 per share and expensed throughout the
fiscal year as monthly management fee costs. On the grant date of March 1,
2006,
the closing price of our stock was $2.39. Based on the closing price the value
of this stock issuance was $597,500. In conforming to the current interpretation
of FAS 123(R) the value of this transaction has now been expensed as of the
grant date as reflected in our restated financials. The shares issued for
services were issued pursuant to a Section 4(2) exemption from registration
under the Securities Act of 1933, as amended.
On
May
26, 2006, we issued 100,000 shares of unregistered common stock to Thomas
Kilbourne, Treasurer and a director for management services from March 1, 2006
through February 28, 2007. These shares were initially valued at $0.75 per
share
and were expensed throughout the fiscal year as monthly management fee costs.
On
the grant date of March 1, 2006, the closing price of our stock was $2.39.
Based
on the closing price the value of this stock issuance was $239,000. In
conforming to the current interpretation of FAS 123(R) the value of this
transaction has now been expensed as of the grant date as reflected in our
restated financials. The shares issued for services were issued pursuant to
a
Section 4(2) exemption from registration under the Securities Act of 1933,
as
amended.
On
August
31, 2006, we issued another 250,000 shares of unregistered common stock to
Eric
Moe, CEO and a director. The shares were issued as additional compensation.
These shares were initially valued at $1.00 per share and expensed throughout
the fiscal year as monthly management fee costs. On the grant date of August
3,
2006, the closing price of our stock was $2.05. Based on the closing price
the
value of this stock issuance was $512,500. In conforming to the current
interpretation of FAS 123(R) the value of this transaction has now been expensed
as of the grant date as reflected in our restated financials. The shares issued
for services were issued pursuant to a Section 4(2) exemption from registration
under the Securities Act of 1933, as amended.
On
February 23, 2007, we issued 200,000 shares of unregistered common stock to
Tim
Lindsey, a director for consulting services from January 2, 2007, through
February 28, 2008. On the grant date of January 2, 2007, the closing price
of
our stock was $1.30. Based on the closing price the value of this stock issuance
was $260,000. In conforming to the current interpretation of FAS 123(R) the
value of this transaction has been expensed as of the grant date. The shares
issued for services were issued pursuant to a Section 4(2) exemption from
registration under the Securities Act of 1933, as amended.
Stock
for Investor Relations Services
On
May
10, 2006, we issued 150,000 shares of unregistered common stock to AnMac
Enterprises (a company owned by Michael McIntyre) for Investor Relations (“IR”)
consulting services from March 1, 2006 through February 28, 2007.
On
the
grant date of March 1, 2006, the closing price of our stock was $2.39. Based
on
the closing price the value of this stock issuance was $358,500. In conforming
to the current interpretation of FAS 123(R) the value of this transaction has
now been expensed as of the grant date as reflected in our restated financials.
The shares issued for services were issued pursuant to a Section 4(2) exemption
from registration under the Securities Act of 1933, as amended.
Office
Lease
On
August
3, 2006, the Board of Directors approved the rental of office space from
Terrence Dunne & Associates, a company owned by Terrence Dunne (CFO and a
director). Originally, we occupied approximately 700 square feet and paid
$600
per month. In October 2006, the rent increased to $700 per month. In March
2007, to accommodate an increase in the administrative staff size we
expanded the amount of office space rented to approximately 850 square
feet. This increase in space resulted in a monthly rent of $1,000. In May
2007,
we again increased our office size and is now paying $1,250 per month for
approximately 1,000 square feet. This office lease is currently on a month
to month basis.
Financing
of Gas Pipeline
On
May
24, 2006, Daybreak financed its forty percent (40%) working interest in the
Tuscaloosa project gas pipeline through a financing arrangement with Hooper
Oil
& Gas Partners, LLC (“Hooper O&G”). This pipeline services the Tensas
Farms et al F-1 well in Tensas Parish, Louisiana. Hooper O&G is a company
controlled by Keith A. Hooper, a 5% shareholder of the Company (at the
time).
We
have
accounted for this agreement as a financing arrangement in the form of a
note
payable. The principal of the note is $200,000. We are obligated to pay $5,000
per quarter in interest until the principal is paid in full. Daybreak is
also
required to pay an additional 1% interest fee based on our original net revenue
interest (“NRI”) on the production revenue of the F-1 well for the life of the
project.
We
are
required to commence repayment of the loan if production from the F-1 well
should cease for any cause for a period exceeding sixty days. From June 14,
2007
through September 7, 2007, we made principal payments totaling $170,000.
The
balance of the loan is now past due. The accelerated repayment schedule was
triggered by the temporary shut-in status of the F-1 well, due to technical
issues with water production. Daybreak and Hooper O& G have
agreed to make final payment on the note by November 30, 2007.
Oil
and Gas Properties
On
September 12, 2006, Daybreak approved the individual participation of Bennett
Anderson (COO) in the North Colgrade project. This project was drilled in
December 2006, in Winn Parish, Louisiana. We had a 19% working interest in
this
project and was not the operator of the project. Mr. Anderson had a 1% working
interest in the project. Both Daybreak and Bennett Anderson have participated
in
the drilling of two wells on this prospect. Neither well has been commercially
successful. The wells have been plugged and abandoned.
On
October 30, 2006, Daybreak approved the individual participation of Robert
Martin (President and Director) and Eric Moe (CEO and Director) in the
Tuscaloosa Project in northeast Louisiana. Both Robert Martin and Eric Moe
participated in the drilling of the Tensas Farms B-1 and Tensas Farms F-3
wells.
We have an approximate 88% and 48% working interest in the B-1 and F-3 wells
respectively. Mr. Martin and Mr. Moe each have a 1% working interest in the
project. The F-3 well began commercial production on March 23, 2007. In February
of 2007, the B-1 well had production casing set and initial completion attempted
resulting in no flow.
On
January 10, 2007, Daybreak approved the individual participation of Terrence
Dunne (CFO and Director) in the Krotz Springs project for the Haas-Hirsch
No. 1
well in St. Landry Parish Louisiana. We were the operator of this project
during
the drilling phase which began in January 2007. We have a 12.5% working interest
in this project. Terrence Dunne has a 2.5% working interest in the project.
Upon
the conclusion of drilling and the completion stage of this project we ceased
to
function as the operator of the project.
Consulting
Contracts
From
March 1, 2005 through February 28, 2007, the Company had a consulting contract
with 413294 Alberta, Ltd. to provide the services of Robert Martin as President
of the Company. For the fiscal year ended February 28, 2006, 413294 Alberta,
Ltd. was paid a total of $40,050. For the fiscal year ended February 28, 2007,
413294 Alberta, Ltd. was paid a total of $161,500. Additionally, 413294 Alberta,
Ltd. was reimbursed for Mr. Martin’s actual expenses.
From
March 1, 2005 through February 28, 2007, the Company had a consulting contract
with Jeffrey Dworkin (a Director) for services in regards to public company
corporate governance and oil and gas mineral rights and leases. For the fiscal
year ended February 28, 2006, Mr. Dworkin was paid a monthly retainer of $1,000
for a total of $12,000. From August 1, 2006 through February 28, 2007, he was
paid a monthly retainer of $1,500 and billed his services at a rate of $150
per
hour for a total of $36,191. Since March 1, 2007, Mr. Dworkin is paid $150
per
hour with no monthly retainer. Additionally, Mr. Dworkin has been reimbursed
for
his actual expenses.
On
January 2, 2007, the Company signed a consulting contract with Tim Lindsey
(a
Director) to facilitate long range strategic planning and advise the Company
in
business and exploration matters in the oil and gas industry. Under the terms
of
his contract, Mr. Lindsey was granted 200,000 shares of unregistered common
stock. These shares were valued at $260,000 and expensed in the fiscal year
ended February 28, 2007. The contract further provides that Mr.
Lindsey will provide his services at a rate of $1,500 per day as
needed. For the fiscal year ended February 28, 2007, the Company had not
incurred any additional fees for the services of Mr. Lindsey.
ITEM
13. EXHIBITS
The
following Exhibits are filed as part of the report:
1.01
|
Placement
agent agreement for the sale of securities in March 2006
(19)
|
1.02
|
Placement
agent agreement for the sale of securities in July
2006
|
3.01
|
(i)
|
Articles
of Incorporation
(1)
|
3.02
|
(i)
|
Amend
Articles of Incorporation for name change
(18)
|
3.03
|
(i)
|
Amend
Articles of Incorporation defining Series A Preferred Convertible
Stock
(19)
|
4.01
|
Registration
statement of securities
(16)
|
7.01
|
Non-Reliance
on previously filed financial statements
(27)
|
10.01
|
Quitclaim
mining deed with Silver Crown Mining of mineral rights in Idaho
(26)
|
10.02
|
Agreement
with Crosspoint Holdings, Inc. for the purchase of Series A Preferred
Stock
(6)
|
10.03
|
Consulting
Agreement with 413294 Alberta Ltd. effective March 1,
2005
|
10.04
|
Consulting
Agreement with AnMac Enterprises effective March 1,
2005
|
10.05
|
Consulting
Agreement with Eric Moe effective March 1,
2005
|
10.06
|
Expiration
of Series A Stock Purchase Agreement with Crosspoint Holdings, Inc.,
(10)
|
10.07
|
Drilling
agreement with MPG Petroleum for Ginny South project.
(11)
|
10.08
|
Agreement
with MPG Petroleum to join land bank for Pearl Prospect
(12)
|
10.09
|
Consulting
agreement with Summitt Ventures for management services
(15)
|
10.10
|
Development
agreement with Chicago Mill Joint Venture for Louisiana project
(26)
|
10.11
|
Prospect
review and non-competition agreement for California project
(26)
|
10.12
|
Joint
Venture Agreement with Nomad Hydrocarbons, Ltd. for California project
(26)
|
10.13
|
Development
agreement with Oracle Operating Co. for Texas project
(26)
|
10.14
|
Prospect
review agreement for California project
(26)
|
10.15
|
Development
agreement with Vision Exploration for Louisiana project
(26)
|
10.16
|
Farmin
agreement with Big Sky Western Canada for well in Alberta,
Canada
(26)
|
10.17
|
Development
agreement with Vision Exploration for prospect in Louisiana
(26)
|
10.18
|
Subscription
agreement and letter of investment intent, March 2006 private placement
(19)
|
10.19
|
Warrant
for the purchase shares of common stock, March 2006 private placement
(19)
|
10.20
|
Registration
rights agreement, March 2006 private placement
(19)
|
10.21
|
Pipeline
license agreement for Tuscaloosa project in Louisiana
(26)
|
10.22
|
Subscription
agreement and letter of investment intent, July 2006 private
placement
|
10.23
|
Warrant
for the purchase shares of common stock, July 2006 private
placement
|
10.24
|
Registration
rights agreement, July 2006 private
placement
|
10.25
|
Development
agreement with Frank Davis Exploration for prospect in
Louisiana
(26)
|
10.26
|
Agreement
for refurbishing and operating of drilling rig
(20)
|
10.27
|
Consulting
Agreement with Jeffrey Dworkin dated August 1,
2006
|
10.28
|
Office
Rent Agreement with Terrence Dunne & Associates dated August 1,
2006
|
10.29
|
Consulting
Agreement with Michael Hooper dated August 3,
2006
|
10.30
|
Purchase
of additional mineral interest in Tuscaloosa project in
Louisiana
(21)
|
10.31
|
Farmout
agreement with Monarch Gulf Exploration, Inc.
(2
2
)
|
10.32
|
Oil
and gas lease with Anadarko E&P Company, L.P.
(23
)
|
10.33
|
Drilling
contract with Energy Drilling for two wells in Louisiana
(2
5
)
|
10.34
|
Consulting
Agreement with Tim Lindsey effective January 2,
2007
|
10.35
|
Consulting
Agreement with 413294 Alberta Ltd. effective March 1,
2007
|
10.36
|
Consulting
Agreement with Jeffrey Dworkin effective March 1,
2007
|
10.37
|
Consulting
Agreement with Michael Hooper effective March 1,
2007
|
10.38
|
Employment
Agreement with Eric Moe, CEO effective March 1,
2007
|
10.39
|
Employment
Agreement with Bennett Anderson effective March 1,
2007
|
10.40
|
Employment
Agreement Thomas Kilbourne effective March 1,
2007
|
10.41
|
Office
Rent Agreement with Terrence Dunne & Associates effective May 1,
2007
|
10.42
|
Seismic
farmout agreement with
Chevron
U.S.A.
(28)
|
10.43
|
Joint
Development Participation Agreement for Tuscaloosa project in
Louisiana
(29)
|
14.02
|
Code
of Ethics for President, CEO and Senior Financial Officers
(4)
|
14.03
|
Code
of Ethics, Revised
(5)
|
16.01
|
Change
in Certifying Accountant
(8)
|
16.02
|
Change
in Certifying Accountant
(9)
|
16.03
|
Change
in Certifying Accountant
(13)
|
16.04
|
Change
in Certifying Accountant
(14)
|
16.05
|
Change
in Certifying Accountant
(24)
|
17.01
|
Resignation
of Current Executive Officers and Directors
(7)
|
19.01
|
Definitive
proxy statement in conjunction with annual meeting
(17)
|
Section
1350 Certifications
|
31.1
|
Certification
of Eric L. Moe
|
|
31.2
|
Certification
of Thomas C. Kilbourne
|
Section
1350 Certifications
|
32.1
|
Certification
of Eric L. Moe
|
|
32.2
|
Certification
of Thomas C. Kilbourne
|
99.1
|
Audit
Committee Pre-Approval Policies
(4)
|
(1)
|
Previously
filed as exhibit to Form 10-SB on November 22, 2002, and incorporated
by
reference herein.
|
(2)
|
Previously
filed as exhibit to Form 10-SB on November 22, 2002, and incorporated
by
reference herein.
|
(3)
|
Previously
filed as exhibit to Form 10-KSB on June 30, 2003, and incorporated
by
reference herein.
|
(4)
|
Previously
filed as exhibit to Form 10-KSB/A on March 19, 2004, and incorporated
by
reference herein.
|
(5)
|
Previously
filed as exhibit to Form 10-KSB on May 19, 2004, and incorporated
by
reference herein.
|
(6)
|
Previously
filed as exhibit to Form 8-K on November 5, 2004, and incorporated
by
reference herein.
|
(7)
|
Previously
filed as exhibit to Form 8-K on December 14, 2004, and incorporated
by reference herein.
|
(8)
|
Previously
filed as exhibit to Form 8-K on January 19, 2005, and incorporated
by
reference herein.
|
(9)
|
Previously
filed as exhibit to Form 8-K/A on February 24, 2005, and incorporated
by
reference herein.
|
(10)
|
Previously
filed as exhibit to Form 8-K on April 7, 2005, and incorporated by
reference herein.
|
(11)
|
Previously
filed as exhibit to Form 8-K on April 21, 2005, and incorporated
by
reference herein.
|
(12)
|
Previously
filed as exhibit to Form 8-K on April 28, 2005, and incorporated
by
reference herein.
|
(13)
|
Previously
filed as exhibit to Form 8-K on May 19, 2005, and incorporated by
reference herein.
|
(14)
|
Previously
filed as exhibit to Form 8-K on May 31, 2005, and incorporated by
reference herein.
|
(15)
|
Previously
filed as exhibit to Form 10-KSB on June 15, 2005, and incorporated
by
reference herein.
|
(16)
|
Previously
filed as exhibit to Form S-8 on August 19, 2005, and incorporated
by
reference herein.
|
(17)
|
Previously
filed as exhibit to Form DEF 14A on September 28, 2005, and incorporated
by reference herein.
|
(18)
|
Previously
filed as exhibit to Form 8-K on November 1, 2005, and incorporated
by
reference herein.
|
(19)
|
Previously
filed as exhibit to Form SB-2 on July 18, 2006, and incorporated
by
reference herein.
|
(20)
|
Previously
filed as exhibit to Form 8-K on September 6, 2006, and incorporated
by
reference herein.
|
(21)
|
Previously
filed as exhibit to Form 8-K on September 28, 2006, and incorporated
by
reference herein.
|
(22)
|
Previously
filed as exhibit to Form 8-K on October 26, 2006, and incorporated
by
reference herein.
|
(23)
|
Previously
filed as exhibit to Form 8-K on November 7, 2006, and incorporated by
reference herein.
|
(24)
|
Previously
filed as exhibit to Form 8-K on November 15, 2006, and incorporated
by
reference herein.
|
(25)
|
Previously
filed as exhibit to Form 8-K on November 17, 2006, and incorporated
by
reference herein.
|
(26)
|
Previously
filed as exhibit to Form SB-2/A on December 28, 2006, and incorporated
by
reference herein.
|
(27)
|
Previously
filed as exhibit to Form 8-K on June 25, 2007, and incorporated by
reference herein.
|
(28)
|
Previously
filed as exhibit to Form 8-K on July 16, 2007, and incorporated by
reference herein.
|
(29)
|
Previously
filed as exhibit to Form 8-K on July 20, 2007, and incorporated by
reference herein.
|
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit
Fees
The
following table presents fees for professional audit services performed by
Malone & Bailey, PC for the audit of our annual financial statements for the
fiscal years ended February 28, 2007 and February 28, 2006 and DeCoria,
Maichel & Teague ("DMT") for the fiscal year ended February 28, 2006 and
fees billed for other services rendered by them during those
periods.
|
|
2007
|
|
|
2006
|
|
Audit
Fees
|
|
$
|
210,723
|
|
|
$
|
56,798
|
|
Audit
Related Fees
|
|
|
26,784
|
|
|
|
0
|
|
Tax
Fees
|
|
|
|
|
|
|
3,250
|
|
All
Other Fees
|
|
$
|
2,643
|
|
|
|
0
|
|
Total
|
|
$
|
240,150
|
|
|
$
|
60,048
|
|
Audit
Fees consist of fees billed for professional services rendered for the audit
of
our financial statements and review of the interim financial statements included
in quarterly reports and services that are normally provided by our independent
accountants in connection with statutory and regulatory filings or
engagements.
Audit
Related Fees
Audit-Related
Fees consist of fees billed for assurance and related services that are
reasonably related to the performance of the audit or review of our consolidated
financial statements and are not reported under “Audit Fees.” Additionally, fees
billed in connection with the filing of our SB-2 registration statement are
included in this category.
Tax
Fees
Tax
Fees
consists of fees billed for professional services for tax compliance, tax advice
and tax planning. These services include assistance regarding federal and state
tax compliance, tax audit defense, customs and duties, and mergers and
acquisitions.
Other
Fees
All
Other
Fees consist of fees billed for products and services provided by the prior
principal accountant, DMT, other than those services described
above.
Audit
Committee Pre-Approval Policies and Procedures
Our
Audit
Committee Charter requires the prior approval of all audit and non-audit
services provided by our independent auditors. All of the services for which
fees are listed above were pre-approved by our Board of Directors.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15 (d) 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/ Eric
L. Moe
|
|
|
|
Eric
L. Moe, its
|
|
|
|
Chief
Executive Officer
|
|
|
|
Date: September
20,
2007
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Thomas
C. Kilbourne
|
|
|
|
Thomas
C. Kilbourne,
its
|
|
|
|
Principal
Accounting
Officer
|
|
|
|
Date: September
20,
2007
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
|
|
|
|
|
By:
|
/s/
Robert N.
Martin
|
|
By:
|
/s/
Dale B.
Lavigne
|
|
|
Robert
N.
Martin
|
|
|
Dale
B.
Lavigne
|
|
|
Director
/
President
|
|
|
Director
/
Chairman
|
|
|
Date: September
20, 2007
|
|
|
Date: September
20, 2007
|
|
|
|
|
|
|
|
By:
|
/s/
Eric L.
Moe
|
|
By:
|
/s/
Jeffrey R.
Dworkin
|
|
|
Eric
L.
Moe
|
|
|
Jeffrey
R.
Dworkin
|
|
|
Director
/
CEO
|
|
|
Director
/
Secretary
|
|
|
Date: September
20, 2007
|
|
|
Date: September
20, 2007
|
|
|
|
|
|
|
|
By:
|
/s/
Ronald D.
Lavigne
|
|
By:
|
/s/
Michael
Curtis
|
|
|
Ronald
D.
Lavigne
|
|
|
Michael
Curtis
|
|
|
Director
|
|
|
Director
|
|
|
Date: September
20, 2007
|
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Date: September
20, 2007
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By:
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/s/
Tim R.
Lindsey
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By:
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/s/
Terrence J.
Dunne
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Tim
R.
Lindsey
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Terrence
J.
Dunne
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Director
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Director
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CFO
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Date: September
20, 2007
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Date: September
20, 2007
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By:
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/s/
Thomas C.
Kilbourne
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Thomas
C.
Kilbourne
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Director
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Treasurer
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Date: September
20, 2007
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137
Exhibit
1.02
PLACEMENT
AGENT AGREEMENT
June
28,
2006
Board
of
Directors
Daybreak
Oil & Gas, Inc.
601
W.
Main Avenue, Suite 1017
Spokane,
WA 99201
Gentlemen:
Bathgate
Capital Partners LLC (the
"Placement Agent"), hereby confirms its agreement with you (the "Company")
as
follows:
SECTION
1
Description
of Securities
The
Company proposes to offer and sell
to qualified investors Units (“Units”) of the Company's securities at an
offering price of $3.00 per Unit, and on terms as set forth
herein. Each Unit is comprised of the one share of the Company’s
convertible preferred stock (“Preferred Stock”) and two warrants (“Warrant”) to
purchase a share of Common Stock. As used in this Agreement, the term
"Memorandum" refers to a Private Placement Memorandum dated June 28,
2006.
SECTION
2
Representations
and Warranties of the Company
In
order to induce the Placement Agent
to enter into this Agreement, the Company hereby represents and warrants to
and
agrees with the Placement Agent as follows:
2.01.
Private
Placement Memorandum
. The Memorandum with respect to the Units
and all exhibits thereto, copies of which have heretofore been delivered by
the
Company to the Placement Agent, has been carefully prepared by the Company
in
conformity with Regulation D ("Regulation D") promulgated pursuant to the
Securities Act of 1933, as amended (the "Act"), and with comparable provisions
of the securities laws of such states as may be reasonably requested by the
Placement Agent. The Memorandum refers to certain of the Company’s
filing with the Securities and Exchange Commission (“SEC”) under the Securities
and Exchange Act of 1934, as amended (the “Exchange Act”) (hereinafter referred
to as the “SEC Filings”). The Memorandum and the SEC Filings do not
include any untrue statement of a material fact or omit to state a material
fact
required to be stated therein or necessary to make the statements therein,
in
light of the circumstances under which they were made, not misleading; provided,
however, the Company does not make any representations or warranties as to
information contained in or omitted from the Memorandum in reliance upon written
information furnished on behalf of the Placement Agent specifically for use
therein. Any additional written information authorized by the Company
to be provided to prospective purchasers shall not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
Daybreak
Oil and Gas, Inc.
June
28,
2006
Page
2
2.02.
Financial
Statements
. DeCoria, Maichel & Teague, P.S.., who has audited
and/or reviewed the financial statements in the SEC Filings, is an independent
certified public accountant. The financial statements of the Company,
together with related Schedules and Notes as set forth in the
SEC Filings, present fairly the financial position and the results of
operations of the Company at the represented dates and for the represented
periods to which they apply; such financial statements have been prepared in
accordance with generally accepted accounting principles which have been
consistently applied throughout the periods concerned except as otherwise stated
therein.
2.03.
No
Material Adverse Change
. Except as may be reflected in or
contemplated by the Memorandum, subsequent to the dates as of which information
is given in the Memorandum, and prior to the Closing Date (as defined
hereinafter), (i) there shall not be any material adverse change in the
business, properties, options to lease, leases, financial condition, management,
or otherwise of the Company or in the Company's business taken as a whole,
(ii)
there shall not have been any material transaction entered into by the Company
other than transactions in the ordinary course of business; (iii) the Company
shall not have incurred any material obligations, contingent or otherwise,
which
are not disclosed in the Memorandum; (iv) there shall not have been nor will
there be any change in the capital stock or adverse change in the short-term
or
long-term debt (except current payments) of the Company; and (v) the Company
has
not and will not have paid or declared any dividends or other
distributions.
2.04.
No
Defaults
. The Company is not in default in the performance of any
obligation, agreement or condition contained in any debenture, note or other
evidence of indebtedness or any indenture or loan agreement of the Company,
other than as set forth in the Memorandum. The execution and delivery
of this Agreement and the consummation of the transactions herein contemplated,
and compliance with the terms of this Agreement will not conflict with or result
in a breach of any of the terms, conditions or provisions of, or constitute
a
default under, the articles of incorporation or bylaws of the Company, or any
note, indenture, mortgage, deed of trust, or other agreement or instrument
to
which the Company is a party or by which it or any of its property is bound,
or
any existing law, order, rule, regulation, writ, injunction, or decree or any
government, governmental instrumentality, agency or body, arbitrator, tribunal
or court, domestic or foreign, having jurisdiction over the Company or its
property. The consent, approval, authorization, or order of any court
or governmental instrumentality, agency or body is not required for the
consummation of the transactions herein contemplated except such as may be
required under the Act or under the securities laws of any state or
jurisdiction.
2.05.
Organization
and Standing
. The Company is, and at the Closing Date will be,
duly organized and validly existing in good standing as a corporation under
the
laws of its state of Washington and with full power and authority to own its
property and conduct its business, present and proposed, as described or
referred to in the Memorandum; the Company has full power and authority to
enter
into this Agreement and to issue the securities comprising the Unit; and the
Company is duly qualified and in good standing as a foreign corporation in
all
jurisdictions in which the character of the property owned or leased or the
nature of the business transacted by it makes such qualification
necessary. The Company has paid all fees required by the jurisdiction
of organization and any jurisdiction in which it is qualified as a foreign
corporation.
2.06.
Capitalization
. Prior
to the Closing Date, the capitalization of the Company shall be as described
in
the Memorandum.
Daybreak
Oil and Gas, Inc.
June
28,
2006
Page
3
2.07.
Legality
of Units
The Units and the Shares have been duly and validly
authorized and, when issued or sold and delivered against payment therefor
as
provided in this Agreement, will be validly issued, fully paid and
nonassessable. The Warrants, when paid for and issued, will be valid,
binding and legally enforceable obligation of the Company. The
securities comprising the Units will conform in all material respects to all
statements with regard thereto in the Memorandum. A sufficient number
of shares of Common Stock of the Company has been reserved for issuance upon
exercise of the Warrants and the Placement Agent’s Warrants.
2.08.
Prior
Sales
. No securities of the Company have been sold by the Company
or by, or on behalf of, or for the benefit of, any person or persons
controlling, controlled by, or under common control with the Company at any
time
prior to the date hereof, except as set out in the Memorandum. No
prior securities sales by the Company or any affiliate are required to be
integrated with the proposed sale of the Units such that the availability of
Regulation D or any other claimed exemption from the registration requirements
of the Act would be made unavailable to the offer and sale of the
Units.
2.09.
Litigation
. There
is and at the Closing Date there will be no action, suit or proceeding before
any court or governmental agency, authority or body pending or to the knowledge
of the Company threatened which might result in judgments against the Company,
or its officers, directors, employees or agents which the Company is obligated
to indemnify, not adequately covered by insurance and which collectively might
result in any material adverse change in the condition (financial or otherwise),
the business or the prospects of the Company or would materially affect the
properties or assets of the Company.
2.10.
Finder
. No
person has acted as a finder in connection with the transactions contemplated
herein, and the Company will indemnify the Placement Agent with respect to
any
claim for finder's fees in connection herewith. The Company further
represents that it has no management or financial consulting or advisory
agreement with anyone except as set forth in the Memorandum. The
Company additionally represents that no officer, director, or 5% or greater
shareholder of the Company is, directly or indirectly, associated with a
National Association of Securities Dealers, Inc. member broker-dealer, other
than such persons as the Company has advised the Placement Agent in writing
are
so associated.
2.11.
Contracts
. Each
contract to which the Company is a party and to which reference is made in
the
Memorandum and/or the SEC Filings has been duly and validly executed, is in
full
force and effect in all material respects in accordance with their respective
terms, and none of such contracts has been assigned by the Company; and the
Company knows of no present situation or condition or fact which would prevent
compliance with the terms of such contracts, as amended to
date. Except for amendments or modifications of such contracts in the
ordinary course of business, the Company has no intention of exercising any
right which it may have to cancel any of its obligations under any of such
contracts, and has no knowledge that any other party to any of such contracts
has any intention not to render full performance under such
contracts.
2.12.
Tax
Returns
. The Company has filed all federal, state and municipal
tax returns which are required to be filed, and has paid all taxes shown on
such
returns and on all assessments received by it to the extent such taxes have
become due. All other taxes with respect to which the Company is
obligated have been paid or adequate accruals have been set up to cover any
such
unpaid taxes, including all federal and state withholding and FICA
payments.
Daybreak
Oil and Gas, Inc.
June
28,
2006
Page
4
2.13.
Property
. Except
as otherwise set forth in the Memorandum and the SEC Filings, the Company has
good title, free and clear of all liens, encumbrances and defects, except liens
for current taxes not due and payable, to all property and assets that are
described in the Memorandum and the SEC Filings as being owned by the Company,
subject only to such exceptions as are not material and do not adversely affect
the present or prospective business of the Company. All of the
claims, options to lease, leases and subleases material to the business of
the
Company under which the Company holds or uses any real or personal property,
including those described or referred to in the Memorandum and the SEC Filings,
are in full force and effect, and the Company is not in default in respect
of
any of the terms or provisions of any such claims, options to lease, leases
or
subleases, and no claim of any sort has been asserted by anyone adverse to
the
Company's rights under any such claims, options to lease, leases or subleases
or
affecting or questioning the Company's rights to the continued possession of
the
claimed, optioned, leased or subleased property covered by such claim, options
to lease, lease or sublease.
2.14.
Authority
. The
execution and delivery by the Company of this Agreement has been duly
authorized, and this Agreement is the valid, binding and legally enforceable
obligation of the Company.
2.15.
Use
of Proceeds
. The Company will apply the proceeds from the sale of
the Units to the purposes set forth in the Memorandum. The Company
will also establish procedures to ensure proper application and stewardship
of
such proceeds.
2.16.
No
Limitations on Payment of Dividends
. Except as otherwise set
forth in the Memorandum, there are no limitations, either contractual or
otherwise, nor will the Company enter into any agreement with any other party,
which prevents or limits the Company's ability to declare or pay dividends
on
its Common Stock.
SECTION
3
Issue,
Sale and Delivery of the Units
3.01.
Placement
Agent Appointment
. The Company hereby appoints the Placement
Agent as its exclusive agent until July 10, 2006, which period may be extended
to July 18, 2006, by mutual consent of the Company and the Placement Agent
(the
"Escrow Date"), to solicit purchasers for 730,000 Units on a "best efforts,
all-or-none" basis and thereafter to solicit purchasers for an additional
1,2750,000 Units on a "best efforts" basis until the offering is terminated
as
provided herein; and the Placement Agent, on the basis of the representations
and warranties herein contained, but subject to the terms and conditions herein
set forth, accepts such appointment and agrees to use its best efforts to find
purchasers for the Units at the price of $3.00 per Unit, provided that the
Company reserves the right to reject in good faith any prospective investor
("Investor") and no commission shall be payable to the Placement Agent in
respect of any proposed sale to any rejected Investor. No other
person will be or has been authorized to solicit purchasers for the Units,
except those persons selected by the Placement Agent. Each Investor
must subscribe for at least 10,000 Units ($30,000), and must certify to the
Company that such investor is an "Accredited Investor" as defined in Rule 501(a)
of Regulation D. Notwithstanding the above, the Company and the
Placement Agent may mutually agree to accept a subscription for fewer than
10,000 Units.
3.02.
Escrow
Account
. It is hereby agreed between the Company and the
Placement Agent that unless 730,000 Units ("Escrow Units") are sold and paid
for
by Investors by the Escrow Date, this Agreement shall automatically be
terminated and the entire proceeds received from the sale of the Units shall
be
returned to the Investors, without deduction therefrom or interest
thereon.
Daybreak
Oil and Gas, Inc.
June
28,
2006
Page
5
If
the
Escrow Units are sold by the Escrow Date, the Company and the Placement Agent
may continue the offering until all of the Units are sold or until they agree
to
terminate the offering. The proceeds from the sale of at least the
first 730,000 Units ($2,190,000) shall be promptly deposited in an escrow
account ("Escrow Account") entitled “Daybreak Oil and Gas, Inc. Escrow Account"
with AMG Guaranty Trust, N.A. (the "Escrow Agent"). The agreement
establishing the Escrow Account ("Escrow Agreement") shall be in form and
content satisfactory to counsel for the Placement Agent and the
Company. The proceeds from any sale of Units after the First Closing
(hereinafter defined) may continue to be deposited to the Escrow
Account. If the Escrow Account is not used for such purpose, the
Company promptly shall pay the commission provided in Section 3.05 and the
non-accountable expense allowance as provided in Section 3.07 to the Placement
Agent.
3.03.
Subscription
Agreement
. Each Investor desiring to purchase Units will be
required to complete and execute a Subscription Agreement and, if applicable,
other offering documents. The Placement Agent shall have the right to
review such documents for each Investor and to reject the tender of any Investor
that it deems not acceptable. All documents concerning any Investor
the Placement Agent has not rejected will be promptly forwarded to the Company
at the address set forth below. The Company, upon receipt of the
documents, will determine within three (3) business days whether it wishes
to
accept the Investor. Payment for the Units subscribed for in the
Subscription Agreements that have been accepted by the Company is to be
delivered to the Company on the Closing Date (as hereinafter
defined).
3.04.
Subscription
Acceptance
. The acceptance of subscriptions for Units tendered by
Investors will be conditional upon (i) the tendering of Subscriptions for at
least 650,000 Units ("Minimum Subscriptions") by the Escrow Date, and (ii)
the
receipt, on the Closing Date, of the net proceeds from subscribers for the
Minimum Subscriptions ("Minimum Payments") less commissions due the Placement
Agent as provided hereinafter. If subscriptions are received for more
than 2,000,000 Units, the Company may (a) accept subscriptions for up to an
additional 400,000 Units, and/or (b) accept one subscription over another and/or
(c) allocate available Units among subscribers as it deems
appropriate.
3.05.
Compensation
of Placement Agent
. In consideration for the Placement Agent's
execution of this Agreement, and for the performance of its obligations
hereunder, the Company agrees to pay the Placement Agent a commission of ten
percent (10%) of the gross proceeds received from the sale of the Units;
provided, in the event Minimum Subscriptions are not received or Minimum
Payments are not made and the offering is terminated, the Placement Agent shall
not receive any commission. Any commissions payable to the Placement
Agent under this paragraph shall be payable on the Closing Date or as otherwise
provided herein.
3.06.
Non-Accountable
Expense Allowance
. The Placement Agent shall receive a
non-accountable expense allowance equal three percent (3%) ($.09 per Unit)
of
the gross proceeds from Units sold and paid for, payable at each
Closing.
3.07.
Payment
. Payment
for Units sold shall be made by the Escrow Agent to the Company at such place
as
may be agreed on among the Company and the Placement Agent, at such a time
and
on such a date, as shall be fixed by agreement between the parties, which in
no
case shall be later than eight (8) days after the Sales Termination
Date. The delivery of the Units against payment therefore is defined
as the "Closing" and the time and date thereof are defined as the "Closing
Date." The first Closing Date will be held when the Minimum Payments
are received ("First Closing").
Daybreak
Oil and Gas, Inc.
June
28,
2006
Page
6
It
is
anticipated that there may be additional Closings as additional funds are
received, and the final Closing will be referred to as the "Final
Closing." The Final Closing could also be the First Closing in the
event that no Units are sold after the First Closing. As soon as
practicable after each Closing Date, the Company shall deliver by mail to each
Investor a certificate for the securities underlying the Units that have been
purchased and which contains a legend conforming to the requirements of Rule
502(d)(3) under the Act.
3.08.
Obligations
of Placement Agent
. The Company agrees that the obligations of
the Placement Agent under this Agreement: (i) shall not preclude the Placement
Agent from contemporaneously participating in the offering or underwriting
of
securities of other issuers; (ii) shall not impose any obligation on the
Placement Agent to require its registered representatives to offer or to sell
the Units, (iii) shall require the Placement Agent to make an effort to find
purchasers for the Units only to the extent the Placement Agent is motivated
to
do so by the compensation and other provisions of this Agreement, (iv) shall
not
otherwise limit or prevent the Placement Agent from carrying on its customary
business as a securities broker-dealer, and (v) shall not require the Placement
Agent to engage in any conduct which violates any law or industry standard
of
conduct applicable to the Placement Agent.
3.09.
Representations
and Warranties
. The parties hereto each represent that as of each
Closing Date the representations and warranties herein contained and the
statements contained in all the certificates heretofore or simultaneously
delivered by any party to another, pursuant to this Agreement, shall in all
material respects be true and correct.
3.10.
Form
D
. The Placement Agent agrees that it will timely supply the
Company from time to time with all information required from the Placement
Agent
for the completion of Form D to be filed with the Securities and Exchange
Commission and such additional information as the Company may reasonably request
to be supplied to the securities authorities of such states in which the Units
have been qualified for sale or are exempt from qualification or
registration. A copy of all such filings shall be delivered to the
Placement Agent and counsel for the Placement Agent promptly prior to their
being filed.
SECTION
4
Offering
of the Units on Behalf of the Company
4.01.
Agent
. In
offering the Units for sale, the Placement Agent shall offer the Units solely
as
an agent for the Company, and such offer shall be made upon the terms and
subject to the conditions set forth herein and in the Memorandum. The
Placement Agent shall commence making such offers as an agent for the Company
as
soon after the date of the Memorandum (the "Offering Date") as it in its sole
discretion may deem advisable; provided, however, that if the Placement Agent
does not commence such offering within ten (10) business days after the Offering
Date, it shall promptly advise the Company.
4.02.
Selected
Dealers
. The Placement Agent may offer and sell the Units for the
account of the Company through registered broker-dealers selected by it
("Selected Dealers") and pursuant to a form of Selected Dealer Agreement between
the Placement Agent and the Selected Dealers, pursuant to which the Placement
Agent may allow such concession (out of its commissions) as it may
determine. Such Agreement shall provide that the Selected Dealers are
acting as agents of the Company. On such sale or allotment by the
Placement Agent of any of the Units to Selected Dealers, the Placement Agent
shall require the Selected Dealer selling any such Units to agree to offer
and
sell the same on the terms and conditions of offering set forth in the
Memorandum and in this Agreement.
Daybreak
Oil and Gas, Inc.
June
28,
2006
Page
7
SECTION
5
Memorandum
5.01.
Delivery
and Form of Memorandum
. The Company will procure, at its expense,
as many copies of the Memorandum as the Placement Agent may reasonably require
for the purposes contemplated by this Agreement and shall deliver said copies
of
the Memorandum within two (2) business days after execution of this Agreement
at
addresses, and in the quantity at each address, as specified by the Placement
Agent. Each Memorandum shall be of a size and format as determined by
the Placement Agent and shall be suitable for mailing and other
distribution.
5.02.
Amendment
of Memorandum
. If during the offering any event occurs or any
event known to the Company relating to or affecting the Company shall occur
as a
result of which the Memorandum as then amended or supplemented would include
an
untrue statement of a material fact, or omits to state any material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, or if it is necessary at any time after
the Offering Date to amend or supplement the Memorandum to comply with the
Act,
the Company will immediately notify the Placement Agent thereof and the Company
will prepare such further amendment to the Memorandum or supplemental or amended
Memorandum or Memoranda as may be required and furnish and deliver to the
Placement Agent, all at the cost of the Company, a reasonable number of copies
of the supplemental or amended Memorandum which as so amended or supplemented
will not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the Memorandum not misleading in the
light of the circumstances existing at the time it is delivered.
5.03.
Use
of Memorandum
. The Company authorizes the Placement Agent and the
Selected Dealers, if any, in connection with the offer and sale of the Units
and
all dealers to whom any of the Units may be sold by the Placement Agent or
by
any Selected Dealer, to use the Memorandum as from time to time amended or
supplemented, in connection with the offering and sale of the Units and in
accordance with the provisions of the Act, the Rules and Regulations thereunder
and applicable state securities laws.
SECTION
6
Covenants
of the Company
The
Company covenants and agrees with
the Placement Agent that:
6.01.
Notification
of Changes
. After the date hereof, the Company will not at any
time, whether before or after the date of the Memorandum, make any amendment
or
supplement to the Memorandum of which amendment or supplement the Placement
Agent shall not have previously been advised and a copy of which shall not
have
previously been furnished to the Placement Agent a reasonable time period prior
to the proposed date of such amendment or supplement, or which the Placement
Agent or counsel for the Placement Agent shall have reasonably objected to
in
writing solely on the grounds that it is not in compliance with the Act or
the
Rules and Regulations or with other federal or state laws.
6.02.
Proceeding
. The
Company will promptly advise the Placement Agent, and will confirm such advice
in writing, upon the happening of any event which, in the judgment of the
Company, makes any material statement in the Memorandum untrue or which requires
the making of any changes in the Memorandum in order to make the statements
therein not misleading, and upon the refusal of any state
Daybreak
Oil and Gas, Inc.
June
28,
2006
Page
8
securities
administrator or similar official to qualify, or the suspension of the
qualification of the Units for offering or sale in any jurisdiction where the
Units are not exempt from qualification or registration, or of the institution
of any proceedings for the suspension of any exemption or for any other
purposes. The Company will use every reasonable effort to prevent any
such refusal to qualify or any such suspension and to obtain as soon as possible
the lifting of any such order, the reversal of any such refusal, and the
termination of any such suspension.
6.03.
Blue
Sky Filings
. As a condition of closing, the Company will take
whatever action is necessary in connection with filing or maintaining any
appropriate exemption from qualification or registration under the applicable
laws of such states as may be selected by the Placement Agent and agreed to
by
the Company, and continue such qualifications and exemptions in effect so long
as required for the purposes of the offer and sale of the Units.
6.04.
Agreement
to Provide Information
. The Company, at its own expense, will
prepare and give and will continue to give such financial statements and other
information to and as may be required by the Commission or the governmental
authorities of states in which the Units may be registered, qualified or exempt
from qualification or registration.
6.05.
Costs
of Offering
. The Company will pay, whether or not the
transactions contemplated hereunder are consummated or this Agreement is
terminated, all costs and expenses incident to the performance of its
obligations under this Agreement, including all expenses incident to the
authorization and issuance of the Units, any taxes incident to the initial sale
of the Units hereunder, the fees and expenses of the Company's counsel and
accountants, the costs and expenses incident to the preparation and printing
of
the Memorandum and any amendments or supplements thereto, the cost of preparing
and printing all exhibits to the Memorandum, the cost of furnishing to the
Placement Agent copies of the Memorandum as herein provided, and the cost of
any
filing with the Commission or pursuant to state securities laws, including
all
filing fees.
6.06.
Use
of Proceeds
. The Company will apply the proceeds from the sale of
the Units to the purposes set forth in the Memorandum.
6.07.
Due
Diligence
. Prior to the First Closing, the Company will cooperate
with the Placement Agent in such investigation as the Placement Agent may make
or cause to be made of the properties, business, management and operations
of
the Company in connection with the offering of the Units, and the Company will
make available to the Placement Agent in connection therewith such information
in its possession as the Placement Agent may reasonably request.
6.08.
Documentation
. Prior
to the First Closing, the Company will deliver to the Placement Agent true
and
correct copies of the articles and bylaws of the Company and of the minutes
of
all meetings of the directors and shareholders of the Company held since January
1, 2002; true and correct copies of all material contracts to which the Company
is a party; and such other documents and information as is reasonably requested
by the Placement Agent. To the extent such documents had previously
been provided, only amendments or updates need be furnished.
6.09.
Management
Cooperation
. The Company shall provide the Placement Agent, at
any time, an opportunity to meet with and question management of the Company
and
authorize management of the Company to speak at such meetings as the Placement
Agent reasonably requests.
Daybreak
Oil and Gas, Inc.
June
28,
2006
Page
9
6.10.
Information
to Investors
. The Company shall make available to each Investor
at a reasonable time prior to his purchase of the Units the opportunity to
ask
questions and receive answers concerning the terms and conditions of the
offering, and to obtain any additional information that the Company has or
that
it can acquire without unreasonable effort or expense that is necessary to
verify the accuracy of information furnished to the Investors.
6.11.
Compliance
with Conditions Precedent
. The Company will use all reasonable
efforts to comply or cause to be complied with the conditions precedent to
the
several obligations of the Placement Agent specified in this
Agreement.
6.12.
Reports
. The
Company agrees to file with the Commission, and states where required, all
reports on Form D in accordance with the provisions of Regulation D promulgated
under the Act and to promptly provide copies of such reports to the Placement
Agent and its counsel.
SECTION
7
Indemnification
7.01.
Indemnification
by Company
. The Company agrees to indemnify, defend and hold
harmless the Placement Agent, its agents, managers, members, representatives,
guarantors, sureties and each person who controls the Placement Agent within
the
meaning of either Section 15 of the Act or Section 20 of the Securities Exchange
Act of 1934 ("Indemnified Persons") from and against any and all losses, claims,
damages, liabilities or expenses, joint or several, (including reasonable legal
or other expenses incurred by each such person in connection with defending
or
investigating any such claims or liabilities, whether or not resulting in any
liability to such Indemnified Persons) which they or any of them may incur
under
the Act, or any state securities law and the Rules and Regulations or the rules
and regulations under any state securities laws or any other statute or at
common law or otherwise and to reimburse such Indemnified Persons for any legal
or other expense (including the cost of any investigation and preparation)
incurred by any of them in connection with any litigation, whether or not
resulting in any liability, but only insofar as such losses, claims, damages,
liabilities and expenses arise out of or are based upon any untrue statement
or
alleged untrue statement of a material fact contained in the Memorandum, the
SEC
Filings, or any amendment or supplement thereto, or any authorized sales
literature or any application or other document filed with the Commission or
in
any state or other jurisdiction in order to obtain and exemption from the
securities registration requirements for the Units under the securities laws
thereof, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or the failure to comply with the security registration requirement
of the Act or any applicable state law; provided, however, that the indemnity
agreement contained in this Section 7.01 shall not apply to amounts paid in
settlement of any such litigation if such settlements are effected without
the
consent of the Company, nor shall it apply to any Indemnified Persons in respect
of any such losses, claims, damages, liabilities or actions arising out of
or
based upon any such untrue statement or alleged untrue statement, or any such
omission or alleged omission, if such statement or omission was made in reliance
upon information furnished in writing to the Company by such Indemnified Persons
specifically for use in connection with the preparation of the Memorandum or
any
such amendment or supplement thereto. This indemnity agreement is in
addition to any other liability that the Company may otherwise have to the
Indemnified Persons.
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7.02.
Notification
to Company
. The Indemnified Persons agree to notify the Company
promptly of the commencement of any litigation or proceeding against the
Indemnified Persons, of which it may be advised, in connection with the offer
and sale of any of the Units of the Company, and to furnish to the Company
at
its request copies of all pleadings therein and permit the Company to be an
observer therein and apprise it of all the developments therein. In
case of commencement of any action in which indemnity may be sought from the
Company on account of the indemnity agreement contained in Section 7.01, the
Indemnified Persons within ten (10) days after the receipt of written notice
of
the commencement of any action against the Indemnified Persons shall notify
the
Company in writing of the commencement thereof. The failure to notify
the indemnifying party shall not relieve it of any liability that it may have
to
an Indemnified Party, except to the extent that the indemnifying party did
not
otherwise have knowledge of the commencement of the action and the indemnifying
party’s ability to defend against the action was prejudiced by such
failure. Such failure shall not relieve the indemnifying party from
any other liability that it may have to the Indemnified Party. In
case any such action shall be brought against the Indemnified Persons of which
the Indemnified Persons shall have notified the Company of the commencement
thereof, the Company shall be entitled to participate in (and to the extent
that
it shall wish, to direct) the defense thereto at its own expense, but such
defense shall be conducted by counsel of recognized standing and reasonably
satisfactory to the Indemnified Persons in such litigation. After
notice that the Company elects to direct the defense, the Company will not
be
liable for any legal or other expenses incurred by the Indemnified Persons
without the prior written consent of the Company. The Company shall
not be liable for amounts paid in settlement of any litigation if such
settlement was effected without its consent.
7.03.
Indemnification
by Placement Agent
. The Placement Agent agrees to indemnify and
hold harmless the Company, its agents, officers, directors, representatives,
guarantors, sureties and each person who controls the Company within the meaning
of either Section 15 of the Act or Section 20 of the Securities Exchange Act
of
1934 from and against any and all losses, claims, damages, liabilities or
expenses, joint or several, (including reasonable legal or other expenses
incurred by each such person in connection with defending or investigating
any
such claims or liabilities, whether or not resulting in any liability to such
person) which they or any of them may incur under the Act, or any state
securities law and the Rules and Regulations or the rules and regulations under
any state securities laws or any other statute or at common law or otherwise
and
to reimburse persons indemnified as above for any legal or other expense
(including the cost of any investigation and preparation) incurred by any of
them in connection with any litigation, whether or not resulting in any
liability, but only insofar as such losses, claims, damages, liabilities and
litigation arise out of or are based upon any statement in or omission from
the
Memorandum or any amendment or supplement thereto, or any application or other
document filed with the Commission or in any state or other jurisdiction in
order to qualify the Units under the securities laws thereof, or any information
furnished pursuant to Section 3.10 hereof, if such statements or omissions
were
made in reliance upon information furnished in writing to the Company by the
Placement Agent or on its behalf specifically for use in connection with the
preparation of the Memorandum or amendment or supplement thereto or application
or document filed. This indemnity agreement is in addition to any
other liability which the Placement Agent may otherwise have to the Company
and
other indemnified persons.
7.04.
Notification
to Placement Agent
. The Company and other Indemnified Persons
agree to notify the Placement Agent promptly of commencement of any litigation
or proceedings against the Placement Agent or other Indemnified Persons, in
connection with the offer and sale of any of the Units and to furnish to the
Placement Agent, at its request, copies of all pleadings therein and permit
the
Placement Agent to be an observer therein and apprise the Placement Agent of
all
developments therein, all at the Company's expense. In case of
commencement of any action in which indemnity may be sought from the Placement
Agent on account of the indemnity agreement contained in Section 7.03,
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the
Company or other Indemnified Persons shall notify the Placement Agent of the
commencement thereof in writing within ten (10) days after the receipt of
written notice of the commencement of any action against the Company or against
any other person indemnified, shall notify the Placement Agent in writing of
such notification. The failure to notify the indemnifying party shall
not relieve it of any liability that it may have to an Indemnified Party, except
to the extent that the indemnifying party did not otherwise have knowledge
of
the commencement of the action and the indemnifying party’s ability to defend
against the action was prejudiced by such failure. Such failure shall
not relieve the indemnifying party from any other liability that it may have
to
the Indemnified Party. . In case any such action shall be
brought against the Company or any other person indemnified of which the Company
shall have notified the Placement Agent of the commencement thereof, the
Placement Agent shall be entitled to participate in (and to the extent that
it
shall wish, to direct) the defense thereto at its own expense, but such defense
shall be conducted by counsel of recognized standing and reasonably satisfactory
to the Company or other persons indemnified in such litigation. After
notice that the Placement Agent elects to direct the defense, the Placement
Agent will not be liable for any legal or other expenses incurred by the
indemnified party without the prior written consent of the Placement
Agent. The Placement Agent shall not be liable for amounts paid in
settlement of any litigation if such settlement was effected without its
consent.
7.05.
Indemnification
of Selected Dealers
. The Company agrees to indemnify Selected
Dealers, if any, and its agents, officers, directors, representatives,
guarantors and sureties on substantially the same terms and conditions as it
indemnifies the Placement Agent and Indemnified Persons pursuant to Section
7.01
provided that each such Selected Dealer agrees in writing with the Placement
Agent to indemnify the Company and its agents, officers, directors,
representatives, guarantors and sureties on substantially the same terms and
conditions as the Placement Agent indemnifies the Company in Section
7.03. The Company hereby authorizes the Placement Agent to enter into
agreements with Selected Dealers providing for such indemnity by the
Company.
7.06.
Contribution
. If
the indemnification provided for in Sections 7.01, 7.03 and 7.05 is unavailable
to an indemnified party in respect of any losses, claims, damages or liabilities
referred to therein, then each indemnifying party under either such paragraph,
in lieu of indemnifying such indemnified party thereunder, shall contribute
to
the amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities: (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the
one
hand and by the Placement Agent or Selected Dealer on the other from the
offering and sale of the Units, or (ii) if the allocation provided by clause
(i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company on the one hand and of the Placement
Agent or Selected Dealer on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities, as
well
as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Placement Agent or Selected
Dealer on the other shall be deemed to be in the same proportion as the total
net proceeds from the offering (before deducting expenses) received by the
Company bears to the total commissions received by the Placement Agent or
Selected Dealer, as in each case set forth in the Memorandum. The
relative fault of the Company and of the Placement Agent or Selected Dealer
shall be determined by reference to, among other things, whether the untrue
or
alleged untrue statement of a material fact or the omission to state a material
fact relates to information supplied by the Company or by the Placement Agent
or
Selected Dealer and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission.
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2
The
Company and the Placement Agent
agree that it would not be just and equitable if contribution pursuant to this
Section 7 were determined by pro rata allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to in the immediately preceding paragraph. The amount paid or payable
by an indemnified party as a result of the losses, claims, damages and
liabilities referred to in the immediately preceding paragraph shall be deemed
to include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding
the provisions of this Section 7, the Placement Agent shall not be required
to
contribute any amount in excess of the amount by which the total price at which
the Units sold by it and distributed exceeds the amount of any damages which
such Placement Agent otherwise has been required to pay by reason of such untrue
or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution hereunder from any person
who was not guilty of such fraudulent misrepresentation.
7.07.
Limitation
of Legal Expenses
. Notwithstanding anything herein to the
contrary, the indemnification for legal expenses included in Sections 7.01,
7.03
And 7.05 shall be limited to the legal expenses of one law firm, except in
the
event of a bona fide conflict of interest, in which event such legal expenses
shall be limited to the legal expenses of two law firms.
SECTION
8
Effectiveness
of Agreement
8.01. This
Agreement shall become effective upon execution by all parties
hereto.
SECTION
9
Conditions
of the Placement Agent's Obligations
The
Placement Agent's obligations to
act as agent of the Company hereunder shall be subject to the accuracy of the
representations and warranties on the part of the Company herein contained,
to
the performance by the Company of all its agreements herein contained, to the
fulfillment of or compliance by the Company with all covenants and conditions
hereof, and to the following additional conditions:
9.01.
No
Material Changes
. Except as contemplated herein or as set forth
in the Memorandum, during the period subsequent to the date of the last balance
sheet included in the Memorandum the Company: (a) shall have
conducted its business in the usual and ordinary manner as the same was being
conducted on the date of the last balance sheet included in the Memorandum,
and
(b) except in the ordinary course of its business, the Company shall not have
incurred any material liabilities, claims or obligations (direct or contingent)
or disposed of any material portion of its assets, or entered into any material
transaction or suffered or experienced any materially adverse change in its
condition, financial or otherwise. The capitalization and short term
debt of the Company shall be substantially the same as at the date of the latest
balance sheet included in the Memorandum, without considering the proceeds
from
the sale of the Units, other than as may be set forth in the Memorandum, and
except as the financial statements of the Company reflect the result of
continued losses from operations consistent with prior periods.
9.02.
Authorization
. The
authorization for the issuance of the securities comprising the Units and the
use of the Memorandum and all corporate proceedings and other legal matters
incident thereto and to this Agreement shall be reasonably satisfactory in
all
respects to counsel to the Placement Agent.
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9.03.
Opinion
. The
Company shall have furnished to the Placement Agent the opinion, dated each
Closing Date and addressed to the Placement Agent, from counsel to the Company,
to the effect that based upon a review by them of the Memorandum, the Company's
certificate of incorporation, bylaws, and relevant corporate proceedings and
contracts, and examination of such statutes they deem necessary and such other
investigation by such counsel as they deem necessary to express such
opinion:
(a) The
Company has been duly incorporated and validly exists as a corporation in good
standing under the laws of the State of Washington and has the corporate power
and authority to own its properties and to carry on its business as described
in
the Memorandum.
(b) The
Company is duly qualified and in good standing as a foreign corporation
authorized to do business in all jurisdictions in which the character of the
properties owned or held under lease or the nature of the business conducted
requires such qualification and in which the failure to qualify would have
a
materially adverse effect on the business of the Company.
(c) On
the basis of a review of the contents of the Memorandum and related matters,
and
based upon the advice of the Company, but without independent verification
by
such counsel of the accuracy, completeness or fairness of the statements
contained in the Memorandum thereto, and without expressing any opinion as
to
the financial statements or other financial data contained
therein: (i) nothing has come to such counsel's attention which leads
them to believe that the Memorandum, as amended or supplemented by any
amendments or supplements thereto made by the Company prior to completion of
the
Offering, does not comply as to form in all material respects with the
requirements of applicable laws; (ii) they do not know of any contract or other
document required to be described in or filed as an exhibit to the Memorandum
which is not so described or filed; and (iii) to the best of their knowledge,
no
order suspending the Offering has been issued and no proceedings for that
purpose have been instituted or are pending or contemplated by any applicable
regulatory authority.
(d) The
authorized and outstanding capital stock of the Company is as set forth in
the
Memorandum; the Units, Shares Warrants, and Placement Agent's Warrants conform
in all material respects to the statements concerning them in the Memorandum;
the outstanding common stock of the Company contains no preemptive rights;
the
Units, Shares, Warrants and Placement Agent's Warrants have been, and the shares
of Common Stock issuable upon exercise of the Warrants and Placement Agent's
Warrants, will be, duly and validly authorized and, upon issuance thereof and
payment therefore in accordance with this Agreement, validly issued, fully
paid
and nonassessable, and will not be subject to the preemptive rights of any
shareholder of the Company.
(e) The
Warrants and Placement Agent's Warrants have been duly and validly authorized
and, when accepted and delivered by the Company, will be valid and binding
obligations of the Company, enforceable in accordance with their respective
terms.
(f) A
sufficient number of shares of Common Stock have been duly reserved for issuance
upon the exercise of the Warrants and the Placement Agent's
Warrants.
(g) The
issuance and sale of the Units, the Shares, the Warrants, and the Placement
Agent's Warrants, the consummation of the transactions herein contemplated,
and
the compliance
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with
the
terms of this Agreement will not conflict with or result in a breach of any
of
the terms, conditions, or provisions of or constitute a default under the
certificate of incorporation or bylaws of the Company; nor, to their knowledge,
will they conflict with or result in a breach of any of the terms, conditions,
or provisions of any note, indenture, mortgage, deed of trust, or other
agreement or instrument to which the Company is a party or by which the Company
or any of its property is bound; or any existing law (provided this paragraph
shall not relate to federal or state securities laws), order, rule, regulation,
writ, injunction, or decree known to such counsel of any government,
governmental instrumentality, agency, body, arbitration tribunal, or court,
domestic or foreign, having jurisdiction over the Company or its
property.
(h) This
Agreement has been duly authorized and executed by the Company and is a valid
and binding agreement of the Company.
As
to all factual matters, including
without limitation the issuance of stock certificates and receipt of payment
therefor, the states in which the Company transacts business and the adoption
of
resolutions reflected by the Company's minute book, such counsel may rely on
the
certificate of an appropriate officer of the Company. Counsel's
opinion as to the validity and enforceability of any and all contracts and
agreements referenced herein may exclude any opinion as to the validity or
enforceability of any indemnification or contribution provisions thereof, or
as
the validity or enforceability of any such contract or agreement may be limited
by bankruptcy or other laws relating to or affecting creditors' rights generally
and by equitable principles.
9.04.
Officers'
Certificate
. The Company shall furnish to the Placement Agent a
certificate signed by the President and Chief Financial Officer of the Company,
dated as of each Closing Date, to the effect that:
(a) The
representations and warranties of the Company in this Agreement are true and
correct in all material respects at and as of the date of the certificate,
and
the Company has complied in all material respects with all the agreements and
has satisfied in all material respects all the conditions on its part to be
performed or satisfied at or prior to the date of the certificate.
(b) Each
has carefully examined the Memorandum and any amendments and supplements thereto
and the SEC Filings referred to in the Memorandum, and to the best of their
knowledge the Memorandum and any amendments and supplements thereto, and/or
the
SEC Filings, contain all statements required to be stated therein, and all
statements contained therein are true and correct, and neither the Memorandum
nor any amendment or supplement thereto, nor the SEC Filings, include any untrue
statement of a material fact or omits to state any material fact required to
be
stated therein or necessary to make the statements therein not misleading and,
during the Offering, the Memorandum will be amended or supplemented to include
all information necessary to be included in the Memorandum so that it does
not
become inaccurate or misleading.
(c) No
order prohibiting the offer or sale of the Units has been issued and, to the
best of the knowledge of the respective signers, no proceeding for that purpose
has been initiated or is threatened by the Commission or any applicable
state.
(d) Except
as set forth in the Memorandum, since the respective dates of the periods for
which information is given in the Memorandum and prior to the date of the
certificate,
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(i)
there
has not been any materially adverse change, financial or otherwise, in the
affairs or condition of the Company, and (ii) the Company has not incurred
any
material liabilities, direct or contingent, or entered into any material
transactions, otherwise than in the ordinary course of business.
(e) Subsequent
to the date of the Memorandum, no dividends or distribution whatever have been
declared and/or paid on or with respect to the Common Stock of the
Company.
9.05.
State
Qualification or Exemption
. The Company shall use its best
efforts to secure an exemption from registration or qualification in those
states in which the Units are sold, and the offer and sale of the Units shall
not be subject to any stop order or other proceeding on the Closing
Date.
9.06.
Satisfactory
Form of Documents
. All opinions, letters, certificates and
evidence mentioned above or elsewhere in this Agreement shall be deemed to
be in
compliance with the provisions hereof only if they are in form and substance
satisfactory to counsel to the Placement Agent, whose approval shall not be
unreasonably withheld.
9.07.
Adverse
Events
. Between the date hereof and each Closing Date, the
Company shall not have sustained any loss on account of fire, explosion, flood,
accident, calamity or any other cause, of such character as materially adversely
affects its business or property considered as an entity, whether or not such
loss is covered by insurance.
9.08.
Litigation
. Between
the date hereof and each Closing Date, there shall be no litigation instituted
or threatened against the Company and there shall be no proceeding instituted
or
threatened against the Company before or by any federal or state commission,
regulatory body or administrative agency or other governmental body, domestic
or
foreign, wherein an unfavorable ruling, decision or finding would materially
adversely affect the business, franchises, licenses, operations or financial
condition or income of the Company.
9.09.
Certificates
. Any
certificate signed by an officer of the Company and delivered to the Placement
Agent shall be deemed a representation and warranty by the Company to the
Placement Agent as to the statements made therein.
SECTION
10
Termination
10.01.
Failure
to Comply with Agreement
. This Agreement may be terminated by
either party hereto by notice to the other party in the event that such party
shall have failed or been unable to comply with any of the terms, conditions
or
provisions of this Agreement required by the Company or the Placement Agent
to
be performed, complied with or fulfilled by it within the respective times
herein provided for, unless compliance therewith or performance or satisfaction
thereof shall have been expressly waived by the non-defaulting party in
writing.
10.02.
Government
Restrictions
. This Agreement may be terminated by either party by
notice to the other party at any time if, in the judgment of either party,
payment for and delivery of the Units are rendered impracticable or inadvisable
because: (i) additional material governmental restrictions not in
force and effect on the date hereof shall have been imposed upon the trading
in
securities generally, or
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minimum
or maximum prices shall have been generally established on the New York Stock
Exchange, the Chicago Board of Trade or the Commodity Futures Trading
Commission, or trading in securities generally on such Exchange, Board, or
Commission shall have been suspended, or a general moratorium shall have been
established by federal or state authorities; or (ii) a war or other national
calamity shall have occurred; or (iii) the condition of any matter affecting
the
Company or any other circumstance is such that it would be undesirable,
impracticable or inadvisable in the judgment of the Placement Agent to proceed
with this Agreement or with the sale of the Units.
10.03.
Liability
on Termination
. Any termination of this Agreement pursuant to
this Section 10 shall be without liability of any character (including, but
not
limited to, loss of anticipated profits or consequential damages on the part
of
any party thereto); except that the Company and the Placement Agent shall be
obligated to pay, respectively, all losses, claims, damages or liabilities,
joint or several, under Section 7.01 in the case of the Company, Section 7.03
in
the case of the Placement Agent and Section 7.06 as to all parties.
SECTION
11
Placement
Agent's Representations and Warranties
The
Placement Agent represents and
warrants to and agrees with the Company that:
11.01.
Registration
. The
Placement Agent is registered as a broker-dealer with the Securities and
Exchange Commission, and is a member in good standing of the National
Association of Securities Dealers, Inc. ("NASD"). The Placement Agent
is registered or otherwise qualified to sell the Units in each state in which
the Placement Agent sells such Units or is exempt from such registration or
qualification.
11.02.
Ability
to Act as Agent
. There is not now pending or, to the knowledge of
the Placement Agent, threatened against the Placement Agent any action or
proceeding of which the Placement Agent has been advised, either in any court
of
competent jurisdiction, before the NASD, the Securities and Exchange Commission
or any state securities commission concerning the Placement Agent's activities
as a broker or dealer, nor has the Placement Agent been named as a "cause"
in
any action or proceeding, any of which may be expected to have a material
adverse effect upon the Placement Agent's ability to act as agent to the Company
as contemplated herein.
11.03.
Right
to Terminate Agreement
. In the event any action or proceeding of
the type referred to in Section 11.02 above (except for actions referred to
in
the Memorandum) shall be instituted or, to the knowledge of the Placement Agent,
threatened against the Placement Agent at any time prior to the effective date
hereunder, or in the event there shall be filed by or against the Placement
Agent in any court pursuant to any federal, state, local or municipal statute,
a
petition in bankruptcy or insolvency or for reorganization or for the
appointment of a receiver or trustee of its assets or if the Placement Agent
makes an assignment for the benefit of creditors, the Company shall have the
right on three (3) days' written notice to the Placement Agent to terminate
this
Agreement without any liability to the Placement Agent of any kind.
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SECTION
12
Placement
Agent's Warrants
12.01.
Warrants
. If
at least 650,000 Units are sold, the Company shall sell to the Placement Agent,
for a total of $100, warrants to purchase shares of Common Stock ("Placement
Agent's Warrants") on the basis of three warrants for each 10 Units sold in
the
Offering. Each Placement Agent's Warrant will entitle the holder to
purchase one share of Common Stock, exercisable at $1.00 per
share. The Placement Agent's Warrants will be exercisable for a
period of seven (7) years after their issuance; and if the Placement Agent's
Warrants are not exercised during this term, they shall, by their terms,
automatically expire. The Company shall set aside and at all times
have available a sufficient number of shares of its Common Stock to be issued
upon the exercise of the Placement Agent's Warrants.
12.02.
Registration
Rights
. The Company understands and agrees that if, at any time
during the eight-year period commencing the Closing Date, it should file a
Registration Statement with the Commission pursuant to the Act, for a public
offering of securities, either for the account of the Company or for the account
of any other person, the Company at its own expense, will offer to holders
of
Placement Agent's Warrants or shares of common stock previously issued upon
the
exercise thereof, the opportunity to register or qualify for public offering
the
Placement Agent's Warrants and shares of common stock underlying the Placement
Agent's Warrants or the shares so issued. This paragraph is not
applicable to a Registration Statement filed with the Securities and Exchange
Commission on Forms S-4 or S-8 or any other inappropriate forms; nor does it
apply to the public offering contemplated in the Memorandum with regard to
the
registration of the Warrant Shares.
In
addition to the rights above
provided, the Placement Agent’s Warrant will be subject to the Registration
Rights Agreement that is Exhibit B of the Memorandum.
12.03.
Other
Provisions
. The Placement Agent’s Warrant shall also contain
customary anti-dilution provisions and a cashless exercise
provision.
SECTION
13
Notice
Except
as otherwise expressly provided
in this Agreement:
13.01.
Notice
to Company
. Whenever notice is required by the provisions of this
Agreement to be given to the Company, such notice shall be in writing addressed
to the Company as provided below:
Daybreak
Oil and Gas, Inc.
601
W.
Main Ave., Suite 1017
Spokane,
Washington 99201
Attn: President
13.02.
Notice
to Placement Agent
. Whenever notice is required by the provisions
of this Agreement to be given to the Placement Agent, such notice shall be
given
in writing addressed to the Placement Agent as follows:
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Bathgate
Capital Partners
LLC
5350
S. Roslyn Street, Suite
400
Greenwood
Village, CO
80111
Attn: Vicki
D. E.
Barone, Senior Managing Partners
SECTION
14
Miscellaneous
14.01.
Benefits
. This
Agreement is made solely for the benefit of the Placement Agent, the Company,
their respective agents, officers, directors, managers, members,
representatives, guarantors, sureties and any controlling person referred to
in
Section 15 of the Act or Section 20 of the Securities Exchange Act of 1934,
and
their respective successors and assigns, and no other person shall acquire
or
have any right under or by virtue of this Agreement. The term
"successor" or the term "successors and assigns" as used in this Agreement
shall
not include any purchasers, as such, of any of the Units.
14.02.
Survival
. The
respective indemnities, agreements, representations, warranties, covenants
and
other statements of the Company or the Company's officers, as set forth in
or
made pursuant to this Agreement and the indemnity agreements of the Company
and
the Placement Agent contained in Section 7 hereof shall survive and remain
in
full force and effect, regardless of (i) any investigation made by or on behalf
of the Company or the Placement Agent or any affiliated persons thereof or
any
controlling person of the Company or of the Placement Agent, (ii) delivery
of or
payment for the Units and (iii) the Closing Date, and any successor of the
Company, the Placement Agent and Selected Dealers, or any controlling person,
or
other person indemnified by section 7, as the case may be, shall be entitled
to
the benefits hereof.
14.03.
Governing
Law
. The laws of the State of Colorado hereof will govern the
validity, interpretation, and construction of this Agreement and of each
part. The parties agree that any dispute that arises between them
relating to this Agreement or otherwise shall be submitted for resolution in
conformity with the Securities Arbitration Rules of the American Arbitration
Association. The parties agree that the situs of an arbitration
hearing before the arbitrators shall be in Denver, Colorado, and each party
shall request such situs.
14.04.
Counterparts
. This
Agreement may be executed in any number of counterparts, each of which will
constitute an original.
Please
confirm that the foregoing
correctly sets forth the Agreement between you and the Placement
Agent.
|
Very
truly yours,
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|
|
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|
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BATHGATE
CAPITAL
PARTNERS LLC
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|
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|
|
|
|
By:
|
/s/ Vickie
D.
Barone
|
|
|
|
Vickie
D. Barone, Senior Managing Partner
|
|
|
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|
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|
|
|
Daybreak
Oil and Gas, Inc.
June
28,
2006
Page
19
We
hereby confirm as of the date hereof
that the above letter sets forth the Agreement between the Placement Agent
and
us.
|
DAYBREAK
OIL AND
GAS, INC.
|
|
July
3,
2007
|
|
|
|
Date
|
By:
|
/s/ Eric
L.
Moe
|
|
|
|
Eric
L. Moe,
CEO
|
|
|
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Exhibit
10.03
THIS
AGREEMENT made effective March 1, 2005 (the "Effective Date").
BETWEEN:
Daybreak
Mines, Inc., a body corporate, incorporated pursuant to the laws of the State
of
Washington
(hereinafter
referred to as the "Corporation")
OF
THE
FIRST PART -
and
-
413294
Alberta Ltd., a body corporate, incorporated pursuant to the laws of the
Province
of Alberta
(hereinafter
referred to as the "Consultant")
WHEREAS
the Corporation wishes to engage the services and expertise of the Consultant
on
the terms and conditions hereinafter set forth, and the Consultant wishes
to
accept such an engagement;
NOW
THEREFORE in consideration of the covenants of each of the parties given
to the
other and for other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties hereto agree as
follows:
1.1
|
Effective
as of the Effective Date, the Corporation engages the Consultant,
and the
Consultant accepts an engagement with the Corporation to render
the
consulting services for the Corporation as set out in Schedule
A. During
the term of this Agreement, the Consultant shall provide the services
of
Robert Martin who shall devote such of his time, attention and
abilities
to the business of the Corporation as may be necessary for the
proper
exercise of the Consultant's duties hereunder. Nothing in this
Agreement
shall be interpreted or construed as creating or establishing a
relationship of employer and/or employee between the Corporation
and
Robert Martin.
|
2.1
|
The
Consultant shall make the services of Mr. Robert Martin available,
as
requested, to
perform
this Agreement. The Consultant agrees that Robert Martin
shall be entitled to
render
services to others in the oil and gas industry during the term
of this
consulting
agreement.
|
2.2
|
The
Consultant's duties shall be to provide the services more particularly
set
forth on
Schedule
"A" hereto.
|
2.3
|
The
Consultant warrants and represents that it is duly qualified to
perform
its duties
hereunder,
and further covenants that in performing its duties hereunder,
it will not
engage
in activity that is in violation of applicable securities laws
or subject
the
Corporation
to liability thereunder.
|
The
Corporation agrees to compensate the Consultant as set out in Schedule "B"
attached hereto.
4.1
|
The
Consultant acknowledges the Corporation will have reporting and
disclosure
obligations
under all applicable securities legislation. The Consultant covenants
and
agrees
that it shall not any time, during or after the termination of
the
Consultant's
engagement
by the Corporation, reveal, divulge, or make known to any person
(other
than
the Corporation or its affiliates) or use for its own account any
customer's lists,
trade
secrets, or secret or confidential information used by the Corporation
or
its
Affiliates
during the Consultant's engagement by any of them and made known
(whether
or not with the knowledge and permission of the Corporation, whether
or
not
developed,
devised or otherwise created in whole or in part by the efforts
of the
Consultant,
and whether or not a matter of public knowledge unless as a result
of
authorized disclosure)
to the Consultant by reason of its engagement by the Corporation
of any of
its Affiliates. The Consultant further covenants and agrees that
all
knowledge and information, which is acquired or developed for the
Corporation or any of its Affiliates by the Consultant, is the
property of
the Corporation. The Consultant further covenants and agrees that
it shall
retain all such knowledge and information which it shall acquire
and
develop during such engagement respecting such customer lists,
trade
secrets and secret or confidential information in trust for the
sole
benefit of the Corporation, its affiliates, and their successors
and
assigns.
|
4.2
|
The
Consultant shall promptly communicate and disclose to the Corporation
all observations made and data obtained by it in the course of its
engagement by the
Corporation. All
written materials, records and documents created by the Consultant
or
coming
into its possession concerning the business or affairs of the Corporation
or any
of
its Affiliates shall, upon the termination of this Agreement, promptly
be
returned to
the Corporation.
Upon the request of the Corporation until termination of
its engagement by the Corporation, the Consultant shall render to the
Corporation or to any Affiliate designated by it such
reports of the activities undertaken by the Consultant or conducted
under the Consultant's direction for the Corporation and
its Affiliates as the Corporation may
request.
|
4.3
|
Any
breach of Confidentiality as outlined above will be prosecuted
to the full
extent of
the
law, and reported to the Consultant's applicable regulatory
Board.
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5.1
|
This
Agreement shall be for a term commencing March
1
,
2005 and terminating
February
28, 2006. Either party may terminate this Agreement at any
time without notice in the event of a fundamental breach of the terms
of this Agreement by the other
party.
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6.
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CHANGE
OF CONTROL, SALE OF CORPORATION, SALE OF ASSETS OF THE
CORPORATION
|
6.1
|
The
Corporation acknowledges the valuable services that the Consultant
has
provided
and
will continue to provide to the Corporation in providing the services
of
Robert
Martin
in his capacity as an officer thereof and an authorized representative
thereof.
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6.2
|
The Corporation acknowledges that in the event of a change of control of the
Corporation
or a sale of any of the assets of the Corporation, there is a possibility
that
the
service of the Consultant would no longer be required and that
this
contract might
be
determined.
|
6.3
|
The
directors of the Corporation have determined that it would be in
the best
interests
of
the Corporation to induce the Consultant to provide the services
of Robert
Martin to
the Corporation by indicating that, in the
event of a change of control of the
Corporation
or the sale of assets, the Consultant would have certain automatic
and
guaranteed
rights.
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6.4
|
"Takeover
of the control of the Corporation"
means:
|
|
(a)
|
any
change in the holding, either direct or indirect, of shares of
the
Corporation,
or any reconstruction, reorganization, recapitalization, consolidation,
amalgamation,
merger, arrangement or other transaction, that results in a person
who
was, or a group of persons acting in concert who were, not previously
in a
position
to exercise effective control ot the Corporation (or any Associate
or
Affiliate
of any such person or group of persons), being in a position to
exercise
such
effective control either in respect of the Corporation or the successor
to
the
Corporation (and for the purposes of this Agreement, a person or
group of
persons
acting in concert, or any Associate or Affiliate of any such person
or
group
of persons, holding shares of the Corporation, or snares of the
successor
to
the Corporation, in excess of the number that would entitle the
holders
thereof
to cast twenty (25%) percent or more of the votes attaching to
all
shares
of the Corporation, or to shares of the successor to the Corporation,
shall
be
deemed to be in a position to exercise elective control of the
Corporation, or
the
successor to the Corporation, as the case may be);
and
|
|
(b)
|
the exercise
of such effective control to cause or result in the election or
appointment
of two or more directors of the Corporation, or of the successor
to
the
Corporation, who were not previously directors of the
Corporation.
|
Any
notices delivered or received between either party shall be deemed to have
been
received:
|
(a)
|
if
it was delivered in person, on the date it was
delivered;
|
|
|
if
it was sent by electronic facsimile transmission, on the date it
was
delivered;
|
|
(c)
|
it
was sent by mail, on the day it was received to the following
address:
|
Daybreak
Mines, Inc.
Spokane,
Washington
Attention: Treasurer
413294
Alberta Ltd.
621
B 37
th
Street
SW
Calgary
AB T3C 1R8
Attention; Robert
Martin
Cell
Phone 403 660-9639
8.
|
MODIFICATION
OF
AGREEMENT
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8.1
|
Any
modification of this Agreement must be made in writing signed by
the
Consultant and an officer of the Corporation or it shall have no
effect
and shall be void,
|
This
Agreement shall be governed by and construed in accordance with the laws
of the
State of Washington and the parties agree to attorn to the jurisdiction of
the
courts of the State of Washington.
The
headings utilized in this Agreement are for convenience only and are not
to be
construed in any way as additions or limitations of the covenants and agreements
contained in this Agreement.
The
covenants in this Agreement shall be construed as an agreement independent
of
any other provision in this Agreement. The parties acknowledge that it is
their
intention that the provisions of this Agreement be binding only to the extent
that they may be lawful under the existing applicable laws and in the event
that
any provision of this Agreement is determined by
a
court of law to be
overly broad or unenforceable, the remaining valid provisions shall remain
in
full force and effect. This Agreement constitutes the sole agreement between
the
parties hereto for services to be performed as herein described and the mutual
covenants contained herein constitute due and adequate consideration for
the
full performance by each party of its obligations under this Agreement and
any
and all previous agreements, written or oral, expressed or implied, between
the
parties or on their releases and forever discharges the other of and from
all
manner of action, causes of action, claims or demands whatsoever under or
in
respect of any agreement.
12.1
|
The
waiver by any party hereto of a breach of any provision of this
Agreement
shall not
operate
or be construed as a waiver of any subsequent breach of the same
or of any
other
provisions of this Agreement.
|
12.2
|
This
Agreement shall be binding upon the parties hereto and shall enure
to the
benefit
of
and be enforceable by each of the parties hereto and their respective
successors and
assigns.
|
IN
WITNESS WHEREOF the parties hereto have executed this Agreement as of the
1st
day of March , 2005.
|
Daybreak
Mines,
Inc.
|
|
|
413294
Alberta
Ltd.
|
|
|
|
|
|
|
|
per:
|
/s/
Dale B.
Lavigne, President
|
|
per:
|
/s/
Robert N.
Martin, President
|
|
Provide
the services of President, of the Corporation and, in this regard, to have
responsibility for the, direction, control and operation of the Corporation
with
the obligation, duty, authority and power to do all acts and things as are
customarily done by persons holding the position of President, fn corporations
of similar size to the Corporation and to do all acts and things as are
reasonably necessary for the efficient and proper operation and development
of
the Corporation, reporting to the Board of Directors of the
Company.
-
Remuneration
shall be payable to the Consultant at the sole discretion of the board
of
directors, As consideration for performance of the services by the Consultant,
the
Corporation shall pay the Consultant 1,100,000 common voting {restricted}
shares.
-
The
consultant will also be paid $1,000 (USD) per month for incidental expenses
for
each
month for which services are provided. The said rates shall be exclusive
of
travel
expenses and related business expenses incurred by the Consultant and
properly
claimable in accordance with the provisions hereof.
-
The
Corporation shall not be required to provide any benefits to the Consultant
including,
without limitation, dental, medical, disability or life
insurance.
-
The
Consultant shall submit invoices to the Corporation for each month or portion
thereof
for which services are provided during the period covered by the invoice
and
also
including any proper claim for travel expenses. Each invoice
shall indicate the
period
covered, the month or portion of a month worked, the rate and the total
charge
for consultancy services.
-
The
Corporation will reimburse the Consultant, at actual cost, for out-of-pocket
expenses
incurred in accordance with the Corporation's standard practice for the
reimbursement
of reasonable travel expenses incurred by its contractors or its own
personnel. The
Corporation will also reimburse the Consultant for any reasonable
long
distance telephone, fax or photocopying charges incurred by the Consultant.
Expenses
claimed must be supported by the applicable receipts.
-
The
Consultant will be responsible for the payment of the income taxes of all
of
its
employees
including, without limitation, Robert Martin,
as
well as Canada
Pension
Plan
premiums and any and all other taxes and contributions imposed by (aw with
respect
to such employees. In the event the Consultant should fail to make any
such
payments, the Consultant indemnifies the Corporation for any claims, causes
or action, or
liabilities which may
be made, advanced or
incurred against the
Corporation
as a result of such non-payment, and agrees to be responsible for the
Corporation's
solicitor-client costs in defending or protecting itself.
-
The
Corporation will, if it determines it to be necessary in its total discretion,
ensure
that
appropriate liability insurance coverage is provided to Robert Martin at
no
cost
to
the
Consultant or to Robert Martin, which coverage should be the same in all
material
respects as insurance coverage provided to Directors and Officers of the
Corporation.
Exhibit
10.04
CONSULTING
SERVICES AGREEMENT
DAYBREAK
MINES, INC. AND ANMAC ENTERPRISES INC.
This
Agreement is made effective the 1st day of March 2005, between DayBreak Mines,
Inc. (the “Company”) and AnMac Enterprises Inc. (the “Consultant”) located at
1496 Bramwell Road, West Vancouver B.C. Canada V7 2N9
WHEREAS,
the Company desires to be assured of the association and services of the
Consultant in order to avail itself of the Consultant’s experience, skills,
abilities, knowledge and background to facilitate long range strategic planning
and to advise the Company in business and/or financial matters and is therefore
willing to engage the Consultant upon the terms and conditions set forth
herein.
WHEREAS,
the Consultant agrees to be engaged and retained by the Company and upon the
terms and conditions set forth herein.
NOW
THEREFORE, in consideration of the foregoing, of the mutual promises hereinafter
set forth and for other good and valuable consideration, the receipt and
suffiency of which are hereby acknowledged, the parties hereto agree as
follows:
The
Company hereby engages the Consultant on a non exclusive basis, and the
Consultant hereby accepts the engagement to become a consultant to the Company
and to render such advice, consultation, information and services to the
directors and officers of the Company regarding general financial and business
matters, including but not limited to:
|
A.
|
mergers
and acquisitions;
|
|
B.
|
due
diligence studies, reorganizations,
divestitures;
|
|
C.
|
capital
structures, banking methods and
systems;
|
|
D.
|
periodic
reporting as to developments concerning the general financial markets
and
public securities markets and industry which may be relevant or of
interest or concern to the Company or the Company’s
business.
|
|
E.
|
guidance
and assistance in available alternatives for accounts receivable
financing
and/or other asset financing;
|
|
F.
|
DTC/volume/transfer
record analysis; and
|
|
G.
|
investor
relations assisting with broker information
services.
|
It
shall
be expressly understood that Consultant shall have no power to bind the Company
to any contract or obligation or to transact any business in the Company’s name
or on behalf of the Company in any manner.
The
term
of this Agreement shall commence on the date hereof and continue for twelve
(12)
months. The Agreement may be extended upon agreement by both
parties.
The
Company shall pay to the Consultant:
|
a)
|
a
monthly salary of $3000.00 for 12 months payable by the 25
th
of each
month.
|
|
b)
|
the
Consultant will receive 350,000 shares of restricted stock for the
first
year of service. The shares will have the standard piggyback registration
rights, which shall be subject to reasonable restrictions (such as
lock-ups and pro-rata cut backs in the amount of shares to be registered)
at the request of either the Company or any underwriter or placement
agent
whom the Company has engaged.
|
All
Securities shall be issued to the Consultant in accordance with an applicable
exemption from registration or, at the option of the Company, pursuant to a
valid registration statement. Unless and until such securities are registered
by
the Company or an applicable exemption to registration is available (such as
safe harbor provided by Rule 144) the Consultant will not sell or transfer
the
securities.
4.
|
Exclusivity,
Performance and
Confidentiality
|
The
services of the Consultant hereunder shall not be exclusive, and Consultant
and
its agents may perform similar or different services for other persons or
entities whether or not they are competitors of the Company. The Consultant
shall be required to expend only such time as is necessary to service the
Company in a commercially reasonable manner. The Consultant acknowledges and
agrees that confidential and valuable information proprietary to the Company
and
obtained during its engagement by the Company shall not be directly or
indirectly, disclosed without the prior written consent of the Company, unless
and until such information is otherwise known to the public generally or is
not
otherwise secret and confidential.
5.
|
Independent
Contractor
|
In
its
performance hereunder, the Consultant and its agents shall be independent
contractors. The Consultant shall complete the services required hereunder
according to his own means and methods of work, shall be in the exclusive charge
and control of the Consultant and shall not be subject to the control or
supervision of the Company, except as to the results of the work or the extent
necessary for the Company to verify the Consultant’s compliance with applicable
laws and regulations to which the Company may be subject. The Company
acknowledges that nothing in this Agreement shall be construed to require the
Consultant to provide services to the Company at any specific time, or in any
specific place or manner.
No
waiver
of any of the provisions of this Agreement shall be deemed or shall constitute
a
waiver of any other provision and no waiver shall constitute a continuing
waiver. No waiver shall be binding unless executed in writing by the party
making the waiver.
No
supplement, modification or amendment of the Agreement shall be binding unless
executed in writing by all parties. This Agreement constitutes the entire
agreement between the parties and supersedes any prior agreements or
negotiations.
|
A.
|
This
Agreement shall in all respects be interpreted, enforced and
governed
under
the laws of State of Washington. The language and all parts of
this
Agreement
shall be in all cases construed as a whole and not strictly for
or against any individual
party.
|
|
B.
|
Any
dispute arising under in any way related to this agreement shall
be
submitted
to binding arbitration by the American Arbitration Association in
accordance
with the Association’s commercial rules then in effect. The arbitration
may be conducted in person, by telephone or online as agreed by all
parties. The arbitration shall be binding on the parties and the
arbitration award may be confirmed by ant court of competent
jurisdiction.
|
9.
|
Counterparts
and Telefacsimile
|
This
Agreement may be executed in one or more counterparts, each of which shall
be
deemed to be an original and all of which shall constitute one agreement. A
telefacsimile of this Agreement may be relied upon as full and sufficient
evidence as an original.
IN
WITNESS WHEREOF, the parties hereto have entered into this Agreement effective
the 1
st
day of
March 2005.
DayBreak
Mines, Inc.
|
|
|
AnMac
Enterprises Inc.
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Robert N. Martin
|
|
|
/s/
Michael McIntyre
|
|
|
|
|
|
|
Robert
Martin, President
|
|
|
Michael
McIntyre, President
|
|
|
|
|
|
|
Date:
3/01/05
|
|
|
Date:
3/01/05
|
|
Exhibit
10.05
CONSULTING
SERVICES AGREEMENT
DAYBREAK
MINES, INC. AND ERIC L. MOE
This
Agreement is made effective the 1st day of March 2005, between DayBreak Mines,
Inc. (the “Company”) and Eric L. Moe (the “Consultant”) located at 8305 North
Colton Place, Spokane, WA. 99208
WHEREAS,
the Company desires to be assured of the association and services of the
Consultant in order to avail itself of the Consultant’s experience, skills,
abilities, knowledge and background to facilitate long range strategic planning
and to advise the Company in business and/or financial matters and is therefore
willing to engage the Consultant upon the terms and conditions set forth
herein.
WHEREAS,
the Consultant agrees to be engaged and retained by the Company and upon the
terms and conditions set forth herein.
NOW
THEREFORE, in consideration of the foregoing, of the mutual promises hereinafter
set forth and for other good and valuable consideration, the receipt and
suffiency of which are hereby acknowledged, the parties hereto agree as
follows:
The
Company hereby engages the Consultant on a non exclusive basis, and the
Consultant hereby accepts the engagement to become a consultant to the Company
and to render such advice, consultation, information and services to the
directors and officers of the Company regarding general financial and business
matters, including but not limited to:
|
A.
|
mergers
and acquisitions;
|
|
B.
|
due
diligence studies, reorganizations,
divestitures;
|
|
C.
|
capital
structures, banking methods and
systems;
|
|
D.
|
periodic
reporting as to developments concerning the general financial markets
and
public securities markets and industry which may be relevant or of
interest or concern to the Company or the Company’s
business.
|
|
E.
|
guidance
and assistance in available alternatives for accounts receivable
financing
and/or other asset
financing;
|
|
F.
|
DTC/volume/transfer
record analysis; and
|
|
G.
|
investor
relations assisting with broker information
services.
|
It
shall be expressly understood that Consultant shall have no power to bind the
Company to any contract or obligation or to transact any business in the
Company’s name or on behalf of the Company in any manner.
The
term of this Agreement shall commence on the date hereof and continue for twelve
(12) months. The Agreement may be extended upon agreement by both
parties.
The
Company shall pay to the to Consultant:
|
a)
|
a
monthly
salary of $2000.00 for 12 months payable by the 25
th
of each
month.
|
|
b)
|
the
Consultant will receive 500,000 shares of restricted stock for the
first
year of service. The shares will have the standard piggyback registration
rights, which shall be subject to reasonable restrictions (such as
lock-ups and pro-rata cut backs in the amount of shares to be registered)
at the request of either the Company or any underwriter or placement
agent
whom the Company has
engaged.
|
All
Securities shall be issued to the Consultant in accordance with an applicable
exemption from registration or, at the option of the Company, pursuant to a
valid registration statement. Unless and until such securities are registered
by
the Company or an applicable exemption to registration is available (such as
safe harbor provided by Rule 144) the Consultant will not sell or transfer
the
securities.
4.
|
Exclusivity,
Performance and
Confidentiality
|
The
services of the Consultant hereunder shall not be exclusive, and Consultant
and
its agents may perform similar or different services for other persons or
entities whether or not they are competitors of the Company. The Consultant
shall be required to expend only such time as is necessary to service the
Company in a commercially reasonable manner. The Consultant acknowledges and
agrees that confidential and valuable information proprietary to the Company
and
obtained during its engagement by the Company shall not be directly or
indirectly, disclosed without the prior written consent of the Company, unless
and until such information is otherwise known to the public generally or is
not
otherwise secret and confidential.
5.
|
Independent
Contractor
|
In
its performance hereunder, the Consultant and its agents shall be independent
contractors. The Consultant shall complete the services required hereunder
according to his own means and methods of work, shall be in the exclusive charge
and control of the Consultant and shall not be subject to the control or
supervision of the Company, except as to the results of the work or the extent
necessary for the Company to verify the Consultant’s compliance with applicable
laws and regulations to which the Company may be subject. The Company
acknowledges that nothing in this Agreement shall be construed to require the
Consultant to provide services to the Company at any specific time, or in any
specific place or manner.
No
waiver of any of the provisions of this Agreement shall be deemed or shall
constitute a waiver of any other provision and no waiver shall constitute a
continuing waiver. No waiver shall be binding unless executed in writing by
the
party making the waiver.
No
supplement, modification or amendment of the Agreement shall be binding unless
executed in writing by all parties. This Agreement constitutes the entire
agreement between the parties and supersedes any prior agreements or
negotiations.
|
A.
|
This
Agreement shall
in all respects be interpreted, enforced and governed
under
the laws of State of Washington. The language and all parts of
this
Agreement
shall be in all cases construed as a whole and not strictly for or
against
any individual party.
|
|
B.
|
Any
dispute arising under in any way related to this agreement shall
be
submitted
to binding arbitration by the American Arbitration Association in
accordance
with the Association’s commercial rules then in effect. The arbitration
may be conducted in person, by telephone or online as agreed by all
parties. The arbitration shall be binding on the parties and the
arbitration award may be confirmed by ant court of competent
jurisdiction.
|
9.
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Counterparts
and Telefacsimile
|
This
Agreement may be executed in one or more counterparts, each of which shall
be
deemed to be an original and all of which shall constitute one agreement. A
telefacsimile of this Agreement may be relied upon as full and sufficient
evidence as an original.
IN
WITNESS WHEREOF, the parties hereto have entered into this Agreement effective
the 1
st
day of
March 2005.
DayBreak Mines, Inc.
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/s/
Robert Martin
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|
|
/s/
Eric L. Moe
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|
|
|
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Robert
Martin, President
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|
Eric
L. Moe
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Date:
3/01/05
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Date:
3/01/05
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BROKER'S
NAME:______________________________________
IMPORTANT:
PLEASE READ CAREFULLY BEFORE SIGNING. SIGNIFICANT REPRESENTATIONS ARE CALLED
FOR
HEREIN.
and
LETTER OF INVESTMENT INTENT
Daybreak
Oil & Gas, Inc.
601
W.
Main Ave., Suite 1017
Spokane,
WA 99201-0613
The
undersigned (the "Subscriber") hereby tenders this subscription for the purchase
of units ("Units" or the "Securities") consisting of shares of common stock
("Shares") of Daybreak Oil & Gas, Inc. (the "Company") and warrants to
purchase Shares. The Units are described in the Company's Private Placement
Memorandum dated June 30,2006 (the "Memorandum"). The Subscriber understands
that a subscription for the Securities may be rejected for any reason and
that,
in the event that this subscription is rejected, the funds delivered herewith
will be promptly returned, without interest thereon or deduction therefrom.
By
execution below, the Subscriber acknowledges that the Company is relying
upon
the accuracy and completeness of the representations contained herein in
complying with their obligations under applicable securities
laws.
1.
Subscription Commitment.
The Subscriber acknowledges that the minimum
subscription is $30,000. The Subscriber hereby subscribes for the purchase
of
the number of Securities specified below and, as full payment therefor, agrees
to pay in cash, the amount set forth below by check made payable to "Daybreak
Oil & Gas Escrow Account," or by wire transfer to the escrow account of the
Company.
|
Number
of Units
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At
$3.00 per Unit for
an aggregate of $.
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The
Subscriber understands that this subscription is not binding on the Company
until accepted by the Company, which acceptance is at the discretion of the
Company and is to be evidenced by the Company's execution of this Subscription
Agreement where indicated. If the subscription is rejected, or if the Minimum
Offering of 730,000 Units ($2,190,000) is not achieved within the offering
period set forth in the Memorandum (the "Offering Period"), the Company shall
return to the Subscriber, without interest or deduction, any payment tendered
by
the Subscriber, and the Company and the Subscriber shall have no further
obligation to each other hereunder. Unless and until rejected by the Company,
or
the Minimum Offering is not achieved within the Offering Period, this
subscription shall be irrevocable by the Subscriber. The Subscriber understands
that the Company may, in the event that the offering to which the Memorandum
relates is oversubscribed, reduce this subscription in any amount and to
any
extent, whether or not pro rata reductions are made of any other investor's
subscription.
2.
Representations and Warranties.
In order to induce the Company to accept
this subscription, the Subscriber hereby represents and warrants to, and
covenants with, the Company as follows:
(a)
The Subscriber has received and had the opportunity to review the Memorandum
and
has been given access to full and complete information regarding the Company
and
has utilized such access to the
Subscriber's
satisfaction for the purpose of obtaining such information regarding the
Company
as the
Subscriber
has reasonably requested; and, particularly, the Subscriber has been given
reasonable opportunity
to
ask
questions of, and receive answers from, representatives of the Company
concerning the terms and
conditions
of the offering of the Securities and to obtain any additional information,
to
the extent reasonably
available;
(b)
Except
for the Memorandum, the Subscriber has not been furnished with any other
materials
or
literature relating to the offer and sale of the Securities; except as set
forth
in the Memorandum, no
representations
or warranties have been made to the Subscriber by the Company, any selling
agent
of the
Company,
or any agent, employee, or affiliate of the Company or such selling
agent.
(c)
The
Subscriber believes that an investment in the securities is suitable for
the
Subscriber
based
upon the Subscriber investment objectives and financial needs. The Subscriber
(i) has adequate means
for
providing for the Subscriber's current financial needs and personal
contingencies; (ii) has no need for
liquidity
in this investment; (iii) at the present time, can afford a complete loss
of
such investment; and (iv)
does
not
have an overall commitment to investments which are not readily marketable
that
is disproportionate
to
the
Subscriber's net worth, and the Subscriber's investment in the Securities
will
not cause such overall
commitment
to become excessive.
(d)
The
Subscriber, in reaching a decision to subscribe, has such knowledge and
experience in
financial
and business matters that the Subscriber is capable of reading and interpreting
financial statements
and
evaluating the merits and risk of an investment in the Securities and has
the
net worth to undertake such
risks.
(e)
The
Subscriber was not offered or sold the Securities, directly or indirectly,
by
means of any
form
of
general advertising or general solicitation, including, but not limited to,
the
following: (1) any
advertisement,
article, notice or other communication published in any newspaper, magazine,
or
similar
medium
of
or broadcast over television or radio; or (2) to the knowledge of the
undersigned, any seminar or
meeting
whose attendees had been invited by any general solicitation or general
advertising.
(f)
The
Subscriber has obtained, to the extent the Subscriber deems necessary, the
Subscriber's
own
personal professional advice with respect to the risks inherent in the
investment in the securities, and the
suitability
of an investment in the Securities in light of the Subscriber's financial
condition and investment
needs;
(g)
The
Subscriber recognizes that the Securities as an investment involves a high
degree of risk,
including
those set forth under the caption "Risk Factors" in the Executive
Summary.
(h)
The information contained in this agreement is true, complete and correct
in all
material respects as of the date hereof; the Subscriber understands that
the
Company's determination that the exemption from the registration provisions
of
the Securities Act of 1933, as amended (the "Act"), which is based upon
non-public offerings and applicable to the offer and sale of the Securities,
is
based, in part, upon the representations, warranties, and agreements made
by the
Subscriber herein; and the Subscriber consents to the disclosure of any such
information, and any other information furnished to the Company, to any
governmental authority, self-regulatory organization, or, to the extent required
by law, to any other person.
(i)
The Subscriber realizes that (i) the purchase of the Securities is a long-term
investment; (ii) the purchaser of the Securities must bear the economic risk
of
investment for an indefinite period of time because the Securities have not
been
registered under the Securities Act of 1933 or under the securities laws
of any
state and, therefore, the Securities cannot be resold unless they are
subsequently registered under said laws or exemptions from such registrations
are available; (iii) there is presently no public market for the Securities
and
the Subscriber may be unable to liquidate the Subscriber's investment in
the
event of an emergency, or pledge the Securities as collateral for a loan;
and
(iv) the transferability of the Securities is
Daybreak
Oil & Gas, Inc.
Subscription
Agreement
restricted
and (A) requires conformity with the restrictions contained in paragraph 2
below
and (B) legends will be placed on the certificate(s) representing the Securities
referring to the applicable restrictions on transferability; and
(j)
The Subscriber certifies, under penalties of perjury, that the Subscriber
is NOT
subject to the backup withholding provisions of Section 3406(a)(i)(C) of
the
Internal Revenue Code.
(k)
Stop transfer instructions will be placed with the transfer agent for the
Securities, and a legend may be placed on any certificate representing the
Securities substantially to the following effect:
THIS
SECURITY HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), IN RELIANCE UPON
THE
EXEMPTIONS FROM REGISTRATION PROVIDED IN THE ACT AND REGULATION D UNDER THE
ACT.
AS SUCH, THE PURCHASE OF THIS SECURITY WAS NECESSARILY WITH THE INTENT OF
INVESTMENT AND NOT WITH A VIEW FOR DISTRIBUTION. THEREFORE, ANY SUBSEQUENT
TRANSFER OF THIS SECURITY OR ANY INTEREST THEREIN WILL BE UNLAWFUL UNLESS
IT IS
REGISTERED UNDER THE ACT OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
FURTHERMORE, IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY
OR
ANY INTEREST THEREIN, WITHOUT THE OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY
THAT THE PROPOSED TRANSFER OR SALE DOES NOT AFFECT THE EXEMPTIONS RELIED
UPON BY
THE COMPANY IN ORIGINALLY DISTRIBUTING THE SECURITY AND THAT REGISTRATION
IS NOT
REQUIRED.
3.
Restricted Nature of the Securities.
The Subscriber has been advised and
understands that (a) the Securities have not been registered under the
Securities Act of 1933 or applicable state securities laws and that the
securities are being offered and sold pursuant to exemptions from such laws;
(b)
the Memorandum may not have been filed with or reviewed by certain state
securities administrators because of the limited nature of the offering;
(c) the
Company is under no obligation to register the Securities under the Act or
any
state securities laws, or to take any action to make any exemption from any
such
registration provisions available. The Subscriber represents and warrants
that
the Securities are being purchased for the Subscriber's own account and for
investment purposes only, and without the intention of reselling or
redistributing the same; the Subscriber has made no agreement with others
regarding any of the Securities; and the Subscriber's financial condition
is
such that it is not likely that it will be necessary to dispose of any of
such
Securities in the foreseeable future. The Subscriber is aware that, in the
view
of the Securities and Exchange Commission, a purchase of such securities
with an
intent to resell by reason of any foreseeable specific contingency or
anticipated change in market value, or any change in the condition of the
Company, or in connection with a contemplated liquidation settlement of any
loan
obtained for the acquisition of such securities and for which such securities
were pledged, would represent an intent inconsistent with the representations
set forth above. The Subscriber further represents and agrees that if, contrary
to the foregoing intentions, the Subscriber should later desire to dispose
of or
transfer any of such securities in any manner, the Subscriber shall not do
so
unless and until (i) said Securities shall have first been registered under
the
Act and all applicable securities laws; or (ii) the Subscriber shall have
first
delivered to the Company a written notice declaring such holder's intention
to
effect such transfer and describe in sufficient detail the manner and
circumstances of the proposed transfer, which notice shall be accompanied
either
by a written opinion of legal counsel who shall be reasonably satisfactory
to
the Company, which opinion shall be addressed to the Company and reasonably
satisfactory in form and substance to the Company's counsel, to the effect
that
the proposed sale or transfer is exempt from the registration provisions
of the
Act and all applicable state securities laws, or by a "no action" letter
from
the Securities and Exchange Commission to the effect that the transfer of
the
Securities without registration will not result in recommendation by the
staff
of the Commission that action be taken with respect thereto.
Daybreak
Oil & Gas, Inc.
Subscription
Agreement
4.
Residence.
The Subscriber represents and warrants that the Subscriber is a bona fide
resident
of,
is
domiciled in and received the offer and made the decision to invest in the
Securities in the state set forth
on
the
signature page hereof, and the Securities are being purchased by the Subscriber
in the Subscriber's
name
solely for the Subscriber's own beneficial interest and not as nominee for,
or
on behalf of, or for the
beneficial
interest of, or with the intention to transfer to, any other person, trust
or
organization, except as
specifically
set forth in paragraph 15 of this Subscription Agreement and Letter of
Investment Intent.
5.
Investor
Qualification.
The Subscriber represents and warrants that the Subscriber or
the
purchaser
of the Securities named in paragraph 15 comes within at least one category
marked below, and that
for
any
category marked the Subscriber has truthfully set forth the factual basis
or
reason the Subscriber
comes
within that category. ALL INFORMATION IN RESPONSE TO THIS PARAGRAPH WILL
BE
KEPT
STRICTLY CONFIDENTIAL. The Subscriber agrees to furnish any additional
information which the
Company
deems necessary in order to verify the answers set forth
below.
Category
I
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The
Subscriber is an individual (not a partnership, corporation, etc.)
whose
individual net worth, or joint net worth with the Subscriber's
spouse,
presently exceeds $1,000,000.
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Explanation.
In calculation of net worth the Subscriber may include equity
in
personal property and real estate, including the Subscriber's principal
residence, cash, short term investments, stocks and securities. Equity
in
personal property and real estate should be based on the fair market
value
of such property less debt secured by such property.
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Category
II
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The
Subscriber is an individual (not a partnership, corporation, etc.)
who had
an individual net income in excess of $200,000 in each of the last
two
years, or joint income with his/her spouse in excess of $300,000
in each
of the last two years, and has a reasonable expectation of reaching
the
same income level in the current year.
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Category
III
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The
Subscriber is an executive officer or director of the
Company.
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Category
IV
|
The
Subscriber is a bank; savings and loan; insurance company; registered
broker or dealer; registered investment company; registered business
development company; licensed small business investment company ("SBIC");
or employee benefit plan within the meaning of Title I of ERISA whose
plan
fiduciary is either a bank, savings and loan, insurance company or
registered investment advisor or whose total assets exceed $5,000,000;
or
a self-directed employee benefit plan with investment decisions made
solely by persons that are accredited investors.
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(describe
entity)
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Category
V
|
The
Subscriber is a private business development company as defined in
Section
202(a)(22) of the Investment Advisers Act of
1940.
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Daybreak
Oil & Gas, Inc.
Subscription
Agreement
|
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Category
VI
|
The
Subscriber is an entity with total assets in excess of $5,000,000
which
was
not
formed for the purpose of investing in the Units and which
is one of the following:
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a
corporation;
or
a partnership;
or
a business trust; or
a
tax-exempt organization described in Section 501(cX3) of the
Internal
Revenue Code of 1986, as amended.
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Category
VII
|
The
Subscriber is a trustee for a trust that is revocable by the grantor
at
any time (including an IRA) and the grantor qualifies under either
Category I or Category II above. A copy of the declaration of trust
or
trust agreement and a representation as to the net worth or income
of the
grantor is enclosed.
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Category
VIII
|
The
Subscriber is an entity all the equity owners of which are "accredited
investors" within one or more of the above categories, other than
Category
IV or Category V.
[If relying upon this category alone, each
equity owner must complete a
separate copy of this
Agreement.]
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(describe
entity)
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Category DC
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The
Subscriber is a trust with total assets in excess of $5,000,000,
not
formed for the
specific
purpose of acquiring the Securities, whose purchase is directed by
a
person who has such knowledge and experience in financial and business
matters that he is capable of evaluating the merits and risks of
the
prospective investment.
|
6.
Additional
Representations.
The undersigned, if other than an
individual, makes the following additional representations:
(a)
The Subscriber was not organized for the specific purpose of acquiring the
Securities;
and
(b)
This Subscription Agreement and Letter of Investment Intent has been duly
authorized by all necessary action on the part of the Subscriber, has been
duly
executed by an authorized officer or representative of the Subscriber, and
is a
legal, valid and binding obligation of the Subscriber enforceable in accordance
with its terms.
7.
Sophistication.
The Subscriber further represents and warrants that he
has such knowledge and experience in financial and business matters so as
to be
capable of evaluating the merits and risks of an investment in the Securities
and protecting the Subscriber's own interests in this transaction, and does
not
desire to utilize the services of any other person in connection with evaluating
such merits and risks.
Daybreak
Oil & Gas, Inc.
Subscription
Agreement
8.
Reliance
on Representations.
The Subscriber understands the
meaning and legal
consequences
of the representations, warranties, agreements, covenants, and confirmations
set
out above and
agrees
that the subscription made hereby may be accepted in reliance thereon. The
Subscriber agrees to
indemnify
and hold harmless the Company and any selling agent (including for this purpose
their employees,
and
each
person who controls either of them within the meaning of Section 20 of the
Securities Exchange Act
of
1934,
as amended) from and against any and all loss, damage, liability or expense,
including reasonable
costs
and
attorney's fees and disbursements, which the Company, or such other persons
may
incur by reason
of,
or in
connection with, any representation or warranty made herein not having been
true
when made, any
misrepresentation
made by the Subscriber or any failure by the Subscriber to fulfill any of
the
covenants or
agreements
set forth herein, in the Purchaser Questionnaire or in any other document
provided by the
Subscriber
to the Company.
9.
Transferabilitv
and Assignability.
Neither this Subscription Agreement nor any of the rights
of
the
Subscriber hereunder may be transferred or assigned by the Subscriber. The
Subscriber agrees that the
Subscriber
may not cancel, terminate, or revoke this Subscription Agreement or any
agreement of the
Subscriber
made hereunder (except as otherwise specifically provided herein) and that
this
Subscription
Agreement
shall survive the death or disability of the Subscriber and shall be binding
upon the Subscriber's
heirs,
executors, administrators, successors, and assigns.
10.
Escrow
Account.
Until such time as the Minimum Units have been accepted, the cash
received
for the subscriptions will be held in a non-interest bearing account ("Escrow
Account") in the name
of
the
Company at AMG Guaranty Trust, NA. Subscribers may not withdraw
funds from the Escrow
Account,
and subscriptions may not be revoked, canceled or terminated by the subscriber.
Subsequent to
acceptance
by the Company of subscriptions for at least 1,000,000 Units (the "Minimum
Units"), the Escrow
Account
will be terminated, and additional Offering proceeds relating to accepted
subscriptions may be
utilized
by the Company immediately upon acceptance by the Company. If the Minimum
Units
are not sold
prior
to
the expiration of the Offering Period, the Offering will terminate and the
Company will withdraw the
Offering,
whereupon each Subscriber will receive a refund of any subscription paid,
without deduction. Upon
such
termination of the Offering by the Company, the Subscriber's subscription
will
be automatically
canceled
and the undersigned will have no further rights or obligations under this
Agreement, and the
Company
and the Placement Agent shall have no liability or other obligation to the
Subscriber.
11.
NASD
Membership - Individual Investor.
Are you a member of the NASD, 1 a person
associated with a member 2 of the NASD, or an affiliate of a
member?
1 The
NASD defines a "member" as being either any broker or dealer admitted to
membership in the NASD
or
any
officer or partner of such a member, or the executive representative of such
a
member or the substitute for
such
representative.
2 The
NASD defines a "person associated with a member" as being every sole proprietor,
general or limited
partner,
officer, director or branch manager or such member, or any natural person
occupying a similar status or
performing
similar functions, or any natural person engaged in the investment banking
or
securities business who is
directly
or indirectly controlling or controlled by such member (for example, any
employee), whether or not any
such
person is registered or exempt from registration without the NASD. Thus,
"person
associated with a member"
includes
a sole proprietor, general or limited partner, officer, director or branch
manager or an organization of any
kind
(whether a corporation, partnership or other business entity) which itself
is a
"member" or a "person associated
with
a
member." ha addition, an organization of any kind is a "person associated
with a
member" if its sole
proprietor
or anyone of its general or limited partners, officers, director or branch
managers is a "member" or
"person
associated with a member."
Daybreak
Oil & Gas, Inc.
Subscription
Agreement
If
"Yes,"
please list any members of the NASD with whom you are associated or
affiliated.
NASD
Membership - Corporate Investor,
If you are a Corporation, are any of your
officers, directors or 5% shareholders a member of the NASD, a person associated
with a member of the NASD, or an affiliate of a member?
If
"Yes,"
please list the name of the respective officer, director or 5% shareholder
and
any members of the NASD with whom they are associated or
affiliated.
12.
Survival.
The representations and warranties of the Subscriber set forth herein shall
survive
the
sale
of the Units pursuant to this Subscription Agreement.
13.
Notices.
All notices or other communications hereunder shall be in writing and shall
be
deemed
to
have been duly given if delivered personally or mailed by certified or
registered mail, return
receipt
requested, postage prepaid, as follows: if to the Subscriber, to the address
set
forth below; and if to the
Company
to the address at the beginning of this letter, or to such other address
as the
Company or the
Subscriber
shall have designated to the other by like notice.
14.
(Applicable
to
FLORIDA
residents
only.)
The Subscriber has been informed and recognizes
that
(a)
the Units have not been registered under the Florida Securities Act, and
(b)
under Section 517.061 (12)
of
the
Florida Securities Act, the Subscriber may void the sale of any Securities
within three (3) days after the
tender
of
this Subscription Agreement and payment hereunder to the
Company.
15.
Counterparts.
This Agreement may be executed in one or more counterparts, each of which
shall
be
deemed an original, but all of which together shall constitute one and the
same
document.
IN
NO
EVENT
WILL THE COMPANY, THE PLACEMENT AGENT, OR ANY OF THEIR
AFFILIATES OR THE PROFESSIONAL ADVISORS ENGAGED
BY THEM BE
LIABLE IF FOR
ANY REASON RESULTS OF OPERATIONS OF THE COMPANY
ARE NOT AS PROJECTED IN
THE DOCUMENTS. INVESTORS MUST LOOK
SOLELY TO, AND RELY ON, THEIR OWN
ADVISORS WITH RESPECT TO THE
TAX CONSEQUENCES OF INVESTING IN THE
SECURITIES.
16.
Title.
Manner in Which Title is To Be Held.
Place
an
"X" in one space below:
(c)
Joint
Tenant with Right of
Survivorship (both parties must sign)
Daybreak
Oil & Gas, Inc.
Subscription
Agreement
Please
print above the exact name(s) in which the Securities are to be
held.
17.
State
of
Residence
.
My state of residence and the state in which I
received the offer to invest
and
made
the decision to invest in the Securities
is .
18.
Date
of Birth.
My date of birth
is:
SIGNATURE
PAGE ON NEXT PAGE
The
Subscriber hereby represents he has read this entire Subscription Agreement
and
the Memorandum
dated
,
2006.
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Address
to Which Correspondence Should be Directed
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Signature
(Individual)
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City,
State and Zip Code
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Signature
(All record holders should sign)
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Tax
Identification or Social Security Number
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Name(s)
Typed or Printed
|
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Telephone
Number
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COPY
OF DRIVER'S LICENSE OR PASSAPORT REQUIRED IF NON-BCP
CUSTOMER
CORPORATION,
PARTNERSHIP, TRUST, RETIREMENT ACCOUNT OR OTHER
ENTITY
|
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Name
of Entity
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Address
to Which Correspondence Should be Directed
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By:
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* Signature
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City,
State and Zip Code
|
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Its:
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Title
|
|
Tax
Identification or Social Security Number
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Name Typed or Printed
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Telephone
Number
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*
If
Securities are being subscribed for by an entity, the Certificate of Signatory
must also be completed.
CERTIFICATE
OF SIGNATORY To be completed if Securities are being subscribed for by an
entity.
I,
, am
the
of
(the
"Entity").
I
certify
that I am empowered and duly authorized by the Entity to execute and carry
out
the terms of the Subscription Agreement and Letter of Investment Intent and
to
purchase and hold the Securities, and certify that the Subscription Agreement
and Letter of Investment Intent has been duly and validly executed on behalf
of
the Entity and constitutes a legal and binding obligation of the
Entity.
IN
WITNESS WHEREOF, I have hereto set may hand
this
day
of
,
2006.
COPY
OF SIGNER'S DRIVER'S LICENSE OR PASSAPORT REQUIRED FOR NON-BCP
CUSTOMERS
This
Subscription Agreement is accepted as of
,
2006.
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Daybreak
Oil &
Gas, Inc.
|
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By:
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/s/
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Authorized
Officer
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Date:
______________________
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Exhibit
10.23
EXHIBIT
C
FORM OF WARRANT
This
Warrant and the underlying shares of Common Stock represented by this
Certificate have not been registered under the Securities Act of 1933 (the
"Act"), and are "restricted securities" as that term is defined in Rule 144
under the Act. The securities may not be offered for sale, sold or otherwise
transferred except pursuant to an effective registration statement under the
Act, or pursuant to an exemption from registration under the Act, the
availability of which is to be established to the satisfaction of the
Company.
Warrant
No. 2006
WARRANT
TO PURCHASE SHARES OF COMMON STOCK
Warrant
to
Purchase
Shares
(subject
to adjustment as set forth herein)
Exercise
Price $2.00 Per Share
(subject
to adjustment as set forth herein)
VOID
AFTER 3:00 P.M., PACIFIC TIME, ON _,2011
THIS
CERTIFIES THAT [INVESTOR'S NAME], [INVESTOR'S ADDRESS] is entitled to purchase
from Daybreak Oil and Gas, Inc., a Washington corporation (hereinafter called
the "Company") with its principal office located at 601 West Main Street, Suite
1017, Spokane, Washington 99201, at any time after the issuance of this warrant,
but before 3: 00 P.M., Pacific Time, on --' 2011 (the "Termination Date"),
at
the purchase price of $2.00 per share (the "Exercise Price"), the number of
shares (the "Shares") of the Company's Common Stock (the "Common Stock") set
forth above. The number of Shares purchasable upon exercise of this Warrant
and
the Exercise Price per Share shall be subject to adjustment from time to time
as
set forth in Section 4 below.
Section
1.
Definitions.
The
following terms used in this agreement shall have the following meanings (unless
otherwise expressly provided herein):
The
"Act.
" The Securities Act of 1933, as amended.
The
"Commission."
The Securities and Exchange Commission.
The
"Company."
Daybreak Oil and Gas, Inc.
"Common
Stock."
The Company's Common Stock.
"Current
Market Price."
The Current Market Price shall be determined as
follows:
(a)
if
the security at issue is listed on a national securities exchange or admitted
to
unlisted trading privileges on such an exchange or quoted on either the National
Market System or the Small Cap Market of the automated quotation service
operated by The Nasdaq Stock Market, Inc. ("Nasdaq"), the current value shall
be
the last reported sale price of that security on such exchange or system on
the
day for which the Current Market Price is to be determined or, if no such sale
is made on such day, the average of the highest closing bid and lowest asked
price for such day on such exchange or system; or
(b)
if
the security at issue is not so listed or quoted or admitted to unlisted trading
privileges, the Current Market Value shall be the average of the last reported
highest bid and lowest asked prices quoted on the Nasdaq Electronic Bulletin
Board, or, if not so quoted, then by the National Quotation Bureau, Inc. on
the
last business day prior to the day for which the Current Market Price is to
be
determined; or
(c)
if
the security at issue is not so listed or quoted or admitted to unlisted trading
privileges and bid and asked prices are not reported, the current market value
shall be determined in such reasonable manner as may be prescribed from time
to
time by the Board of Directors of the Company, subject to the objection and
arbitration procedure as described in Section 7 below.
"Expiration
Date."
J
2011.
"Holder"
or "Warrantholder."
The person to whom this Warrant is issued, and any
valid transferee thereof pursuant to Section 3.1 below.
"NASD."
The National Association of Securities Dealers, Inc.
"Nasdaq."
The automated quotation system operated by the Nasdaq Stock Market,
Inc.
"Termination
of Business.
"
Any
sale, lease or exchange of all, or substantially all, of the Company's assets
or
business or any dissolution, liquidation or winding up of the
Company.
"Warrants."
The warrants issued in accordance with the terms of this Agreement and
any
Warrants issued in substitution for or replacement of such warrants, including
those evidenced by a certificate or certificates originally issued or issued
upon division, exchange, substitution or transfer pursuant to this
Agreement.
"Warrant
Securities."
The Common Stock purchasable upon exercise of a
Warrant
including
the Common Stock underlying unexercised portions of a Warrant.
Section
2.
Term
of
Warrants; Exercise of Warrant.
2.1.
Exercise
of Warr
ant.
Subject to the terms of this Agreement, the Holder shall have the right,
at
any time prior to 5:00 p.m., Spokane Time, on the Expiration Date, to purchase
from the Company up to the number of fully paid and nonassessable Shares to
which the Holder may at the time be entitled to purchase pursuant to this
Agreement, upon surrender to the Company, at its principal office, of the
Warrant to be exercised, together with the purchase form attached hereto as
Exhibit 1. duly filled in and signed, and upon payment to the Company of the
Exercise Price for the number of Shares in respect of which such Warrants are
then exercised, but in no event for less than 100 Shares (unless fewer than
an
aggregate of 100 shares are then purchasable under all outstanding Warrants
held
by a Holder).
2.2.
Exercise Price.
The exercise price ("Exercise Price) is $2.00 per Share, as
modified in accordance with Section 4, below.
2.3.
Issuance
of Shares.
Upon such surrender of the Warrants and payment of such
Exercise
Price as aforesaid, the Company shall issue and cause to be delivered with
all
reasonable dispatch to or upon the written order of the Holder and in such
name
or names as the Holder may designate, a certificate or certificates for the
number of full Shares so purchased upon the exercise of the Warrant, together
with cash, as provided in Section 13 hereof, in respect of any ftactional Shares
otherwise issuable upon such surrender.
2.4
.
Upon receipt of the Warrant by the company as described in Sections 2.1. above,
the Holder shall be deemed to be the holder of record of the Shares issuable
upon such exercise, notwithstanding that the transfer books of the Company
may
then be closed or that certificates representing such Shares may not have been
prepared or actually delivered to the Holder.
Section
3. Transferability and Form of Warrant
3.1.
Limitation on Transfer.
Any assignment or transfer of a Warrant shall
be made by the presentation and surrender of the Warrant to the Company at
its
principal office or the office of its transfer agent, if any, accompanied by
a
duly executed Assignment Form. Upon the presentation and surrender of these
items to the Company, the Company, at its sole expense, shall execute and
deliver to the new Holder or Holders a new Warrant or Warrants, in the name
of
the new Holder or Holders as named in the Assignment Form, and the Warrant
presented or surrendered shall at that time be canceled.
3.2.
Exchange of Certificate.
Any Warrant may be exchanged for another
certificate or certificates entitling the Warrantholder to purchase a like
aggregate number of Shares as the certificate or certificates surrendered then
entitled such Warrantholder to purchase. Any Warrantholder desiring to exchange
a Warrant shall make such request in writing delivered to the Company, and
shall
surrender, properly endorsed, with signatures guaranteed, the certificate
evidencing the Warrant to be so exchanged. Thereupon, the Company shall execute
and deliver to the person entitled thereto a new Warrant as so
requested.
3.3.
Mutilated, Lost, Stolen, or Destroyed Certificate.
In case the
certificate or certificates evidencing the Warrants shall be mutilated, lost,
stolen or destroyed, the Company shall, at the request of the Warrantholder,
issue and deliver in exchange and substitution for and upon
cancellation
of the mutilated certificate or certificates, or in lieu of and substitution
for
the certificate or certificates lost, stolen or destroyed, a new Warrant or
certificates of like tenor and representing an equivalent right or interest,
but
only upon receipt of evidence satisfactory to the Company of such loss, theft
or
destruction of such Warrant and a bond of indemnity, if requested, also
satisfactory in form and amount, at the applicant's cost. Applicants for such
substitute Warrant shall also comply with such other reasonable regulations
and
pay such other reasonable charges as the Company may prescribe.
Section
4. Adjustment of Number of Shares.
The
number and kind of securities purchasable upon the exercise of the Warrants
and
the Warrant Price shall be subj ect to adj ustment from time to time upon the
happening of certain events, as follows:
4.1.
Adjustments.
The number of Shares purchasable upon the exercise of the
Warrants shall be subject to adjustments as follows:
(a)
In
case the Company shall (i) pay a dividend in Common Stock or make a distribution
to its stockholders in Common Stock, (ii) subdivide its outstanding Common
Stock, (iii) combine its outstanding Common Stock into a smaller number of
shares of Common Stock, or (iv) issue by classification of its Common Stock
other securities of the Company, the number of Shares purchasable upon exercise
of the Warrants immediately prior thereto shall be adjusted so that the
Warrantholder shall be entitled to receive the kind and number of Shares or
other securities of the Company which it would have owned or would have been
entitled to receive immediately after the happening of any of the events
described above, had the Warrants been exercised immediately prior to the
happening of such event or any record date with respect thereto. Any adjustment
made pursuant to this subsection 4.1. (a) shall become effective immediately
after the effective date of such event retroactive to the record date, if any,
for such event.
(b)
In
case the Company shall issue rights, options, warrants, or convertible
securities to all or substantially all holders of its Common Stock, without
any
charge to such holders, entitling them to subscribe for or purchase Common
Stock
at a price per share which is lower at the record date mentioned below than
the
then Current Market Price, the number of Shares thereafter purchasable upon
the
exercise of each Warrant shall be determined by multiplying the number of Shares
theretofore purchasable upon exercise of the Warrants by a fraction, of which
the numerator shall be the number of shares of Common Stock outstanding
immediately prior to the issuance of such rights, options, warrants or
convertible securities plus the number of additional shares of Common Stock
offered for subscription or purchase, and of which the denominator shall be
the
number of shares of Common Stock outstanding immediately prior to the issuance
of such rights, options, warrants, or convertible securities plus the number
of
shares which the aggregate offering
price
of
the total number of shares offered would purchase at such Current Market Price.
Such adjustment shall be made whenever such rights, options, warrants, or
convertible securities are issued, and shall become effective immediately and
retroactively to the record
date
for
the determination of stockholders entitled to receive such rights, options,
warrants, or convertible securities.
(c)
In
case the Company shall distribute to all or substantially all holders of its
Common Stock evidences of its indebtedness or assets (excluding cash dividends
or distributions out of earnings) or rights, options, warrants, or convertible
securities containing the right to subscribe for or purchase Common Stock
(excluding those referred to in subsection 4.1 (b) above), then in each case
the
number of Shares thereafter purchasable upon the exercise of the Warrants shall
be determined by multiplying the number of Shares theretofore purchasable upon
exercise of the Warrants by a fraction, of which the numerator shall be the
then
Current Market Price on the date of such distribution, and of which the
denominator shall be such Current Market Price on such date minus the then
fair
value (determined as provided in subparagraph ( e) below) of the portion of
the
assets or evidences of indebtedness so distributed or of such subscription
rights, options, warrants, or convertible securities applicable to one share.
Such adjustment shall be made whenever any such distribution is made and shall
become effective on the date of distribution retroactive to the record date
for
the determination of stockholders entitled to receive such
distribution.
(d)
No
adjustment in the number of Shares purchasable pursuant to the Warrants shall
be
required unless such adjustment would require an increase or decrease of at
least one percent in the number of Shares then purchasable upon the exercise
of
the Warrants or, if the Warrants are not then exercisable, the number of Shares
purchasable upon the exercise of the Warrants on the first date thereafter
that
the Warrants become exercisable; provided, however, that any adjustments which
by reason of this subsection (4.1 (d» are not required to be made immediately
shall be carried forward and taken into account in any subsequent
adjustment.
(e)
Whenever the number of Shares purchasable upon the exercise of the Warrant
is
adjusted, as herein provided, the Exercise Price payable upon exercise of the
Warrant shall be adjusted by multiplying such Exercise Price immediately prior
to such adjustment by a fraction, of which the numerator shall be the number
of
Warrant Shares purchasable upon the exercise of the Warrant immediately prior
to
such adjustment, and of which the denominator shall be the number of Warrant
Shares so purchasable immediately thereafter.
(f)
Whenever the number of Shares purchasable upon exercise of the Warrants is
adjusted as herein provided, the Company shall cause to be promptly mailed
to
the Warrantholder by first class mail, postage prepaid, notice of such
adjustment and a certificate of the chief financial officer of the Company
setting forth the number of Shares purchasable upon the exercise of the Warrants
after such adjustment, a brief statement of the facts requiring such adjustment
and the computation by which such adjustment was made.
(g)
For
the purpose of this Section 4.1, the term "Common Stock" shall mean (i) the
class of stock designated as the Common Stock of the Company at the date of
this
Agreement, or (ii) any other class of stock resulting from successive changes
or
reclassifications of such Common Stock consisting solely of changes in par
value, or from par value to no par value, or from no par value to par value.
In
the event that at any time, as
a
result
of an adjustment made pursuant to this Section 4, the Warrantholder shall become
entitled to purchase any securities of the Company other than Common Stock,
(y)
if the Warrantholder's right to purchase is on any other basis than that
available to all holders of the Company's Common Stock, the Company shall obtain
an opinion of an independent investment banking firm valuing such other
securities and (z) thereafter the number of such other securities so purchasable
upon exercise of the Warrants shall be subject to adjustment from time to time
in a manner and on terms as nearly equivalent as practicable to the provisions
with respect to the Shares contained in this Section 4.
(h)
Upon
the expiration of any rights, options, warrants, or conversion privileges,
if
such shall have not been exercised, the number of Shares purchasable upon
exercise of the Warrants, to the extent the Warrants have not then been
exercised, shall, upon such expiration, be readjusted and shall thereafter
be
such as they would have been had they been originally adjusted (or had the
original adjustment not been required, as the case may be) on the basis of
(i)
the fact that the only shares of Common Stock so issued were the shares of
Common Stock, if any, actually issued or sold upon the exercise of such rights,
options, warrants, or conversion privileges, and (ii) the fact that such shares
of Common Stock, if any, were issued or sold for the consideration actually
received by the Company upon such exercise plus the consideration, if any,
actually received by the Company for the issuance, sale or grant of all such
rights, options, warrants, or conversion privileges whether or not exercised;
provided, however, that no such readjustment shall have the effect of decreasing
the number of Shares purchasable upon exercise of the Warrants by an amount
in
excess of the amount of the adjustment initially made in respect of the
issuance, sale, or grant of such rights, options, warrants, or conversion
rights.
4.2.
No Adjustment for Dividends.
Except as provided in Section 4.1, no
adjustment in
respect
of any dividends or distributions out of eamings shall be made during the term
of the Warrants or upon the exercise of the Warrants.
4.3.
No Adjustment in Certain Cases.
No adjustments shall be made pursuantto
Section 4
hereof
in
connection with the issuance of the Common Stock upon exercise of the Warrants.
No
adjustments
shall be made pursuant to Section 4 hereof in connection with grant or exercise
of presently authorized or outstanding options to purchase, or the issuance
of
shares of Common Stock under the Company's director or employee benefit
plan.
4.4.
Preservation ofPurchase Rights upon Reclassification, Consolidation, etc.
In case of
any
consolidation of the Company with or merger of the Company into another
corporation, or in case of any sale or conveyance to another corporation of
the
property, assets, or business of the Company as an entirety or substantially
as
an entirety, the Company or such successor or purchasing corporation, as the
case may be, shall execute with the Warrantholder an agreement that the
Warrantholder shall have the right thereafter upon payment of the Exercise
Price
in effect immediately prior to such action to purchase, upon exercise of the
Warrants, the kind and amount of shares and other securities and property which
it would have owned or have been entitled to receive after the happening of
such
consolidation, merger, sale, or conveyance had the Warrants been exercised
immediately prior to such action. In the event of a merger described in Section
368(a)(2)(E) of the Internal Revenue Code of 1986, in which the Company is
the
surviving
corporation,
the right to purchase Shares under the Warrants shall terminate on the date
of
such merger and thereupon the Warrants shall become null and void, but only
if
the controlling corporation shall agree to substitute for the Warrants, its
warrants which entitle the holder thereof to purchase upon their exercise the
kind and amount of shares and other securities and property which it would
have
owned or been entitled to receive had the Warrants been exercised immediately
prior to such merger. Any such agreements referred to in this Section 4.4 shall
provide for adjustments, which shall be as nearly equivalent as may be
practicable to the adjustments provided for in Section 4 hereof The provisions
of this Section (4.4) shall similarly apply to successive consolidations,
mergers, sales, or conveyances.
4.5.
Par Value ofShares of Common Stock.
Before taking any action which
would cause
an
adjustment effectively reducing the portion of the Exercise Price allocable
to
each Share below the par value per share of the Common Stock issuable upon
exercise of the Warrants, the Company will take any corporate action which
may,
in the opinion of its counsel, be necessary in order that the Company may
validly and legally issue fully paid and nonassessable Common Stock upon
exercise of the Warrants.
4.6.
Independent Public Accountants.
The Company may retain a firm of
independent
public
accountants of recognized national standing (which may be any such firm
regularly employed by the Company) to make any computation required under this
Section 4, and a certificate signed by
such
firm
shall be conclusive evidence of the correctness of any computation made under
this Section 4.
4.7.
Statement on Warrants.
Irrespective of any adjustments in the number of
securities
issuable
upon exercise of the Warrants, Warrants theretofore or thereafter issued may
continue to express the same number of securities as are stated in the similar
Warrants initially issuable pursuant to this Agreement. However, the Company
may, at any time in its sole discretion (which shall be conclusive), make any
change in the form of Warrant that it may deem appropriate and that does not
affect the substance thereof; and any Warrant thereafter issued, whether upon
registration of transfer of, or in exchange or substitution for, an outstanding
Warrant, may be in the form so changed.
4.8.
Treasury Stock.
For purposes of this Section 4, shares of Common
Stock owned or held at any relevant time by, or for the account of, the Company,
in its treasury or otherwise, shall not be deemed to be outstanding for purposes
of the calculations and adjustments described.
Section
5.
Payment
of Exercise Price
The
payment of the Exercise Price shall be made in cash or by check or any
combination
thereof
Section
6.
Redemption
6.1
Right to Redeem.
The Company may, at its option, redeem the Warrants in
whole or
in
part
on a pro rata basis for a redemption price of $.05 per Warrant (the "Redemption
Price") on 15
days
prior written notice to the Warrant Holders. The right to redeem the Warrants
may be exercised by the Company only in the event (i) the average of the closing
sale prices of the
Company's
common stock is at or above $3.00 per share for twenty (20) out of the thirty
(30)
trading
preceding the date the Warrants are called, (ii) the Warrant Securities can
be
resold pursuant to an effective registration statement under the Act, (iii)
the
expiration of the 15 days notice period is within the Exercise Period. In the
event the Company exercises its right to redeem the Warrants, the Expiration
Date will be deemed to be, and the Warrants will be exercisable until the close
of business on, the date fixed for redemption in such notice (the "Redemption
Date"). If any Warrant called for redemption is not exercised by such time,
it
will cease to be exercisable and the Warrant Holder thereof will be entitled
only to the Redemption Price.
6.2
Termination ofRights.
From and after the Redemption Date, all rights of
the holders
of
record
of redeemed Warrants (except the right to receive the Redemption Price) shall
terminate.
6.3
Payment of Redemption Price.
The Company shall pay to the holders of
record of redeemed Warrants all amounts to which the holders of record of such
redeemed Warrants who shall have surrendered their Warrants are
entitled.
Section
7. Notice to Holders.
If,
prior
to the expiration of this Warrant either by its terms or by its exercise in
full, any of
the
following shall occur:
(a)
the
Company shall declare a dividend or authorize any other distribution on its
Common
Stock; or
(b)
the
Company shall authorize the granting to the shareholders of its Common Stock
of
rights to subscribe for or purchase any securities or any other similar rights;
or
(c)
any
reclassification, reorganization or similar change of the Common Stock, or
any
consolidation or merger to which the Company is a party, or the sale, lease,
or
exchange of any
significant
portion of the assets of the Company; or
(d)
the
voluntary or involuntary dissolution, liquidation or winding up of the Company;
or
(e)
any
purchase, retirement or redemption by the Company of its Common
Stock;
then,
and
in any such case, the Company shall deliver to the Holder or Holders written
notice thereof at least 30 days prior to the earliest applicable date specified
below with respect to which notice is to be given, which notice shall state
the
following:
(x)
the
date on which a record is to be taken for the purpose of such dividend,
distribution or rights, or, if a record is not to be taken, the date as of
which
the shareholders of Common Stock of record to be entitled to such dividend,
distribution or rights are to be determined;
(y)
the
date on which such reclassification, reorganization, consolidation, merger,
sale, transfer, dissolution, liquidation, winding up or purchase, retirement
or
redemption is expected to
become
effective, and the date, if any, as of which the Company's shareholders of
Common Stock of record shall be entitled to exchange their Common Stock for
securities or other property deliverable upon such reclassification,
reorganization, consolidation, merger, sale, transfer, dissolution, liquidation,
winding up, purchase, retirement or redemption; and
(z)
if
any matters referred to in the foregoing clauses (x) and (y) are to be voted
upon by shareholders of Common Stock, the date as of which those shareholders
to
be entitled to vote are to be determined.
Section
8. Officers' Certificate.
Whenever
the Exercise Price or the aggregate number of Warrant Securities purchasable
pursuant to this Warrant shall be adjusted as required by the provisions of
Section 4 above, the Company shall promptly file with its Secretary or an
Assistant Secretary at its principal office, and with its transfer agent, if
any, an officers' certificate executed by the Company's President and Secretary
or Assistant Secretary, describing the adjustment and setting forth, in
reasonable detail, the facts requiring such adjustment and the basis for and
calculation of such adjustment in accordance with the provisions of this
Warrant. Each such officers' certificate shall be made available to the Holder
or Holders of this Warrant for inspection at all reasonable times, and the
Company, after each such adjustment, shall promptly deliver a copy of the
officers' certificate relating to that adjustment to the Holder or Holders
of
this Warrant. The officers' certificate described in this Section 8 shall be
deemed to be conclusive as to the correctness of the adjustment reflected
therein if, and only if, no Holder of this Warrant delivers written notice
to
the Company of an objection to the adjustment within 30 days after the officers'
certificate is delivered to the Holder or Holders of this Warrant. The Company
will make its books and records available for inspection and copying during
normal business hours by the Holder so as to permit a determination as to the
correctness of the adjustment. If written notice of an objection is delivered
by
a Holder to the Company and the
parties
cannot reconcile the dispute, the Holder and the Company shall submit the
dispute to arbitration pursuant to the provisions of Section 20 below. Failure
to prepare or provide the officers' certificate shall not modify the parties'
rights hereunder.
Section
9. Reservation of Warrant Securities.
There
has
been reserved, and the Company shall at all times keep reserved so long as
the
Warrants remain outstanding, out of its authorized and unissued Common Stock,
such number of shares of Common Stock as shall be subject to purchase under
the
Warrants. Every transfer agent for the Common Stock and other securities of
the
Company issuable upon the exercise of the Warrants will be irrevocably
authorized and directed at all times to reserve such number of authorized shares
and other securities as shall be requisite for such purpose. The Company will
keep a copy of this Agreement on file with every transfer agent for the Common
Stock and other
securities
of the Company issuable upon the exercise of the Warrants. The Company will
supply every such transfer agent with duly executed stock and other
certificates, as appropriate, for such purpose and will provide or otherwise
make available any cash which may be payable as provided in Section 14
hereof
Section
10.
Restrictions
on Transfer; Registration Rights.
10.1.
Restrictions on Transfer.
The Warrantholder agrees that prior to making any
disposition of the Warrants or the Shares, the Warrantholder shall give written
notice to the Company describing briefly the manner in which any such proposed
disposition is to be made; and no such disposition shall be made if the Company
has notified the Warrantholder that in the opinion of counsel reasonably
satisfactory to the Warrantholder, there is no applicable exemption from the
registration requirements under the Act available for the disposition, and
a
registration statement or other notification or post-effective amendment thereto
(hereinafter collectively a "Registration Statement") under the Act is required
with respect to such disposition and no such Registration Statement has been
filed by the Company with, and declared effective, if necessary, by, the
Commission.
10.2.
Registration Right.
The Warrant Securities are subj ect to the terms of a
Registration Rights Agreement. Upon request, a copy of the Registration Rights
Agreement is available, without charge, from the Company.
Section
11.
Payment
of Taxes.
The
Company will pay all documentary stamp taxes, if any, attributable to the
initial
issuance
of the Warrants or the securities comprising the Shares; provided, however,
the
Company
shall
not
be required to pay any tax which may be payable in respect of any transfer
of
the Warrants or the securities comprising the Shares.
Section
12.
Transfer
to Comply With the Securities Act of 1933
This
Warrant, the Warrant Securities, and all other securities issued or issuable
upon exercise
of
this
Warrant, may not be offered, sold or transferred, in whole or in part, except
in
compliance
with
the
Act, and except in compliance with all applicable state securities laws. The
Company may
cause
substantially the following legends, or their equivalents, to be set forth
on
each certificate representing the Warrant Securities, or any other security
issued or issuable upon exercise of this Warrant, not theretofore distributed
to
the public or sold to underwriters, as defmed by the Act, for distribution
to
the public pursuant to Section 8 above:
(a)
"THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
.SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD,
EXCHANGED, HYPOTHECATED OR TRANSFERRED IN ANY MANNER EXCEPT IN COMPLIANCE WITH
THE AGREEMENT PURSUANT TO WHICH THEY WERE ISSUED."
(b)
Any
legend required by applicable state securities laws.
Any
certificate issued at any time in exchange or substitution for any certificate
bearing such
legends
(except a new certificate issued upon completion of a public distribution
pursuant to a
registration
statement under the Securities Act of 1933, as amended (the "Act"), or the
securities represented thereby) shall also bear the above legends unless, in
the
opinion of the Company's counsel, the securities represented thereby need no
longer be subject to such restrictions.
Section
13.
Fractional
Shares
No
fractional shares or scrip representing fractional shares shall be issued upon
the exercise of all or any part of this Warrant. With respect to any fraction
of
a share of any security called for upon any exercise of this Warrant, the
Company shall pay to the Holder an amount in money equal to that fraction
multiplied by the Current Market Price of that share.
Section
14.
No
Rights
as Stockholder; Notices to Warrantholder.
Nothing
contained in this Agreement or in the Warrants shall be construed as conferring
upon
the
Warrantholder or its transferees any rights as a stockholder of the Company,
including the right to vote, receive dividends, consent or receive notices
as a
stockholder in respect to any meeting of stockholders for the election of
directors of the Company or any other matter. The Company
covenants,
however, that for so long as this Warrant is at least partially unexercised,
it
will furnish any Holder of this Warrant with copies of all reports and
communications furnished to the shareholders of the Company. In addition, if
at
any time prior to the expiration of the Warrants and prior to their exercise,
anyone or more of the following events shall occur:
(a)
any
action which would require an adjustment pursuant to Section 4.1 (except
subsections
4. 1 (e) and 4. 1 (h) or 4.4; or
(b)
a
dissolution, liquidation, or winding up of the Company (other than in connection
with a consolidation, merger, or sale of its property, assets, and business
as
an entirety or substantially as an entirety) shall be proposed:
then
the
Company shall give notice in writing of such event to the Warrantholder, as
provided in
Section
17 hereof, at least 20 days prior to the date fixed as a record date or the
date
of closing the
transfer
books for the determination of the stockholders entitled to any relevant
dividend,
distribution,
subscription rights or other rights or for the determination of stockholders
entitled to vote on such proposed dissolution, liquidation, or winding up.
Such
notice shall specify such record date or the date of closing the transfer books,
as the case may be. Failure to mail or receive notice or any defect therein
shall not affect the validity of any action taken with respect
thereto.
Section
15.
Charges
Due Upon Exercise.
The
Company shall pay any and all issue or transfer taxes, including, but not
limited to, all federal or state taxes, that may be payable with respect to
the
transfer of this Warrant or the issue or delivery of Warrant Securities upon
the
exercise of this Warrant.
Section
16.
Warrant
Securities to be Fully Paid
The
Company covenants that all Warrant Securities that may be issued and delivered
to a Holder of this Warrant upon the exercise of this Warrant and payment of
the
Exercise Price will be, upon such delivery, validly and duly issued, fully
paid
and nonassessable.
Section
17.
Notices
Any
notice pursuant to this Agreement by the Company or by a Warrantholder or a
holder of
Shares
shall be in writing and shall be deemed to have been duly given if delivered
or
mailed by
certified
mail, return receipt requested:
(i)
If to a Warrantholder or a holder of Shares, addressed to the address set forth
above.
(ii)
If to the Company addressed to it at 601 W. Main Ave., Suite 1017, Spokane,
Washington
99201, Attention: Secretary.
Each
party may from time to time change the address to which notices to it are to
be
delivered or mailed hereunder by notice in accordance herewith to the other
party.
Section
18.
Merger
or
Consolidation of the Company.
The
Company will not merge or consolidate with or into any other corporation or
sell
all or substantially all of its property to another corporation, unless the
provisions of Section 4.4 are complied with.
Section
19.
Applicable
Law
This
Warrant shall be governed by and construed in accordance with the laws of the
State of
Washington,
and courts located in Spokane County, Washington shall have exclusive
jurisdiction
over
all
disputes arising hereunder.
Section
20.
Arbitration.
The
Company and the Holder, and by receipt of this Warrant or any Warrant
Securities, all subsequent Holders or holders of Warrant Securities, agree
to
submit all controversies, claims, disputes and matters of difference with
respect to this Warrant, including, without limitation, the application of
this
Section 20 to arbitration in Spokane, Washington, according to the rules and
practices of the American Arbitration Association from time to time in force;
provided, however, that if such rules and practices conflict with the applicable
procedures of Washington courts of
general
jurisdiction or any other provisions of Washington law then in force, those
Washington rules and provisions shall govern. This agreement to arbitrate shall
be specifically enforceable.
Arbitration
may proceed in the absence of any party if notice of the proceeding has been
given to that party. The parties agree to abide by all awards rendered in any
such proceeding. These awards shall be final and binding on all parties to
the
extent and in the manner provided by the rules of civil procedure enacted in
Washington. All awards may be filed, as a basis of judgment and of the
issuance
of execution for its collection, with the clerk of one or more courts, state
or
federal, having
jurisdiction
over either the party against whom that award is rendered or its property.
No
party shall be considered in default hereunder during the pendency of
arbitration proceedings relating to that default.
Section
21. Acceptance of Terms; Successors.
By
its
acceptance of this Warrant Certificate, the Holder accepts and agrees to comply
with all of the terms and provisions hereof. All the covenants and provisions
of
this Warrant Certificate by or for the benefit of the Company or the Holder
shall bind and inure to the benefit of their respective successors and assigns
hereunder.
Section
22.
Miscellaneous
Provisions
(a)
Subject to the terms and conditions contained herein, this Warrant shall be
binding on the Company and its successors and shall inure to the benefit of
the
original Holder, its successors and assigns and all holders of Warrant
Securities and the exercise of this Warrant in full shall not terminate the
provisions of this Warrant as it relates to holders of Warrant
Securities.
(b)
If
the Company fails to perform any of its obligations hereunder, it shall be
liable to
the
Holder for all damages, costs and expenses resulting from the failure,
including, but not limited
to,
all
reasonable attorney's fees and disbursements.
(c)
This
Warrant cannot be changed or terminated or any performance or condition
waived
in
whole or in part except by an agreement in writing signed by the party against
whom
enforcement
of the change, termination or waiver is sought; provided, however, that any
provisions
hereof
may be amended, waived, discharged or terminated upon the written consent of
the
Company
and
the
Company.
(d)
If
any provision of this Warrant shall be held to be invalid, illegal or
unenforceable,
such
provision shall be severed, enforced to the extent possible, or modified in
such
a way as to
make
it
enforceable, and the invalidity, illegality or unenforceability shall not affect
the remainder of this Warrant.
(e)
The
Company agrees to execute such further agreements, conveyances, certificates
and
other documents as may be reasonably requested by the Holder to effectuate
the
intent and provisions of this Warrant.
(f)
Paragraph headings used in this Warrant are for convenience only and shall
not
be taken or construed to define or limit any of the terms or provisions of
this
Warrant. Unless
otherwise
provided, or unless the context shall otherwise require, the use of the singular
shall include the plural and the use of any gender shall include all
genders.
Dated
_________________
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DAYBREAK
OIL AND GAS,
INC.
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By:
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Terrence
J. Dunne, Chief
Financial Officer
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EXHIBIT
1
PURCHASE
FORM
Dated
___________________
The
undersigned hereby irrevocably elects to exercise the Warrant represented by
this
Warrant
Certificate to the extent of
purchasing
Shares
of Daybreak Oil and Gas,
Inc.,
and
hereby tenders payment of the exercise price thereof.
INSTRUCTIONS
FOR REGISTRATION OF STOCK
Name
__________________________________________
(please
type or print in block letters)
Address______________________________________________
_____________________________________________________
ASSIGNMENT
FORM
FOR
VALUE
RECEIVED, ________________________________
,
hereby
sells, assigns and transfers unto
Name
__________________________________________
(please
type or print in block letters)
Address______________________________________________
_____________________________________________________
the
right to purchase Shares of
Daybreak Oil and Gas, Inc represented by this Warrant Certificate to the extent
of ___________________
Shares
as
to which such right is exercisable and does hereby irrevocably constitute and
appoint ____________________________________
attorney,
to transfer the same on the books of the Company with full power of substitution
in the premises.
Notice:
the signature on this assignment must correspond with the name as it appears
upon the face of this Warrant Certificate in every particular, without
alteration or enlargement or any change whatever.
15
Exhibit
10.24
EXHIBIT
B REGISTRATION RIGHTS AGREEMENT
This
Registration Rights Agreement (this "AGREEMENT") is made and entered into as
of
July ___ 2006, by and among Daybreak Oil and Gas, Inc., a corporation
(the "COMPANY"), and the investors signatory hereto (each a "INVESTOR" and
collectively, the "INVESTORS").
This
Agreement is made pursuant to Subscription Agreements between the Company and
each
Investor (the "SUBSCRIPTION AGREEMENT").
The
Company and the Investors hereby agree as follows:
1.
Definitions.
Capitalized terms used and not otherwise defined herein that
are defined
in
the
Subscription Agreement will have the meanings given such terms in the
Subscription Agreement. As used in this Agreement, the following terms have
the
respective meanings set forth in this Section 1:
"ADDITIONAL
WARRANTS" has the meaning set forth in Section 2( d). "ADVICE" has the meaning
set forth in Section 6(d).
"EFFECTIVE
DATE" means the date that the Registration Statement filed pursuant to Section
2( a)
or
2(b)
is first declared effective by the Commission.
"EFFECTIVENESS
PERIOD" has the meaning set forth in Section 2(a).
"EXCHANGE
ACT" means the Securities Exchange Act of 1934, as amended.
"FILING
DATE" means (a) with respect to the initial Registration Statement required
to
be filed under Section 2(a), the latter of the 60th day following the Closing
Date or within thirty (30) days after the effective date of the registration
statement relating to our private placement offering dated March 3, 2006; and
(b) with respect to any additional Registration Statements that may be required
pursuant to Section 2(b)' the 45th day following (x) if such Registration
Statement is required because the Commission shall have notified the Company
in
writing that certain Registrable Securities were not eligible for inclusion
on a
previously filed Registration Statement, the date or time on which the
Commission shall indicate as being the first date or time that such Registrable
Securities may then be included in a Registration Statement, or (y) if such
Registration Statement is required for a reason other than as described in
(x)
above, the date on which the Company first knows, or reasonably should have
known, that such additional Registration Statement( s) is required; and (c)
with
respect to a Registration Statement required to be filed under Section 2(c),
the
30th day following the date on which the Company becomes eligible to utilize
Form S-3 to register the resale of Common Stock.
"HOLDER"
or "HOLDERS" means the holder or holders, as the case may be, from time to
time
of
Registrable
Securities.
"INDEMNIFIED
PARTY" has the meaning set forth in Section 5( c).
"INDEMNIFYING
PARTY" has the meaning set forth in Section 5( c).
"LOSSES"
has the meaning set forth in Section 5(a).
"OFFERING"
means that private offering of shares and warrants, offered together as Units,
made
pursuant
to the Placement Agent Agreement.
"PLACEMENT
AGENT AGREEMENT' means that agreement dated June 30, 2006, between the Company
and Bathgate Capital Partners LLC relating to the offering of Units of the
Company's securities.
"PROCEEDING"
means an action, claim, suit, investigation or proceeding (including, without
limitation, an investigation or partial proceeding, such as a deposition),
whether commenced or threatened.
"PROSPECTUS"
means the prospectus included in a Registration Statement (including, without
limitation, a prospectus that includes any information previously omitted from
a
prospectus filed as part of an effective registration statement in reliance
upon
Rule 430A promulgated under the Securities Act), as amended or supplemented
by
any prospectus supplement, with respect to the terms of the offering of any
portion of the Registrable Securities covered by a Registration Statement,
and
all other amendments and supplements to the Prospectus, including post-effective
amendments, and all material incorporated by reference or deemed to be
incorporated by reference in such Prospectus.
"REGISTRABLE
SECURITIES" means: (i) the Shares, (ii) the Warrant Shares, (iii) any securities
issued or issuable upon any stock split, dividend or other distribution,
recapitalization or similar event, or any conversion price adjustment with
respect to any of the securities referenced in (i) or (ii) above.
"REGISTRATION
STATEMENT" means the initial registration statement required to be filed in
accordance with Section 2(a) and any additional registration statement(s)
required to be filed under Section 2(b) and 2( c), including (in each case)
the
Prospectus, amendments and supplements to such registration statements or
Prospectus, including pre- and post-effective amendments, all exhibits thereto,
and all material incorporated by reference or deemed to be incorporated by
reference therein.
"RULE
144" means Rule 144 promulgated by the Commission pursuant to the Securities
Act, as such Rule may be amended from time to time, or any similar rule or
regulation hereafter adopted by the Commission having substantially the same
effect as such Rule.
"RULE
415" means Rule 415 promulgated by the Commission pursuant to the Securities
Act, as such Rule may be amended from time to time, or any similar rule or
regulation hereafter adopted by the Commission having substantially the same
effect as such Rule.
"RULE
424" means Rule 424 promulgated by the Commission pursuant to the Securities
Act, as such Rule may be amended from time to time, or any similar rule or
regulation hereafter adopted by the Commission having substantially the same
effect as such Rule.
"SECURITIES
ACT" means the Securities Act of 1933, as amended.
"SHARES"
means the shares of Common Stock issued or issuable to the Investors pursuant
to
the Subscription Agreement.
"WARRANTS"
means the Common Stock purchase warrants issued or issuable to the Investors
pursuant to the Subscription Agreement and the Placement Agent Warrants issued
pursuant to the Placement Agent Agreement.
"WARRANT
SHARES" means the shares of Common Stock issued or issuable upon exercise of
the
Warrants and the Additional Warrants.
"WASHINGTON
COURTS" means the state and federal courts sitting in the City and County of
Spokane.
2.
Registration.
(a)
On or
prior to each Filing Date, the Company shall prepare and file with the
Commission
a Registration Statement covering the resale of all Registrable Securities
not
already covered by an existing and effective Registration Statement, for an
offering to be made on a continuous basis pursuant to Rule 415, on Form SB-2
(or
on such other form appropriate for such purpose). Such Registration Statement
shall contain (except if otherwise required pursuant to written
comments
received from the Commission upon a review of such Registration Statement)
the
"Plan of
Distribution"
attached hereto as Annex A. The Company shall cause such Registration Statement
to be declared effective under the Securities Act as soon as possible but,
in
any event, no later than its Effectiveness Date, and shall use its reasonable
best efforts to keep the Registration Statement continuously effective under
the
Securities Act until the date which is the earlier of (i) eight years after
its
Effective Date, (ii) such time as all of the Registrable Securities covered
by
such Registration Statement have been publicly sold by the Holders, or (iii)
such time as all of the Registrable Securities covered by such Registration
Statement may be sold by the Holders pursuant to Rule 144(k) as determined
by
the counsel to the Company pursuant to a written opinion letter to such effect,
addressed and acceptable to the Company's transfer agent and the affected
Holders (the "EFFECTIVENESS PERIOD").
(b)
If
for any reason the Commission does not permit all of the Registrable Securities
to be included in the Registration Statement filed pursuant to Section 2( a),
or
for any other reason any outstanding Registrable Securities are not then covered
by an effective Registration Statement, then the Company shall prepare and
file
by the Filing Date for such Registration Statement, an additional Registration
Statement covering the resale of all Registrable Securities not already covered
by an existing and effective Registration Statement for an offering to be made
on a continuous basis pursuant to Rule 415, on Form SB-2 (or on such other
form
appropriate for such purpose). Each such Registration Statement shall contain
(except if otherwise required pursuant to written comments received from the
Commission upon a review of such Registration Statement) the "Plan of
Distribution" attached hereto as Annex A. The Company shall cause each such
Registration Statement to be declared effective under the Securities Act as
soon
as possible but, in any event, by its Effectiveness Date, and shall use its
reasonable best efforts to keep such Registration Statement continuously
effective under the Securities Act during the entire Effectiveness
Period.
(c)
Promptly following any date on which the Company becomes eligible to use a
registration statement on Form S-3 to register the Registrable Securities for
resale, the Company
shall
file a registration statement on Form S-3 covering the Registrable Securities
(or a post-effective amendment on Form S-3 to the then effective Registration
Statement) and shall cause such Registration Statement to be declared effective
as soon as possible thereafter, but in any event prior to the Effectiveness
Date
therefor. Such Registration Statement shall contain (except if otherwise
required pursuant to written comments received from the Commission upon a review
of such Registration Statement) the "Plan of Distribution" attached hereto
as
Annex A. The Company shall cause such Registration Statement to be declared
effective under the Securities Act as soon as possible but, in any event, by
its
Effectiveness Date, and shall use its reasonable best efforts to keep such
Registration Statement continuously effective under the Securities Act during
the entire Effectiveness Period.
(d)
If a
Registration Statement is not filed on or prior to its Filing Date (if the
Company files a Registration Statement without affording the Holders the
opportunity to review and comment on the same as required by Section 3(a)
hereof, the Company shall not be deemed to have satisfied this clause (i)(such
failure or breach being referred to as an "EVENT" and the date on which such
Event occurs, being referred to as the "EVENT DATE"), then in addition to any
other rights the Holders may have hereunder or under applicable law, the Company
shall issue to the holders of the Registrable Securities, as liquidated damages
and not as a penalty, warrants ("ADDITIONAL WARRANTS"). The number of Additional
Warrants that shall be issued to a Holder is equivalent to one Additional
Warrant for every Unit purchased such Holder. The Additional Warrants will
have
a per share exercise price equal to $2.00 per share. The Additional Warrants
will be exercisable for five years, and will be in the same form as the warrants
issued as part of the Units in the Offering.
(e)
Each
Holder agrees to furnish to the Company a completed Questionnaire in the form
attached to this Agreement as Annex B (a "SELLING HOLDER QUESTIONNAIRE"). The
Company shall not be required to include the Registrable Securities of a Holder
in a Registration Statement and shall not be required to issue any Additional
Warrants or other damages under Section 2( d) to any Holder who fails to furnish
to the Company a fully completed Selling Holder Questionnaire at least two
Trading Days prior to the Filing Date (subject to the requirements set forth
in
Section 3(a».
3.
Registration Procedures. In connection with the Company's registration
obligations hereunder, the Company shall:
(a)
Not
less than four Trading Days prior to the filing of the Registration Statement
or
any related Prospectus or any amendment or supplement thereto, the Company
shall
furnish to each Holder copies of the "Selling Stockholders" section of such
document, the "Plan of Distribution" and any risk factor contained in such
document that addresses specifically this transaction or the Selling
Stockholders, as proposed to be filed which documents will be subject to the
review of such Holder. The Company shall not file a Registration Statement,
any
Prospectus or any amendments or supplements thereto in which the "Selling
Stockholder" section thereof differs from the disclosure received from a Holder
in its Selling Holder Questionnaire (as amended or supplemented).
(b)
Prepare and file with the Commission such amendments, including post-effective
amendments, to each Registration Statement and the Prospectus used in connection
therewith as may be necessary to keep such Registration Statement continuously
effective as to the applicable Registrable Securities for its Effectiveness
Period and prepare and file with the Commission such
additional
Registration Statements in order to register for resale under the Securities
Act
all of the Registrable Securities; (ii) cause the related Prospectus to be
amended or supplemented by any required Prospectus supplement, and as so
supplemented or amended to be filed pursuant to Rule 424; (iii) respond as
promptly as reasonably possible to any comments received from the Commission
with respect to each Registration Statement or any amendment thereto and, as
promptly as reasonably possible provide the Holders true and complete copies
of
all correspondence from and to the Commission relating to such Registration
Statement that would not result in the disclosure to the Holders of material
and
non-public information conceming the Company; and (iv) comply in all material
respects with the provisions of the Securities Act and the Exchange Act with
respect to the Registration Statements and the disposition of all Registrable
Securities covered by each Registration Statement.
(c)
Notify the Holders as promptly as reasonably possible (and, in the case of
(i)(A) below, not less than three Trading Days prior to such filing) and (if
requested by any such Person) confirm such notice in writing no later than
one
Trading Day following the day (i)(A) when a Prospectus or any Prospectus
supplement or post-effective amendment to a Registration Statement is proposed
to be filed; (B) when the Commission notifies the Company whether there will
be
a "review" of such Registration Statement and whenever the Commission comments
in writing on such Registration Statement (the Company shall provide true and
complete copies thereof and all written responses thereto to each of the Holders
that pertain to the Holders as a Selling Stockholder or to the Plan of
Distribution, but not information which the Company believes would constitute
material and non-public information); and (C) with respect to each Registration
Statement or any post-effective amendment, when the same has become effective;
(ii) of any request by the Commission or any other Federal or state governmental
authority for amendments or supplements to a Registration Statement or
Prospectus or for additional information; (iii) of the issuance by the
Commission of any stop order suspending the effectiveness of a Registration
Statement covering any or all of the Registrable Securities or the initiation
of
any Proceedings for that purpose; (iv) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; and (v) of the occurrence of any event or passage of time that makes
the financial statements included in a Registration Statement ineligible for
inclusion therein or any statement made in such Registration Statement or
Prospectus or any
document
incorporated or deemed to be incorporated therein by reference untrue in any
material respect or that requires any revisions to such Registration Statement,
Prospectus or other documents so that, in the case of such Registration
Statement or the Prospectus, as the case may be, it will not contain any untrue
statement of a material fact or omit to state any material fact required to
be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(d)
Use
its reasonable best efforts to avoid the issuance of, or, if issued, obtain
the
withdrawal of (i) any order suspending the effectiveness of a Registration
Statement, or (ii) any suspension of the qualification (or exemption from
qualification) of any of the Registrable Securities for sale in any
jurisdiction, at the earliest practicable moment.
(e)
Furnish to each Holder, without charge, at least one conformed copy of each
Registration Statement and each amendment thereto and all exhibits to the extent
requested by such
Person
(including those previously furnished) promptly after the filing of such
documents with the Commission.
(f)
Promptly deliver to each Holder, without charge, as many copies of each
Prospectus or Prospectuses (including each form of prospectus) and each
amendment or supplement thereto as such Persons may reasonably request. The
Company hereby consents to the use of such Prospectus and each amendment or
supplement thereto by each of the selling Holders in connection with the
offering and sale of the Registrable Securities covered by such Prospectus
and
any amendment or supplement thereto.
(g)
Prior
to any public offering of Registrable Securities, to register or qualify or
cooperate with the selling Holders in connection with the registration or
qualification (or exemption from such registration or qualification) of such
Registrable Securities for offer and sale under the securities or Blue Sky
laws
of all jurisdictions within the United States, to keep each such registration
or
qualification (or exemption therefrom) effective during the Effectiveness Period
and to do any and all other acts or things necessary or advisable to enable
the
disposition in such
jurisdictions
of the Registrable Securities covered by the Registration
Statements.
(h)
Cooperate with the Holders to facilitate the timely preparation and delivery
of
certificates representing Registrable Securities to be delivered to a transferee
pursuant to the Registration Statements, which certificates shall be free,
to
the extent permitted by the Subscription Agreement, of all restrictive legends,
and to enable such Registrable Securities to be in such denominations and
registered in such names as any such Holders may request.
(i)
Upon
the occurrence of any event contemplated by Section 3(c)(v), as promptly as
reasonably possible, prepare a supplement or amendment, including a
post-effective amendment, to the affected Registration Statements or a
supplement to the related Prospectus or any document incorporated or deemed
to
be incorporated therein by reference, and file any other required document
so
that, as thereafter delivered, no Registration Statement nor any Prospectus
will
contain an untrue statement of a material fact or omit to state a material
fact
required to be stated therein or necessary to make the statements therein,
in
light of the circumstances under which they were made, not
misleading.
4.
Registration Expenses.
All fees and expenses incident to the performance
of or compliance with this Agreement by the Company shall be borne by the
Company whether or not any Registrable Securities are sold pursuant to a
Registration Statement. The fees and expenses referred to in the foregoing
sentence shall include, without limitation, (i) all registration and filing
fees
(including, without limitation, fees and expenses (A) with respect to filings
required to be made with any Trading Market on which the Common Stock is then
listed for trading, and (B) in compliance with applicable state securities
or
Blue Sky laws), (ii) printing expenses (including, without limitation, expenses
of printing certificates for Registrable Securities and of printing prospectuses
if the printing of prospectuses is reasonably requested by the holders of a
majority of the Registrable
Securities
included in the Registration Statement), (iii) messenger, telephone and delivery
expenses, (iv) fees and disbursements of counsel for the Company , (v)
Securities Act liability insurance, if the Company so desires such insurance,
and (vi) fees and expenses of all other Persons retained by the Company in
connection with the consummation of the transactions contemplated by this
Agreement.
In
addition, the Company shall be responsible for all of its internal expenses
incurred in connection
with
the
consummation of the transactions contemplated by this Agreement (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expense of any annual audit and
the
fees and expenses incurred in connection with the listing of the Registrable
Securities on any securities exchange as required hereunder.
5.
Indemnification.
(a)
Indemnification by the Company.
The Company shall, notwithstanding any
termination of this Agreement, indemnify and hold harmless each Holder, the
officers, directors, agents, investment advisors, partners, members and
employees of each of them, each Person who
controls
any such Holder (within the meaning of Section 15 of the Securities Act or
Section 20 of
the
Exchange Act) and the officers, directors, agents and employees of each such
controlling Person, to the fullest extent permitted by applicable law, from
and
against any and all losses, claims, damages, liabilities, costs (including,
without limitation, reasonable costs of preparation and reasonable attorneys'
fees) and expenses (collectively, "LOSSES"), as incurred, arising out of or
relating to any untrue or alleged untrue statement of a material fact contained
in any Registration Statement, any Prospectus or any form of prospectus or
in
any amendment or supplement thereto or in any preliminary prospectus, or arising
out of or relating to any omission or alleged omission of a
material
fact required to be stated therein or necessary to make the statements therein
(in the case of any Prospectus or form of prospectus or supplement thereto,
in
light of the circumstances under which they were made) not misleading, except
to
the extent, but only to the extent, that (1) such untrue statements or omissions
are based solely upon information regarding such Holder furnished in writing
to
the Company by such Holder expressly for use therein, or to the extent that
such
information relates to such Holder or such Holder's proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Holder expressly for use in the Registration Statement,
such
Prospectus or such form of Prospectus or in any amendment or supplement thereto
(it being understood that the Holder has approved Annex A hereto for this
purpose) or (2) in the case of an occurrence of an event of the type specified
in Section 3(c)(ii)-(v), the use by such Holder of an outdated or defective
Prospectus after the Company has notified such Holder in writing that the
Prospectus is outdated or defective and prior to the receipt by such Holder
of
an Advice or an amended or supplemented Prospectus, but only if and to the
extent that following the receipt of the Advice or the amended or supplemented
Prospectus the misstatement or omission giving rise to such Loss would have
been
corrected. The Company shall notify the Holders promptly of the institution,
threat or assertion of any Proceeding of which the Company is aware in
connection with the transactions contemplated by this Agreement.
(b)
Indemnification by Holders.
Each Holder shall, severally and not jointly,
indemnify and hold harmless the Company, its directors, officers, agents and
employees, each Person who controls the Company (within the meaning of Section
15 of the Securities Act and Section 20 of the Exchange Act), and the directors,
officers, agents or employees of such controlling Persons, to the fullest extent
permitted by applicable law, from and against all Losses, as incurred, arising
solely out of or based solely upon: (x) such Holder's failure to comply with
the
prospectus delivery requirements of the Securities Act or (y) any untrue
statement of a material fact contained in any Registration Statement, any
Prospectus, or any form of prospectus, or in any amendment or supplement
thereto, or arising solely out of or based solely upon any omission of a
material fact required to be stated therein or necessary to make the statements
therein not misleading to the extent, but only to the extent that, (1) such
untrue statements or omissions are based solely upon information
regarding
such Holder furnished in writing to the Company by such Holder expressly for
use
therein, or to the extent that such information relates to such Holder or such
Holder's proposed method of
distribution
of Registrable Securities and was reviewed and expressly approved in writing
by
such Holder expressly for use in the Registration Statement (it being understood
that the Holder has approved Annex A hereto for this purpose), such Prospectus
or such form of Prospectus or in any amendment or supplement thereto or (2)
in
the case of an occurrence of an event of the type specified in Section 3( c
)(ii
)-(v), the use by such Holder of an outdated or defective Prospectus after
the
Company has notified such Holder in writing that the Prospectus is outdated
or
defective and prior to the receipt by such Holder of an Advice or an amended
or
supplemented Prospectus, but only if and to the extent that following the
receipt of the Advice or the amended or supplemented Prospectus the misstatement
or omission giving rise to such Loss would have been corrected. In no event
shall the liability of any selling Holder hereunder be greater in amount than
the dollar amount of the net proceeds received by such Holder upon the sale
of
the Registrable Securities giving rise to such indemnification
obligation.
(c)
Conduct of Indemnification Proceedings.
If any Proceeding shall be
brought or asserted against any Person entitled to indemnity hereunder (an
"INDEMNIFIED PARTY"), such Indemnified Party shall promptly notify the Person
from whom indemnity is sought (the "INDEMNIFYING PARTY") in writing, and the
Indemnifying Party shall assume the defense thereof, including the employment
of
counsel reasonably satisfactory to the Indemnified Party and the payment of
all
fees and expenses incurred in connection with defense thereof; provided, that
the failure of any Indemnified Party to give such notice shall not relieve
the
Indemnifying Party of its obligations or liabilities pursuant to this Agreement,
except (and only) to the extent that it shall be finally determined by a court
of competent jurisdiction (which determination is not subject to appeal or
further review) that such failure shall have proximately and materially
adversely prejudiced the Indemnifying Party.
An
Indemnified Party shall have the right to employ separate counsel in any such
Proceeding and to participate in the defense thereof, but the fees and expenses
of such counsel shall be at the expense of such Indemnified Party or Parties
unless: (1) the Indemnifying Party has agreed in writing to pay such fees and
expenses; (2) the Indemnifying Party shall have failed promptly to assume the
defense of such Proceeding and to employ counsel reasonably satisfactory to
such
Indemnified Party in any such Proceeding; or (3) the named parties to any such
Proceeding
(including
any impleaded parties) include both such Indemnified Party and the Indemnifying
Party, and such Indemnified Party shall have been advised by counsel that a
conflict of interest is likely to exist if the same counsel were to represent
such Indemnified Party and the Indemnifying Party (in which case, if such
Indemnified Party notifies the Indemnifying Party in writing that it elects
to
employ separate counsel at the expense of the Indemnifying Party, the
Indemnifying Party shall not have the right to assume the defense thereof and
such counsel shall be at the expense of the
Indemnifying
Party). The Indemnifying Party shall not be liable for any settlement of any
such Proceeding effected without its written consent, which consent shall not
be
unreasonably withheld. No Indemnifying Party shall, without the prior written
consent of the Indemnified Party (which consent shall not be unreasonably
withheld), effect any settlement of any pending Proceeding in respect of which
any Indemnified Party is a party, unless such settlement includes an
unconditional release of such Indemnified Party from all liability on claims
that are the subject matter of such Proceeding.
All
fees
and expenses of the Indemnified Party (including reasonable fees and expenses
to
the extent incurred in connection with investigating or preparing to defend
such
Proceeding in a manner not inconsistent with this Section) shall be paid to
the
Indemnified Party, as incurred, within ten Trading Days of written notice
thereof to the Indemnifying Party (regardless of whether it is ultimately
determined that an Indemnified Party is not entitled to indemnification
hereunder; provided, that the Indemnifying Party may require such Indemnified
Party to undertake to reimburse all such fees and expenses to the extent it
is
finally judicially determined that such Indemnified Party is not entitled to
indemnification hereunder).
(d)
Contribution.
If a claim for indemnification under Section 5( a) or 5(b)
is unavailable to an Indemnified Party (by reason of public policy or
otherwise), then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission of a material fact, has been taken or made by, or relates
to
information supplied by, such Indemnifying Party or Indemnified Party, and
the
parties' relative intent, knowledge, access to information and opportunity
to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses shall be deemed to include, subject
to the limitations set forth in Section 5(c), any reasonable attorneys' or
other
reasonable fees or expenses incurred by such party in connection with any
Proceeding to the extent such party would have been indemnified for such fees
or
expenses if the indemnification provided for in this Section was available
to
such party in accordance with its terms.
The
parties hereto agree that it would not be just and equitable if contribution
pursuant to this Section 5( d) were determined by pro rata allocation or by
any
other method of allocation that does not take into account the equitable
considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 5( d), no Holder shall be
required to contribute, in the aggregate, any amount in excess of the amount
by
which the proceeds actually received by such Holder from the sale of the
Registrable Securities subject to the Proceeding exceeds the amount of any
damages that such Holder has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission.
The
indemnity and contribution agreements contained in this Section are in addition
to any liability that the Indemnifying Parties may have to the Indemnified
Parties.
6.
Miscellaneous.
(a)
Remedies.
In the event of a breach by the Company or by a Holder, of any
of their obligations under this Agreement, each Holder or the Company, as the
case may be, in addition to
being
entitied to exercise all rights granted by law and under this Agreement,
including recovery of
damages,
will be entitled to specific performance of its rights under this Agreement.
The
Company and each Holder agree that monetary damages would not provide adequate
compensation for any losses incurred by reason of a breach by it of any of
the
provisions of this Agreement and hereby
further
agrees that, in the event of any action for specific performance in respect
of
such breach, it shall waive the defense that a remedy at law would be
adequate.
(b)
No
Piggyback on Registrations.
Except as and to the extent specified in
Schedule 3. 1 (v) to the Subscription Agreement, neither the Company nor any
of
its security holders (other than the Holders in such capacity pursuant hereto)
may include securities of the Company in a Registration Statement other than
the
Registrable Securities.
(c)
Compliance.
Each Holder covenants and agrees that it will comply with the
prospectus delivery requirements of the Securities Act as applicable to it
in
connection with sales of Registrable Securities pursuant to the Registration
Statement.
(d)
Discontinued Disposition.
Each Holder agrees by its acquisition of such
Registrable Securities that, upon receipt of a notice from the Company of the
occurrence of any event of the kind described in Section 3( c), such Holder
will
forthwith discontinue disposition of such Registrable Securities under the
Registration Statement until such Holder's receipt of the copies of the
supplemented Prospectus and/or amended Registration Statement or until it is
advised in writing (the "ADVICE") by the Company that the use of the applicable
Prospectus may be resumed, and, in either case, has received copies of any
additional or supplemental filings that are incorporated or deemed to be
incorporated by reference in such Prospectus or Registration Statement. The
Company may provide appropriate stop orders to enforce the provisions of this
paragraph.
(e)
Piggy-Back Registrations.
If at any time during the Effectiveness Period
there is not an effective Registration Statement covering all of the Registrable
Securities and the Company shall determine to prepare and file with the
Commission a registration statement relating to an offering for its own account
or the account of others under the Securities Act of any of its equity
securities, other than on Form S-4 or Form S-8 (each as promulgated under the
Securities Act) or their then equivalents relating to equity securities to
be
issued solely in connection with any acquisition of any entity or business
or
equity securities issuable in connection with stock option or other employee
benefit plans, then the Company shall send to each Holder written notice of
such
determination and, if within fifteen days after receipt of such notice, any
such
Holder shall so request in writing, the Company shall include in such
registration statement all or any part of such Registrable Securities such
holder requests to be registered, subject to customary underwriter cutbacks
applicable to all holders of registration rights.
(f)
Amendments and Waivers.
The provisions of this Agreement, including the
provisions
of this Section 6(f), may not be amended, modified or supplemented, and waivers
or consents to departures from the provisions hereof may not be given, unless
the same shall be in writing and signed by the Company and the Holders of no
less than a majority in interest of the then outstanding Registrable Securities.
Notwithstanding the foregoing, a waiver or consent to depart from the provisions
hereof with respect to a matter that relates exclusively to the rights of
certain
Holders
and that does not directly or indirectly affect the rights of other Holders
may
be given by Holders of at least a majority of the Registrable Securities to
which such waiver or consent relates.
(g)
Notices.
Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall
be
deemed given and effective on the earliest of (a) the date of transmission,
if
such notice or communication is delivered via facsimile (provided the sender
receives a machine-generated confirmation of successful transmission) at
the
facsimile
number specified in this Section prior to 6:30 p.m. (New York City time) on
a
Trading Day, (b) the next Trading Day after the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile number
specified in this Section on a day that is not a Trading Day orlater than 6:
3 0
p. m. (New York City time) on any Trading Day, ( c) the Trading Day following
the date of mailing, if sent by U. S. nationally recognized overnight courier
service, or (d) upon actual receipt by the party to whom such notice is required
to be given. The address for such notices and communications shall be as
follows:
If
to the
Company:
Daybreak
Oil and Gas, Inc.
601
W.
Main Ave., Suite 1017
Spokane,
W A 99201-0613
Attention:
Chief Financial Officer
If
to an
Investor:
To
the
address set forth under such
Investor's
name on the signature pages hereto.
If
to any
other Person who is then the registered Holder:
To
the
address of such Holder as it appears in the stock transfer books of the Company
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
(h)
Successors and Assigns.
This Agreement shall inure to the benefit of and
be binding upon the successors and permitted assigns of each of the parties
and
shall inure to the benefit of each Holder. The Company may not assign its rights
or obligations hereunder without the prior written consent of each Holder.
Each
Holder may assign their respective rights hereunder in the manner and to the
Persons as permitted under the Subscription Agreement.
(i)
Execution and Counterparts.
This Agreement may be executed in any number
of counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the same
Agreement. In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid binding obligation of the
party executing (or on whose behalf such signature is executed) the same with
the same force and effect as if such facsimile signature were the original
thereof.
(j)
Governing Law.
All questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of
Washington, without regard to the principles of conflicts oflaw thereof. Each
party agrees that all Proceedings concerning the interpretations, enforcement
and defense of the transactions contemplated by this Agreement (whether brought
against a party hereto or its respective Affiliates, employees or agents) will
be commenced in the Washington Courts. Each party hereto hereby irrevocably
submits to the exclusive jurisdiction of the Washington Courts for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any Proceeding, any claim that it is not
personally subject to the jurisdiction of any Washington Court, or that such
Proceeding has been commenced in an improper or inconvenient forum. Each party
hereto hereby irrevocably waives personal service of process and consents to
process being
served
in
any such Proceeding by mailing a copy thereof via registered or certified mail
or overnight delivery (with evidence of delivery) to such party at the address
in effect for notices to it under this Agreement and agrees that such service
shall constitute good and sufficient service of process and notice thereof.
Nothing contained herein shall be deemed to limit in any way any right to serve
process in any manner permitted by law. Each party hereto hereby irrevocably
waives, to the fullest extent permitted by applicable law, any and all right
to
trial by jury in any Proceeding arising out of or relating to this Agreement
or
the transactions contemplated hereby. If either party shall commence a
Proceeding to enforce any provisions of this Agreement, then the prevailing
party in such Proceeding shall be reimbursed by the other party for its
attorney's fees and other costs and expenses incurred with the investigation,
preparation and prosecution of such Proceeding.
(k)
Cumulative Remedies.
The remedies provided herein are cumulative and not
exclusive of any remedies provided by law.
(1)
Severability.
If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, illegal,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect and shall
in
no way be affected, impaired or invalidated, and the parties hereto shall use
their reasonable efforts to find and employ an alternative means to achieve
the
same or substantially the same result as that contemplated by such term,
provision, covenant or restriction. It is hereby stipulated and
declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such
that
may be hereafter declared invalid, illegal, void or unenforceable.
(m)
Headings.
The headings in this Agreement are for convenience of reference
only and
shall
not
limit or otherwise affect the meaning hereof.
(n)
Independent Nature of Investors' Obligations and Rights.
The obligations
of each Investor under this Agreement are several and not joint with the
obligations of each other Investor, and no Investor shall be responsible in
any
way for the performance of the obligations of any other
Investor
under this Agreement. Nothing contained herein or in any Transaction Document,
and no action taken by any Investor pursuant thereto, shall be deemed to
constitute the Investors as a partnership, an association, a j oint venture
or
any other kind of entity, or create a presumption that the Investors are in
any
way acting in concert or as a group with respect to such obligations or the
transactions contemplated by this Agreement or any other Transaction Document.
Each Investor acknowledges that no other Investor will be acting as agent of
such Investor in enforcing its rights under this Agreement. Each Investor shall
be entitled to independently protect and enforce its rights, including without
limitation the rights arising out of this Agreement, and it shall not be
necessary for any other Investor to be joined as an additional party in any
Proceeding for such purpose. The Company acknowledges that each of the Investors
has been provided with the same Registration Rights Agreement for the purpose
of
closing a transaction with multiple Investors and not because it was required
or
requested to do so by any Investor.
IN
WITNESS WHEREOF, the parties have executed this Registration Rights Agreement
as
of the date first written above.
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DAYBREAK
OIL AND GAS, INC.
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Date
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By:
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/s/
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Name:
Robert
Martin
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Title:
President
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[REMAINDER
OF PAGE INTENTIONALLY LEFT
BLANK
SIGNATURE PAGES OF INVESTORS TO FOLLOW]
IN
WITNESS WHEREOF, the parties have executed this Registration Rights Agreement
as
of the date first written above.
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name)
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By:
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(Signature)
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Title:
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ADDRESS
FOR NOTICE
c/o:
Street:
City/State/Zip:
Attention:
Tel:
Fax:
Email:
Annex
A
Plan
of
Distribution
The
Selling Stockholders and any of their pledgees, donees, transferees, assignees
and successors-ininterest may, from time to time, sell any or all of their
shares of Common Stock on any stock exchange, market or trading facility on
which the shares are traded or in private transactions. These sales may be
at
fixed or negotiated prices. The Selling Stockholders may use anyone or more
of
the following methods when selling shares:
-
ordinary
brokerage transactions and transactions in which the broker-dealer solicits
Investors;
-
block
trades in which the broker-dealer will attempt to sell the shares as agent
but
may
position
and resell a portion of the block as principal to facilitate the
transaction;
-
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
-
an
exchange distribution in accordance with the rules of the applicable
exchange;
-
privately
negotiated transactions;
-
to
cover short sales made after the date that this Registration Statement
is
declared effective
by
the
Commission;
-
broker-dealers
may agree with the Selling Stockholders to sell a specified number of such
shares
at a stipulated price per share;
-
a
combination of any such methods of sale; and
-
any
other method permitted pursuant to applicable law.
The
Selling Stockholders may also sell shares under Rule 144 under the Securities
Act, if available,
rather
than under this prospectus.
Broker-dealers
engaged by the Selling Stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the Selling Stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
Selling Stockholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved.
The
Selling Stockholders may from time to time pledge or grant a security interest
in some or all of the Shares owned by them and, if they default in the
performance of their secured obligations, the pledgees or secured parties may
offer and sell shares of Common Stock from time to time under this prospectus,
or under an amendment to this prospectus under Rule 424(b)(3) or other
applicable provision of the Securities Act of 1933 amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus. upon the Company being notified
in writing by a Selling Stockholder that any material arrangement has been
entered into with a broker-dealer for the sale of Common Stock through a block
trade,
special
offering,
exchange distribution or secondary distribution or a purchase by a broker or
dealer, a supplement to this prospectus will be filed, if required, pursuant
to
Rule 424(b) under the Securities Act, disclosing (i) the name of each such
Selling Stockholder and of the participating brokerdealer(s), (ii) the
number of shares involved, (iii) the price at which such the shares of Common
Stock were sold, (iv)the commissions paid or discounts or concessions allowed
to
such brokerdealer(s), where applicable, (v) that such broker-dealer(s) did
not conduct any investigation to verify the information set out or incorporated
by reference in this prospectus, and (vi) other facts material to the
transaction. In addition, upon the Company being notified in writing by a
Selling Stockholder that a donee or pledgee intends to sell more than 500 shares
of Common Stock, a supplement to this prospectus will be filed if then required
in accordance with applicable securities law.
The
Selling Stockholders also may transfer the shares of Common Stock in other
circumstances, in which case the transferees, pledgees or other successors
in
interest will be the selling beneficial owners for purposes of this
prospectus.
The
Selling Stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be "underwriters" within the meaning of
the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Discounts, concessions, commissions and
similar selling expenses, if any, that can be attributed to the sale of
Securities will be paid by the Selling Stockholder and/or the purchasers. Each
Selling Stockholder has represented and warranted to the Company that it
acquired the securities subject to this registration statement in the ordinary
course of such Selling Stockholder's business and, at the time of its purchase
of such securities such Selling Stockholder had no agreements or understandings,
directly or indirectly, with any person to distribute any such
securities.
The
Company has advised each Selling Stockholder that it may not use shares
registered on this
Registration
Statement to cover short sales of Common Stock made prior to the date on which
this Registration Statement shall have been declared effective by the
Commission. If a Selling Stockholder uses this prospectus for any sale of the
Common Stock, it will be subject to the prospectus delivery requirements of
the
Securities Act. The Selling Stockholders will be responsible to comply with
the
applicable provisions of the Securities Act and Exchange Act, and the rules
and
regulations thereunder promulgated, including, without limitation, Regulation
M,
as applicable to such Selling Stockholders in connection with resales of their
respective shares under this Registration Statement.
The
Company is required to pay all fees and expenses incident to the registration
of
the shares, but the Company will not receive any proceeds from the sale of
the
Common Stock. The Company has agreed to indemnify the Selling Stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
Annex
B
DAYBREAK
OIL AND GAS, INC.
SELLING
SECURITYHOLDER QUESTIONNAIRE
The
undersigned beneficial owner of common stock (the "COMMON STOCK") of Daybreak
Oil and Gas, Inc. (the "COMPANY") understands that the Company has filed or
intends to file with the Securities and Exchange Commission (the "COMMISSION")
a
Registration Statement for the registration and resale of the Registrable
Securities, in accordance with the terms of the Registration Rights Agreement,
dated as of
~
2006 (the
"REGISTRATION RIGHTS AGREEMENT"), among the Company and the Investors named
therein. A copy of the Registration Rights Agreement is available from the
Company upon request at the address set forth below. All capitalized terms
used
and not otherwise defined herein shall have the meanings ascribed thereto in
the
Registration Rights Agreement.
The
undersigned hereby provides the following information to the Company and
represents and warrants that such information is accurate:
QUESTIONNAIRE
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(a)
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Full
Legal Name of Selling
Securityholder
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(b)
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Full
Legal Name of Registered Holder (if notthe same as (a) above) through
which
Registrable
Securities Listed in Item 3 below are
held:
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(c)
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Full
Legal Name of Natural Control Person (which means a natural person
who
directly or indirectly alone or with others has power to vote or
dispose
of the securities covered by the
questionnaire):
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2.
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ADDRESS
FOR NOTICES TO SELLING
SECURITYHOLDER:
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Telephone:
Fax:
Contact
Person:
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3.
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BENEFICIAL
OWNERSHIP OF REGISTRABLE
SECURITIES:
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Type
and
Principal Amount of Registrable Securities beneficially owned:
(a)
Are you a broker-dealer?
Yes ___
No
___
Note:
If
yes, the Commission's staffhas indicated that you should be identified as an
underwriter in the Registration Statement.
(b)
Are
you an affiliate of a broker-dealer?
Yes ___
No
___
(c)
If
you are an affiliate of a broker-dealer, do you certify that you bought the
Registrable Securities in the ordinary course of business, and at the time
of
the purchase of the Registrable Securities to be resold, you had no agreements
or understandings, directly or indirectly, with any person to distribute the
Registrable Securities?
Yes
___
No ___
Note:
If
no, the Commission's staffhas indicated that you should be identified as an
underwriter in the Registration Statement.
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5.
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BENEFICIAL
OWNERSHIP OF OTHER SECURITIES OF THE COMPANY
OWNED
BY THE SELLING SECURITYHOLDER.
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Except
as
set forth below in this Item 5, the undersigned is not the beneficial or
registered owner of any securities of the Company other than the Registrable
Securities listed above in Item 3.
Type
and
Amount of Other Securities beneficially owned by the Selling
Securityholder:
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6.
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RELATIONSHIPS
WITH THE COMPANY:
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Except
as
set forth below, neither the undersigned nor any of its affiliates, officers,
directors or principal equity holders (owners of5% of more of the equity
securities of the undersigned) has held any position or office or has had any
other material relationship with the Company (or its predecessors or affiliates)
during the past three years.
State
any
exceptions here:
The
undersigned agrees to promptly notify the Company of any inaccuracies or changes
in the information provided herein that may occur subsequent to the date hereof
and prior to the Effective Date for the Registration Statement.
By
signing below, the undersigned consents to the disclosure of the information
contained herein in its answers to Items 1 through 6 and the inclusion of such
information in the Registration Statement and the related prospectus. The
undersigned understands that such information will be relied upon by the Company
in connection with the preparation or amendment of the Registration Statement
and the related prospectus.
IN
WITNESS WHEREOF the undersigned, by authority duly given, has caused this Notice
and Questionnaire to be executed and delivered either in person or by its duly
authorized agent.
Dated:____________________
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Beneficial
Owner:
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By:
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Signature
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Title:
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PLEASE
FAX A COPY OF THE COMPLETED AND EXECUTED NOTICE AND QUESTIONNAIRE, AND RETURN
THE ORIGINAL BY OVERNIGHT MAIL, TO:
Workland
& Witherspoon, PLLC
601
W.
Main Ave., Suite 714
Spokane,
W A 99201
B-3
Exhibit
10.27
CONSULTING
SERVICES AGREEMENT BETWEEN:
DAYBREAK
OIL AND GAS, INC. (Hereinafter the "Company")
JEFFREY
R. DWORKIN (Hereinafter the "Consultant')
WHEREAS,
the Company desires to be assured of the association and services of the
Consultant in order to avail itself of the Consultant's experience, skills,
abilities, knowledge and background as an public oil and gas industry executive
and to advise the Company in public oil and gas industry business and/or
financial matters and is therefore willing to engage the Consultant upon
the
terms and conditions set forth herein.
WHEREAS,
the Consultant agrees to be engaged and retained by the Company and upon
the
terms and conditions set forth herein.
NOW
THEREFORE, in consideration of the foregoing, and for other good and valuable
consideration, the receipt and suffiency of which are hereby acknowledged,
the
parties hereto agree as follows:
The
Company hereby engages the Consultant on a non exclusive basis, and the
Consultant hereby accepts the engagement to become a consultant to the Company
and to render such advice, consultation, information and services to the
directors and officers of the Company regarding public oil and gas industry
business matters and public company corporate governance
matters.
It
shall
be expressly understood that Consultant shall have no power to bind the Company
to any contract or obligation or to transact any business in the Company's
name
or on behalf of the Company in any manner.
The
term
of this Agreement shall commence on the date hereof and continue for Seven
(7)
months. The Agreement may be extended upon agreement by both
parties.
The
Company shall pay to the Consultant:
|
a)
|
Consulting
Fees in the amount of one hundred fifty ($150.00) dollars per hour
for
time spent on the business of the Company including but not limited
to
telephone conversations, personal conferences, strategy development
and
planning, letter and document preparation and review, research
and
drafting.
|
|
b)
|
the
Consultant will also be paid for expenses incurred or
advanced
on your behalf.
|
|
c)
|
The
Consultant will also be paid a monthly miscellaneous
expense
fee of $1,500.00 per month.
|
4. Exclusivity,
Performance and Confidentiality
The
services of the Consultant hereunder shall not be exclusive, and Consultant
and
its agents may perform similar or different services for other persons or
entities whether or not they are competitors of the Company. The Consultant
shall be required to expend only such time as is necessary to service the
Company in a commercially reasonable manner. The Consultant acknowledges
and
agrees that confidential and valuable information proprietary to the Company
and
obtained during its engagement by the Company shall not be directly or
indirectly, disclosed without the prior written consent of the Company, unless
and until such information is otherwise known to the public generally or
is not
otherwise secret and confidential.
5. Independent
Contractor
In
its
performance hereunder, the Consultant and its agents shall be independent
contractors. The Consultant shall complete the services required hereunder
according to his own means and methods of work, shall be in the exclusive
charge
and control of the Consultant and shall not be subject to the control or
supervision of the Company, except as to the results of the work or the extent
necessary for the Company to verify the Consultant's compliance with applicable
laws and regulations to which the Company may be subject. The Company
acknowledges that nothing in this Agreement shall be construed to require
the
Consultant to provide services to the Company at any specific time, or in
any
specific place or manner.
No
waiver
of any of the provisions of this Agreement shall be deemed or shall constitute
a
waiver of any other provision and no waiver shall constitute a continuing
waiver. No waiver shall be binding unless executed in writing by the party
making the waiver.
No
supplement, modification or amendment of the Agreement shall be binding unless
executed in writing by all parties. This Agreement constitutes the entire
agreement between the parties and supersedes any prior agreements or
negotiations.
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a.
|
This
Agreement shall in all respects be interpreted, enforced and governed
under the laws of State of Washington. The language and all parts
of this
Agreement shall be in all cases construed as a whole and not strictly
for
or against any individual
party.
|
|
b.
|
Any
dispute arising under in any way related to this agreement shall
be
submitted to binding arbitration by the American Arbitration Association
in accordance with the Association's commercial rules then in effect.
The
arbitration may be conducted in person, by telephone or online
as agreed
by all parties. The arbitration shall be binding on the parties
and the
arbitration award may be confirmed by ant court of competent
jurisdiction.
|
9.
Counterparts
and facsimile
This
Agreement may be executed in one or more counterparts, each of which shall
be
deemed to be an original and all of which shall constitute one agreement.
A
telefacsimile of this Agreement may be relied upon as full and sufficient
evidence as an original.
IN
WITNESS WHEREOF, the parties hereto have entered into this Agreement effective
the 1
st
day of
August 2006.
Daybreak
Oil and Gas, Inc.
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|
|
|
|
|
|
|
|
/s/ JEFFREY
R. DWORKIN
|
|
|
|
Jeffrey
R. Dworkin
|
|
|
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|
|
|
|
Date:
8/1/06
|
|
/s/
Thomas
C. Kilbourne, Treasurer
Exhibit
10.28
Daybreak
Oil and Gas, Inc.
601
West
Main Ave Suite
1017 Spokane,
WA 99201
Off:
(509)
232-7674 Fax:
(509) 455-8483
OFFICE
LEASE AGREEMENT
BETWEEN:
TERRANCE J. DUNNE & ASSOCIATES INC. (The Tenant)
AND
DAYBREAK
OIL AND GAS, INC. (The Subtenant)
WHEREAS,
the Tenant leases a total of 3,136 rentable square feet from Joshua Green
Corporation (The Landlord) pursuant to a Lease Renewal and Modification
Agreement (Schedule “A”) dated April 27, 2006 at a rental rate of $16.00 per
square foot for the term commencing on May 1, 2006 and ending on April 30,
2007;
AND
WHEREAS, the Subtenant has agreed to sublease from the Tenant certain offices
and storage space from the Tenant consisting of approximately 400 square feet
plus use of common area (Schedule “B”).
NOW
THEREFORE, in consideration of the foregoing, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the
parties hereto agree as follows:
The
term
of this Agreement shall commence on the first day of August 2006 and expire
on
the last day of April 2007. This Agreement may be extended upon agreement by
both parties.
The
Subtenant shall pay to the Tenant $600.00 on the first day of each month during
the term of this Agreement. If this Agreement is extended the rent shall be
modified in accordance with Schedule “C”.
The
Tenant agrees to comply with the terms and conditions of the Lease Renewal
and
Modification Agreement and to pay the rent to the Landlord in the amounts and
at
the times as stipulated therein and to refrain from such acts as would cause
the
Landlord to terminate the Lease.
The
Subtenant agrees to conduct its’ business and affairs in such manner so as to
comply with the terms and conditions of Lease Agreement dated February 1, 2002
between the Tenant and the Landlord as amended or renewed.
No
waiver
of any of the provisions of this Agreement shall be deemed or shall constitute
a
waiver of any other provision and no waiver shall constitute a continuing
waiver. No waiver shall be binding unless executed in writing by the party
making the waiver.
No
supplement, modification or amendment of the Agreement shall be binding unless
executed in writing by all parties. This Agreement constitutes the entire
agreement between the parties and supersedes any prior agreements or
negotiations.
|
a.
|
This
Agreement shall in all respects be interpreted, enforced and governed
under
the laws of State of Washington. The language and all parts of this
Agreement
shall be in all cases construed as a whole and not strictly for or
against
any individual party.
|
|
b.
|
Any
dispute arising under in any way related to this agreement shall
be
submitted
to binding arbitration by the American Arbitration Association in
accordance
with the Association’s commercial rules then in effect. The arbitration
may be conducted in person, by telephone or online as agreed by all
parties. The arbitration shall be binding on the parties and the
arbitration award may be confirmed by ant court of competent
jurisdiction.
|
IN
WITNESS WHEREOF, the parties hereto have entered into this Agreement effective
the 1
st
day of
August 2006.
Daybreak
Oil and Gas, Inc.
|
|
|
Terrence
J. Dunne & Associates
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Thomas C.
Kilbourne
|
|
|
/s/
Terrence J.
Dunne
|
|
Thomas
C.
Kilbourne, Treasurer
|
|
|
Terrence
J.
Dunne
|
|
|
|
|
|
|
|
|
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Date:
8/01/06
|
|
|
Date:
8/01/06
|
|
SCHEDULE B
Daybreak
Office Space Allocation
Office
|
Approx
Length / Width
|
Square
Footage
|
|
|
|
Suite
1017 – Front Office
|
17’
x
9’
|
153
|
Suite
1012 – S.W. Corner Office
|
9.5’
x
12’
|
114
|
Suite
1012 – S. W. Storage Area
|
10’
x
5’
|
50
|
Suite
1012 – Conference Room
|
13’
x 11’
|
72 (1/2
footage)
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Total
Daybreak Footage
|
|
389
|
|
|
|
|
|
|
$16.00
per Square Foot
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|
$
6224.00
|
|
|
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Divided
by 12 Months
|
|
518.67
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Common
Area Factor
|
|
81.33
|
Total
Monthly Rent
|
|
$
600.00
|
|
|
|
Schedule
C
Future
Monthly Rent
Provided
this Agreement is extended beyond April 30, 2007 the monthly rent shall be
as
follows:
May
1, 2007 through April 30,
2008 $625.00
per month
May
1, 2008 through April 30,
2009 $650.00
per month
Exhibit
10.29
Daybreak
Oil and Gas,
Inc.
601
West
Main Ave Suite
1017 Spokane,
WA 99201
Off:
(509)
232-7674 Fax:
(509) 455-8483
CONSULTING
SERVICES AGREEMENT
BETWEEN: DAYBREAK
OIL AND GAS, INC. (The Company)
AND
MICHAEL
J. HOOPER (The Consultant)
WHEREAS,
the Company desires to be assured of the association and services of the
Consultant in order to avail itself of the Consultant’s experience, skills,
abilities, knowledge and background as an accounting and accounting systems
analyst and is therefore willing to engage the Consultant upon the terms and
conditions set forth herein.
WHEREAS,
the Consultant agrees to be engaged and retained by the Company and upon the
terms and conditions set forth herein.
NOW
THEREFORE, in consideration of the foregoing, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the
parties hereto agree as follows:
1.
Engagement
The
Company hereby engages the Consultant on a non exclusive basis, and the
Consultant hereby accepts the engagement to become a consultant to the Company
and to render such advice, consultation, information and services to the
directors and officers of the Company regarding general financial and business
matters, including but not limited to:
-
development
and maintenance of internal controls
-
development
and maintenance of accounting system design including chart of
accounts
-
develop
and maintain integration of accounting system and financial
statements
-
development
and maintenance of internal management reports.
It
shall
be expressly understood that Consultant shall have no power to bind the Company
to any contract or obligation or to transact any business in the Company’s name
or on behalf of the Company in any manner.
2.
Term
The
term
of this Agreement shall commence on the date hereof and continue for seven
(7)
months. The Agreement may be extended upon agreement by both
parties.
It
is
agreed and understood by both parties that the Consultant may have provided
services to the Company prior to the effective date of this Agreement. In such
case, the Consultant will submit an invoice for services rendered in the manner
provided in Section 3 herein and subject to approval by the Treasurer or Chief
Financial Officer, the Company shall pay such invoice.
3.
Compensation
The
Company shall pay to the Consultant consulting fees in the amount of $40.00
per
hour plus any expenses incurred or advanced on behalf of the
Company.
The
Consultant agrees to submit invoices to the Company on or before the last day
of
each month, which invoice will contain the following information:
-
the
date or dates the Consultant provided services to the Company;
-
a
description of the services provided;
-
the
amount of time spent by the Consultant providing the service.
The
Company agrees to pay the invoice within a reasonable period of time following
its examination and review by the Treasurer or Chief Financial
Officer.
4.
Exclusivity,
Performance and Confidentiality
The
services of the Consultant hereunder shall not be exclusive, and Consultant
and
its agents may perform similar or different services for other persons or
entities whether or not they are competitors of the Company. The Consultant
shall be required to expend only such time as is necessary to service the
Company in a commercially reasonable manner. The Consultant acknowledges and
agrees that confidential and valuable information proprietary to the Company
and
obtained during its engagement by the Company shall not be directly or
indirectly, disclosed without the prior written consent of the Company, unless
and until such information is otherwise known to the public generally or is
not
otherwise secret and confidential.
5.
Independent
Contractor
In
its
performance hereunder, the Consultant shall be an independent contractor. The
Consultant shall complete the services required hereunder according to his
own
means and methods of work, shall be in the exclusive charge and control of
the
Consultant and shall not be subject to the control or supervision of the
Company, except as to the results of the work or the extent necessary for the
Company to verify the Consultant’s compliance with applicable laws and
regulations to which the Company may be subject. The Company
acknowledges that nothing in this Agreement shall be construed to require the
Consultant to provide services to the Company at any specific time, or in any
specific place or manner.
6.
Waiver
No
waiver
of any of the provisions of this Agreement shall be deemed or shall constitute
a
waiver of any other provision and no waiver shall constitute a continuing
waiver. No waiver shall be binding unless executed in writing by the party
making the waiver.
7.
Complete
Agreement
No
supplement, modification or amendment of the Agreement shall be binding unless
executed in writing by all parties. This Agreement constitutes the entire
agreement between the parties and supersedes any prior agreements or
negotiations.
8.
General
Provisions
a.
This
Agreement shall in all respects be interpreted, enforced and governed
under
the
laws of State of Washington. The language and all parts of this
Agreement
shall be in all cases construed as a whole and not strictly for or against
any
individual party.
b.
Any
dispute arising under in any way related to this agreement shall be
submitted
to binding arbitration by the American Arbitration Association in
accordance
with the Association’s commercial rules then in effect. The arbitration may be
conducted in person, by telephone or online as agreed by all parties. The
arbitration shall be binding on the parties and the arbitration award may be
confirmed by any court of competent jurisdiction.
IN
WITNESS WHEREOF, the parties hereto have entered into this Agreement effective
the 1
st
day of
August 2006.
DayBreak
Oil and Gas, Inc.
|
|
|
|
|
|
|
|
|
|
/s/
Thomas
C. Kilbourne
|
|
|
/s/
Michael J.
Hooper
|
|
Thomas
C.
Kilbourne, Treasurer
|
|
|
Michael
J.
Hooper
|
|
|
|
|
|
|
Date:
8/01/06
|
|
|
Date:
8/01/06
|
|
Exhibit
10.34
CONSULTING
SERVICES AGREEMENT
This
Consulting Services Agreement
(“Agreement”) is made as of the __2nd day
of January, 2007 to the _29th day of February, 2008, by and between Daybreak
Oil
and Gas, Inc., (“Daybreak”), a Washington corporation, and Timothy R. Lindsey,
doing business as Lindsey Energy and Natural Resources (“Consultant”), 18331
Langsbury Drive, Houston, Texas 77084.
Whereas
,
Daybreak desires to be assured of the association and services of the Consultant
in order to avail itself of the Consultant’s experience, skills, abilities,
knowledge and background to facilitate long range strategic planning and to
advise Daybreak in business and/or exploration matters, and
Whereas
,
Daybreak wishes to engage Consultant to provide advisory and other services
for
Daybreak and Consultant wishes to accept such engagement, all on the terms
and
conditions set forth herein.
Whereas
,
the Board of Directors of the Company considers it to be in the best interests
of the Company to enter into this Agreement with the Consultant and this
Agreement has been duly approved by the Board of Directors of the
Company;
Now
therefore
, in consideration of the mutual promises herein and other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1.
Engagement.
Daybreak
hereby engages the Consultant on a non-exclusive basis, and the Consultant
hereby accepts the engagement, to become a consultant to Daybreak and to render
such advice, consultation, information, and services to the directors and
officers of Daybreak regarding the exploration for and production of gas and
oil
energy including but not limited to:
(a) assess
current capital allocation in existing exploration and production operations
and
to identify and develop future core areas for growth;
(b) create
strategic exploration, acquisition, exploitation and development portfolio
and
to balance capital spending to enhance current financial returns while providing
significant future reserves and production growth;
(c) review
and interpret physical data such as maps, seismic sections, digital data bases,
drilling reports, well files, gravity surveys, geochemical surveys and regional
maps; and
(d) carry
out exploration work in order to ascertain whether particular projects contain
commercially exploitable gas and oil resources and make recommendations to
the
Board of Directors and officers of the Company.
CONSULTING
SERVICES
AGREEMENT
The
Consultant will report to the person or positions designated by the Company
to
whom the Consultant will be reporting and will discharge such duties and
responsibilities as are assigned to the Consultant from time to
time.
2.
Term.
The
term of this Agreement shall commence on February ____, 2007 and continue in
effect until February ____, 2008. Notwithstanding the foregoing, this
Agreement may be terminated prior to the end of the term by either Daybreak
or
Consultant, for any reason or for no reason, upon thirty (30) days written
notice to the other party. In the event of termination, Consultant
shall be entitled to all fees and other consideration contained in this
Agreement earned and accrued to the effective date of termination.
3.
Compensation.
(a) Monetary. In
exchange for his commitment to provide services to Daybreak under Section One
above, Daybreak agrees to pay Consultant a daily work rate in the amount of
One
Thousand Five Hundred Dollars ($1,500.00) per day rate plus out of pocket
expenses.
The
Consultant shall submit invoices to the Corporation for each month or portion
thereof for which services are provided during the period covered by the invoice
and also including any proper claim for travel expenses. Each invoice
shall indicate the period covered, the month or portion of a month worked,
the
rate and the total charge for consulting services.
The
Company will reimburse the Consultant, at actual cost, for out-of-pocket
expenses incurred in accordance with the Corporation’s standard practice for the
reimbursement of reasonable travel expenses incurred by its contractors or
its
own personnel. The Corporation will also reimburse the Consultant for
any reasonable long distance telephone, fax or photocopying charges incurred
by
the Consultant. Expenses claimed must be supported by the applicable
receipts.
(b)
Restricted Shares.
(i)
Grant
and Issuance
. As consideration for Consultant’s employment with
Daybreak, Daybreak grants and issues to Consultant Two Hundred Thousand
(200,000) unregistered and restricted common shares of its stock valued at
$1.00
per share (“Granted Shares”). In addition, the term “Granted Shares”
shall include any shares of stock received by Consultant from any stock split,
stock dividend, combination of shares, or any other change or exchange for
other
securities by reclassification, reorganization, merger, consolidation,
recapitalization, or otherwise, derived from the Two Hundred Thousand (200,000)
unregistered and restricted common shares granted and issued pursuant to Section
3.b of this Agreement. The Company acknowledges that the shares of
Common Stock to be issued pursuant to this Agreement (collectively the “Shares”)
have not been registered under the Securities Act of 1933 (the “Act”), and
accordingly are “restricted shares” within the meaning of Rule 144 of the
Act. The Shares shall be restricted and as such the Shares may not be
resold or transferred unless the Company has received an opinion of counsel
reasonably satisfactory to the Company that such resale or transfer is exempt
from the registration requirements of the Act.
CONSULTING
SERVICES
AGREEMENT
(ii)
Rights
as Shareholder
. During the term of this Agreement, Consultant
will have all the rights of a shareholder with respect to Granted Shares,
including the right to vote them and to receive all dividends and other
distributions paid with respect to them, provided however that the shares shall
be subject to the restrictions provided for in Section 3.b of this
Agreement.
(iii)
Not
Transferable
. Consultant may not sell, exchange, transfer,
pledge, hypothecated, or otherwise dispose of (“Transfer”) Granted Shares to
anyone other than Daybreak during the term of this Agreement, and Granted Shares
may only be Transferred to Daybreak if Consultant forfeits Granted Shares
pursuant to Section 3.b.iv of this Agreement.
(iv)
Forfeiture
. If
Consultant’s employment is terminated, except as provided below, either by
Consultant or by Daybreak prior to the expiration of the term of this Agreement,
Consultant shall forfeit and endorse over to Daybreak a proportionate number
of
Granted Shares based upon the number of months remaining on the term of this
Agreement as compared to the entire term of this Agreement. If
Consultant’s employment is terminated prior to the end of a month, it is shall
be presumed that the month of termination is a remaining month on the term
of
this Agreement.
Example
1. The term of this Agreement is twelve (12) months. If
Consultant’s employment is terminated effective as of the end of the fifth month
of employment, Consultant has completed five (5) months of employment and there
are seven (7) months remaining on the term of this Agreement. As
such, Consultant forfeits 7/12
ths
of the
Granted
Shares and must endorse those shares of stock over to Daybreak for no
consideration.
Example
2. Same facts as in Example 1, except Consultant’s employment was
terminated five (5) days into the eighth month of employment, Consultant has
only completed seven (7) months of employment and there are six (5) months
remaining on the term of this Agreement. As such, Consultant forfeits
7/12
ths
of the
Granted Shares and must endorse those shares of stock over to Daybreak for
no
consideration.
In
the
event of the death of the Consultant, the parties agree that the Consultant
shall not forfeit any of the granted shares issued to the Consultant by Daybreak
under the terms of this Agreement.
(v)
Legend
. Stock
certificates representing Granted Shares shall be imprinted with a legend in
substantially the same form set forth herein stating that the shares represented
thereby may not be sold, exchanged, transferred, pledged, hypothecated, or
otherwise disposed of except as otherwise provided in this
Agreement.
CONSULTING
SERVICES
AGREEMENT
THIS
SECURITY HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), IN RELIANCE UPON THE
EXEMPTIONS FROM REGISTRATION PROVIDED IN THE ACT AND REGULATION D UNDER THE
ACT. AS SUCH, THE ACQUISITION OF THIS SECURITY WAS NECESSARILY WITH
THE INTENT OF INVESTMENT AND NOT WITH A VIEW FOR
DISTRIBUTION. THEREFORE, ANY SUBSEQUENT TRANSFER OF THIS SECURITY OR
ANY INTEREST THEREIN WILL BE UNLAWFUL UNLESS IT IS REGISTERED UNDER THE ACT
OR
UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE. FURTHERMORE, IT
IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY OR ANY INTEREST
THEREIN, WITHOUT THE OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT THE
PROPOSED TRANSFER OR SALE DOES NOT AFFECT THE EXEMPTIONS RELIED UPON BY THE
COMPANY IN ORIGINALLY DISTRIBUTING THE SECURITY AND THAT REGISTRATION IS NOT
REQUIRED.
(vi)
Stock
Splits, Dividends, etc
. If, due to a stock split, stock
dividend, combination of shares, or any other change or exchange for other
securities by reclassification, reorganization, merger, consolidation,
recapitalization, or otherwise, Consultant, as the owner of the Granted Shares
subject to the restrictions hereunder, shall be entitled to new, additional,
or
different shares of stock or securities, the certificate or certificates for,
or
otherwise evidence of, such new, additional, or different shares or securities,
together with a stock power or other instrument of transfer appropriately
endorsed, also shall be endorsed with a legend as provided in Section 3.b.v
of
this Agreement.
4.
Independent
Contractor Status
. In the performance of the work
contemplated in this Agreement, Consultant is an independent contractor with
the
authority to control and direct the performance of the details of the work,
Daybreak being interested only in the results obtained. Consultant is
not an agent or employee of Daybreak for any purpose, and the employees of
Consultant are not entitled to any of the benefits that Daybreak provides for
its employees. Consultant shall be responsible for payment of all
taxes, including federal, state, and local taxes arising out of its activities
under this Agreement, including, but not limited to, income tax, social security
tax, and unemployment insurance tax that might be due. It is
understood that Daybreak does not agree to use Consultant
exclusively. Nothing in this Agreement shall constitute or be
construed as a creation of a partnership or joint venture between Consultant
and
Daybreak, or their successors or assigns. The parties acknowledge and
agree that Consultant, its principals, associates and employees, are not engaged
in the practice of law nor are they engaged in providing legal advice or counsel
in connection with their representation of Daybreak.
CONSULTING
SERVICES
AGREEMENT
The
parties further acknowledge and agree that any association or referral with
or
to any law firm by or with Consultant shall not be considered or construed
to be
the practice of law by Consultant in connection with such association or
referral.
5.
Confidential
Information
. In the course of providing services for
Daybreak, each of Daybreak and Consultant may learn or discover information
that
is identified by the other as non-public, proprietary
information. Each of Daybreak and Consultant agrees that, during the
term of engagement and for a period of twenty-four (24) months thereafter,
it
will not, directly or indirectly, disclose or use any such information of the
other party (“Confidential Information”) without the consent of such
party. Confidential Information shall not include: information
which is currently in the public domain or hereafter enters the public domain
without the fault or involvement of the receiving party; information known
to
the receiving party prior to its disclosure by other party and information
disclosed to a receiving party from a source (other than the other party) having
a lawful right to make such disclosure to the receiving party, or information
required to be disclosed under any court order or governmental directive. The
terms of this Agreement shall be treated as Confidential Information by both
parties.
6.
Summons/Subpoenas
. In
the event that Consultant or any party acting on behalf of Consultant
(Consultant and any such person being a “Subpoenaed Party”) receives a subpoena
or summons requesting that the Subpoenaed Party produce documents or records
containing Confidential Information of Daybreak or otherwise pertaining to
the
services rendered hereunder or testify concerning such Confidential Information
of Daybreak or services, the Subpoenaed Party will immediately notify
Daybreak. Daybreak may, within the time permitted for the Subpoenaed
Party to respond to any such requests, initiate such legal action seeking a
protective order or other relief as Daybreak deems appropriate to protect
information from disclosure. If Daybreak takes no action within the
time permitted for the Subpoenaed Party to respond or if Daybreak’s actions do
not result in a judicial order preventing the Subpoenaed Party from supplying
or
disclosing the requested information or testifying, the Subpoenaed Party may
comply with the request. Daybreak agrees to reimburse and pay the
Subpoenaed Party for all costs and expenses incurred by the Subpoenaed Party
(or
such person) in connection with any such summons or subpoenas concerning
Daybreak, including reasonable attorney’s fees and time spent by the Subpoenaed
Party ‘s personnel, billed at their regular rates.
7.
Indemnification
. Each
party agrees to indemnify and hold the other party, its officers and employees,
harmless against any and all claims, lawsuits, judgments, costs, liens, losses,
expenses, fees (including reasonable attorney’s fees and costs of defense),
proceedings, actions, demands, causes of action, liability and suits of any
kind
and nature, including but not limited to, personal injury (including death),
property damage, or other harm for which recovery damages is sought that may
arise out of or be occasioned or caused by each party’s negligent act, error or
omission or the negligent act, error or omission of any agent, officer,
director, representative, employee, consultant or subconsultant of each party
and their respective officers, agents, employees, directors and representatives
while in the exercise of performance of the rights or duties under this
Agreement.
CONSULTING
SERVICES
AGREEMENT
8.
General
.
(a) This
Agreement shall be interpreted and construed in accordance with the laws of
the
State of Washington without giving effect to principles of conflict of
law. Any action arising in connection with this Agreement must be
brought in Spokane County Superior Court, Spokane, Washington. By
this Agreement, the parties confer jurisdiction over the subject matter of
and
parties to this Agreement. The party who prevails in any such action
will be entitled to an award of the reasonable costs and attorneys’ fees
incurred in the action.
(b) The
terms and conditions set forth in this Agreement are intended by Daybreak and
Consultant to constitute the final and complete statement of their agreement,
and all prior proposals, communications, negotiations, understandings, and
representations relating to the subject matter of this Agreement, whether verbal
or written, are hereby superseded. No modification or amendment of
this Agreement shall be effected unless the same is in writing and signed by
both parties.
(c) Any
notice required or desired to be given under this Agreement shall be given
in
writing and sent by certified mail, return receipt requested, addressed as
follows:
i. To
Daybreak:
Daybreak
Oil and Gas, Inc.
Thomas
C.
Kilbourne
1012
Washington Mutual Financial Center
601
West
Main Avenue
Spokane,
Washington 99201
ii. To
Consultant:
Timothy
R. Lindsey
18331
Langsbury Drive
Houston,
Texas 77084
Notice
shall be effective upon receipt.
(d) Consultant
consents in advance to Daybreak’s right to assign this Agreement to any
successor in interest that expressly assumes Daybreak’s obligations hereunder in
writing. Consultant may not assign its rights and obligations under
this Agreement.
(e) Each
of the sections contained herein shall be and remain separate from, independent
of, and severable from all and any other sections herein except as otherwise
indicated by the context of this Agreement. Any decision or
declaration that one or more of the sections or subsections are null and void
shall have no effect on the remaining sections or subsections of this
Agreement.
(f) Upon
any termination of employment, Consultant shall within ten (10) business days,
deliver or cause to be delivered to the Company all books, documents, effects,
monies received in trust, or other property belonging to the Company or its
subsidiaries for which the Company or its subsidiaries are liable to others,
which are in possession, charge, control, or custody of the
Consultant.
CONSULTING
SERVICES
AGREEMENT
(g) This
Agreement shall inure to the benefit of and be binding upon the Consultant
and
its heirs, executors, legal personal representatives, and administrators, and
upon the Company.
(h) This
Agreement may be executed in one or more counterparts, each of which shall
be
deemed an original and together shall constitute a single
agreement. Facsimile signatures shall be good and sufficient evidence
of signature for all purposes of this Agreement.
IN
WITNESS WHEREOF, the parties have executed this Agreement as of the 2nd day
of
January, 2007.
COMPANY:
Daybreak
Oil and Gas, Inc.
By:
/s/
Thomas C.
Kilbourne
Thomas
C. Kilbourne, Treasurer
CONSULTANT:
/s/
Tim R.
Lindsey
Timothy
R. Lindsey
CONSULTING
SERVICES AGREEMENT
-7-
Exhibit
10.36
CONSULTING
SERVICES AGREEMENT
This
Consulting Services Agreement
(“Agreement”) is entered into effective
the 1
st
day of
March, 2007, by and between Daybreak Oil and Gas, Inc., (“Daybreak”), a
Washington corporation, and Jeffrey R. Dworkin located in Calgary, Alberta,
Canada.
Whereas
,
Daybreak desires to be assured of the association and services of the Consultant
in order to avail itself of the Consultant’s experience, skills, abilities,
knowledge and background to facilitate long range strategic planning and to
advise Daybreak in business and/or exploration matters, and
Whereas
,
Daybreak wishes to engage Consultant to provide advisory and other services
for
Daybreak and Consultant wishes to accept such engagement, all on the terms
and
conditions set forth herein.
Whereas
,
the Board of Directors of the Company considers it to be in the best interests
of the Company to enter into this Agreement with the Consultant and this
Agreement has been duly approved by the Board of Directors of the
Company;
Whereas,
the Consultant shall make his services available, as requested, to
perform this Agreement;
Now
therefore
, in consideration of the mutual promises herein and other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1.
Engagement.
Daybreak
hereby engages the Consultant and the Consultant hereby accepts the engagement,
to become a consultant to Daybreak and to render such advice, consultation,
information, and services to the directors and officers of Daybreak regarding
public company corporate governance and legal knowledge of oil and gas industry
contracts including but not limited to:
(a) assist
in creation and implementation of corporate governance standards
(b) review
and advise on oil and gas mineral rights leases;
The
Consultant will report to the person or positions designated by the Company
to
whom the Consultant will be reporting and will discharge such duties and
responsibilities as are assigned to the Consultant from time to
time.
The
Consultant represents that he is duly qualified to perform the duties hereunder
and further covenant that in performing his duties hereunder, he will not engage
in activity that is in violation of applicable security laws or subject the
Corporation to liability thereunder.
2.
Term.
The
term of this Agreement shall commence on March 1, 2007 and continue in effect
until February 29, 2008. Notwithstanding the foregoing, this
Agreement may be terminated prior to the end of the term by either Daybreak
or
Consultant, for any reason or for no
CONSULTING
SERVICES AGREEMENT
reason,
upon thirty (30) days written notice to the other party. In the event
of termination, Consultant shall be entitled to all fees and other consideration
contained in this Agreement earned and accrued to the effective date of
termination.
3.
Compensation.
(a) Monetary. In
exchange for his commitment to provide services to Daybreak under Section One
above, Daybreak agrees to pay Consultant a hourly rate in the amount of One
Hundred Fifty Dollars ($150.00) plus out of pocket expenses. The Consultant
shall submit invoices to the Corporation for each month or portion thereof
for
which services are provided during the period covered by the invoice and also
including any proper claim for travel expenses. Each invoice shall
indicate the period covered, the month or portion of a month worked, the rate
and the total charge for consulting services.
During
the term of this agreement, Consultant is entitled to reimbursement for
reasonable business expenses incurred on behalf of Daybreak in accordance with
the standard practice for the reimbursement policies and procedures established
by Daybreak. All out-of-pocket expenses submitted for reimbursement, shall
be
done in a timely manner. Such timely manner shall be defined as the expense
reimbursement request shall be received by Daybreak no later than sixty (60)
days after the date of the expense receipt or the occurrence of such expense.
Any expense receipt dated sixty (60) days earlier than the expense reimbursement
request is received shall not be eligible for reimbursement by Daybreak. If
any
receipt for a charge on a Company credit card is not submitted to Daybreak
within sixty (60) days of the transaction date, the transaction amount can
be
charged back to the Consultant or be deducted from the Consultant’s next
invoice. Compensation provided Consultant under this Agreement takes into
account Consultant’s personal obligation to incur and pay certain additional
expenses required of Consultant as a consultant of Daybreak for which Daybreak
is under no obligation to reimburse Consultant.
4.
Independent
Contractor Status
. In the performance of the work
contemplated in this Agreement, Consultant is an independent contractor with
the
authority to control and direct the performance of the details of the work,
Daybreak being interested only in the results obtained. Consultant is
not an agent or employee of Daybreak for any purpose, and the employees of
Consultant are not entitled to any of the benefits that Daybreak provides for
its employees. Consultant shall be responsible for payment of all
taxes, including federal, state, and local taxes arising out of its activities
under this Agreement, including, but not limited to, income tax, social security
tax, and unemployment insurance tax that might be due. It is
understood that Daybreak does not agree to use Consultant
exclusively. Nothing in this Agreement shall constitute or be
construed as a creation of a partnership or joint venture between Consultant
and
Daybreak, or their successors or assigns. The parties acknowledge and
agree that Consultant, its principals, associates and employees, are not engaged
in the practice of law nor are they engaged in providing legal advice or counsel
in connection with their representation of Daybreak. The parties
further acknowledge and agree that any association or referral with or to any
law firm by or with Consultant shall not be considered or construed to be the
practice of law by Consultant in connection with such association or
referral.
CONSULTING
SERVICES AGREEMENT
5.
Confidential
Information
. In the course of providing services for
Daybreak, each of Daybreak and Consultant may learn or discover information
that
is identified by the other as non-public, proprietary
information. Each of Daybreak and Consultant agrees that, during the
term of engagement and for a period of twenty-four (24) months thereafter,
it
will not, directly or indirectly, disclose or use any such information
of the
other party (“Confidential Information”) without the consent of such
party. Confidential Information shall not include: information
which is currently in the public domain or hereafter enters the public
domain
without the fault or involvement of the receiving party; information known
to
the receiving party prior to its disclosure by other party and information
disclosed to a receiving party from a source (other than the other party)
having
a lawful right to make such disclosure to the receiving party, or information
required to be disclosed under any court order or governmental directive.
The
terms of this Agreement shall be treated as Confidential Information by
both
parties.
6.
Summons/Subpoenas
. In
the event that Consultant or any party acting on behalf of Consultant
(Consultant and any such person being a “Subpoenaed Party”) receives a subpoena
or summons requesting that the Subpoenaed Party produce documents or records
containing Confidential Information of Daybreak or otherwise pertaining to
the
services rendered hereunder or testify concerning such Confidential Information
of Daybreak or services, the Subpoenaed Party will immediately notify
Daybreak. Daybreak may, within the time permitted for the Subpoenaed
Party to respond to any such requests, initiate such legal action seeking a
protective order or other relief as Daybreak deems appropriate to protect
information from disclosure. If Daybreak takes no action within the
time permitted for the Subpoenaed Party to respond or if Daybreak’s actions do
not result in a judicial order preventing the Subpoenaed Party from supplying
or
disclosing the requested information or testifying, the Subpoenaed Party may
comply with the request. Daybreak agrees to reimburse and pay the
Subpoenaed Party for all costs and expenses incurred by the Subpoenaed Party
(or
such person) in connection with any such summons or subpoenas concerning
Daybreak, including reasonable attorney’s fees and time spent by the Subpoenaed
Party ‘s personnel, billed at their regular rates.
7.
Indemnification
. Each
party agrees to indemnify and hold the other party, its officers and employees,
harmless against any and all claims, lawsuits, judgments, costs, liens, losses,
expenses, fees (including reasonable attorney’s fees and costs of defense),
proceedings, actions, demands, causes of action, liability and suits of any
kind
and nature, including but not limited to, personal injury (including death),
property damage, or other harm for which recovery damages is sought that may
arise out of or be occasioned or caused by each party’s negligent act, error or
omission or the negligent act, error or omission of any agent, officer,
director, representative, employee, consultant or subconsultant of each party
and their respective officers, agents, employees, directors and representatives
while in the exercise of performance of the rights or duties under this
Agreement.
8.
General
.
(a) This
Agreement shall be interpreted and construed in accordance with the laws of
the
State of Washington without giving effect to principles of conflict of
law. Any action arising in connection with this Agreement must be
brought in Spokane County Superior Court, Spokane, Washington. By
this Agreement, the parties confer jurisdiction over the subject matter of
and
parties to this Agreement. The party who prevails in any such action
will be entitled to an award of the reasonable costs and attorneys’ fees
incurred in the action.
CONSULTING
SERVICES AGREEMENT
(b) The
terms and conditions set forth in this Agreement are intended by Daybreak and
Consultant to constitute the final and complete statement of their agreement,
and all prior proposals, communications, negotiations, understandings, and
representations relating to the subject matter of this Agreement, whether verbal
or written, are hereby superseded. No modification or amendment of
this Agreement shall be effected unless the same is in writing and signed by
both parties.
(c) Any
notice required or desired to be given under this Agreement shall be given
in
writing and sent by certified mail, return receipt requested, addressed as
follows:
i. To
Daybreak:
Daybreak
Oil and Gas, Inc.
Thomas
C.
Kilbourne
1012
Washington Mutual Financial Center
601
West
Main Avenue
Spokane,
Washington 99201
ii. To
Consultant:
Jeffrey
R. Dworkin
1001
13
th
Ave
S.W.
#
320
Calgary,
AB Canada T2R 0RL5
Notice
shall be effective upon receipt.
(d) Consultant
consents in advance to Daybreak’s right to assign this Agreement to any
successor in interest that expressly assumes Daybreak’s obligations hereunder in
writing. Consultant may not assign its rights and obligations under
this Agreement.
(e)
Each
of the
sections contained herein shall be and remain separate from, independent of,
and
severable from all and any other sections herein except as otherwise indicated
by the context of this Agreement. Any decision or declaration that
one or more of the sections or subsections are null and void shall have no
effect on the remaining sections or subsections of this Agreement.
(f)
Upon
any
termination of employment, Consultant shall within ten (10) business days,
deliver or cause to be delivered to the Company all books, documents, effects,
monies received in trust, or other property belonging to the Company or its
subsidiaries for which the Company or its subsidiaries are liable to others,
which are in possession, charge, control, or custody of the
Consultant.
CONSULTING
SERVICES AGREEMENT
(g)
This
Agreement shall inure to the benefit of and be binding upon the Consultant
and
its heirs, executors, legal personal representatives, and administrators, and
upon the Company.
(h)
This
Agreement may be executed in one or more counterparts, each of which shall
be
deemed an original and together shall constitute a single
agreement. Facsimile signatures shall be good and sufficient evidence
of signature for all purposes of this Agreement.
(i)
The
waiver by
any party hereto of a breach of any provision of this Agreement
shall
not
operate or be construed as a waiver of any subsequent breach of the same or
of
any other provisions of this Agreement
The
parties have executed this Agreement as of the
31
day of May, 2007.
COMPANY:
Daybreak
Oil and Gas, Inc.
By:
/s/
Thomas C.
Kilbourne
Thomas
C. Kilbourne, Treasurer
CONSULTANT:
Jeffrey
R. Dworkin
By:
/s/
Jeffrey R.
Dworkin
Jeffrey
R. Dworkin
CONSULTING
SERVICES AGREEMENT
-5-
Exhibit
10.37
CONSULTING
SERVICES AGREEMENT
This
Consulting Services Agreement
(“Agreement”) is made as of the 1st
day of March, 2007 to the 28th day of February, 2008, by and between Daybreak
Oil and Gas, Inc., (“Daybreak”), a Washington corporation, and Michael J.
Hooper, an individual.
Whereas
,
Daybreak desires to be assured of the association and services of the Consultant
in order to avail itself of the Consultant’s experience, skills, abilities,
knowledge and background as an Accounting and Accounting Systems Analyst,
and
Whereas
,
Daybreak wishes to engage Consultant to provide advisory and other services
for
Daybreak and Consultant wishes to accept such engagement, all on the terms
and
conditions set forth herein.
Whereas
,
the Board of Directors of the Company considers it to be in the best interests
of the Company to enter into this Agreement with the Consultant and this
Agreement has been duly approved by the Board of Directors of the
Company;
Now
therefore
, in consideration of the mutual promises herein and other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1.
Engagement.
Daybreak
hereby engages the Consultant on a non-exclusive basis, and the Consultant
hereby accepts the engagement, to become a consultant to Daybreak and to render
such advice, consultation, information, and services to the directors and
officers of Daybreak regarding accounting system design, accounting input and
organization, management reports, internal control procedures and related
matters.
The
Consultant will report to the person or positions designated by the Company
to
whom the Consultant will be reporting and will discharge such duties and
responsibilities as are assigned to the Consultant from time to
time.
The
Consultant warrants that he is duly qualified to perform the duties hereunder
and further covenants that in performing his duties hereunder, he will not
engage in any activity that is in violation of applicable security laws or
subject the Corporation to liability thereunder.
It
shall
be expressly understood that the Consultant shall have no power to bind the
Company to any contract or obligation or to transact any business in the
Company’s name or on behalf of the Company in any manner.
2.
Term.
The
term of this Agreement shall commence on March 1, 2007 and continue in effect
until February 29, 2008. Notwithstanding the foregoing, this
Agreement may be terminated prior to the end of the term by either Daybreak
or
Consultant, for any reason or for no reason, upon thirty (30) days written
notice to the other party. In the event of termination, Consultant
shall be entitled to all fees and other consideration contained in this
Agreement earned and accrued to the effective date of termination.
CONSULTING
SERVICES AGREEMENT
3.
Compensation.
(a) Monetary. In
exchange for his commitment to provide services to Daybreak under Section One
above, Daybreak agrees to pay Consultant an hourly rate in the amount of Forty
Dollars ($40.00) per hour plus out of pocket expenses incurred or advanced
on
behalf of the Company.
The
Consultant shall submit invoices to the Corporation for each month or portion
thereof for which services are provided during the period covered by the invoice
and also including any proper claim for travel expenses. Each invoice
shall indicate the period covered, the month or portion of a month worked,
the
rate and the total charge for consulting services.
The
Company agrees to pay the invoice within a reasonable period of time following
its examination and review by the Treasurer or Chief Financial
Officer.
The
Company will reimburse the Consultant, at actual cost, for out-of-pocket
expenses incurred in accordance with the Corporation’s standard practice for the
reimbursement of reasonable travel expenses incurred by its contractors or
its
own personnel. The Corporation will also reimburse the Consultant for
any reasonable long distance telephone, fax or photocopying charges incurred
by
the Consultant. Expenses claimed must be supported by the applicable
receipts.
4.
Independent
Contractor Status
. In the performance of the work
contemplated in this Agreement, Consultant is an independent contractor with
the
authority to control and direct the performance of the details of the work,
Daybreak being interested only in the results obtained. Consultant is
not an agent or employee of Daybreak for any purpose, and the employees of
Consultant are not entitled to any of the benefits that Daybreak provides for
its employees. Consultant shall be responsible for payment of all
taxes, including federal, state, and local taxes arising out of its activities
under this Agreement, including, but not limited to, income tax, social security
tax, and unemployment insurance tax that might be due. It is
understood that Daybreak does not agree to use Consultant
exclusively. Nothing in this Agreement shall constitute or be
construed as a creation of a partnership or joint venture between Consultant
and
Daybreak, or their successors or assigns. The parties acknowledge and
agree that Consultant, its principals, associates and employees, are not engaged
in the practice of law nor are they engaged in providing legal advice or counsel
in connection with their representation of Daybreak. The parties
further acknowledge and agree that any association or referral with or to any
law firm by or with Consultant shall not be considered or construed to be the
practice of law by Consultant in connection with such association or
referral.
5.
Confidential
Information
. In the course of providing services for
Daybreak, each of Daybreak and Consultant may learn or discover information
that
is identified by the other as non-public, proprietary
information. Each of Daybreak and Consultant agrees that, during the
term of engagement and for a period of twenty-four (24) months thereafter,
it
will not, directly or indirectly, disclose or use any such information of the
other party (“Confidential Information”) without the consent of such
party. Confidential Information shall not include: information
which is currently in the public domain or hereafter enters the public domain
without the fault or
CONSULTING
SERVICES AGREEMENT
involvement
of the receiving party; information known to the receiving party prior to its
disclosure by other party and information disclosed to a receiving party from
a
source (other than the other party) having a lawful right to make such
disclosure to the receiving party, or information required to be disclosed
under
any court order or governmental directive. The terms of this Agreement shall
be
treated as Confidential Information by both parties.
6.
Summons/Subpoenas
. In
the event that Consultant or any party acting on behalf of Consultant
(Consultant and any such person being a “Subpoenaed Party”) receives a subpoena
or summons requesting that the Subpoenaed Party produce documents or records
containing Confidential Information of Daybreak or otherwise pertaining to
the
services rendered hereunder or testify concerning such Confidential Information
of Daybreak or services, the Subpoenaed Party will immediately notify
Daybreak. Daybreak may, within the time permitted for the Subpoenaed
Party to respond to any such requests, initiate such legal action seeking a
protective order or other relief as Daybreak deems appropriate to protect
information from disclosure. If Daybreak takes no action within the
time permitted for the Subpoenaed Party to respond or if Daybreak’s actions do
not result in a judicial order preventing the Subpoenaed Party from supplying
or
disclosing the requested information or testifying, the Subpoenaed Party may
comply with the request. Daybreak agrees to reimburse and pay the
Subpoenaed Party for all costs and expenses incurred by the Subpoenaed Party
(or
such person) in connection with any such summons or subpoenas concerning
Daybreak, including reasonable attorney’s fees and time spent by the Subpoenaed
Party ‘s personnel, billed at their regular rates.
7.
Indemnification
. Each
party agrees to indemnify and hold the other party, its officers and employees,
harmless against any and all claims, lawsuits, judgments, costs, liens, losses,
expenses, fees (including reasonable attorney’s fees and costs of defense),
proceedings, actions, demands, causes of action, liability and suits of any
kind
and nature, including but not limited to, personal injury (including death),
property damage, or other harm for which recovery damages is sought that may
arise out of or be occasioned or caused by each party’s negligent act, error or
omission or the negligent act, error or omission of any agent, officer,
director, representative, employee, consultant or subconsultant of each party
and their respective officers, agents, employees, directors and representatives
while in the exercise of performance of the rights or duties under this
Agreement.
8.
General
.
(a) This
Agreement shall be interpreted and construed in accordance with the laws of
the
State of Washington without giving effect to principles of conflict of
law. Any action arising in connection with this Agreement must be
brought in Spokane County Superior Court, Spokane, Washington. By
this Agreement, the parties confer jurisdiction over the subject matter of
and
parties to this Agreement. The party who prevails in any such action
will be entitled to an award of the reasonable costs and attorneys’ fees
incurred in the action.
(b) The
terms and conditions set forth in this Agreement are intended by Daybreak and
Consultant to constitute the final and complete statement of their agreement,
and all prior proposals, communications, negotiations, understandings, and
representations relating to the subject matter of this Agreement, whether verbal
or written, are hereby superseded. No modification or amendment of
this Agreement shall be effected unless the same is in writing and signed by
both parties.
CONSULTING
SERVICES AGREEMENT
(c) Any
notice required or desired to be given under this Agreement shall be given
in
writing and sent by certified mail, return receipt requested, addressed as
follows:
i. To
Daybreak:
Daybreak
Oil and Gas, Inc.
Thomas
C.
Kilbourne
1012
Washington Mutual Financial Center
601
West
Main Avenue
Spokane,
Washington 99201
ii. To
Michael J. Hooper:
Michael
J. Hooper
601
W.
Main Avenue Suite 1017
Spokane,
WA 99201
Notice
shall be effective upon receipt.
(d)
Consultant
consents in advance to Daybreak’s right to assign this Agreement to any
successor in interest that expressly assumes Daybreak’s obligations hereunder in
writing. Consultant may not assign its rights and obligations under
this Agreement.
(e)
Each
of the
sections contained herein shall be and remain separate from, independent of,
and
severable from all and any other sections herein except as otherwise indicated
by the context of this Agreement. Any decision or declaration that
one or more of the sections or subsections are null and void shall have no
effect on the remaining sections or subsections of this Agreement.
(f)
Upon
any
termination of employment, Consultant shall within ten (10) business days,
deliver or cause to be delivered to the Company all books, documents, effects,
monies received in trust, or other property belonging to the Company or its
subsidiaries for which the Company or its subsidiaries are liable to others,
which are in possession, charge, control, or custody of the
Consultant.
(g)
This
Agreement shall inure to the benefit of and be binding upon the Consultant
and
its heirs, executors, legal personal representatives, and administrators, and
upon the Company.
(h)
This
Agreement may be executed in one or more counterparts, each of which shall
be
deemed an original and together shall constitute a single
agreement. Facsimile signatures shall be good and sufficient evidence
of signature for all purposes of this Agreement.
CONSULTING
SERVICES AGREEMENT
(i)
The
waiver by
any party hereto of a breach of any provision of this Agreement
shall
not
operate or be construed as a waiver of any subsequent breach of the same or
of
any other provisions of this Agreement
IN
WITNESS WHEREOF, the parties have executed this Agreement as of the 28th day
of
February, 2007.
COMPANY:
Daybreak
Oil and Gas, Inc.
By:
/s/ Thomas C.
Kilbourne
Thomas
C. Kilbourne, Treasurer
CONSULTANT:
Michael
J. Hooper
By:
/s/ Michael J.
Hooper
Michael
J. Hooper
CONSULTING
SERVICES AGREEMENT
-5-
Exhibit
10.38
EMPLOYMENT
AGREEMENT
THIS
EMPLOYMENT AGREEMENT ("Agreement") is entered into effective the 1
st
day of
March,
2007, between Daybreak Oil and Gas Inc., a Washington corporation ("Daybreak,
Employer, Company") and Eric L. Moe, ("Employee").
It
is
agreed as follows:
1.
Employment.
Employer employs Employee, and Employee accepts employment,
upon the terms and conditions set forth in this Agreement.
2.
Term.
This Agreement begins on March 1, 2007, and continues until May
31, 2007, unless terminated earlier by either party in compliance with this
Agreement's provisions governing termination. After May 31, 2007, employment
will be month to month subject to approval each month, by the Daybreak Board
of
Directors.
3.
Compensation.
a.
Salary.
Employer will pay Employee a monthly salary of Ten Thousand
Five Hundred ($10,500) dollars during the term of this Agreement. The salary
will be paid in accordance with Employer's existing payroll policies for
comparable employees. Employee's compensation will be subject to prospective
review by Employer in its sole discretion.
b.
Fringe Benefits.
Employee may receive bonuses during the term of
employment as determined by Employer, in its sole discretion. Employee will
be
entitled to participate in all other fringe benefit programs applicable to
comparable employees of Employer. Employer may amend, eliminate, or add to
the
existing fringe benefit programs in its sole discretion.
4.
Duties.
Employee will be employed initially as Chief Executive Officer
(CEO) of Daybreak, and in such additional or other capacities and offices as
may
be assigned by the Board of Directors from time to time. The Employee warrants
and represents that he is duly qualified to perform the duties hereunder and
further covenants that in performing his duties hereunder, he will not engage
in
any activity that is in violation of applicable security laws or subject the
Corporation to liability thereunder.
It
shall
be expressly understood that the Employee shall have no power to bind the
Company to any contract or obligation on behalf of Daybreak in any manner
without approval of the Board of Directors.
5.
Other Employment.
Without the prior consent of Daybreak, Employee is
prohibited from directly or indirectly, during the term of this Agreement,
rendering services of a business, professional, or commercial nature to any
other person, firm or corporation, whether or not the services are rendered
for
compensation.
6.
Vacation Benefits.
Employee is entitled to vacation periods with full
pay in accordance with established Daybreak policy. Vacation will be scheduled
by mutual agreement; however, Employee will be allowed sufficient discretion
in
scheduling to assure the vacation benefit may be used.
7.
Expenses.
During the term of employment, Employee is entitled to
reimbursement for reasonable business expenses incurred on behalf of Daybreak
in
accordance with the standard practice for the reimbursement policies and
procedures established by Employer. All out-of-pocket expenses submitted for
reimbursement, shall be done in a timely manner. Such timely manner shall be
defined as the expense reimbursement request shall be received by Employer
no
later than sixty (60) days after the date of the expense receipt or the
occurrence of such expense. Any expense receipt dated sixty (60) days earlier
than the expense reimbursement request is received shall not be eligible for
reimbursement by Daybreak. If any receipt for a charge on a Company credit
card
is not submitted to Employer within sixty (60) days of the transaction date,
the
transaction amount can be charged back to the Employee or be deducted from
the
Employee’s next payroll check. Compensation provided Employee under this
Agreement takes into account Employee's personal obligation to incur and pay
certain additional expenses required of Employee as an employee of Employer
for
which Daybreak is under no obligation to reimburse Employee.
8.
Employment at Will.
This is an agreement for employment of indefinite
duration. The employment relationship may be terminated at will by either party.
Termination by either party must be made by written notice to the other party
given at least 7 days in advance of the termination date. Upon termination,
Employee will be paid accrued unpaid salary prorated in accordance with
Employer's general policies and procedures.
9.
Employer Business.
All business revenues and fees produced or
transacted through the efforts of Employee are the sole property of Daybreak.
Employee will have no right to the business or to share in any revenues or
fees
resulting from the conduct of the business other than the compensation provided
for in this Agreement.
10.
Confidential Information.
a.
Disclosure Prohibited.
Employee acknowledges that, in the course of
this employment, Employee will become acquainted with confidential information
belonging to Daybreak. Employee may not, at any time during the period of
Employee's employment or thereafter, except as authorized in writing by
Daybreak, directly or indirectly, use, disclose, reproduce, or in any other
way
publicly or privately disseminate any "Confidential Information" as
defined.
b.
Definition.
"Confidential Information" means all information not
generally known to the public, which relates to the business of Daybreak or
any
third parties doing business with Daybreak. By way of example, confidential
information includes, but is not limited to, information relating to oil and
gas
plays, development information on oil and gas prospects, fundraising plans,
customers and customer lists, pricing, contracts, costs and other financial
information, merchandising and marketing techniques, inventions, plans
specifications, and products disclosed to or known by Employee in connection
with his employment by Employer.
11.
Protection of Daybreak Property.
All records, files, manuals, lists of
customers, blanks, forms, materials, supplies, computer programs, and other
materials furnished to Employee by Daybreak, used on its behalf, or generated
or
obtained during the course of this employment remain the property of Daybreak.
Employee is only a holder of this property for the sole use and benefit of
Employer and will safely keep and preserve such property, except as consumed
in
the normal business operation of Employer. Upon termination of this employment,
Employee will immediately deliver to Daybreak, or its authorized representative,
all of Daybreak's property, including all copies, remaining in Employee's
possession or control.
12.
Remedies.
The parties recognize that irreparable injury will result to
Daybreak and its business and property if Employee breaches the covenant of
confidentiality contained in Section 10 of this Agreement. It is agreed that
if
Employee breaches the covenant of confidentiality, Daybreak will be entitled
to
an injunction to restrain further breach of that covenant by Employee or any
of
Employee's partners, agents, employers and employees, or any persons acting
for
or with Employee, in addition to any other remedies Daybreak may
have.
13.
Assignability.
These contractual obligations of Employee are personal
and neither the rights nor obligations under this Agreement may be assigned
or
transferred by Employee to any other person. This Agreement will bind and
benefit any successor of Employer, whether by merger, sale of assets,
reorganization or other form of business acquisition, disposition, or business
reorganization.
14.
Amendment.
This Agreement contains the entire understanding of the
parties. This Agreement may be changed only by a written document signed by
Employee and Daybreak.
15.
Notices.
All notices and other communications required or permitted to
be given by this Agreement must be in writing and must be given and will be
deemed received if and when either hand-delivered and a signed receipt is given,
or mailed by registered or certified U.S. mail, return receipt requested,
postage prepaid, and if to Employer to:
Daybreak
Oil and Gas, Inc.
601
W.
Main Avenue Suite 1012
Spokane,
WA 99201
And,
if
to Employee to:
Eric
L.
Moe
8305
North Colton Place
Spokane,
WA 99201
Either
party may change the address to which notice to it is to be addressed by
notifying the other party of the change.
16.
Enforcement.
This Agreement is to be construed in accordance with the
laws of the State of Washington. Any action arising in connection with this
Agreement must be brought in Spokane County Superior Court, Spokane, Washington.
By this Agreement, the parties confer jurisdiction over the subject matter
of
and parties to this Agreement. The party who prevails in any such action will
be
entitled to an award of the reasonable costs and attorneys' fees incurred in
the
action.
IN
WITNESS WHEREOF, the parties have executed this Agreement.
|
"EMPLOYER"
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“EMPLOYEE”
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Daybreak
Oil and Gas Inc.,
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a
Washington corporation
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By:
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/s/
Thomas C.
Kilbourne
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/s/
Eric L.
Moe
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Its:
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Treasurer
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Eric
L.
Moe
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|
|
Exhibit
10.39
EMPLOYMENT
AGREEMENT
THIS
EMPLOYMENT AGREEMENT ("Agreement") is entered into effective the 1
st
day of
March,
2007, between Daybreak Oil and Gas Inc., a Washington corporation (“Daybreak”,
"Employer", “Company”) and Bennett W. Anderson, ("Employee").
It
is
agreed as follows:
1.
Employment.
Employer employs Employee, and Employee accepts employment,
upon the terms and conditions set forth in this Agreement.
2.
Term.
This Agreement begins on March 1, 2007, and continues until
February 28, 2008, unless terminated earlier by either party in compliance
with
this Agreement's provisions governing termination.
3.
Compensation.
a.
Salary.
Employer will pay Employee a monthly salary of Ten Thousand
Five Hundred ($10,500) dollars during the term of this Agreement. The salary
will be paid in accordance with Employer's existing payroll policies for
comparable employees. Employee's compensation will be subject to prospective
review by Employer in its sole discretion.
b.
Fringe Benefits.
Employee may receive bonuses during the term of
employment as determined by Employer, in its sole discretion. Employee will
be
entitled to participate in all other fringe benefit programs applicable to
comparable employees of Employer. Employer may amend, eliminate, or add to
the
existing fringe benefit programs in its sole discretion.
4.
Duties.
Employee will be employed initially as Chief Operating Officer
of Daybreak, and in such additional or other capacities and offices as may
be
assigned by the Board of Directors from time to time. The Employee warrants
and
represents that he is duly qualified to perform the duties hereunder and further
covenants that in performing his duties hereunder, he will not engage in any
activity that is in violation of applicable security laws or subject the
Corporation to liability thereunder.
It
shall
be expressly understood that the Employee shall have no power to bind the
Company to any contract or obligation on behalf of Daybreak in any manner
without approval of the Board of Directors.
5.
Other Employment.
Without the prior express written authorization of
Daybreak, Employee is prohibited from directly or indirectly, during the term
of
this Agreement,
rendering
services of a business, professional, or commercial nature to any other person,
firm or corporation, whether or not the services are rendered for
compensation.
Employment
Agreement: 1 of 4
6.
Vacation Benefits.
Employee is entitled to vacation periods with full
pay in accordance with established Daybreak policy. Vacation will be scheduled
by mutual agreement; however, Employee will be allowed sufficient discretion
in
scheduling to assure the vacation benefit may be used.
7.
Expenses.
During the term of employment, Employee is entitled to
reimbursement for reasonable business expenses incurred on behalf of Daybreak
in
accordance with the standard practice for the reimbursement policies and
procedures established by Employer. All out-of-pocket expenses submitted for
reimbursement, shall be done in a timely manner. Such timely manner shall be
defined as the expense reimbursement request shall be received by Employer
no
later than sixty (60) days after the date of the expense receipt or the
occurrence of such expense. Any expense receipt dated sixty (60) days earlier
than the expense reimbursement request is received shall not be eligible for
reimbursement by Daybreak. If any receipt for a charge incurred on a Company
credit card is not submitted to Employer within sixty (60) days of the
transaction date, the transaction amount can be charged back to the Employee
or
be deducted from the Employee’s next payroll check. Compensation provided
Employee under this Agreement takes into account Employee's personal obligation
to incur and pay certain additional expenses required of Employee as an employee
of Employer for which Daybreak is under no obligation to reimburse
Employee.
8.
Employment at Will.
This is an agreement for employment of indefinite
duration. The employment relationship may be terminated at will by either party.
Termination by either party must be made by written notice to the other party
given at least 7 days in advance of the termination date. Upon termination,
Employee will be paid accrued unpaid salary prorated in accordance with
Employer's general policies and procedures.
9.
Employer Business.
All business revenues and fees produced or
transacted through the efforts of Employee are the sole property of Daybreak.
Employee will have no right to the business or to share in any revenues or
fees
resulting from the conduct of the business other than the compensation provided
for in this Agreement.
10.
Confidential Information.
a.
Disclosure Prohibited.
Employee acknowledges that, in the course of
this employment, Employee will become acquainted with confidential information
belonging to Daybreak. Employee may not, at any time during the period of
Employee's employment or thereafter, except as authorized in writing by
Daybreak, directly or indirectly, use, disclose, reproduce, or in any other
way
publicly or privately disseminate any "Confidential Information" as
defined.
Employment
Agreement: 2 of 4
b.
Definition.
"Confidential Information" means all information not
generally known to the public, which relates to the business of Daybreak or
any
third parties doing business with Daybreak. By way of example, confidential
information includes, but is not limited to, information relating to oil and
gas
plays, development information on oil and gas prospects, fundraising plans,
customers and customer lists, pricing, contracts, costs and other financial
information, merchandising and marketing techniques, inventions, plans
specifications, and products disclosed to or known by Employee in connection
with his employment by Employer.
11.
Protection of Daybreak Property.
All records, files, manuals, lists of
customers, blanks, forms, materials, supplies, computer programs, and other
materials furnished to Employee by Daybreak, used on its behalf, or generated
or
obtained during the course of this employment remain the property of Daybreak.
Employee is only a holder of this property for the sole use and benefit of
Employer and will safely keep and preserve such property, except as consumed
in
the normal business operation of Employer. Upon termination of this employment,
Employee will immediately deliver to Daybreak, or its authorized representative,
all of Daybreak’s property, including all copies, remaining in Employee's
possession or control.
12.
Remedies.
The parties recognize that irreparable injury will result to
Daybreak and its business and property if Employee breaches the covenant of
confidentiality contained in Section 10 of this Agreement. It is agreed that
if
Employee breaches the covenant of confidentiality, Daybreak will be entitled
to
an injunction to restrain further breach of that covenant by Employee or any
of
Employee's partners, agents, employers and employees, or any persons acting
for
or with Employee, in addition to any other remedies Daybreak may
have.
13.
Assignability.
These contractual obligations of Employee are personal
and neither the rights nor obligations under this Agreement may be assigned
or
transferred by Employee to any other person. This Agreement will bind and
benefit any successor of Employer, whether by merger, sale of assets,
reorganization or other form of business acquisition, disposition, or business
reorganization.
14.
Amendment.
This Agreement contains the entire understanding of the
parties. This Agreement may be changed only by a written document signed by
Employee and Daybreak.
15.
Notices.
All notices and other communications required or permitted to
be given by this Agreement must be in writing and must be given and will be
deemed received if and when either hand-delivered and a signed receipt is given,
or mailed by registered or certified U.S. mail, return receipt requested,
postage prepaid, and if to Employer to:
Daybreak
Oil and Gas, Inc.
601
W.
Main Ave. Suite 1012
Spokane,
WA 99201
Employment
Agreement: 3 of 4
And,
if
to Employee to:
Bennett
W. Anderson
1023
E.
760 South
Orem,
UT
84097
Either
party may change the address to which notice to it is to be addressed by
notifying the other party of the change.
16.
Enforcement.
This Agreement is to be construed in accordance with the
laws of the State of Washington. Any action arising in connection with this
Agreement must be brought in Spokane County Superior Court, Spokane, Washington.
By this Agreement, the parties confer jurisdiction over the subject matter
of
and parties to this Agreement. The party who prevails in any such action will
be
entitled to an award of the reasonable costs and attorneys' fees incurred in
the
action.
IN
WITNESS WHEREOF, the parties have executed this Agreement.
|
"EMPLOYER"
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“EMPLOYEE”
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|
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|
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Daybreak
Oil and Gas Inc.,
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a
Washington corporation
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|
|
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By:
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/s/
Thomas C.
Kilbourne
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/s/
Bennett W.
Anderson
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|
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Its:
Treasurer
|
|
|
Bennett
W.
Anderson
|
|
Employment
Agreement: 4 of 4
Exhibit
10.40
EMPLOYMENT
AGREEMENT
THIS
EMPLOYMENT AGREEMENT ("Agreement") is entered into effective the 1
st
day of
March,
2007, between Daybreak Oil and Gas Inc., a Washington corporation (“Daybreak”,
"Employer", “Company”) and Thomas C. Kilbourne, ("Employee").
It
is
agreed as follows:
1.
Employment.
Employer employs Employee, and Employee accepts employment,
upon the terms and conditions set forth in this Agreement.
2.
Term.
This Agreement begins on March 1, 2007, and continues until
February 28, 2008, unless terminated earlier by either party in compliance
with
this Agreement's provisions governing termination.
3.
Compensation.
a.
Salary.
Employer will pay Employee a monthly salary of Eight Thousand
Five Hundred ($8,500) dollars during the term of this Agreement. The salary
will
be paid in accordance with Employer's existing payroll policies for comparable
employees. Employee's compensation will be subject to prospective review by
Employer in its sole discretion.
b.
Fringe Benefits.
Employee may receive bonuses during the term of
employment as determined by Employer, in its sole discretion. Employee will
be
entitled to participate in all other fringe benefit programs applicable to
comparable employees of Employer. Employer may amend, eliminate, or add to
the
existing fringe benefit programs in its sole discretion.
4.
Duties.
Employee will be employed initially as Controller and Treasurer
of Daybreak, and in such additional or other capacities and offices as may
be
assigned by the Board of Directors from time to time. The Employee warrants
and
represents that he is duly qualified to perform the duties hereunder and further
covenants that in performing his duties hereunder, he will not engage in any
activity that is in violation of applicable security laws or subject the
Corporation to liability thereunder.
It
shall
be expressly understood that the Employee shall have no power to bind the
Company to any contract or obligation on behalf of Daybreak in any manner
without approval of the Board of Directors.
5.
Other Employment.
Without the prior express written authorization of
Daybreak, Employee is prohibited from directly or indirectly, during the term
of
this Agreement,
Employment
Agreement: 1 of 4
rendering
services of a business, professional, or commercial nature to any other person,
firm or corporation, whether or not the services are rendered for
compensation.
6.
Vacation Benefits.
Employee is entitled to vacation periods with full
pay in accordance with established Daybreak policy. Vacation will be scheduled
by mutual agreement; however, Employee will be allowed sufficient discretion
in
scheduling to assure the vacation benefit may be used.
7.
Expenses.
During the term of employment, Employee is entitled to
reimbursement for reasonable business expenses incurred on behalf of Daybreak
in
accordance with the standard practice for the reimbursement policies and
procedures established by Employer. All out-of-pocket expenses submitted for
reimbursement, shall be done in a timely manner. Such timely manner shall be
defined as the expense reimbursement request shall be received by Employer
no
later than sixty (60) days after the date of the expense receipt or the
occurrence of such expense. Any expense receipt dated sixty (60) days earlier
than the expense reimbursement request is received shall not be eligible for
reimbursement by Daybreak. If any receipt for a charge incurred on a Company
credit card is not submitted to Employer within sixty (60) days of the
transaction date, the transaction amount can be charged back to the Employee
or
be deducted from the Employee’s next payroll check. Compensation provided
Employee under this Agreement takes into account Employee's personal obligation
to incur and pay certain additional expenses required of Employee as an employee
of Employer for which Daybreak is under no obligation to reimburse
Employee.
8.
Employment at Will.
This is an agreement for employment of indefinite
duration. The employment relationship may be terminated at will by either party.
Termination by either party must be made by written notice to the other party
given at least 7 days in advance of the termination date. Upon termination,
Employee will be paid accrued unpaid salary prorated in accordance with
Employer's general policies and procedures.
9.
Employer Business.
All business revenues and fees produced or
transacted through the efforts of Employee are the sole property of Daybreak.
Employee will have no right to the business or to share in any revenues or
fees
resulting from the conduct of the business other than the compensation provided
for in this Agreement.
10.
Confidential Information.
a.
Disclosure Prohibited.
Employee acknowledges that, in the course of
this employment, Employee will become acquainted with confidential information
belonging to Daybreak. Employee may not, at any time during the period of
Employee's employment or thereafter, except as authorized in writing by
Daybreak, directly or indirectly, use, disclose, reproduce, or in any other
way
publicly or privately disseminate any "Confidential Information" as
defined.
Employment
Agreement: 2 of 4
b.
Definition.
"Confidential Information" means all information not
generally known to the public, which relates to the business of Daybreak or
any
third parties doing business with Daybreak. By way of example, confidential
information includes, but is not limited to, information relating to oil and
gas
plays, development information on oil and gas prospects, fundraising plans,
customers and customer lists, pricing, contracts, costs and other financial
information, merchandising and marketing techniques, inventions, plans
specifications, and products disclosed to or known by Employee in connection
with his employment by Employer.
11.
Protection of Daybreak Property.
All records, files, manuals, lists of
customers, blanks, forms, materials, supplies, computer programs, and other
materials furnished to Employee by Daybreak, used on its behalf, or generated
or
obtained during the course of this employment remain the property of Daybreak.
Employee is only a holder of this property for the sole use and benefit of
Employer and will safely keep and preserve such property, except as consumed
in
the normal business operation of Employer. Upon termination of this employment,
Employee will immediately deliver to Daybreak, or its authorized representative,
all of Daybreak’s property, including all copies, remaining in Employee's
possession or control.
12.
Remedies.
The parties recognize that irreparable injury will result to
Daybreak and its business and property if Employee breaches the covenant of
confidentiality contained in Section 10 of this Agreement. It is agreed that
if
Employee breaches the covenant of confidentiality, Daybreak will be entitled
to
an injunction to restrain further breach of that covenant by Employee or any
of
Employee's partners, agents, employers and employees, or any persons acting
for
or with Employee, in addition to any other remedies Daybreak may
have.
13.
Assignability.
These contractual obligations of Employee are personal
and neither the rights nor obligations under this Agreement may be assigned
or
transferred by Employee to any other person. This Agreement will bind and
benefit any successor of Employer, whether by merger, sale of assets,
reorganization or other form of business acquisition, disposition, or business
reorganization.
14.
Amendment.
This Agreement contains the entire understanding of the
parties. This Agreement may be changed only by a written document signed by
Employee and Daybreak.
15.
Notices.
All notices and other communications required or permitted to
be given by this Agreement must be in writing and must be given and will be
deemed received if and when either hand-delivered and a signed receipt is given,
or mailed by registered or certified U.S. mail, return receipt requested,
postage prepaid, and if to Employer to:
Daybreak
Oil and Gas, Inc.
601
W.
Main Ave. Suite 1012
Spokane,
WA 99201
Employment
Agreement: 3 of 4
And,
if
to Employee to:
Thomas
C.
Kilbourne
P.O.
Box
953
Osburn,
ID 83849
Either
party may change the address to which notice to it is to be addressed by
notifying the other party of the change.
16.
Enforcement.
This Agreement is to be construed in accordance with the
laws of the State of Washington. Any action arising in connection with this
Agreement must be brought in Spokane County Superior Court, Spokane, Washington.
By this Agreement, the parties confer jurisdiction over the subject matter
of
and parties to this Agreement. The party who prevails in any such action will
be
entitled to an award of the reasonable costs and attorneys' fees incurred in
the
action.
IN
WITNESS WHEREOF, the parties have executed this Agreement.
"EMPLOYER"
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“EMPLOYEE”
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Daybreak
Oil and Gas Inc.,
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a
Washington corporation
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By:
|
/s/
Terrence J.
Dunne
|
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/s/
Thomas C.
Kilbourne
|
|
Its:
|
Chief
Financial
Officer
|
|
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Thomas
C.
Kilbourne
|
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|
Title
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|
Employment
Agreement: 4 of 4
Exhibit
10.41
Daybreak
Oil and Gas, Inc.
601
West
Main Ave Suite
1017 Spokane,
WA 99201
Off:
(509)
232-7674 Fax:
(509) 455-8483
OFFICE
LEASE AGREEMENT
BETWEEN:
TERRANCE J. DUNNE & ASSOCIATES INC. (The Tenant)
AND
DAYBREAK
OIL AND GAS, INC. (The Subtenant)
WHEREAS,
the Tenant leases a total of 3,136 rentable square feet from Joshua Green
Corporation (The Landlord) pursuant to a Lease Renewal and Modification
Agreement for the term commencing on May 1, 2007 and ending on April 30,
2008;
AND
WHEREAS, the Subtenant has agreed to sublease from the Tenant certain offices
and storage space from the Tenant consisting of approximately 1,000 square
feet
plus use of common area (Schedule “B”).
NOW
THEREFORE, in consideration of the foregoing, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the
parties hereto agree as follows:
The
term
of this Agreement shall commence on the first day of May 2007 and shall be
on a
month to month basis. This Agreement may be extended upon agreement by both
parties.
The
Subtenant shall pay to the Tenant $1,250.00 on the first day of each month
during the term of this Agreement. If this Agreement is extended the rent shall
be modified in accordance with Schedule “C”.
The
Tenant agrees to comply with the terms and conditions of the Lease Renewal
and
Modification Agreement and to pay the rent to the Landlord in the amounts and
at
the times as stipulated therein and to refrain from such acts as would cause
the
Landlord to terminate the Lease.
The
Subtenant agrees to conduct its’ business and affairs in such manner so as to
comply with the terms and conditions of Lease Agreement dated February 1, 2002
between the Tenant and the Landlord as amended or renewed.
No
waiver
of any of the provisions of this Agreement shall be deemed or shall constitute
a
waiver of any other provision and no waiver shall constitute a continuing
waiver. No waiver shall be binding unless executed in writing by the party
making the waiver.
No
supplement, modification or amendment of the Agreement shall be binding unless
executed in writing by all parties. This Agreement constitutes the entire
agreement between the parties and supersedes any prior agreements or
negotiations.
|
a.
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This
Agreement shall in all respects be interpreted, enforced and governed
under
the laws of State of Washington. The language and all parts of this
Agreement
shall be in all cases construed as a whole and not strictly for or
against
any individual party.
|
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b.
|
Any
dispute arising under in any way related to this agreement shall
be
submitted
to binding arbitration by the American Arbitration Association in
accordance
with the Association’s commercial rules then in effect. The arbitration
may be conducted in person, by telephone or online as agreed by all
parties. The arbitration shall be binding on the parties and the
arbitration award may be confirmed by ant court of competent
jurisdiction.
|
IN
WITNESS WHEREOF, the parties hereto have entered into this Agreement effective
the 1
st
day of
May 2007.
Daybreak
Oil and Gas, Inc.
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Terrence
J. Dunne & Associates
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/s/
Thomas C.
Kilbourne
|
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|
/s/
Terrence J.
Dunne
|
|
Thomas
C.
Kilbourne, Treasurer
|
|
|
Terrence
J.
Dunne
|
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|
|
Title
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Date:
5/01/07
|
|
|
Date:
5/01/07
|
|
Exhibit
31.1
Certification
I,
Eric
L. Moe
, certify
that:
|
(1)
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I
have reviewed this annual report on Form 10-KSB of Daybreak Oil
and Gas,
Inc. Company.
|
|
(2)
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such
statements
were made, not misleading with respect to the period covered by
this
report;
|
|
(3)
|
Based
on my knowledge, the financial statements, and other financial
information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
small
business issuer as of, and for, the periods presented in this
report;
|
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(4)
|
The
small business issuer’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures
(as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
small
business issuer and have:
|
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(a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under my supervision, to
ensure
that material information relating to the small business issuer,
including
its consolidated subsidiaries, is made known to me by others within
those
entities, particularly during the period in which this report is
being
prepared;
|
|
(c)
|
Evaluated
the effectiveness of the small business issuer's disclosure controls
and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of
the end of
the period covered by this report based on such evaluation;
and
|
|
(d)
|
Disclosed
in this report any change in the small business issuer's internal
control
over financial reporting that occurred during the small business
issuer's
most recent fiscal quarter (the small business issuer's fourth
fiscal
quarter in the case of an annual report) that has materially affected,
or
is reasonably likely to materially affect, the small business issuer's
internal control over financial reporting;
and
|
|
(5)
|
The
small business issuer’s other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the small business issuer's auditors and the audit
committee
of the small business issuer's board of directors (or persons performing
the equivalent functions):
|
|
(a)
|
All
significant deficiencies and material weaknesses in the design
or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability
to record, process, summarize and report financial information;
and
|
|
(b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer's
internal control over financial
reporting.
|
Date:
September
20, 2007
By:
/s/ ERIC L
MOE
Eric
L. Moe
, Chief Executive
Officer
Exhibit
31.2
Certification
I,
Thomas
C. Kilbourne, certify that:
|
(1)
|
I
have reviewed this annual report on Form 10-KSB of Daybreak Oil and
Gas,
Inc. Company.
|
|
(2)
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
(3)
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
small
business issuer as of, and for, the periods presented in this
report;
|
|
(4)
|
The
small business issuer’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small
business issuer and have:
|
|
(a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under my supervision, to ensure
that material information relating to the small business issuer,
including
its consolidated subsidiaries, is made known to me by others within
those
entities, particularly during the period in which this report is
being
prepared;
|
|
(c)
|
Evaluated
the effectiveness of the small business issuer's disclosure controls
and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of
the period covered by this report based on such evaluation;
and
|
|
(d)
|
Disclosed
in this report any change in the small business issuer's internal
control
over financial reporting that occurred during the small business
issuer's
most recent fiscal quarter (the small business issuer's fourth fiscal
quarter in the case of an annual report) that has materially affected,
or
is reasonably likely to materially affect, the small business issuer's
internal control over financial reporting;
and
|
|
(5)
|
The
small business issuer’s other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the small business issuer's auditors and the audit
committee
of the small business issuer's board of directors (or persons performing
the equivalent functions):
|
|
(a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability
to record, process, summarize and report financial information;
and
|
|
(b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer's
internal control over financial
reporting.
|
Date:
September
20, 2007
By:
/s/ THOMAS C. KILBOURNE
Thomas
C.
Kilbourne, Principal Accounting Officer
Exhibit
32.1
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Annual Report of Daybreak Oil and Gas, Inc., (the "Company")
on Form 10-KSB for the period ending February 28, 2007, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Eric
L.
Moe,
Chief Executive Officer
of Daybreak Oil and
Gas, Inc. Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of
2002, that:
(1)
|
The
Report fully complies with the requirements of Section 13(a) or 15(d)
of
the Securities Exchange Act of 1934;
and
|
(2)
|
The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
|
Date:
September
20, 2007
By:
/s/ ERIC L
MOE
Eric
L. Moe,
Chief Executive
Officer
Exhibit
32.2
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Annual Report of Daybreak Oil and Gas, Inc., (the "Company")
on Form 10-KSB for the period ending February 28, 2007, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I,
Thomas C. Kilbourne
,
Principal
Accounting Officer
of
Daybreak Oil and Gas, Inc. Company, certify, pursuant to 18 U.S.C. Section
1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1)
|
The
Report fully complies with the requirements of Section 13(a) or 15(d)
of
the Securities Exchange Act of 1934;
and
|
(2)
|
The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
|
Date:
September
20, 2007
By:
/s/ THOMAS C. KILBOURNE
Thomas
C.
Kilbourne
,
Principal
Accounting Officer