UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2017
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number: 000-50107
DAYBREAK OIL AND GAS, INC.
(Exact name of registrant as specified in its charter)
Washington |
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91-0626366 |
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
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|
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1101 N. Argonne Road, Suite A 211, Spokane Valley, WA |
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99212 |
(Address of principal executive offices) |
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(Zip code) |
(509) 232-7674
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company., or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, and smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ |
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Accelerated filer ¨ |
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Non-accelerated filer ¨ |
(Do not check if a smaller reporting company) |
Smaller reporting company þ |
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Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes þ No
At July 13, 2017 the registrant had 51,532,364 outstanding shares of $0.001 par value common stock.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
PART II - OTHER INFORMATION
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ITEM 1. |
28 |
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ITEM 1A. |
28 |
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ITEM 6. |
29 |
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30 |
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAYBREAK OIL AND GAS, INC.
Balance Sheets Unaudited
The accompanying notes are an integral part of these unaudited financial statements
3
DAYBREAK OIL AND GAS, INC.
Statements of Operations Unaudited
The accompanying notes are an integral part of these unaudited financial statements
4
DAYBREAK OIL AND GAS, INC.
Statements of Cash Flows Unaudited
The accompanying notes are an integral part of these unaudited financial statements
5
DAYBREAK OIL AND GAS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION AND BASIS OF PRESENTATION:
Organization
Originally incorporated as Daybreak Uranium, Inc., (Daybreak Uranium) under the laws of the State of Washington on March 11, 1955, Daybreak Uranium 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 natural gas exploration and production industry. On October 25, 2005, the Company shareholders approved a name change from Daybreak Mines, Inc. to Daybreak Oil and Gas, Inc. (referred to herein as Daybreak or the Company) to better reflect the business of the Company.
All of the Companys crude oil and natural gas production is sold under contracts which are market-sensitive. Accordingly, the Companys financial condition, results of operations, and capital resources are highly dependent upon prevailing market prices of, and demand for, crude oil and natural gas. These commodity prices are subject to wide fluctuations and market uncertainties due to a variety of factors that are beyond the control of the Company. These factors include the level of global demand for petroleum products, foreign supply of crude oil and natural gas, the establishment of and compliance with production quotas by oil-exporting countries, the relative strength of the U.S. dollar, weather conditions, the price and availability of alternative fuels, and overall economic conditions, both foreign and domestic.
Basis of Presentation
The accompanying unaudited interim financial statements and notes for the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q for quarterly reports under Section 13 or 15 (d) of the Securities Exchange Act of 1934 (the Exchange Act). Accordingly, they do not include all of the information and footnote disclosures normally required by accounting principles generally accepted in the United States of America for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements have been included and such adjustments are of a normal recurring nature. Operating results for the three months ended May 31, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending February 28, 2018.
These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended February 28, 2017.
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions. These estimates and assumptions may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results could differ materially from those estimates. The accounting policies most affected by managements estimates and assumptions are as follows:
·
The reliance on estimates of proved reserves to compute the provision for depreciation, depletion and amortization and to determine the amount of any impairment of proved properties;
·
The valuation of unproved acreage and proved crude oil and natural gas properties to determine the amount of any impairment of crude oil and natural gas properties;
·
Judgment regarding the productive status of in-progress exploratory wells to determine the amount of any provision for abandonment; and
·
Estimates regarding abandonment obligations.
Reclassifications
Certain reclassifications have been made to conform the prior periods financial information to the current periods presentation. These reclassifications had no effect on previously reported net loss or accumulated deficit.
6
NOTE 2 GOING CONCERN:
Financial Condition
The Companys financial statements for the three months ended May 31, 2017 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company has incurred net losses since entering the crude oil and natural gas exploration industry and as of May 31, 2017 has an accumulated deficit of $36,646,757 and a working capital deficit of $13,838,048 which raises substantial doubt about the Companys ability to continue as a going concern.
Management Plans to Continue as a Going Concern
The Company continues to implement plans to enhance its ability to continue as a going concern. Daybreak currently has a net revenue interest (NRI) in 20 producing wells in its East Slopes Project located in Kern County, California (the East Slopes Project). The revenue from these wells has created a steady and reliable source of income for the Company. The Companys average working interest in these wells is 36.6% and the average NRI is 28.4% for these same wells.
The Company anticipates its revenue will continue to increase as the Company participates in the drilling of more wells in the East Slopes Project in California and as our exploratory drilling project begins in Michigan. However given the current decline and instability in hydrocarbon prices, the timing of any drilling activity in California and Michigan will be dependent on a sustained improvement in hydrocarbon prices and a successful refinancing or restructuring of our credit facility.
The Company believes that our liquidity will improve when there is a sustained improvement in hydrocarbon prices. Daybreaks sources of funds in the past have included the debt or equity markets and the sale of assets. While the Company has experienced revenue growth, which has resulted in positive cash flow from its crude oil and natural gas properties, it has not yet established a positive cash flow on a company-wide basis. It will be necessary for the Company to obtain additional funding from the private or public debt or equity markets in the future. However, the Company cannot offer any assurance that it will be successful in executing the aforementioned plans to continue as a going concern.
Daybreaks financial statements as of May 31, 2017 do not include any adjustments that might result from the inability to implement or execute Daybreaks plans to improve our ability to continue as a going concern.
NOTE 3 CONCENTRATION OF CREDIT RISK:
Substantially all of the Companys trade accounts receivable result from crude oil and natural gas sales or joint interest billings to its working interest partners. This concentration of customers and joint interest owners may impact the Companys overall credit risk as these entities could be affected by similar changes in economic conditions as well as other related factors. Trade accounts receivable are generally not collateralized.
At the Companys East Slopes project in California there is only one buyer available for the purchase of all crude oil production. The Company has no natural gas production in California. At May 31, 2017 and February 28, 2017 this one customer represented 100.0% of crude oil sales receivable. If this buyer is unable to resell its products or if they lose a significant sales contract then the Company may incur difficulties in selling its crude oil production.
The Companys accounts receivable balances from California crude oil sales of $75,887 and $83,405 at May 31, 2017 and February 28, 2017, respectively were from one customer, Plains Marketing. Crude oil sales receivables balances of $75,887 and $83,405 at May 31, 2017 and February 28, 2017 represent crude oil sales that occurred in May and February 2017, respectively.
Joint interest participant receivables balances of $78,479 and $55,154 at May 31, 2017 and February 28, 2017, respectively represent amounts due from working interest partners in California, where the Company is the Operator. There were no allowances for doubtful accounts for the Companys trade accounts receivable at May 31, 2017 and February 28, 2017 as the joint interest owners have a history of paying their obligations.
7
NOTE 4 CRUDE OIL AND NATURAL GAS PROPERTIES:
Crude oil and natural gas property balances at May 31, 2017 and February 28, 2017 are set forth in the table below.
For the three months ended May 31, 2017, a $51,486 revision in unproved crude oil and natural gas properties occurred to properly recognize geologic and geophysical lease expenses associated with our Michigan exploratory joint drilling project development.
NOTE 5 ACCOUNTS PAYABLE:
On March 1, 2009, the Company became the operator for its East Slopes Project. Additionally, the Company then assumed certain original defaulting partners approximate $1.5 million liability representing a 25% working interest in the drilling and completion costs associated with the East Slopes Project four earning well program. The Company subsequently sold the same 25% working interest on June 11, 2009. Of the $1.5 million default, $244,849 remains unpaid and is included in the May 31, 2017 accounts payable balance.
NOTE 6 ACCOUNTS PAYABLE- RELATED PARTIES:
The May 31, 2017 and February 28, 2017 accounts payable related parties balances of $1,473,274 and $1,414,481 respectively, were comprised primarily of deferred salaries of the Companys Executive Officers and certain employees; directors fees; expense reimbursements; and deferred interest payments on a 12% Subordinated Notes owed to the Companys President and Chief Executive Officer. Payment of these deferred items has been delayed until the Companys cash flow situation improves.
NOTE 7 ASSET RETIREMENT OBLIGATION (ARO):
For the three months ended May 31, 2017 the credit adjusted risk free rate (CARFR) percentage used in the calculation of the asset retirement obligation (ARO) was revised from 10% to 15% to more accurately reflect the Companys current cost of funds. This revision resulted in a $40,108 reduction in the ARO liability balance shown on the Companys Balance Sheet at May 31, 2017. The ARO balance at May 31, 2017 is set forth in the table below:
|
Asset Retirement Obligation |
|
Balance, February 28, 2017 |
$ |
93,409 |
Revision to asset retirement obligation |
|
(40,108) |
Accretion for the three months ended May 31, 2017 |
|
1,895 |
Balance, May 31, 2017 |
$ |
55,196 |
8
NOTE 8 SHORT-TERM AND LONG-TERM BORROWINGS:
Current debt (Short-term borrowings)
Note Payable Related Party
At May 31, 2017 and February 28, 2017, the Company had a loan balance of $250,100 with the Companys Chairman, President and Chief Executive Officer which were obtained during the years ended February 29, 2012 and February 28, 2013, that was used for a variety of corporate purposes including an escrow requirement on a loan commitment; maturity extension fees on third party loans; and a reduction of principal on the Companys credit line with UBS Bank. These loans are non-interest bearing loans and repayment will be made upon a mutually agreeable date in the future.
Line of Credit
The Company has an existing $890,000 line of credit for working capital purposes with UBS Bank USA (UBS), established pursuant to a Credit Line Agreement dated October 24, 2011 that is secured by the personal guarantee of its Chairman, President and Chief Executive Officer. At May 31, 2017 and February 28, 2017, the Line of Credit had an outstanding balance of $811,681 and $817,622, respectively. Interest is payable monthly at a stated reference rate of 0.249% + 337.5 basis points and was $9,059 and $8,913, respectively for the three months ended May 31, 2017 and 2016. The reference rate is based on the 30 day LIBOR (London Interbank Offered Rate) and is subject to change from UBS.
Maximilian Loan Agreement (Credit Facility)
On October 31, 2012, the Company entered into a loan agreement with Maximilian Resources LLC, a Delaware limited liability company and successor by assignment to Maximilian Investors LLC (either party, as appropriate, is referred to in these notes to the financial statements as Maximilian), which provided for a revolving credit facility of up to $20 million, that matured on October 31, 2016, with a minimum commitment of $2.5 million. On October 31, 2016 through the Fourth Amendment to the Amended and Restated Loan and Security Agreement, the maturity date of the loan was changed to February 28, 2020.
Maximilian Loan - Amended and Restated Loan Agreement
In connection with the Companys acquisition of a working interest from App Energy, LLC, a Kentucky limited liability company (App Energy) in the Twin Bottoms Field in Lawrence County, Kentucky, the Company amended its loan agreement with Maximilian on August 28, 2013. The amendment increased the amount of the credit facility to $90 million and reduced the annual interest rate to 12%. The Company evaluated the amendment of the revolving credit facility under ASC 470-50-40 and determined that the Companys borrowing capacity under the amended loan agreement exceeded its borrowing capacity under the old loan agreement. Consequently, the unamortized discount and deferred financing costs as of the date of amendment are being amortized over the term of the amended loan agreement.
On October 31, 2016, the Company entered into a Fourth Amendment to the Amended and Restated Loan and Security Agreement with Maximilian, which amended the Companys loan agreement with Maximilian (the Restructuring Agreement). Pursuant to the Restructuring Agreement, in exchange for the proceeds it received from the Kentucky Sale, Maximilian and the Company have agreed to a commitment by Maximilian to advance up to $250,000 in financing to the Company over the following six month period and the pursuit of the Michigan exploratory joint drilling project using the $250,000 set aside from the Kentucky Sale.
As a result of the decline in hydrocarbon prices that started in June of 2014, the Company has been unable to make any type of interest or principal payments required under the amended terms of its credit facility with Maximilian since December of 2015. Under the terms of the Restructuring Amendment all unpaid interest is currently being accrued. Historically, a series of waivers have been granted by Maximilian for the principal and interest payments that have not been made. Due to the waivers granted by Maximilian, the Company is currently not considered to be in default under terms of the credit facility. Maximilian is continuing to work with the Company in restructuring the credit facility terms during this period of lower hydrocarbon prices, but there can be no assurances that this cooperation will continue. Further, our lender is under no obligation to advance us any additional funding and, rather, there can be no assurances that out lender will not declare the Company to be in default under the credit facility. A change of control or management of our lender, among other reasons, could also result in our loan being called due and payable.
9
Maximilian Promissory Note Michigan Exploratory Joint Drilling Project
As of May 31, 2017, the Company had received $94,650 in aggregate from multiple advances starting in the year ended February 28, 2017 from Maximilian under a separate promissory note agreement dated January 17, 2017 and amended on February 10, 2017 regarding the development of an exploratory joint drilling project in Michigan. Advances under this agreement are subject to a 5% (five percent) per annum interest rate. If a well that the Company elects to participate in is scheduled to be spudded at the Michigan exploratory joint drilling project on or before December 31, 2017, then the advances under the promissory note must be repaid in full upon the earlier of (a) the time that is ten days prior to the first well being spudded on the Michigan exploratory joint drilling project or (b) December 31, 2017. If there is not a well scheduled to be spudded at the Michigan exploratory joint drilling project on or before December 31, 2017 that the Company elects to participate in, then the Company will assign to Maximilian its working interest in the Michigan exploratory joint drilling project, in full payment and satisfaction of the advances under the promissory note. Advances under the promissory note may be prepaid at any time without penalty. In the event of a default of any of the Companys obligations under the promissory note, the amounts due may be called immediately due and payable at Maximilians option.
In accordance with the guidance found in ASC-470-10-45, the entire balance of the Maximilian loan is presented under the current liabilities section of the balance sheets. In accordance with the guidance found in ASC 835-30 the net amount of the deferred finance costs associated with the credit facility are included with the debt discount as a reduction of the loan balance shown on the Balance Sheets as of May 31, 2017 and February 28, 2017, respectively.
Current debt balances at May 31, 2017 and February 28, 2017 are set forth in the table below:
|
May 31, 2017 |
|
February 28, 2017 |
||
Credit facility balance |
$ |
8,995,444 |
|
$ |
8,960,444 |
Less unamortized discount and debt issuance costs |
|
(136,148) |
|
|
(238,598) |
Subtotal O&G operating debt |
|
8,859,296 |
|
|
8,721,846 |
Michigan exploratory joint drilling debt |
|
94,650 |
|
|
84,000 |
Net debt |
$ |
8,953,946 |
|
$ |
8,805,846 |
Deferred financing costs at May 31, 2017 and February 28, 2017 relating to the original and the amended credit facility with Maximilian, are set forth in the table below:
|
May 31, 2017 |
|
February 28, 2017 |
||
Deferred financing costs loan fees |
$ |
181,648 |
|
$ |
181,648 |
Deferred financing costs loan commissions |
|
630,662 |
|
|
630,662 |
Deferred financing costs fair value of warrants |
|
530,488 |
|
|
530,488 |
Deferred financing costs fair value of common stock |
|
419,832 |
|
|
419,832 |
|
|
1,762,630 |
|
|
1,762,630 |
Accumulated amortization |
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(1,626,482) |
|
|
(1,524,032) |
|
$ |
136,148 |
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$ |
238,598 |
Deferred financing cost balances of $136,148 and $238,598 at May 31, 2017 and February 28, 2017, respectively includes the fair value of common shares and warrants issued to Maximilian and to a third party that assisted in both the original and the amended financing transactions. The unamortized deferred financing costs are netted against debt in the balance sheets. Amortization expense of deferred financing costs was $102,450 and $107,524, respectively for the three months ended May 31, 2017 and 2016.
Encumbrances
The Companys debt obligations, pursuant to the above mentioned credit facility loan agreement and promissory notes entered into by and between Maximilian and the Company are secured by a perfected first priority security interest in substantially all of the personal property of the Company, and two mortgages; one covering its leases in California and the other covering its leases in Michigan.
10
Non-current debt (Long-term borrowings)
12% Subordinated Notes
The Companys 12% Subordinated Notes (the Notes) issued pursuant to a January 2010 private placement offering to accredited investors, resulted in $595,000 in gross proceeds (of which $250,000 was from a related party) to the Company and accrue interest at 12% per annum, payable semi-annually on January 29th and July 29th. On January 29, 2015, the Company and 12 of the 13 holders of the Notes agreed to extend the maturity date of the Notes for an additional two years to January 29, 2017. Effective January 29, 2017, the maturity date of the Notes and the expiration date of the warrants that were issued in conjunction with the Notes were extended for an additional two years to January 29, 2019. There are ten noteholders, holding 980,000 warrants, who have not yet exercised their warrants. The exercise price of the associated warrants was lowered from $0.14 to $0.07 as a part of the Note maturity extension. The Notes principal of $565,000 is payable in full at the amended maturity date of the Notes. The fair value of the warrant modification, as determined by the Black-Scholes option pricing model, was $29,075 and was recognized as a discount to debt and is being amortized over the extended maturity date of the Notes. The Black-Scholes valuation encompassed the following weighted average assumptions: a risk free interest rate of 1.22%; volatility of 378.73%; and dividend yield of 0.0%. Should the Board of Directors, on the maturity date, decide that the payment of the principal and any unpaid interest would impair the financial condition or operations of the Company, the Company may then elect a mandatory conversion of the unpaid principal and interest into the Companys common stock at a conversion rate equal to 75% of the average closing price of the Companys common stock over the 20 consecutive trading days preceding December 31, 2018. Amortization expense was $3,635 and $-0-, respectively at May 31, 2017 and 2016. The unamortized debt discount at May 31, 2017 and February 28, 2017 was $24,229 and 27,864, respectively.
12% Note balances at May 31, 2017 and February 28, 2017 are set forth in the table below:
|
May 31, 2017 |
|
February 28, 2017 |
||
12% Subordinated Notes |
$ |
315,000 |
|
$ |
315,000 |
Debt discount |
|
(13,508) |
|
|
(15,535) |
Net 12% Subordinated Note balance |
$ |
301,492 |
|
$ |
299,465 |
12% Note balances related parties at February 28, 2017 and February 29, 2016 are set forth in the table below:
|
May 31, 2017 |
|
February 28, 2017 |
||
12% Subordinated Notes related party |
$ |
250,000 |
|
$ |
250,000 |
Debt discount |
|
(10,721) |
|
|
(12,329) |
Net 12% Subordinated Note related party balance |
$ |
239,279 |
|
$ |
237,671 |
NOTE 9 DISCONTINUED OPERATIONS:
Effective October 31, 2016, the Company finalized the sale of its interest in the Twin Bottoms Field in Kentucky. The sale included Daybreaks working interest in 14 producing horizontal crude oil wells, its mineral rights, its lease acreage and infrastructure. In accordance with the guidance provided in ASC 205-20, the Company concluded that this sale qualified for presentation as discontinued operations. The Company has no ongoing or future plans to be involved in this segment of its crude oil and natural gas projects. Prior period income statement balances applicable to the Twin Bottoms Field in Kentucky have been reclassified and are included under the Discontinued Operations caption in the statements of operations for May 31, 2016.
Operating income, interest income, operating expenses and interest expense related to Kentucky for the three months ended May 31, 2017 and May 31, 2016 are set forth in the tables below.
|
|
For the Three Months Ended |
||||
|
|
May 31, 2017 |
|
May 31, 2016 |
||
Crude oil and natural gas sales revenue |
|
$ |
- |
|
$ |
108,330 |
Interest income |
|
|
- |
|
|
280,733 |
Production, exploration and drilling expenses |
|
|
- |
|
|
(29,525) |
Depreciation, Depletion and Amortization (DD&A) expenses |
|
|
- |
|
|
(62,050) |
Interest expense |
|
|
- |
|
|
(257,007) |
Income (loss) from discontinued operations |
|
$ |
- |
|
$ |
40,481 |
11
The statements of cash flows include certain significant non-cash operating items for discontinued operations in Kentucky during the three months ended May 31, 2016, comprised of depreciation, depletion and amortization (DD&A) expense of $62,050 and debt modification fees of $71,591. Investing items related to discontinued operations in Kentucky for the three months ended May 31, 2016 were $2,350.
NOTE 10 STOCKHOLDERS DEFICIT:
Preferred Stock
The Company is authorized to issue up to 10,000,000 shares of preferred stock with a par value of $0.001. The Companys 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.
Series A Convertible Preferred Stock
The Company has designated 2,400,000 shares of the 10,000,000 preferred shares as Series A Convertible Preferred Stock (Series A Preferred), with a $0.001 par value. At May 31, 2017 and February 28, 2017, there were 709,568 and 724,565 shares issued and outstanding, respectively, that had not been converted into our common stock. As of May 31, 2017, there are 44 accredited investors who have converted 690,197 Series A Preferred shares into 2,070,591 shares of Daybreak common stock.
The conversions of Series A Preferred that have occurred since the Series A Preferred was first issued in July 2006 are set forth in the table below.
12
Holders of Series A Preferred shall accrue dividends, in the amount of 6% of the original purchase price per annum. Dividends may be paid in cash or common stock at the discretion of the Company. Dividends are cumulative whether or not in any dividend period or periods we have assets legally available for the payment of such dividends. Accumulations of dividends on Series A Preferred do not bear interest. Dividends are payable upon declaration by the Board of Directors. As of May 31, 2017 no dividends have been declared or paid. Dividends earned since issuance for each fiscal year and the three months ended May 31, 2017 are set forth in the table below:
Common Stock
The Company is authorized to issue up to 200,000,000 shares of $0.001 par value common stock of which 51,532,364 and 51,487,373 shares were issued and outstanding as of May 31, 2017 and February 28, 2017, respectively. For the three months ended May 31, 2017, there was one shareholder of Series A Preferred that converted 14,997 shares to 44,991 shares of the Companys common stock. Issuances of common stock since February 28, 2017 are set forth in the table below:
|
Common Stock Balance |
|
Par Value |
|
Common stock, Issued and Outstanding, February 28, 2017 |
51,487,373 |
|
|
|
Conversion of Series A Convertible Preferred Stock to common stock |
44,991 |
|
$ |
45 |
Common stock, Issued and Outstanding, May 31, 2017 |
51,532,364 |
|
|
|
NOTE 11 WARRANTS:
Warrants outstanding and exercisable as of May 31, 2017 are set forth in the table below:
|
|
Warrants |
|
Exercise Price |
|
Remaining Life (Years) |
|
Exercisable Warrants Remaining |
12% Subordinated notes |
|
1,190,000 |
|
$0.07 |
|
1.67 |
|
980,000 |
Warrants issued in 2012 for debt financing |
|
2,435,517 |
|
$0.044 |
|
0.42 |
|
316,617 |
Warrants issued for Kentucky oil project |
|
3,498,601 |
|
$0.04 |
|
1.25 |
|
3,498,601 |
Warrants issued for Kentucky debt financing |
|
2,623,951 |
|
$0.04 |
|
1.25 |
|
2,623,951 |
Warrants issued for Kentucky debt financing |
|
309,503 |
|
$0.214 |
|
1.25 |
|
309,503 |
Warrants issued in share-for-warrant exchange |
|
427,729 |
|
$0.04 |
|
1.25 |
|
427,729 |
|
|
10,485,301 |
|
|
|
|
|
8,156,401 |
13
Warrant activity for the three months ended May 31, 2017 is set forth in the table below:
|
|
Number of Warrants |
|
Weighted Average Exercise Price |
Warrants outstanding, February 28, 2017 |
|
8,156,401 |
|
$0.05 |
|
|
|
|
|
Changes during the three months ended May 31, 2017: |
|
|
|
|
Issued |
|
- |
|
|
Expired / Cancelled / Forfeited |
|
- |
|
|
Warrants outstanding, May 31, 2017 |
|
8,156,401 |
|
$0.05 |
|
|
|
|
|
Warrants exercisable, May 31, 2017 |
|
8,156,401 |
|
$0.05 |
During the three months ended May 31, 2017, there were no warrants issued, exercised, cancelled or that expired. The remaining outstanding warrants as of May 31, 2017, have a weighted average exercise price of $0.05, a weighted average remaining life of 1.27 years, and an intrinsic value of $-0-.
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 rates to income from continuing operations before income taxes is set forth in the table below:
|
May 31, 2017 |
|
February 28, 2017 |
||
Computed at U.S. and state statutory rates (40%) |
$ |
(306,916) |
|
$ |
(1,387,422) |
Permanent differences |
|
11,362 |
|
|
83,606 |
Changes in valuation allowance |
|
295,554 |
|
|
1,303,816 |
Total |
$ |
- |
|
$ |
- |
Tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred liabilities are set forth in the table below:
|
May 31, 2017 |
|
February 28, 2017 |
||
Deferred tax assets: |
|
|
|
|
|
Net operating loss carryforwards |
$ |
10,669,399 |
|
$ |
10,425,780 |
Crude oil and natural gas properties |
|
53,938 |
|
|
32,488 |
Stock based compensation |
|
88,723 |
|
|
88,723 |
Other |
|
(2,133) |
|
|
(32,618) |
Less valuation allowance |
|
(10,809,927) |
|
|
(10,514,373) |
Total |
$ |
- |
|
$ |
- |
At May 31, 2017, Daybreak had estimated net operating loss (NOL) carryforwards for federal and state income tax purposes of approximately $26,673,498 which will begin to expire, if unused, beginning in 2024. The valuation allowance increased $295,554 and $1,303,816 for the three months ended May 31, 2017 and the year ended February 28, 2017, respectively. Section 382 of the Internal Revenue Code places annual limitations on the Companys net operating loss (NOL) carryforward.
The above estimates are based on managements decisions concerning elections which could change the relationship between net income and taxable income. Management decisions are made annually and could cause estimates to vary significantly. The Company files federal income tax returns with the United States Internal revenue Service and state income tax returns in various state tax jurisdictions. As a general rule the Companys tax returns for the fiscal years after 2011 currently remain subject to examinations by appropriate tax authorities. None of our tax returns are under examination at this time.
14
NOTE 13 COMMITMENTS AND CONTINGENCIES:
Various lawsuits, claims and other contingencies arise in the ordinary course of the Companys business activities. While the ultimate outcome of any future contingency is not determinable at this time, management believes that any liability or loss resulting therefrom will not materially affect the financial position, results of operations or cash flows of the Company.
The Company, as an owner or lessee and operator of oil and natural gas properties, is subject to various federal, state and local laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability on the lessee under an oil and natural gas lease for the cost of pollution clean-up resulting from operations and subject the lessee to liability for pollution damages. In some instances, the Company may be directed to suspend or cease operations in the affected area. The Company maintains insurance coverage that is customary in the industry, although the Company is not fully insured against all environmental risks.
The Company is not aware of any environmental claims existing as of May 31, 2017. There can be no assurance, however, that current regulatory requirements will not change or that past non-compliance with environmental issues will not be discovered on the Companys oil and natural gas properties.
NOTE 14 SUBSEQUENT EVENT:
On July 13, 2017, in connection with receiving from Maximilian a current waiver of default covering all the principal and interest payments due through July 1, 2017 that the Company has been unable to make, the Company agreed to cross-collateralize its California and Michigan properties for both the credit facility and the Michigan promissory note loans.
15
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is managements assessment of the current and historical financial and operating results of the Company and of our financial condition. It is intended to provide information relevant to an understanding of our financial condition, changes in our financial condition and our results of operations and cash flows and should be read in conjunction with our unaudited financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q for the three months ended May 31, 2017 and in our Annual Report on Form 10-K for the year ended February 28, 2017. References to Daybreak, the Company, we, us or our mean Daybreak Oil and Gas, Inc.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements contained in our Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) are intended to be covered by the safe harbor provided for under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act.
All statements other than statements of historical fact contained in this MD&A report are inherently uncertain and are forward-looking statements. Statements that relate to results or developments that we anticipate will or may occur in the future are not statements of historical fact. Words such as anticipate, believe, could, estimate, expect, intend, may, plan, predict, project, will and similar expressions identify forward-looking statements. Examples of forward-looking statements include, without limitation, statements about the following:
·
Our future operating results;
·
Our future capital expenditures;
·
Our future financing;
·
Our expansion and growth of operations; and
·
Our future investments in and acquisitions of 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. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, the following risks and uncertainties:
·
General economic and business conditions;
·
Exposure to market risks in our financial instruments;
·
Fluctuations in worldwide prices and demand for crude oil and natural gas;
·
Our ability to find, acquire and develop crude oil and natural gas properties;
·
Fluctuations in the levels of our crude oil and natural gas exploration and development activities;
·
Risks associated with crude oil and natural gas exploration and development activities;
·
Competition for raw materials and customers in the crude oil and natural gas industry;
·
Technological changes and developments in the crude oil and natural gas industry;
·
Legislative and regulatory uncertainties, including proposed changes to federal tax law and climate change legislation, regulation of hydraulic fracturing and potential environmental liabilities;
·
Our ability to continue as a going concern;
·
Our ability to secure financing under any commitments as well as additional capital to fund operations; and
·
Other factors discussed elsewhere in this Form 10-Q and in our other public filings, press releases, and discussions with Company management.
Our reserve estimates are determined through a subjective process and are subject to periodic revision.
Should one or more of the risks or uncertainties described above or elsewhere in our Form 10-K for the year ended February 28, 2017 and in this Form 10-Q for the three months ended May 31, 2017 occur, or should any underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. We specifically undertake no obligation to publicly update or revise any information contained in any forward-looking statement or any forward-looking statement in its entirety, whether as a result of new information, future events, or otherwise, except as required by law.
16
All forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement.
Introduction and Overview
We are an independent crude oil and natural gas exploration, development and production company. Our basic business model is to increase shareholder value by finding and developing crude oil and natural gas reserves through exploration and development activities, and selling the production from those reserves at a profit. To be successful, we must, over time, be able to find oil and natural gas reserves and then sell the resulting production at a price that is sufficient to cover our finding costs, operating expenses, administrative costs and interest expense, plus offer us a return on our capital investment. A secondary means of generating returns can include the sale of either producing or non-producing lease properties.
Our longer-term success depends on, among many other factors, the acquisition and drilling of commercial grade crude oil and natural gas properties and on the prevailing sales prices for crude oil and natural gas along with associated operating expenses. The volatile nature of the energy markets makes it difficult to estimate future prices of crude oil and natural gas; however, any prolonged period of depressed prices would have a material adverse effect on our results of operations and financial condition.
Our operations are focused on identifying and evaluating prospective crude oil and natural gas properties and funding projects that we believe have the potential to produce crude oil or natural gas in commercial quantities. We conduct all of our drilling, exploration and production activities in the United States, and all of our revenues are derived from sales to customers within the United States. Currently, we are in the process of developing a multi-well oilfield project in Kern County, California and an exploratory joint drilling project in Michigan. During the twelve months ended February 28, 2017, we sold all of our working interest in the Twin Bottoms Field in Kentucky.
Our management cannot provide any assurances that Daybreak will ever operate profitably. We have not been able to generate sustained positive earnings on a Company-wide basis. As a small company, we are more susceptible to the numerous business, investment and industry risks that have been described in Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended February 28, 2017 and in Part III, Item 1A. Risk Factors of this 10-Q Report. Throughout this Quarterly Report on Form 10-Q, oil is shown in barrels (Bbls); natural gas is shown in thousands of cubic feet (Mcf) unless otherwise specified, and hydrocarbon totals are expressed in barrels of oil equivalent (BOE).
Below is brief summary of our crude oil projects in California and Michigan. Refer to our discussion in Item 2. Properties, in our Annual Report on Form 10-K for the year ended February 28, 2017 for more information on the California project or the sale of our working interest in the Twin Bottoms Field in Lawrence County, Kentucky.
Kern County, California (East Slopes Project)
The East Slopes Project is located in the southeastern part of the San Joaquin Basin near Bakersfield, California. Drilling targets are porous and permeable sandstone reservoirs that exist at depths of 1,200 feet to 4,500 feet. Since January 2009, we have participated in the drilling of 25 wells in this project. We have been the Operator at the East Slopes Project since March 2009.
The crude oil produced from our acreage from the Vedder Sand is considered heavy oil. The crude oil ranges from 14 ° to 16 ° API gravity and must be heated to separate and remove water prior to sale. Our crude oil wells in the East Slopes Project produce from five reservoirs at our Sunday, Bear, Black, Ball and Dyer Creek locations. The Sunday property has six producing wells, while the Bear property has nine producing wells. The Black property is the smallest of all currently producing reservoirs, and currently has two producing wells at this property. The Ball property also has two producing wells while the Dyer Creek property has one producing well.
During the three months ended May 31, 2017 we had production from 20 vertical crude oil wells. Our average working interest and NRI in these 20 wells is 36.6% and 28.4%, respectively.
There are several other similar prospects on trend with the Bear, Black and Dyer Creek reservoirs exhibiting the same seismic characteristics. Some of these prospects, if successful, would utilize the Companys existing production facilities. In addition to the current field development, there are several other exploratory prospects that have been identified from the seismic data, which we plan to drill in the future.
17
California Drilling Plans
Planned drilling activity and implementation of our oilfield development plan will not begin until there is a sustained improvement in crude oil prices and additional financing is in put in place. We plan to spend approximately $75,000 in new capital investments within the East Slopes Project area in the 2017 2018 fiscal year.
Michigan Acreage Acquisition
In January 2017, Daybreak acquired a 30% working interest in 1,400 acres in the Michigan Basin where we have two shallow crude oil prospects. The leases have been secured and multiple targets have been identified through a 2-D seismic interpretation. A 3-D seismic survey was obtained in January and February of 2017. An analysis of the seismic survey confirmed the prospect identified on the 2-D seismic, as well as identified several additional drilling locations. We will obtain an additional 3-D survey to better delineate the other locations before a drilling program commences. The wells will be drilled vertically with conventional completions and no hydraulic fracturing will be required. The first well is expected to be drilled during the late summer of 2017. We plan to spend approximately $300,000 in new capital investments within the Michigan acreage area in the 2017-2018 fiscal year.
Encumbrances
The Companys debt obligations, pursuant to a credit facility loan agreement and promissory notes entered into by and between Maximilian Resources LLC, a Delaware limited liability company and successor by assignment to Maximilian Investors LLC, a Delaware limited liability company, as lender, ( either party, as appropriate, is referred to in this Quarterly Report on Form 10-Q as Maximilian), and the Company are secured by a perfected first priority security interest in substantially all of the personal property of the Company, and two mortgages; one covering our leases in California and the other covering our leases in Michigan. For further information on the credit facility loan agreements and promissory note with Maximilian refer to the discussion under the caption Current debt (Short-term borrowings) in the MD&A portion of this Quarterly report on Form 10-Q.
Results of Operations Three Months Ended May 31, 2017 compared to the Three Months Ended May 31, 2016
California Crude Oil Prices
The price we receive for crude oil sales in California is based on prices quoted on the New York Mercantile Exchange (NYMEX) for spot West Texas Intermediate (WTI) Cushing, Oklahoma delivery contracts, less deductions that vary by grade of crude oil sold and transportation costs. We do not have any natural gas revenues in California.
There has been a significant amount of volatility in crude oil prices and dramatic decline in our realized sale price of crude oil since June of 2014, when the monthly average price of WTI crude oil was $105.79 per barrel. This decline in the price of crude oil has had a substantial negative impact on our cash flow from our producing California properties. While there has been an improvement in crude oil prices for the three months ended May 31, 2017 in comparison to the three months ended May 31, 2016 there is no guarantee that this trend will continue. In fact, both the average WTI price of crude oil and our average realized price of crude oil was lower in May 2017 (the third month of our quarter) than in March 2017. It is beyond our ability to accurately predict how long crude oil prices will continue to remain at these lower price levels; when or at what level they may begin to stabilize; or when they may start to rebound as there are many factors beyond our control that dictate the price we receive on our crude oil sales.
A comparison of the average WTI price, average realized crude oil sales price for the three months ended May 31, 2017 and 2016 is shown in the table below:
|
|
Three Months Ended |
|
|
||||
|
|
May 31, 2017 |
|
May 31, 2016 |
|
Percentage Change |
||
Average three month WTI crude oil price |
|
$ |
49.62 |
|
$ |
41.67 |
|
19.1% |
Average three month realized crude oil sales price (Bbl) |
|
$ |
41.62 |
|
$ |
31.70 |
|
31.3% |
For the three months ended May 31, 2017, the average WTI price was $49.62 and our average realized crude oil sale price was $41.62, representing a discount of $8.00 per barrel or 16.1% lower than the average WTI price. In comparison, for the three months ended May 31, 2016, the average WTI price was $41.67 and our average realized sale price was $31.70 representing a discount of $9.97 per barrel or 23.9% lower than the average WTI price. Historically, the sale price we receive for California heavy crude oil has been less than the quoted WTI price because of the lower API gravity of our California crude oil in comparison to the API gravity of quoted WTI crude oil.
18
California Crude Oil Revenue and Production
Crude oil revenue in California for the three months ended May 31, 2017 increased $28,578 or 27.2% to $133,724 in comparison to revenue of $105,145 for the three months ended May 31, 2016. The average sale price of a barrel of crude oil for the three months ended May 31, 2017 was $41.62 in comparison to $31.70 for the three months ended May 31, 2016. The increase of $9.92 per barrel or 31.3% in the average realized price of a barrel of crude oil accounted for 100% of the increase in crude oil revenue for the three months ended May 31, 2017.
Our net sales volume for the three months ended May 31, 2017 was 3,213 barrels of crude oil in comparison to 3,317 barrels sold for the three months ended May 31, 2016. This decrease in crude oil sales volume of 104 barrels or 3.1% was primarily due to the natural decline in reservoir pressure during the three months ended May 31, 2017.
The gravity of our produced crude oil in California ranges between 14° API and 16° API. Production for the three months ended May 31, 2017 was from 20 wells resulting in 1,828 well days of production in comparison to 1,829 well days of production for the three months ended May 31, 2016.
Our crude oil sales revenue for the three months ended May 31, 2017 and 2016 are set forth in the following table:
|
|
Three Months Ended May 31, 2017 |
|
Three Months Ended May 31, 2016 |
||||||
Project |
|
Revenue |
|
Percentage |
|
Revenue |
|
Percentage |
||
California East Slopes Project |
|
$ |
133,724 |
|
100.0% |
|
$ |
105,146 |
|
100.0% |
*Our average realized sale price on a BOE basis for the three months ended May 31, 2017 was $41.62 in comparison to $31.70 for the three months ended May 31, 2016, representing an increase of $9.92 or 31.3% per barrel.
Operating Expenses
Total operating expenses for the three months ended May 31, 2017 were $421,133, an increase of $65,661 or 18.5% compared to $355,472 for the three months ended May 31, 2016. The increase was due to the exploration work associated with our new Michigan exploratory joint drilling project in the amount of $77,849. Operating expenses for the three months ended May 31, 2017 and May 31, 2016 are set forth in the table below:
Production expenses include expenses associated with the production of crude oil and natural gas. These expenses include pumpers, electricity, road maintenance, control of well insurance, property taxes and well workover costs; and, relate directly to the number of wells that are in production. For the three months ended May 31, 2017, these expenses increased by $6,748 or 16.5% to $47,768 in comparison to $41,020 for the three months ended May 31, 2016. For the three months ended May 31, 2017 and May 31, 2016 we had 20 wells on production in California. Production expense on a barrel of oil equivalent (BOE) basis for the three months ended May 31, 2017 and 2016 were $14.87 and $12.37, respectively. Production expenses represented 11.4% of total operating expenses.
Exploration and drilling expenses include geological and geophysical (G&G) expenses as well as leasehold maintenance, plugging and abandonment (P&A) expenses and dry hole expenses. These expenses increased $91,890 to $92,347 in comparison to $457 for the three months ended May 31, 2016. The two primary reasons for the increase were the seismic and exploration work being done on the new Michigan exploratory joint drilling project for $77,849 and the P&A operations on two non-producing well bores in California for $14,492 representing $92,340 in aggregate. Exploration and drilling expenses represented 21.9% of total operating expenses.
19
DD&A expenses relate to equipment, proven reserves and property costs, along with impairment, and is another component of operating expenses. For the three months ended May 31, 2017, DD&A expenses decreased $1,506 or 5.5% to $25,719 in comparison to $27,225 for the three months ended May 31, 2016. On a BOE basis DD&A represented $8.01 and $8.21 for the three months ended May 31, 2017 and 2016, respectively. DD&A and impairment expenses represented 6.1% of total operating expenses.
G&A expenses include the salaries of our six employees, including management. Other items included in our G&A expenses are legal and accounting expenses, director fees, stock compensation, investor relations fees, travel expenses, insurance, Sarbanes-Oxley (SOX) compliance expenses and other administrative expenses necessary for an operator of crude oil and natural gas properties as well as for running a public company. For the three months ended May 31, 2017, these expenses decreased $31,471 or 11.0% to $255,299 in comparison to $286,770 for the three months ended May 31, 2016. For the three months ended May 31, 2017, we received, as Operator, administrative overhead reimbursement of $13,322 for the East Slopes Project which was used to directly offset certain employee salaries. We are continuing a program of reducing all of our G&A costs wherever possible. G&A expenses represented 60.6% of total operating expenses for the three months ended May 31, 2017.
Interest income for the three months ended May 31, 2017 was $14 in comparison to $22 for the three months ended May 31, 2016.
Interest expense for the three months ended May 31, 2017 decreased $378,798 or 44.1% to $479,893 in comparison to $858,691 for the three months ended May 31, 2016. The decrease in interest expense was due to a lower loan balance on our credit facility with Maximilian since the proceeds from the Kentucky project sale were used to pay-down a portion of the loan balance. Refer to the discussion below under the caption Current debt (Short-term borrowings) for more information on the Maximilian loan.
Due to the nature of our business, we expect that revenues, as well as all categories of expenses, will continue to fluctuate substantially on a quarter-to-quarter and year-to-year basis. Revenue are highly dependent on the volatility of hydrocarbon prices and production volumes. Production expenses will fluctuate according to the number and percentage ownership of producing wells as well as the amount of revenues we receive based on the price of crude oil. Exploration and drilling expenses will be dependent upon the amount of capital that we have to invest in future development projects, as well as the success or failure of such projects. Likewise, the amount of DD&A expense will depend upon the factors cited above including the size of our proven reserves base and the market price of energy products. G&A expenses will also fluctuate based on our current requirements, but will generally tend to increase as we expand the business operations of the Company. An ongoing goal of the Company is to improve cash flow to cover the current level of G&A expenses and to fund our drilling programs in California and Michigan.
Capital Resources and Liquidity
Our primary financial resource is our proven crude oil reserve base. Our ability to fund any future capital expenditure programs is dependent upon the prices we receive from crude oil sales, the success of our drilling programs in California and Michigan and the availability of capital resource financing. Since June 2014, there has been a significant decline in the WTI price of crude oil and consequently in the realized price we receive from crude oil sales in California. This decline in the price of crude oil has had a substantial negative impact on our cash flow, financial statements and our ability to implement an aggressive drilling program in California.
In the current fiscal year we plan to spend approximately $75,000 in capital investments in California and $300,000 in Michigan; however our actual expenditures may vary significantly from this estimate if our plans for exploration and development activities change during the year or if we are not able to obtain financing to fund these capital investments. Factors such as changes in operating margins and the availability of capital resources could increase or decrease our ultimate level of expenditures during the current fiscal year.
Changes in our capital resources at May 31, 2017 in comparison with February 28, 2017 are set forth in the table below:
|
May 31, 2017 |
|
February 28, 2017 |
|
Increase (Decrease) |
|
Percentage Change |
|||
Cash |
$ |
39,823 |
|
$ |
42,003 |
|
$ |
(2,180) |
|
(5.2%) |
Current assets |
$ |
321,092 |
|
$ |
309,308 |
|
$ |
11,784 |
|
3.8% |
Total assets |
$ |
1,158,351 |
|
$ |
1,263,313 |
|
$ |
(104,962) |
|
(8.3%) |
Current liabilities |
$ |
(14,159,140) |
|
$ |
(13,462,236) |
|
$ |
696,904 |
|
5.2% |
Total liabilities |
$ |
(14,755,107) |
|
$ |
(14,092,781) |
|
$ |
662,326 |
|
4.7% |
Working capital |
$ |
(13,838,048) |
|
$ |
(13,152,928) |
|
$ |
685,120 |
|
5.2% |
20
Our working capital deficit increased approximately $685,120 or 5.2% to $13,838,048 at May 31, 2017 in comparison to $13,152,928 at February 28, 2017. The increase in our working capital deficit was due to an increase in accounts payable and accrued interest as well as our borrowings under the Maximilian credit facility and for the Michigan exploratory joint drilling project.
While we have ongoing positive cash flow from our crude oil operations in California, we have not yet been able to generate sufficient cash flow to cover all of our G&A and interest expense requirements. We anticipate an increase in our cash flow will occur when we are able to return to our planned drilling program that will result in an increase in the number of wells on production.
Our business is capital intensive. Our ability to grow is dependent upon favorably obtaining outside capital and generating cash flows from operating activities necessary to fund our investment activities. There is no assurance that we will be able to achieve profitability. Since our future operations will continue to be dependent on successful exploration and development activities and our ability to seek and secure capital from external sources, should we be unable to achieve sustainable profitability this could cause any equity investment in the Company to become worthless.
Major sources of funds in the past for us have included the debt or equity markets and the sale of assets. While we have achieved positive cash flow from operations in California, we will have to rely on these capital markets to fund future operations and growth. Our business model is focused on acquiring exploration or development properties as well as existing production. Our ability to generate future revenues and operating cash flow will depend on successful exploration, and/or acquisition of crude oil and natural gas producing properties, which may very likely require us to continue to raise equity or debt capital from outside sources.
Daybreak has ongoing capital commitments to develop certain leases pursuant to their underlying terms. Failure to meet such ongoing commitments may result in the loss of the right to participate in future drilling on certain leases or the loss of the lease itself. These ongoing capital commitments will cause us to seek additional forms of financing through various methods, including issuing debt securities, equity securities, bank debt, or combinations of these instruments which could result in dilution to existing security holders and increased debt and leverage. The current uncertainty in the credit and capital markets as well as the decline in crude oil prices since June of 2014, may restrict our ability to obtain needed capital. No assurance can be given that we will be able to obtain funding under any loan commitments or any additional financing on favorable terms, if at all. Sales of interests in our assets may be another source of cash flow available to us.
The Companys financial statements for the three months ended May 31, 2017 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. We have incurred net losses since entering the crude oil and natural gas exploration industry and as of three months ended May 31, 2017 have an accumulated deficit of $36,646,757 and a working capital deficit of $13,838,048 which raises substantial doubt about our ability to continue as a going concern.
In the current fiscal year, we will continue to seek additional financing for our planned exploration and development activities in California and Michigan. We could obtain financing through one or more various methods, including issuing debt securities, equity securities, or bank debt, or combinations of these instruments, which could result in dilution to existing security holders and increased debt and leverage. No assurance can be given that we will be able to obtain funding under any loan commitments or any additional financing on favorable terms, if at all. Sales of interests in our assets may be another source of cash flow.
Changes in Financial Condition
During the three months ended May 31, 2017, we received crude oil sales revenue from 20 wells in California. Our commitment to improving corporate profitability remains unchanged. During the three months ended May 31, 2017, we had an operating loss of $287,409 in comparison to an operating loss of $250,326 for the three months ended May 31, 2016. An increase of $9.92 per barrel BOE in our average realized price of crude oil for the three months ended May 31, 2017 resulted in a revenue increase of $28,578 or 27.2% in comparison to the three months ended May 31, 2016.
Our balance sheet at May 31, 2017 reflects total assets of approximately $1.2 million in comparison to approximately $1.3 million at February 28, 2017. This decrease is primarily due to a $50,000 reclass of unproved properties to exploration expenses in Michigan, plus DD&A and a revision in recognition of our asset retirement obligation in California.
21
At May 31, 2017, total liabilities were approximately $14.8 million in comparison to approximately $14.1 million at February 28, 2017. The increase in liabilities was due to increases in payables, accrued interest and our credit facility balance with Maximilian.
For the three months ended May 31, 2017, there were 44,991 shares of common stock issued as a result of the conversion of 14,997 shares of Series A Convertible Preferred stock. The issued and outstanding shares of common stock at May 31, 2017 was 51,532,364.
Cash Flows
Changes in the net funds provided by and (used in) our operating, investing and financing activities are set forth in the table below:
|
Three Months Ended May 31, 2017 |
|
Three Months Ended May 31, 2016 |
|
Increase (Decrease) |
|
Percentage Change |
|||
Net cash provided by (used in) operating activities |
$ |
(31,239) |
|
$ |
10,062 |
|
|
(41,301) |
|
(410.5%) |
Net cash provided by investing activities |
$ |
- |
|
$ |
2,350 |
|
|
(2,350) |
|
(100.0%) |
Net cash provided by (used in) financing activities |
$ |
29,059 |
|
$ |
(6,087) |
|
|
35,146 |
|
577.4% |
Cash Flow Provided By (Used In) Operating Activities
Cash flow from operating activities is derived from the production of our crude oil and natural gas reserves and changes in the balances of non-cash accounts, receivables, payables or other non-energy property asset account balances. For the three months ended May 31, 2017, cash flow used in operating activities was $31,239 in comparison to $10,062 provided by operating activities for the three months ended May 31, 2016. This decrease of $41,301 in our cash flow provided from operating activities for the three months ended May 31, 2017 was primarily due to an increase in our liability account balances and a decrease in our accrued interest balance in comparison to the three months ended May 31, 2016. Variations in cash flow from operating activities may impact our level of exploration and development expenditures.
Cash Flow Provided By Investing Activities
Cash flow from investing activities is derived from changes in oil and gas property balances and other investment activities. Cash flow provided by investing activities for the three months ended May 31, 2017 was $-0-, in comparison to $2,350 provided by our investing activities for the three months ended May 31, 2016.
Cash Flow Provided By (Used In) Financing Activities
Cash flow from financing activities is derived from changes in long-term liability account balances, our borrowing activities or in equity account balances, excluding retained earnings. Cash flow used in financing activities for the three months ended May 31, 2017 was $29,059 an increase of $35,146 in comparison to the $6,087 used in financing activities in the three months ended May 31, 2016. For the three months ended May 31, 2017, we received advances on the Maximilian credit facility and our Michigan exploratory joint drilling project of $45,650 in aggregate. Refer to the caption Current debt Maximilian Loan Agreement for further discussion of the Maximilian loan.
The following discussion is a summary of cash flows provided by or used in our financing activities at May 31, 2017.
Current debt (Short-term borrowings)
Related Party
At May 31, 2017 and February 28, 2017, the Company had a loan balance of $250,100 with the Companys Chairman, President and Chief Executive Officer which were obtained during the years ended February 29, 2012 and February 28, 2013, that was used for a variety of corporate purposes including an escrow requirement on a loan commitment; maturity extension fees on third party loans; and a reduction of principal on the Companys credit line with UBS Bank. These loans are non-interest bearing loans and repayment will be made upon a mutually agreeable date in the future.
22
Line of Credit
The Company has an existing $890,000 line of credit for working capital purposes with UBS Bank USA (UBS), established pursuant to a Credit Line Agreement dated October 24, 2011 that is secured by the personal guarantee of its Chairman, President and Chief Executive Officer. At May 31, 2017 and February 28, 2017, the Line of Credit had an outstanding balance of $811,681 and $817,622, respectively. Interest is payable monthly at a stated reference rate of 0.249% + 337.5 basis points and was $9,059 and $8,913, respectively for the three months ended May 31, 2017 and 2016. The reference rate is based on the 30 day LIBOR (London Interbank Offered Rate) and is subject to change from UBS.
Maximilian Loan Agreement (Credit Facility)
On October 31, 2012, the Company entered into a loan agreement with Maximilian Resources LLC, a Delaware limited liability company and successor by assignment to Maximilian Investors LLC (either party, as appropriate, is referred to in this Quarterly Report on Form 10-Q as Maximilian), which provided for a revolving credit facility of up to $20 million, that matured on October 31, 2016, with a minimum commitment of $2.5 million. On October 31, 2016 through the Fourth Amendment to the Amended and Restated Loan and Security Agreement, the maturity date of the loan was changed to February 28, 2020.
Maximilian Loan - Amended and Restated Loan Agreement
In connection with the Companys acquisition of a working interest from App Energy, LLC, a Kentucky limited liability company (App Energy) in the Twin Bottoms Field in Lawrence County, Kentucky, the Company amended its loan agreement with Maximilian on August 28, 2013. The amendment increased the amount of the credit facility to $90 million and reduced the annual interest rate to 12%. The Company evaluated the amendment of the revolving credit facility under ASC 470-50-40 and determined that the Companys borrowing capacity under the amended loan agreement exceeded its borrowing capacity under the old loan agreement. Consequently, the unamortized discount and deferred financing costs as of the date of amendment are being amortized over the term of the amended loan agreement.
On October 31, 2016, the Company entered into a Fourth Amendment to the Amended and Restated Loan and Security Agreement with Maximilian, which amended the Companys loan agreement with Maximilian (the Restructuring Agreement). Pursuant to the Restructuring Agreement, in exchange for the proceeds it received from the Kentucky Sale, Maximilian and the Company have agreed to a commitment by Maximilian to advance up to $250,000 in financing to the Company over the next six months and the pursuit of the Michigan exploratory joint drilling project using the $250,000 set aside from the Kentucky Sale. The Company recognized a gain on debt settlement in aggregate of approximately $3.9 million through the sale of the Kentucky property and reduction in the outstanding credit facility balance.
As a result of the decline in hydrocarbon prices that started in June of 2014, the Company has been unable to make any type of interest or principal payments required under the amended terms of its credit facility with Maximilian since December of 2015. Under the terms of the Restructuring Amendment all unpaid interest is currently being accrued. A series of waivers have been granted by Maximilian for the principal and interest payments that have not been made. Due to the waivers granted by Maximilian, the Company is currently not considered to be in default under terms of the credit facility. Maximilian is continuing to work with the Company in restructuring the credit facility terms during this period of lower hydrocarbon prices, but there can be no assurances that this cooperation will continue. Further, our lender is under no obligation to advance us any additional funding and, rather, there can be no assurances that out lender will not declare the Company to be in default under the credit facility. A change of control or management of our lender, among other reasons, could also result in our loan being called due and payable.
23
Maximilian Promissory Note Michigan Exploratory Joint Drilling Project
As of May 31, 2017, the Company had received $94,650 in aggregate from multiple advances starting in the year ended February 28, 2017 from Maximilian under a separate promissory note agreement dated January 17, 2017 and amended on February 10, 2017 regarding the development of an exploratory joint drilling project in Michigan. Advances under this agreement are subject to a 5% (five percent) per annum interest rate. If a well that the Company elects to participate in is scheduled to be spudded on the Michigan exploratory joint drilling project on or before December 31, 2017, then the advances under the promissory note must be repaid in full upon the earlier of (a) the time that is ten days prior to the first well being spudded on the Michigan exploratory joint drilling project or (b) December 31, 2017. If there is not a well scheduled to be spudded at the Michigan exploratory joint drilling project on or before December 31, 2017 that the Company elects to participate in, then the Company will assign to Maximilian its working interest in the Michigan exploratory joint drilling project, in full payment and satisfaction of the advances under the promissory note. Advances under the promissory note may be prepaid at any time without penalty. In the event of a default of any of the Companys obligations under the promissory note, the amounts due may be called immediately due and payable at Maximilians option.
In accordance with the guidance found in ASC-470-10-45, the entire balance of the Maximilian loan is presented under the current liabilities section of the balance sheets. In accordance with the guidance found in ASC 835-30 the net amount of the deferred finance costs associated with the credit facility are included with the debt discount as a reduction of the loan balance shown on the Balance Sheets as of May 31, 2017 and February 28, 2017, respectively.
Current debt balances at May 31, 2017 and February 28, 2017 are set forth in the table below:
|
May 31, 2017 |
|
February 28, 2017 |
||
Credit facility balance |
$ |
8,995,444 |
|
$ |
8,960,444 |
Less unamortized discount and debt issuance costs |
|
(136,148) |
|
|
(238,598) |
Subtotal O&G operating debt |
|
8,859,296 |
|
|
8,721,846 |
Michigan exploratory joint drilling project debt |
|
94,650 |
|
|
84,000 |
Net debt |
$ |
8,953,946 |
|
$ |
8,805,846 |
Deferred financing costs at May 31, 2017 and February 28, 2017 relating to the original and the amended credit facility with Maximilian, are set forth in the table below:
|
May 31, 2017 |
|
February 28, 2017 |
||
Deferred financing costs loan fees |
$ |
181,648 |
|
$ |
181,648 |
Deferred financing costs loan commissions |
|
630,662 |
|
|
630,662 |
Deferred financing costs fair value of warrants |
|
530,488 |
|
|
530,488 |
Deferred financing costs fair value of common stock |
|
419,832 |
|
|
419,832 |
|
|
1,762,630 |
|
|
1,762,630 |
Accumulated amortization |
|
(1,626,482) |
|
|
(1,524,032) |
|
$ |
136,148 |
|
$ |
238,598 |
Deferred financing costs of $136,148 and $238,598 at May 31, 2017 and February 28, 2017, respectively includes the fair value of common shares and warrants issued to Maximilian and to a third party that assisted in both the original and the amended financing transactions. The unamortized deferred financing costs are netted against debt in the balance sheets. Amortization expense of deferred financing costs was $102,450 and $107,524, respectively for the three months ended May 31, 2017 and 2016.
Encumbrances
The Companys debt obligations, pursuant to the above mentioned credit facility loan agreement and promissory notes entered into by and between Maximilian and the Company are secured by a perfected first priority security interest in substantially all of the personal property of the Company, and two mortgages; one covering its leases in California and the other covering its leases in Michigan.
24
Non-current debt (Long-term borrowings)
12% Subordinated Notes
The Companys 12% Subordinated Notes (the Notes) issued pursuant to a January 2010 private placement offering to accredited investors, resulted in $595,000 in gross proceeds (of which $250,000 was from a related party) to the Company and accrue interest at 12% per annum, payable semi-annually on January 29th and July 29th. On January 29, 2015, the Company and 12 of the 13 holders of the Notes agreed to extend the maturity date of the Notes for an additional two years to January 29, 2017. Effective January 29, 2017, the maturity date of the Notes and the expiration date of the warrants that were issued in conjunction with the Notes were extended for an additional two years to January 29, 2019. There are ten noteholders, holding 980,000 warrants, who have not yet exercised their warrants. The exercise price of the associated warrants was lowered from $0.14 to $0.07 as a part of the Note maturity extension. The Notes principal of $565,000 is payable in full at the amended maturity date of the Notes. The fair value of the warrant modification, as determined by the Black-Scholes option pricing model, was $29,075 and was recognized as a discount to debt and is being amortized over the extended maturity date of the Notes. The Black-Scholes valuation encompassed the following weighted average assumptions: a risk free interest rate of 1.22%; volatility of 378.73%; and dividend yield of 0.0%. Should the Board of Directors, on the maturity date, decide that the payment of the principal and any unpaid interest would impair the financial condition or operations of the Company, the Company may then elect a mandatory conversion of the unpaid principal and interest into the Companys common stock at a conversion rate equal to 75% of the average closing price of the Companys common stock over the 20 consecutive trading days preceding December 31, 2018. Amortization expense was $3,635 and $-0-, respectively at May 31, 2017 and 2016. The unamortized debt discount at May 31, 2017 and February 28, 2017 was $24,229 and $27,864, respectively.
12% Note balances at May 31, 2017 and February 28, 2017 and February 29, 2016 are set forth in the table below:
|
May 31, 2017 |
|
February 28, 2017 |
||
12% Subordinated Notes |
$ |
315,000 |
|
$ |
315,000 |
Debt discount |
|
(13,508) |
|
|
(15,535) |
Net 12% Subordinated Note balance |
$ |
301,492 |
|
$ |
299,465 |
12% Note balances related parties at February 28, 2017 and February 29, 2016 are set forth in the table below:
|
May 31, 2017 |
|
February 28, 2017 |
||
12% Subordinated Notes related party |
$ |
250,000 |
|
$ |
250,000 |
Debt discount |
|
(10,721) |
|
|
(12,329) |
Net 12% Subordinated Note related party balance |
$ |
239,279 |
|
$ |
237,671 |
Capital Commitments
Daybreak has ongoing capital commitments to develop certain leases pursuant to their underlying terms. Failure to meet such ongoing commitments may result in the loss of the right to participate in future drilling on certain leases or the loss of the lease itself. These ongoing capital commitments may also cause us to seek additional capital from sources outside of the Company. The current uncertainty in the credit and capital markets, and the economic downturn, may restrict our ability to obtain needed capital.
Restricted Stock and Restricted Stock Unit Plan
On April 6, 2009, the Board approved the Restricted Stock and Restricted Stock Unit Plan (the 2009 Plan) allowing the executive officers, directors, consultants and employees of Daybreak and its affiliates to be eligible to receive restricted Common Stock and restricted Common Stock unit awards. Subject to adjustment, the total number of shares of Daybreak Common Stock that will be available for the grant of awards under the 2009 Plan may not exceed 4,000,000 shares; provided, that, for purposes of this limitation, any stock subject to an award that is forfeited in accordance with the provisions of the 2009 Plan will again become available for issuance under the 2009 Plan. We believe that awards of this type further align the interests of our employees and our shareholders by providing significant incentives for these employees to achieve and maintain high levels of performance. Restricted stock and restricted stock units also enhance our ability to attract and retain the services of qualified individuals.
25
At May 31, 2017, a total of 3,000,000 shares of restricted stock had been awarded and remained outstanding under the 2009 Plan, and 2,986,220 of the shares had fully vested. A total of 1,013,780 Common Stock shares remained available at May 31, 2017 for issuance pursuant to the 2009 Plan. A summary of the 2009 Plan issuances is set forth in the table below:
Grant Date |
|
Shares Awarded |
|
Vesting Period |
|
Shares Vested (1) |
|
Shares Returned (2) |
|
Shares Outstanding (Unvested) |
4/7/2009 |
|
1,900,000 |
|
3 Years |
|
1,900,000 |
|
- |
|
- |
7/16/2009 |
|
25,000 |
|
3 Years |
|
25,000 |
|
- |
|
- |
7/16/2009 |
|
625,000 |
|
4 Years |
|
619,130 |
|
5,870 |
|
- |
7/22/2010 |
|
25,000 |
|
3 Years |
|
25,000 |
|
- |
|
- |
7/22/2010 |
|
425,000 |
|
4 Years |
|
417,090 |
|
7,910 |
|
- |
|
|
3,000,000 |
|
|
|
2,986,220 (1) |
|
13,780 |
|
- |
(1)
Does not include shares that were withheld to satisfy such tax liability upon vesting of a restricted award by a Plan Participant, and subsequently returned to the 2009 Plan.
(2)
Reflects the number of common shares that were withheld pursuant to the settlement of the number of shares with a fair market value equal to such tax withholding liability, to satisfy such tax liability upon vesting of a restricted award by a Plan Participant.
For the three months ended May 31, 2017, the Company did not recognize any stock compensation expense related to the above restricted stock grants since all issuances have been fully amortized.
Management Plans to Continue as a Going Concern
We continue to implement plans to enhance Daybreaks ability to continue as a going concern. The Company currently has a net revenue interest in 20 producing crude oil wells in our East Slopes Project located in Kern County, California. The revenue from these wells has created a steady and reliable source of revenue for the Company. Our average working interest in these wells is 36.6% and the average net revenue interest is 28.4%.
We anticipate revenues will continue to increase as the Company participates in the drilling of more wells in the East Slopes Project in California and as our drilling operations begin in Michigan. However given the current decline and instability in hydrocarbon prices, the timing of any drilling activity in California and Michigan will be dependent on a sustained improvement in hydrocarbon prices and a successful refinancing or restructuring of our credit facility.
We believe that our liquidity will improve when there is a sustained improvement in hydrocarbon prices. Our sources of funds in the past have included the debt or equity markets and the sale of assets. While the Company does have positive cash flow from its crude oil properties, it has not yet established a positive cash flow on a company-wide basis. It will be necessary for the Company to obtain additional funding from the private or public debt or equity markets in the future. However, we cannot offer any assurance that we will be successful in executing the aforementioned plans to continue as a going concern.
Our financial statements as of May 31, 2017 do not include any adjustments that might result from the inability to implement or execute Daybreaks plans to improve our ability to continue as a going concern.
Critical Accounting Policies
Refer to Daybreaks Annual Report on Form 10-K for the fiscal year ended February 28, 2017.
Off-Balance Sheet Arrangements
As of May 31, 2017, we did not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partners that have been, or are reasonably likely to have, a material effect on our financial position or results of operations.
26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide the information otherwise required by this Item.
ITEM 4. CONTROLS AND PROCEDURES
Managements Evaluation of Disclosure Controls and Procedures
As of the end of the reporting period, May 31, 2017, an evaluation was conducted by Daybreak management , including our President and Chief Executive Officer, who is also serving as our interim principal finance and accounting officer, as to the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) of the Exchange Act. Such disclosure controls and procedures are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods specified by the SEC rules and forms. Additionally, it is vital that such information is accumulated and communicated to our management, including our President and Chief Executive Officer, in a manner to allow timely decisions regarding required disclosures. Based on that evaluation, our management concluded that our disclosure controls were effective as of May 31, 2017.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Companys internal control over financial reporting during the three months ended May 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
Limitations
Our management does not expect that our disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems 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.
27
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the period ended February 28, 2017, which could materially affect our business, financial condition or future results. The risks described in this report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial could have a material adverse effect on our business, financial condition and results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)
Recent Sales of Unregistered Securities:
On May 9, 2017, the Company issued 44,991 shares of Common Stock to an accredited investor pursuant to the terms of a Daybreak private placement offering held in July 2006, during which the accredited investor received shares of Daybreak Series A Convertible Preferred Stock, the terms of which are disclosed in the Companys Amended and Restated Articles of Incorporation. Each share of Series A Convertible Preferred Stock can be converted by the shareholder at any time into three shares of the Companys Common Stock. Pursuant to the terms of the Series A Convertible Preferred Stock, the Common Stock was issued to the accredited investor upon the conversion of 14,997 shares of Series A Convertible Preferred Stock by the accredited investor, in reliance on an exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933 relating to securities exchanged by the issuer with its existing security holders exclusively where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange.
28
ITEM 6. EXHIBITS
The following Exhibits are filed as part of the report:
Exhibit
Number
Description
10.01 (1)
10.02 (1)
10.03 (1)
10.04 (1)
31.1 (1)
32.1 (1)
101.INS (2)
XBRL Instance Document
101.SCH (2)
XBRL Taxonomy Schema
101.CAL (2)
XBRL Taxonomy Calculation Linkbase
101.DEF (2)
XBRL Taxonomy Definition Linkbase
101.LAB (2)
XBRL Taxonomy Label Linkbase
101.PRE (2)
XBRL Taxonomy Presentation Linkbase
(1)
Filed herewith.
(2)
Furnished herewith.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DAYBREAK OIL AND GAS, INC. |
|
|
|
By: |
/s/ JAMES F. WESTMORELAND |
|
James F. Westmoreland, its |
|
President, Chief Executive Officer and interim |
|
principal finance and accounting officer |
|
(Principal Executive Officer, Principal Financial |
|
Officer and Principal Accounting Officer) |
|
|
Date: July 14, 2017 |
30
Exhibit 10.01
PROMISSORY NOTE
Date: January 17 , 2017 |
Amount: $75,000.00 |
For value received, Daybreak Oil and Gas, Inc., a Washington corporation whose address is 1101 N. Argonne Road., Suite A 211, Spokane Valley, WA 99212 ( Borrower ), promises to pay to Maximilian Resources, LLC, a Delaware limited liability company whose address is 250 West 55 th Street, New York, New York, 10019 ( Lender ), the principal amount of Seventy Five Thousand and no/100 Dollars ($75,000.00) with interest, on the terms set forth in this Note.
BACKGROUND
A.
Borrower, Lender, and Westside Exploration, LLC ( Westside ) are parties to an Exploration Agreement dated December 1, 2016 (the Exploration Agreement ).
B.
Pursuant to the Exploration Agreement, Borrower, Lender, and Westside desire to develop oil and gas interests in areas of mutual interest in Montcalm County, Michigan (the AMIs ).
C.
Borrower, Lender, and Westside will have the following working interest percentages within the AMIs.
Party |
Working Interest Percentage |
Lender |
40% |
Westside Exploration, LLC |
30% |
Daybreak Oil and Gas, Inc. |
30% |
D.
Pursuant to the Exploration Agreement, Lender provided funding of $250,000 to purchase: (A) those initial oil and gas leases within the AMI described in Exhibit C of the Exploration Agreement (the Initial Leasehold ), and (B) a 3-D seismic survey of the AMIs, including the Initial Leasehold, to help evaluate whether a well will be spudded on the Initial Leasehold.
E.
Borrower owns a 30% working interest in the Initial Leasehold.
F.
Borrower and Lender desire that Borrower repay Lender the amounts owed under this Note by: (i) making payments pursuant to Section 1 if a well is scheduled to be spudded on the Initial Leasehold on or before December 31, 2017 and Borrower elects to participate in said well, or (ii) assigning to Lender all of Borrowers 30% working interest in the Initial Leasehold if: (y) no well is scheduled to be spudded on the Initial Leasehold on or before December 31, 2017, or (z) a well is scheduled to be spudded on the Initial Leasehold on or before December 31, 2017 but Borrower elects not to participate in said well.
TERMS
1.
Payment if Well Scheduled to be Spudded and Borrower Elects to Participate . If a well is scheduled to be spudded on the Initial Leasehold on or before December 31, 2017 and Borrower elects to participate in said well, then Borrower promises to pay to Lender all amounts owing under this Note on the earlier of: (A) December 31, 2017, or (B) the date that is 10 days prior to such a well being spudded.
2.
Payment if No Well Scheduled to be Spudded or If Borrower Elects Not to Participate . If: (A) no well is scheduled to be spudded on the Initial Leasehold on or before December 31, 2017, or (B) a well is scheduled to be spudded on the Initial Leasehold on or before December 31, 2017 but Borrower elects not to participate in such well, then Borrower will assign to Lender all of Borrowers 30% working interest in the Initial Leasehold in full and complete payment and satisfaction of all amounts owed pursuant to this Note.
3.
Interest Rate/Prepayment . Interest shall accrue on the unpaid balance of this Note at a rate of 5% per annum.
4.
Prepayment . Borrower may at any time prepay this Note, in whole or in part, without penalty.
5.
Security . This Note is secured by the Mortgage on the Initial Leasehold between Lender and Borrower (the " Mortgage ").
6.
Default . The occurrence of any of the following events is an Event of Default under this Note:
a.
Borrower breaches or fails to perform any term contained in this Note or the Mortgage, which breach or failure remains uncured for thirty (30) days after written notice of such breach or failure is sent from Lender to Borrower.
b.
Borrower defaults in any payment under this Note, and such default is not cured within thirty (30) days after written notice from Lender to Borrower of such default.
c.
Borrower fails to comply with or to perform any other term in this Note or in the Mortgage, which failure continues for thirty (30) days following written notice from Lender to Borrower of such failure.
7.
Remedies . Upon occurrence of an Event of Default: (a) this Note will, at Lender's option, be immediately due and payable without demand or notice, and (b) Lender may exercise any right and remedies granted to it by this Note, the Mortgage, or otherwise available to Lender under applicable law.
8.
Miscellaneous . All persons signing this Note on behalf of Borrower warrant to Lender that they are duly and properly authorized to execute this Note and that this Note is a loan for business purposes. Nothing in this Note waives or restricts any right of Lender granted in any other document or by law. No delay on the part of Lender in the exercise of any right or remedy will operate as a waiver. No single or partial exercise by Lender of any right or remedy will preclude any other future exercise of that right or remedy or the exercise of any other right or remedy. The terms and conditions of this Note may not be amended, waived or modified except in a writing signed by Borrower and Lender. A waiver on one occasion will not be construed as a waiver of that term on any future occasion. Acceptance of partial or late payments owing on this Note at any time will not be deemed a waiver of any default. All rights, remedies and security granted to Lender herein are cumulative and in addition to other rights, remedies or security which may be granted elsewhere or by law. Whenever possible, each provision of this Note will be interpreted in such manner as to be effective and valid under applicable law. If any provision hereof is declared invalid or illegal it will be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of the provision or the remaining provisions of this Note. Any reference to the Lender includes any holder of this Note and any holder succeeds to the Lender's rights. This Note binds the respective heirs, personal representatives, successors and assigns of the Borrower.
9.
Governing Law . This Note will be governed by the laws of the state of Texas without regard to its conflicts of law provisions.
10.
WAIVER OF JURY TRIAL . BORROWER HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED ON CONTRACT, TORT, OR OTHERWISE) BETWEEN THE BORROWER AND LENDER ARISING OUT OF OR IN ANY WAY RELATED TO THIS NOTE.
[Signature Page Follows]
2
BORROWER: |
|
|
|
Daybreak Oil and Gas, Inc. |
|
|
|
By: |
/s/ James F. Westmoreland |
|
James F. Westmoreland, President and Chief Executive Officer |
[SIGNATURE PAGE TO PROMISSORY NOTE]
3
MORTGAGE
This Mortgage (" Mortgage ") is made on January ___, 2017, between Daybreak Oil and Gas, Inc., a Washington corporation whose address is 1101 N. Argonne Road., Suite A 211, Spokane Valley, WA 99212 ( Mortgagor ), and Maximilian Resources, LLC, a Delaware limited liability company whose address is 250 West 55 th Street, New York, New York, 10019 ( Mortgagee ).
For value received, Mortgagor mortgages and warrants to Mortgagee all of Mortgagors thirty percent (30%) working interest in the oil and gas leases located in the County of Montcalm, State of Michigan, and described on Exhibit A , together with the rents, income, and profits therefrom, all of the foregoing being collectively referred to as the " Mortgaged Property ".
This Mortgage is made and given to secure payment of a promissory note ( Note ) dated January ___, 2017 in the principal amount of Seventy Five Thousand and no/100 Dollars ($75,000.00), executed by Mortgagor and delivered to Mortgagee, and any and all extensions, renewals, or modifications of such Note.
Mortgagor further warrants, represents, and agrees, as follows:
1.
Payment of Note . Mortgagor agrees to perform in accordance with the terms of the Note and any extensions, renewals, or modifications of the Note.
2.
Events of Default . An Event of Default will exist if: (a) an Event of Default exists under the Note, (b) Mortgagor fails to comply with or to perform any term of this Mortgage and such default continues for thirty (30) days following written notice from Mortgagee to Mortgagor, or (c) Mortgagor, without the written consent of Mortgagee, shall sell, convey, or transfer the Mortgaged Property or any interest therein or any rents or profits therefrom or shall cause or suffer any mortgage, lien, or other encumbrance or any writ of attachment, garnishment, execution, or other legal process to be placed upon the Mortgaged Property or any interest therein or any rents or profits therefrom, except in favor of Mortgagee, or if any part of the Mortgaged Property or any interest therein shall be transferred by operation of law.
3.
Remedies . Mortgagee shall have all rights and remedies provided for in this Mortgage or otherwise permitted by law. In addition, upon the occurrence of an event of default defined in paragraph 2 above, Mortgagee shall have the right, and is hereby authorized:
(a)
To foreclose this Mortgage by action pursuant to applicable law.
(b)
To sell, release, and convey the Mortgaged Property at public sale, and to execute and deliver to the purchasers at such sale good and sufficient deeds of conveyance, rendering any surplus funds, after payment of the Note in full and the expenses of such sale, including attorney fees as provided by law, to Mortgagor, all in accordance with Chapter 32 of the Michigan Revised Judicature Act, as the same may be amended from time to time, and any similar statutory provisions which may hereafter be enacted in addition thereto or in substitution therefor.
All rights and remedies of Mortgagee under this Mortgage, whether or not exercisable only on default, shall be cumulative and may be exercised from time to time, and no delay by Mortgagee in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy, except to the extent otherwise provided by law.
4.
Expenses . Mortgagor shall pay to Mortgagee on demand any and all expenses, including attorney's fees and legal expenses, paid or incurred by Mortgagee in collecting or attempting to collect the Note or in protecting and enforcing the rights of any obligations to Mortgagee under any provision of this Mortgage, including, without limitation, taking any action in any insolvency or bankruptcy proceedings concerning Mortgagor or
foreclosing this Mortgage by advertisement or by action, and all such expenses shall be part of the Note and shall bear interest, from the date paid or incurred by Mortgagee, at the same rate as the Note described above.
5.
Notices . All notices to Mortgagor and to Mortgagee shall be deemed to be duly given if and when mailed, with postage prepaid, to the respective addresses of Mortgagor and Mortgagee appearing on the first page hereof, or if and when delivered personally.
6.
Miscellaneous . The covenants contained herein shall be binding upon and inure to the benefit of Mortgagor and Mortgagor's heirs, executors, administrators, and personal representatives and Mortgagee and its successors and assigns. Whenever used herein, unless the context otherwise requires, the singular number shall include the plural, and the use of any gender shall be applicable to all genders. The headings to the various paragraphs hereof have been inserted for convenient reference only and shall to no extent have the effect of amending or changing the express provisions of this Mortgage. This Mortgage shall be terminated and released when the Mortgagors obligations under the Note are satisfied, and Mortgagee shall execute any and all documentation requested by Mortgagor to accomplish such termination or release.
7.
Severability . Any provision of this Mortgage prohibited or unenforceable by any applicable law shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof.
[Signature Page Follows]
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IN WITNESS WHEREOF, Mortgagor has executed this Mortgage as of the day and year first above written.
MORTGAGOR: |
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Daybreak Oil and Gas, Inc. |
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/s/ JAMES F. WESTMORELAND |
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James F. Westmoreland |
STATE OF TEXAS)
) ss.
COUNTY OF GALVESTON)
The foregoing was acknowledged before me this 17th day of January, 2017, by James F. Westmoreland, the President and Chief Executive Officer of Daybreak Oil and Gas, Inc.
______________________________________
Notary Public, ___________ Co., Texas
My Commission Expires: __________
DRAFTED BY/RETURN TO:
NICHOLAS OERTEL
Foster Swift Collins & Smith PC
313 S. Washington Square
Lansing, MI 48933
TELEPHONE: (517) 371-8139
FAX: (517) 367-7139
[Signature Page to Mortgage]
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Exhibit 10.02
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Daybreak Oil and Gas, Inc. 1101 N. Argonne Rd. Suite A- 211 Spokane Valley, WA 99212 Office: (509) 232-7674 Fax: (509) 232-2220 |
February 10, 2017
Via electronic mail only
Maximilian Resources, LLC
250 West 55th Street, 14th Floor
New York, NY 10019
Attention: Zach Weiner
Re:
Loan from Maximilian Resources LLC, to Daybreak Oil and Gas, Inc.
Ladies and Gentlemen:
The undersigned Daybreak Oil and Gas, Inc., is the Borrower (and herein so-called) under that certain Promissory Note covering the Exploration Agreement for the development of oil and gas interests in Montcalm County, Michigan, by and between Borrower and Maximilian Resources LLC (Lender).
Borrower hereby requests that Lender advance the amount of NINE THOUSAND US DOLLARS ($9,000) (the Loan), pursuant to the terms of the Promissory Note between Borrower and Lender dated January 17, 2017, as amended to reflect this advance, for the development of oil and gas interests in Montcalm County, Michigan. Borrower hereby directs that such advance be transmitted, by wire transfer, f to the following account(s):
Amount: |
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Bank: |
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Routing Number (ABA): |
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Account No.: |
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Account Name: |
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To induce Lender to make the advance requested above, the undersigned hereby certifies to Lender as follows:
1.
All information, including without limitation, all representations, exhibits, financial statements and other materials, submitted to Lender by Borrower or any affiliate in connection with or in support of the Loan continues to be correct and accurate as of the date hereof; and
2.
Except as may have been previously disclosed to Lender, there is no outstanding, pending or threatened litigation against the undersigned or affecting Borrower or any surety of any of Borrowers obligations to Lender, or the collateral for the Loan which would affect any such person or entity or said collateral in any material adverse way; and
3.
Neither Borrower nor any other surety of any of Borrowers obligations to Lender, has suffered or incurred any material adverse financial change since the date of the last financial statement submitted by such person or entity to Lender; and
4.
Borrower has not breached any term, provision, representation, warranty, or covenant contained in any Loan Documents, each of the representations, warranties, and covenants of each such person contained in each of the Loan Documents is true and correct as of the date hereof; and
5.
No event or series of events, that the Lender has not been made aware of, has or have intervened since the date Borrower initially executed and delivered the Note, which would either individually or collectively adversely affect the collateral for the Loan in any material way.
Very truly yours, |
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DAYBREAK OIL AND GAS, INC., |
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a Washington corporation |
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By: |
/s/ THOMAS C. KILBOURNE |
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Name: Thomas C. Kilbourne Title: Controller |
Exhibit 10.03
PROMISSORY NOTE
Date: May 4, 2017 |
Amount: $10,650.00 |
For value received, Daybreak Oil and Gas, Inc., a Washington corporation, whose address is 1101 N. Argonne Rd., Suite A 211, Spokane Valley, WA 99212 ( Borrower ), promises to pay to Maximilian Resources, LLC, a Delaware limited liability company whose address is 250 West 55 th Street, New York, New York, 10019 ( Lender ), the principal amount of Ten Thousand, Six Hundred and Fifty and no/100 Dollars ($10,650.00) with interest, on the terms set forth in this Note.
BACKGROUND
A.
Borrower, Lender, and Westside Exploration, LLC (Westside) are parties to an Exploration Agreement dated December 1, 2016 (the Exploration Agreement ).
B.
Pursuant to the Exploration Agreement, Borrower, Lender, and Westside are developing oil and gas interests in areas of mutual interest in Montcalm County, Michigan referred to as Belvidere (the Belvidere AMIs ) and Bushnell (the Bushnell AMI ).
C.
Borrower, Lender, and Westside have the following working interest percentages within the Belvidere and Bushnell AMIs.
Party |
Working Interest Percentage |
Lender |
40% |
Borrower |
30% |
Westside |
30% |
D.
Pursuant to the Exploration Agreement, Lender has previously provided funding to advance the develop the AMIs covered under the Exploration Agreement as follows:
a.
$250,000 to purchase oil and gas leases within both the Belvidere AMI and the Bushnell AMI (more fully described in Exhibit C of the Exploration Agreement) and to acquire a 3-D seismic survey to further evaluate the Belvidere AMI; and
b.
$30,000 to pay for cost overruns that were incurred completing the 3-D seismic survey over the Belvidere AMI.
E.
Borrower and Westside have each executed Promissory Notes for their proportionate share (as defined in Paragraph C above) of the funding Maximilian has provided (as described in Paragraph D above).
F.
The oil and gas leases included in the Bushnell AMI are expiring, but can be extended for three (3) years. Maximilian has agreed to provide the funding to extend those leases with a May 2017 expiration date in the Bushnell AMI and the Borrower has agreed to execute Promissory Note (the Note ) for its share of this additional funding.
TERMS
1.
Payment if Well Scheduled to be Spudded and Borrower Elects to Participate . If a well is scheduled to be spudded on the Initial Leasehold on or before December 31, 2017 and Borrower elects to participate in said well, then Borrower promises to pay to Lender all amounts owing under this Note on the earlier of: (A) December 31, 2017, or (B) the date that is 10 days prior to a such well being spudded.
2.
Payment if No Well Scheduled to be Spudded or If Borrower Elects Not to Participate . If: (A) no well is scheduled to be spudded on the Initial Leasehold on or before December 31, 2017, or (B) a well is scheduled to be spudded on the Initial Leasehold on or before December 31, 2017 but Borrower elects not to participate in such well, then Borrower will assign to Lender all of Borrowers 30% working interest in the Initial Leasehold in full and complete payment and satisfaction of all amounts owed pursuant to this Note.
3.
Interest Rate/Prepayment . Interest shall accrue on the unpaid balance of this Note at a rate of 5% per annum.
4.
Prepayment . Borrower may at any time prepay this Note, in whole or in part, without penalty.
5.
Security . This Note is secured by the Mortgage on the Initial Leasehold between Lender and Borrower (the " Mortgage ").
6.
Default . The occurrence of any of the following events is an Event of Default under this Note:
a.
Borrower breaches or fails to perform any term contained in this Note or the Mortgage, which breach or failure remains uncured for thirty (30) days after written notice of such breach or failure is sent from Lender to Borrower.
b.
Borrower defaults in any payment under this Note, and such default is not cured within thirty (30) days after written notice from Lender to Borrower of such default.
c.
Borrower fails to comply with or to perform any other term in this Note or in the Mortgage, which failure continues for thirty (30) days following written notice from Lender to Borrower of such failure.
7.
Remedies . Upon occurrence of an Event of Default: (a) this Note will, at Lender's option, be immediately due and payable without demand or notice, and (b) Lender may exercise any right and remedies granted to it by this Note, the Mortgage, or otherwise available to Lender under applicable law.
8.
Miscellaneous . All persons signing this Note on behalf of Borrower warrant to Lender that they are duly and properly authorized to execute this Note and that this Note is a loan for business purposes. Nothing in this Note waives or restricts any right of Lender granted in any other document or by law. No delay on the part of Lender in the exercise of any right or remedy will operate as a waiver. No single or partial exercise by Lender of any right or remedy will preclude any other future exercise of that right or remedy or the exercise of any other right or remedy. The terms and conditions of this Note may not be amended, waived or modified except in a writing signed by Borrower and Lender. A waiver on one occasion will not be construed as a waiver of that term on any future occasion. Acceptance of partial or late payments owing on this Note at any time will not be deemed a waiver of any default. All rights, remedies and security granted to Lender herein are cumulative and in addition to other rights, remedies or security which may be granted elsewhere or by law. Whenever possible, each provision of this Note will be interpreted in such manner as to be effective and valid under applicable law. If any provision hereof is declared invalid or illegal it will be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of the provision or the remaining provisions of this Note. Any reference to the Lender includes any holder of this Note and any holder succeeds to the Lender's rights. This Note binds the respective heirs, personal representatives, successors and assigns of the Borrower.
9.
Governing Law . This Note will be governed by the laws of the state of Michigan without regard to its conflicts of law provisions.
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10.
WAIVER OF JURY TRIAL . BORROWER HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED ON CONTRACT, TORT, OR OTHERWISE) BETWEEN THE BORROWER AND LENDER ARISING OUT OF OR IN ANY WAY RELATED TO THIS NOTE.
BORROWER: |
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Daybreak Oil and Gas, Inc. |
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By: |
/s/ James F. Westmoreland |
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James F. Westmoreland, President |
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MORTGAGE
This Mortgage (" Mortgage ") is made on May 4, 2017, between Daybreak Oil and Gas, Inc, a Washington corporation, whose office is 1101 N. Argonne Rd., Suite A 211, Spokane, WA 99212 ( Mortgagor ), and Maximilian Resources, LLC, a Delaware limited liability company whose address is 250 West 55 th Street, New York, New York, 10019 ( Mortgagee ).
For value received, Mortgagor mortgages and warrants to Mortgagee all of Mortgagors thirty percent (30%) working interest in the oil and gas leases located in the County of Montcalm, State of Michigan, and described on Exhibit A , together with the rents, income, and profits therefrom, all of the foregoing being collectively referred to as the " Mortgaged Property ".
This Mortgage is made and given to secure payment of a promissory note ( Note ) dated May 4, 2017 in the principal amount of Ten Thousand, Six Hundred and Fifty and no/100 Dollars ($10,650.00), executed by Mortgagor and delivered to Mortgagee, and any and all extensions, renewals, or modifications of such Note.
Mortgagor further warrants, represents, and agrees, as follows:
1.
Payment of Note . Mortgagor agrees to perform in accordance with the terms of the Note and any extensions, renewals, or modifications of the Note.
2.
Events of Default . An Event of Default will exist if: (a) an Event of Default exists under the Note, (b) Mortgagor fails to comply with or to perform any term of this Mortgage and such default continues for thirty (30) days following written notice from Mortgagee to Mortgagor, or (c) Mortgagor, without the written consent of Mortgagee, shall sell, convey, or transfer the Mortgaged Property or any interest therein or any rents or profits therefrom or shall cause or suffer any mortgage, lien, or other encumbrance or any writ of attachment, garnishment, execution, or other legal process to be placed upon the Mortgaged Property or any interest therein or any rents or profits therefrom, except in favor of Mortgagee, or if any part of the Mortgaged Property or any interest therein shall be transferred by operation of law.
3.
Remedies . Mortgagee shall have all rights and remedies provided for in this Mortgage or otherwise permitted by law. In addition, upon the occurrence of an event of default defined in paragraph 2 above, Mortgagee shall have the right, and is hereby authorized:
(a)
To foreclose this Mortgage by action pursuant to applicable law.
(b)
To sell, release, and convey the Mortgaged Property at public sale, and to execute and deliver to the purchasers at such sale good and sufficient deeds of conveyance, rendering any surplus funds, after payment of the Note in full and the expenses of such sale, including attorney fees as provided by law, to Mortgagor, all in accordance with Chapter 32 of the Michigan Revised Judicature Act, as the same may be amended from time to time, and any similar statutory provisions which may hereafter be enacted in addition thereto or in substitution therefor.
All rights and remedies of Mortgagee under this Mortgage, whether or not exercisable only on default, shall be cumulative and may be exercised from time to time, and no delay by Mortgagee in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy, except to the extent otherwise provided by law.
4.
Expenses . Mortgagor shall pay to Mortgagee on demand any and all expenses, including attorney's fees and legal expenses, paid or incurred by Mortgagee in collecting or attempting to collect the Note or in protecting and enforcing the rights of any obligations to Mortgagee under any provision of this Mortgage, including, without limitation, taking any action in any insolvency or bankruptcy proceedings concerning Mortgagor or
foreclosing this Mortgage by advertisement or by action, and all such expenses shall be part of the Note and shall bear interest, from the date paid or incurred by Mortgagee, at the same rate as the Note described above.
5.
Notices . All notices to Mortgagor and to Mortgagee shall be deemed to be duly given if and when mailed, with postage prepaid, to the respective addresses of Mortgagor and Mortgagee appearing on the first page hereof, or if and when delivered personally.
6.
Miscellaneous . The covenants contained herein shall be binding upon and inure to the benefit of Mortgagor and Mortgagor's heirs, executors, administrators, and personal representatives and Mortgagee and its successors and assigns. Whenever used herein, unless the context otherwise requires, the singular number shall include the plural, and the use of any gender shall be applicable to all genders. The headings to the various paragraphs hereof have been inserted for convenient reference only and shall to no extent have the effect of amending or changing the express provisions of this Mortgage. This Mortgage shall be terminated and released when the Mortgagors obligations under the Note are satisfied, and Mortgagee shall execute any and all documentation requested by Mortgagor to accomplish such termination or release.
7.
Severability . Any provision of this Mortgage prohibited or unenforceable by any applicable law shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof.
[Signature Page Follows]
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IN WITNESS WHEREOF, Mortgagor has executed this Mortgage as of the day and year first above written.
MORTGAGOR: |
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Daybreak Oil and Gas, Inc. |
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/s/ JAMES F. WESTMORELAND |
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James F. Westmoreland, President |
STATE OF __________)
) ss.
COUNTY OF ________)
The foregoing was acknowledged before me this ________ day of ________, 2017, by James F. Westmoreland, the President of Daybreak Oil and Gas, Inc.
______________________________________
Notary Public, ___________ Co., Michigan
My Commission Expires: __________
DRAFTED BY/RETURN TO:
John A. Piedmonte
Westside Exploration, LLC
P.O. Box 88
Monroe, MI 48161
TELEPHONE: (734) 243-0719
FAX: (734) 243-5503
[Signature Page to Mortgage]
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Exhibit 31.1
Certification
I, James F. Westmoreland, certify that:
(1)
I have reviewed this interim report on Form 10-Q of Daybreak Oil and Gas, Inc.
(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 registrant as of, and for, the periods presented in this report;
(4)
The registrants 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant 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 registrant, 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;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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 principles;
(c)
Evaluated the effectiveness of the registrants 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 registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
(5)
The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants 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 registrants 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 registrants internal control over financial reporting.
Date: July 14, 2017
By /s/ JAMES F. WESTMORELAND
James F. Westmoreland, President, Chief Executive Officer
and interim principal finance and accounting officer
(Principal Executive Officer, Principal Financial Officer and 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 Interim Report of Daybreak Oil and Gas, Inc. on Form 10-Q for the period ending May 31, 2017, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, the undersigned, in the capacity and on the date indicated below, hereby 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: July 14, 2017
By /s/ JAMES F. WESTMORELAND
James F. Westmoreland, President, Chief Executive Officer
and interim principal finance and accounting officer
(Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)