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 November 30, 2020
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 |
|
91-0626366 |
| (State
or other jurisdiction of incorporation or organization) |
|
(I.R.S.
Employer Identification No.) |
| |
|
|
|
1101 N. Argonne Road, Suite A 211,
Spokane Valley, WA |
|
99212 |
| (Address of principal executive
offices) |
|
(Zip
code) |
(509) 232-7674
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report)
Securities registered pursuant to Section 12(b) of the Act:
|
Title of each class |
Trading Symbol(s) |
Name of each exchange
on which registered
|
|
n/a |
n/a |
n/a |
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
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
¨ |
|
Accelerated filer ¨ |
| |
|
|
| Non-accelerated filer þ |
|
Smaller reporting company þ |
| |
|
|
| |
|
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 January 13, 2021 the registrant had
60,491,122 outstanding shares of $0.001 par value
common stock.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL
STATEMENTS
DAYBREAK OIL AND GAS,
INC.
Balance Sheets – Unaudited
| |
|
As of
November 30, 2020
|
|
|
As of
February 29, 2020
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
| CURRENT
ASSETS: |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
61,717 |
|
|
$ |
94,043 |
|
|
Accounts receivable: |
|
|
|
|
|
|
|
|
|
Crude oil sales |
|
|
56,991 |
|
|
|
56,910 |
|
|
Joint interest participants |
|
|
49,183 |
|
|
|
38,366 |
|
|
Prepaid expenses and other current assets |
|
|
78,136 |
|
|
|
51,115 |
|
|
Total current assets |
|
|
246,027 |
|
|
|
240,434 |
|
| |
|
|
|
|
|
|
|
|
| LONG-TERM
ASSETS: |
|
|
|
|
|
|
|
|
|
Crude oil properties, successful efforts method, net |
|
|
|
|
|
|
|
|
| Proved
properties |
|
|
570,226 |
|
|
|
598,735 |
|
| Unproved
properties |
|
|
55,978 |
|
|
|
55,978 |
|
|
Prepaid drilling costs |
|
|
16,452 |
|
|
|
16,452 |
|
|
Operating lease, right-of-use asset |
|
|
— |
|
|
|
5,857 |
|
|
Total long-term assets |
|
|
642,656 |
|
|
|
677,022 |
|
| Total
assets |
|
$ |
888,683 |
|
|
$ |
917,456 |
|
| |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT |
|
|
|
|
|
|
|
|
| CURRENT
LIABILITIES: |
|
|
|
|
|
|
|
|
|
Accounts payable and other accrued liabilities |
|
$ |
1,813,641 |
|
|
$ |
1,555,700 |
|
|
Accounts payable – related parties |
|
|
968,480 |
|
|
|
919,888 |
|
|
Accrued interest |
|
|
111,338 |
|
|
|
73,962 |
|
|
Convertible note payable – related party |
|
|
— |
|
|
|
27,835 |
|
|
12% Notes payable |
|
|
315,000 |
|
|
|
315,000 |
|
|
12% Notes payable – related party |
|
|
250,000 |
|
|
|
250,000 |
|
|
Production revenue payable – current, net of unamortized
discount |
|
|
50,269 |
|
|
|
43,069 |
|
|
Paycheck protection program (PPP) loan |
|
|
74,355 |
|
|
|
— |
|
|
Operating lease liability – current |
|
|
— |
|
|
|
5,857 |
|
|
Line of credit |
|
|
849,145 |
|
|
|
872,401 |
|
|
Total current liabilities |
|
|
4,432,228 |
|
|
|
4,063,712 |
|
| |
|
|
|
|
|
|
|
|
| LONG TERM
LIABILITIES: |
|
|
|
|
|
|
|
|
|
Note payable |
|
|
120,000 |
|
|
|
120,000 |
|
|
Production revenue payable, net of unamortized discount and current
portion |
|
|
1,426,788 |
|
|
|
1,345,202 |
|
|
Asset retirement obligation |
|
|
30,132 |
|
|
|
27,149 |
|
|
Total long-term liabilities |
|
|
1,576,920 |
|
|
|
1,492,351 |
|
| Total
liabilities |
|
|
6,009,148 |
|
|
|
5,556,063 |
|
| |
|
|
|
|
|
|
|
|
| COMMITMENTS AND
CONTINGENCIES |
|
|
|
|
|
|
|
|
| STOCKHOLDERS’
DEFICIT: |
|
|
|
|
|
|
|
|
|
Preferred stock – 10,000,000 shares authorized, $0.001 par
value; |
|
|
— |
|
|
|
— |
|
|
Series A Convertible Preferred stock – 2,400,000 shares authorized,
$0.001 par value, 6% cumulative dividends; 709,568 shares issued
and outstanding |
|
|
710 |
|
|
|
710 |
|
|
Common stock – 200,000,000 shares authorized; $0.001 par value,
60,491,122 and 53,532,364 shares issued and outstanding,
respectively |
|
|
60,491 |
|
|
|
53,532 |
|
|
Additional paid-in capital |
|
|
24,249,081 |
|
|
|
24,223,783 |
|
|
Accumulated deficit |
|
|
(29,430,747 |
) |
|
|
(28,916,632 |
) |
|
Total stockholders’ deficit |
|
|
(5,120,465 |
) |
|
|
(4,638,607 |
) |
|
Total liabilities and stockholders’ deficit |
|
$ |
888,683 |
|
|
$ |
917,456 |
|
The accompanying notes are an integral part of these unaudited
financial statements
DAYBREAK OIL AND GAS,
INC.
Statements of Operations – Unaudited
| |
|
For the Three Months Ended
November 30,
|
|
|
For the Nine Months Ended
November 30,
|
|
| |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
| REVENUE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil sales |
|
$ |
96,322 |
|
|
$ |
141,964 |
|
|
$ |
274,085 |
|
|
$ |
501,377 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| OPERATING
EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production |
|
|
53,581 |
|
|
|
44,733 |
|
|
|
136,218 |
|
|
|
134,276 |
|
|
Exploration and drilling (G&G) |
|
|
73 |
|
|
|
9 |
|
|
|
73 |
|
|
|
123 |
|
|
Depreciation, depletion, and amortization (DD&A) |
|
|
13,491 |
|
|
|
13,288 |
|
|
|
42,318 |
|
|
|
44,210 |
|
|
General and administrative |
|
|
124,792 |
|
|
|
156,622 |
|
|
|
427,345 |
|
|
|
545,055 |
|
|
Total operating expenses |
|
|
191,937 |
|
|
|
214,652 |
|
|
|
605,954 |
|
|
|
723,664 |
|
|
OPERATING LOSS |
|
|
(95,615 |
) |
|
|
(72,688 |
) |
|
|
(331,869 |
) |
|
|
(222,287 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| OTHER EXPENSE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(56,302 |
) |
|
|
(152,135 |
) |
|
|
(182,246 |
) |
|
|
(425,070 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| NET LOSS |
|
|
(151,917 |
) |
|
|
(224,823 |
) |
|
|
(514,115 |
) |
|
|
(647,357 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative convertible preferred stock dividend requirement |
|
|
(31,841 |
) |
|
|
(31,841 |
) |
|
|
(96,223 |
) |
|
|
(96,223 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS |
|
$ |
(183,758 |
) |
|
$ |
(256,664 |
) |
|
$ |
(610,338 |
) |
|
$ |
(743,580 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| NET LOSS PER COMMON
SHARE, basic and diluted |
|
$ |
(0.00 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
60,491,122 |
|
|
|
53,532,364 |
|
|
|
57,081,331 |
|
|
|
53,092,364 |
|
The accompanying notes are an integral part of these unaudited
financial statements
DAYBREAK OIL AND GAS, INC.
Statements of Changes in Stockholders' Deficit
For the Three Months and Nine Months Ended November 30, 2020 and
November 30, 2019
| |
|
Series A
Convertible |
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
| |
|
Preferred Stock |
|
|
Common Stock |
|
|
Paid-In |
|
|
Accumulated |
|
|
|
|
| |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| BALANCE,
FEBRUARY 29, 2020 |
|
|
709,568 |
|
|
$ |
710 |
|
|
|
53,532,364 |
|
|
$ |
53,532 |
|
|
$ |
24,223,783 |
|
|
$ |
(28,916,632 |
) |
|
$ |
(4,638,607 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of warrants issued for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Investor relations
services |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,474 |
|
|
|
— |
|
|
|
1,474 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(196,997 |
) |
|
|
(196,997 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| BALANCE, MAY 31,
2020 |
|
|
709,568 |
|
|
|
710 |
|
|
|
53,532,364 |
|
|
|
53,532 |
|
|
|
24,225,257 |
|
|
|
(29,113,629 |
) |
|
|
(4,834,130 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Conversion of
related party note payable |
|
|
— |
|
|
|
— |
|
|
|
6,958,758 |
|
|
|
6,959 |
|
|
|
20,876 |
|
|
|
— |
|
|
|
27,835 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of warrants issued for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Investor relations
services |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,474 |
|
|
|
— |
|
|
|
1,474 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(165,201 |
) |
|
|
(165,201 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| BALANCE, AUGUST 31,
2020 |
|
|
709,568 |
|
|
|
710 |
|
|
|
60,491,122 |
|
|
|
60,491 |
|
|
|
24,247,607 |
|
|
|
(29,278,830 |
) |
|
|
(4,970,022 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of warrants issued for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Investor relations
services |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,474 |
|
|
|
— |
|
|
|
1,474 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(151,917 |
) |
|
|
(151,917 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, NOVEMBER 30, 2020 |
|
|
709,568 |
|
|
$ |
710 |
|
|
|
60,491,122 |
|
|
$ |
60,491 |
|
|
$ |
24,249,081 |
|
|
$ |
(29,430,747 |
) |
|
$ |
(5,120,465 |
) |
| |
|
Series A
Convertible |
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
| |
|
Preferred Stock |
|
|
Common Stock |
|
|
Paid-In |
|
|
Accumulated |
|
|
|
|
| |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| BALANCE,
FEBRUARY 28, 2019 |
|
|
709,568 |
|
|
$ |
710 |
|
|
|
51,532,364 |
|
|
$ |
51,532 |
|
|
$ |
22,997,759 |
|
|
$ |
(28,161,988 |
) |
|
$ |
(5,111,987 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accounts payable
settlement |
|
|
— |
|
|
|
— |
|
|
|
2,000,000 |
|
|
|
2,000 |
|
|
|
4,000 |
|
|
|
— |
|
|
|
6,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(263,585 |
) |
|
|
(263,585 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| BALANCE, MAY 31,
2019 |
|
|
709,568 |
|
|
|
710 |
|
|
|
53,532,364 |
|
|
|
53,532 |
|
|
|
23,001,759 |
|
|
|
(28,425,573 |
) |
|
|
(5,369,572 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Forgiveness of
liabilities to related parties |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,215,145 |
|
|
|
— |
|
|
|
1,215,145 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(158,949 |
) |
|
|
(158,949 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| BALANCE, AUGUST 31,
2019 |
|
|
709,568 |
|
|
|
710 |
|
|
|
53,532,364 |
|
|
|
53,532 |
|
|
|
24,216,904 |
|
|
|
(28,584,522 |
) |
|
|
(4,313,376 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of warrants issued for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Investor relations
services |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,948 |
|
|
|
— |
|
|
|
2,948 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(224,823 |
) |
|
|
(224,823 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, NOVEMBER 30, 2019 |
|
|
709,568 |
|
|
$ |
710 |
|
|
|
53,532,364 |
|
|
$ |
53,532 |
|
|
$ |
24,219,852 |
|
|
$ |
(28,809,345 |
) |
|
$ |
(4,535,251 |
) |
The accompanying notes are an integral part of these unaudited
financial statements
DAYBREAK OIL AND GAS, INC.
Statements of Cash Flows – Unaudited
| |
|
Nine Months Ended |
|
| |
|
November 30, 2020 |
|
|
November 30, 2019 |
|
| CASH FLOWS FROM
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
| Net
loss |
|
$ |
(514,115 |
) |
|
$ |
(647,357 |
) |
| Adjustments to
reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
| Depreciation,
depletion, amortization and impairment expense |
|
|
42,318 |
|
|
|
44,210 |
|
| Amortization of
debt discount |
|
|
88,786 |
|
|
|
336,658 |
|
| Operating lease
expense in conjunction with right of use asset |
|
|
5,857 |
|
|
|
5,814 |
|
| Warrant issued
for investor relations services |
|
|
4,422 |
|
|
|
2,948 |
|
| Changes in assets
and liabilities: |
|
|
|
|
|
|
|
|
| Accounts
receivable – crude oil sales |
|
|
(81 |
) |
|
|
8,940 |
|
| Accounts
receivable - joint interest participants |
|
|
(10,817 |
) |
|
|
(7,299 |
) |
| Prepaid expenses
and other current assets |
|
|
38,067 |
|
|
|
(42,019 |
) |
| Accounts payable
and other accrued liabilities |
|
|
226,689 |
|
|
|
112,048 |
|
| Accounts payable
- related parties |
|
|
48,592 |
|
|
|
82,674 |
|
| Operating lease
liability in conjunction with right of use asset |
|
|
(5,857 |
) |
|
|
(5,814 |
) |
|
Accrued interest |
|
|
59,120 |
|
|
|
61,103 |
|
| Net
cash used in operating activities |
|
|
(17,019 |
) |
|
|
(48,094 |
) |
| |
|
|
|
|
|
|
|
|
| CASH FLOWS FROM
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
| Additions to line
of credit |
|
|
— |
|
|
|
74,000 |
|
| Proceeds from
paycheck protection program (PPP) loan |
|
|
74,355 |
|
|
|
— |
|
| Insurance
financing repayments |
|
|
(44,662 |
) |
|
|
— |
|
|
Payments on line of credit |
|
|
(45,000 |
) |
|
|
(45,000 |
) |
| Net
cash provided by (used in) financing activities |
|
|
(15,307 |
) |
|
|
29,000 |
|
| |
|
|
|
|
|
|
|
|
| NET DECREASE IN
CASH AND CASH EQUIVALENTS |
|
|
(32,326 |
) |
|
|
(19,094 |
) |
| CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
94,043 |
|
|
|
30,078 |
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
61,717 |
|
|
$ |
10,984 |
|
| |
|
|
|
|
|
|
|
|
| CASH PAID
FOR: |
|
|
|
|
|
|
|
|
| Interest |
|
$ |
19,261 |
|
|
$ |
26,978 |
|
| Income taxes |
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
| SUPPLEMENTAL
CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
| Unpaid
additions to crude oil properties |
|
$ |
10,826 |
|
|
$ |
210 |
|
| Non-cash increase
to line of credit due to monthly interest |
|
$ |
21,744 |
|
|
$ |
23,624 |
|
| Operating lease –
right of use asset and associated liabilities |
|
$ |
— |
|
|
$ |
13,787 |
|
| Forgiveness of
liabilities to related parties |
|
$ |
— |
|
|
$ |
1,215,145 |
|
| Settlement of
related party debt with production revenue interest |
|
$ |
— |
|
|
$ |
250,100 |
|
| Financing of
insurance premiums |
|
$ |
65,088 |
|
|
$ |
— |
|
| Common stock
issued for settlement of related party note payable |
|
$ |
27,835 |
|
|
$ |
— |
|
| Common stock
issued for settlement of accounts payable |
|
$ |
— |
|
|
$ |
6,000 |
|
The accompanying notes are an integral part of these unaudited
financial statements
DAYBREAK OIL AND
GAS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION:
Organization
Originally incorporated as Daybreak Uranium, Inc., (“Daybreak
Uranium”) on March 11, 1955, under the laws of the State of
Washington, Daybreak Uranium was organized to explore for, acquire,
and develop mineral properties in the Western United States. In
August 1955, the assets of Morning Sun Uranium, Inc. were acquired
by Daybreak Uranium. In May 1964, Daybreak Uranium changed its name
to Daybreak Mines, Inc. During 2005, management of the Company
decided to enter the crude oil 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 Company’s crude oil production is sold under contracts
which are market-sensitive. Accordingly, the Company’s financial
condition, results of operations, and capital resources are highly
dependent upon prevailing market prices of, and demand for, crude
oil. These commodity prices are subject to wide fluctuations and
market uncertainties due to a variety of factors that are beyond
the control of the Company. These factors include the level of
global demand for petroleum products, foreign supply of crude oil,
the establishment of and compliance with production quotas by crude
oil-exporting countries, the relative strength of the U.S. dollar,
weather conditions, the price and availability of alternative
fuels, and overall economic conditions, both foreign and domestic,
crude oil disputes between Russia and Saudi Arabia; and national
and international pandemics like the coronavirus outbreak.
Basis of Presentation
The accompanying unaudited interim financial statements and notes
for the Company have been prepared in accordance with accounting
principles generally accepted in the United States of America for
interim financial information and with the instructions to Form
10-Q for quarterly reports under Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the “Exchange Act”). Accordingly,
they do not include all of the information and footnote disclosures
normally required by accounting principles generally accepted in
the United States of America for complete financial statements.
In the opinion of management, all adjustments considered necessary
for a fair presentation of the financial statements have been
included and such adjustments are of a normal recurring nature.
Operating results for the nine months ended November 30, 2020 are
not necessarily indicative of the results that may be expected for
the fiscal year ending February 28, 2021.
These financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the
Company’s Annual Report on Form 10-K for the fiscal year ended
February 29, 2020.
Use of Estimates
In preparing financial statements in conformity with accounting
principles generally accepted in the United States of America,
management is required to make estimates and assumptions. These
estimates and assumptions may affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements, and revenues
and expenses during the reporting period. Actual results could
differ materially from those estimates. The accounting policies
most affected by management’s estimates and assumptions are as
follows:
|
· |
The
reliance on estimates of proved reserves to compute the provision
for depreciation, depletion and amortization (“DD&A”) and to
determine the amount of any impairment of proved
properties; |
|
· |
The
valuation of unproved acreage and proved crude oil properties to
determine the amount of any impairment of crude oil
properties; |
|
· |
Judgment
regarding the productive status of in-progress exploratory wells to
determine the amount of any provision for abandonment;
and |
|
· |
Estimates
regarding abandonment obligations; and |
|
· |
Estimates
regarding projected cash flows used in determining the production
payable discount. |
Earnings per Share
The Company follows ASC Topic 260, Earnings per Share, to
account for the earnings per share. Basic earnings per common share
(“EPS”) calculations are determined by dividing net income (loss)
by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per common share
calculations are determined by dividing net income (loss) by the
weighted average number of common shares and dilutive common share
equivalents outstanding. During periods when common stock
equivalents, if any, are anti-dilutive they are not considered in
the computation.
NOTE 2 — GOING CONCERN:
Financial Condition
The Company’s financial statements for the nine months ended
November 30, 2020 have been prepared on a going concern basis,
which contemplates the realization of assets and the settlement of
liabilities in the normal course of business. The Company has
incurred net operating losses since entering the crude oil
exploration industry and as of November 30, 2020 has an accumulated
deficit of $29.4 million and a working capital deficit
of $4.2 million which raises substantial doubt about
the Company’s ability to continue as a going concern.
Management Plans to Continue as a Going Concern
The Company continues to implement plans to enhance its ability to
continue as a going concern. Daybreak currently has a net revenue
interest (“NRI”) in 20 producing crude oil wells in its East Slopes
Project located in Kern County, California (the “East Slopes
Project”). The revenue from these wells has created a steady and
reliable source of income for the Company. The Company’s average
working interest (“WI”) in these wells is 36.6% and the average net
revenue interest (“NRI”) is 28.4% for these same wells.
In December 2019, the 2019 novel coronavirus (“COVID-19") surfaced
in Wuhan, China. The World Health Organization declared a global
emergency on January 30, 2020, with respect to the outbreak and
several countries, including the United States, Japan, parts of
Europe and Australia have initiated travel restrictions to and from
China. The impacts of the outbreak are unknown and rapidly
evolving. This widespread health crisis and the governmental
restrictions associated with it, have adversely affected demand for
crude oil, depressed crude oil prices, and affected our ability to
access capital. These factors, in turn, have had a negative impact
on our operations, and financial condition as evidenced by the
unprecedented decline in crude oil prices and our revenues during
this same time period.
On March 27, 2020, President Trump signed into law the Coronavirus
Aid, Relief, and Economic Security Act commonly referred to as the
CARES Act. One component of the CARES Act was the paycheck
protection program (“PPP”) which provides small business with the
resources needed to maintain their payroll and cover applicable
overhead. The PPP is implemented by the Small Business
Administration (“SBA”) with support from the Department of the
Treasury. The PPP provides funds to pay up to eight weeks of
payroll costs including benefits. Funds can also be used to pay
interest on mortgages, rent, and utilities. The Company applied
for, and was accepted to participate in this program. On May 11,
2020, the Company received funding for approximately $74,355. We
plan on participating in any future plans that become available to
help businesses deal with the negative impact of this outbreak.
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 volatility
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 success in
securing financing for its drilling programs.
The Company believes that its liquidity will improve when there is
a sustained improvement in hydrocarbon prices. Daybreak’s sources
of funds in the past have included the debt or equity markets and
the sale of assets. 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.
Daybreak’s financial statements as of November 30, 2020 do not
include any adjustments that might result from the inability to
implement or execute the Company’s plans to improve its ability to
continue as a going concern.
NOTE 3 —
CONCENTRATION
RISK:
Substantially all of the Company’s trade accounts receivable
consists of receivables from the sale of crude oil production from
operations by the Company and receivables from the Company’s
working interest partners in crude oil projects in which the
Company acts as Operator of the project. This concentration of
customers and joint interest owners may impact the Company’s
overall credit risk, as these entities could be affected by similar
changes in economic conditions including lower crude oil prices as
well as other related factors. Trade accounts receivable are
generally not collateralized.
At the Company’s East Slopes project in California, there is only
one buyer for the purchase of crude oil production. The Company has
no natural gas production in California. At November 30, 2020 and
February 29, 2020 this one customer represented 100.0% of crude oil
sales receivable. If this buyer is unable to resell its products or
if they lose a significant sales contract, the Company may incur
difficulties in selling its crude oil production.
Crude oil sales receivables balances of $56,991 and $56,910 at
November 30, 2020 and February 29, 2020, were from one customer,
Plains Marketing; and represent crude oil sales that occurred in
November and February 2020, respectively.
Joint interest participant receivables balances of $49,183 and
$38,366 at November 30, 2020 and February 29, 2020, respectively,
represent amounts due from working interest partners in California,
where the Company is the Operator. There were no allowances for
doubtful accounts for the Company’s trade accounts receivable at
November 30, 2020 and February 29, 2020, as the joint interest
owners have a history of paying their obligations.
NOTE 4 — CRUDE OIL PROPERTIES:
Crude oil property balances at November 30, 2020 and February 29,
2020 are set forth in the table below.
| |
|
November 30, 2020 |
|
|
February 29, 2020 |
|
| Proved leasehold
costs |
|
$ |
115,119 |
|
|
$ |
115,119 |
|
| Costs of wells and development |
|
|
2,289,016 |
|
|
|
2,278,190 |
|
| Capitalized
exploratory well costs |
|
|
1,341,494 |
|
|
|
1,341,494 |
|
| Cost of proved
crude oil properties |
|
|
3,745,629 |
|
|
|
3,734,803 |
|
| Accumulated
depletion, depreciation, amortization and impairment |
|
|
(3,175,403 |
) |
|
|
(3,136,068 |
) |
| Proved crude oil
properties, net |
|
$ |
570,226 |
|
|
$ |
598,735 |
|
| Michigan unproved
crude oil properties |
|
|
55,978 |
|
|
|
55,978 |
|
| Total proved
and unproved crude oil properties, net |
|
$ |
626,204 |
|
|
$ |
654,713 |
|
NOTE 5 — ACCOUNTS PAYABLE:
On March 1, 2009, the Company became the operator for its East
Slopes Project located in Kern County, California. Additionally,
the Company then assumed certain original defaulting partners’
approximate $1.5 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 liability, $244,849 remains unpaid and is
included in both the November 30, 2020 and February 29, 2020
accounts payable balances. Payments on this liability has been
delayed until the Company’s cash flow situation improves. On
October 17, 2018, a working interest partner in California filed a
UCC financing statement in regards to payables owed to the partner
by the Company. At November 30, 2020 and February 29, 2020, the
balance owed this working interest partner was $91,422 and
$101,544, respectively, and is included in the approximate $1.81
million and 1.56 million accounts payable balance at November 30,
2020 and February 29, 2020, respectively.
NOTE 6 — ACCOUNTS PAYABLE- RELATED
PARTIES:
The November 30, 2020 and February 29, 2020 accounts payable –
related parties balances of approximately $0.97 million and $0.92
million respectively, were comprised primarily of deferred salaries
of one of the Company’s Executive Officers and certain employees;
directors’ fees; expense reimbursements; and deferred interest
payments on a 12% Subordinated Notes owed to the Company’s
Chairman, President and Chief Executive Officer. Payment of any
other deferred items has been delayed until the Company’s cash flow
situation improves.
NOTE 7 — SHORT-TERM AND LONG-TERM BORROWINGS:
Convertible Promissory Note Payable – Related
Party
During the twelve months ended February 29, 2020, the Company’s
Chairman, President and Chief Executive Officer loaned the Company
$27,835 for general operating expenses under a Convertible Note
Purchase Agreement. The Note had a maturity date of July 12, 2020
and carried no interest, fees or penalties. By the terms of
the Convertible Note Purchase Agreement, Mr. Westmoreland had also
agreed to loan up to an additional $22,165 in funding for the
Company, if and when agreed upon, but this additional amount was
not ever loaned pursuant to the Note.
On July 12, 2020, the Convertible Promissory Note issued on January
14, 2020 matured. The Note was not repaid in full on or prior to
the maturity date, so, pursuant to the terms of the conversion
feature of the Convertible Promissory Note, the $27,835 balance of
the Convertible Note was automatically converted into the Company’s
common stock shares on July 13, 2020. The conversion price was
$0.004 per share resulting in 6,958,758 shares being issued. The
balance of the Note was $-0- and $27,835 at November 30, 2020 and
February 29, 2020, respectively.
12% Subordinated Notes
The Company’s 12% Subordinated Notes (“the Notes”) issued pursuant
to a January 2010 private placement offering to accredited
investors, resulted in $595,000 in gross proceeds (of which
$250,000 was from a related party) to the Company and accrue
interest at 12% per annum, payable semi-annually on January 29th
and July 29th. On January 29, 2015, the Company and 12 of the 13
holders of the Notes agreed to extend the maturity date of the
Notes for an additional two years to January 29, 2017. Effective
January 29, 2017, the maturity date of the Notes and the expiration
date of the warrants that were issued in conjunction with the Notes
were extended for an additional two years to January 29, 2019. The
980,000 warrants held by ten noteholders expired on January 29,
2019.
The Company has informed the Note holders that the payment of
principal and final interest will be late and is subject to future
financing being completed. The Notes principal of $565,000 was
payable in full at the amended maturity date of the Notes, and has
not been paid. The terms of the Notes, state that should the Board
of Directors decide that the payment of the principal and any
unpaid interest would impair the financial condition or operations
of the Company, the Company may then elect a mandatory conversion
of the unpaid principal and interest into the Company’s common
stock at a conversion rate equal to 75% of the average closing
price of the Company’s common stock over the 20 consecutive trading
days preceding December 31, 2018. As of November 30, 2020, no
conversion of the unpaid principal and interest into the Company’s
common stock has occurred. The accrued interest on the 12% Notes at
November 30, 2020 and February 29, 2020 was $323,324 and $272,428,
respectively. There was no unamortized debt discount remaining at
November 30, 2020 and February 29, 2020, respectively.
12% Note balances at November 30, 2020 and February 29, 2020 are
set forth in the table below:
| |
|
November 30, 2020 |
|
|
February 29, 2020 |
|
| 12% Subordinated
Notes |
|
$ |
315,000 |
|
|
$ |
315,000 |
|
| 12% Subordinated
Notes – related party |
|
|
250,000 |
|
|
|
250,000 |
|
| Total 12%
Subordinated Note balance |
|
$ |
565,000 |
|
|
$ |
565,000 |
|
12% Note balances – accrued interest at November 30, 2020 and
February 29, 2020 are set forth in the table below:
| |
|
November 30, 2020 |
|
|
February 29, 2020 |
|
| Accrued interest 12%
Subordinated Notes |
|
$ |
88,338 |
|
|
$ |
59,962 |
|
| Accrued interest
12% Subordinated Notes – related party |
|
|
234,986 |
|
|
|
212,466 |
|
| Total accrued
interest 12% Subordinated Notes |
|
$ |
323,324 |
|
|
$ |
272,428 |
|
The accrued interest owed on the 12% Subordinated Note to the
related party is presented on the Company’s Balance Sheets under
the caption Accounts payable – related party rather than
under the caption Accrued interest.
Production Revenue Payable
Since December 2018, the Company has been conducting a fundraising
program to fund the drilling of future wells in California and
Michigan and to settle some of its historical debt. The purchasers
of production payment interests will receive a production revenue
payment on future wells to be drilled in California and Michigan in
exchange for their purchase. As of November 30, 2020, the
production revenue payment program balance was $950,100 of which
$550,100 was owed to a related party - the Company’s Chairman,
President and Chief Executive Officer.
The production payment interest entitles the purchasers to receive
production payments equal to twice their original amount paid,
payable from a percentage of the Company’s future net production
payments from wells drilled after the date of the purchase and
until the Production Payment Target (as described below) is met.
The Company shall pay fifty percent of its net production
payments from the relevant wells to the purchasers until each
purchaser has received two times the purchase price (the
“Production Payment Target”). Once the Company pays the purchasers
amounts equal to the Production Payment Target, it shall thereafter
pay a pro-rated eight percent (8%) of $1.3 million on its net
production payments from the relevant wells to each of the
purchasers. However, if the total raised is less than the target
$1.3 million, then the payment will be a proportionate amount of
the eight percent (8%). Additionally, if the Production Payment
Target is not met within the first three years, the Company shall
pay seventy-five percent of its production payments from the
relevant wells to the purchasers until the Production Payment
Target is met.
The Company accounted for the amounts received from these sales in
accordance with ASC 470-10-25 and 470-10-35 which require amounts
recorded as debt to be amortized under the interest method as
described in ASC 835-30, Interest Method. Consequently, the program
balance of $950,100 has been recognized as a production revenue
payable. The Company determined an effective interest rate based on
future expected cash flows to be paid to the holders of the
production payment interests. This rate represents the discount
rate that equates estimated cash flows with the initial proceeds
received from the sales and is used to compute the amount of
interest to be recognized each period. Estimating the future cash
outflows under this agreement requires the Company to make certain
estimates and assumptions about future revenues and payments and
such estimates are subject to significant variability. Therefore,
the estimates are likely to change which may result in future
adjustments to the accretion of the interest expense and the
amortized cost based carrying value of the related payables.
Accordingly, the Company has estimated the cash flows associated
with the production revenue payments and determined a discount of
$998,879 as of November 30, 2020, which is being accounted as
interest expense over the estimated period over which payments will
be made based on expected future revenue streams. For the nine
months ended November 30, 2020 and 2019, amortization of the debt
discount on these payables amounted to $88,786 and $336,658,
respectively, which has been included in interest expense in the
statements of operations.
Production revenue payable balances at November 30, 2020 and
February 29, 2020 are set forth in the table below:
| |
|
November 30, 2020 |
|
|
February 29, 2020 |
|
| Estimated payments of
production revenue payable |
|
$ |
1,948,979 |
|
|
$ |
2,054,766 |
|
| Less: unamortized
discount |
|
|
(471,922 |
) |
|
|
(666,495 |
) |
| |
|
|
1,477,057 |
|
|
|
1,388,271 |
|
| Less: current
portion |
|
|
(50,269 |
) |
|
|
(43,069 |
) |
| Net production
revenue payable – long-term |
|
$ |
1,426,788 |
|
|
$ |
1,345,202 |
|
Paycheck Protection Program (PPP) Loan
On March 27, 2020, President Trump signed into law the Coronavirus
Aid, Relief, and Economic Security Act commonly referred to as the
CARES Act. One component of the CARES Act was the paycheck
protection program (“PPP”) which provides small business with the
resources needed to maintain their payroll and cover applicable
overhead. The PPP is implemented by the Small Business
Administration (“SBA”) with support from the Department of the
Treasury. The PPP provides funds to pay up to eight weeks of
payroll costs including benefits. Funds can also be used to pay
interest on mortgages, rent, and utilities. The Company applied
for, and was accepted to participate in this program. On May 11,
2020, the Company received funding for approximately $74,355.
The loan is a two-year loan with a maturity date of May 5, 2022.
The loan bears an annual interest rate of 1%. The loan shall be
payable monthly with the first six monthly payments deferred. It is
the Company’s intent to apply for loan forgiveness under the
provisions of Section 1106 of the CARES Act. Loan forgiveness is
subject to the sole approval of the SBA. The Company is eligible
for loan forgiveness in an amount equal to payments made during the
8-week period beginning on the Loan date, with the exception that
no more than 25.0% of the amount of loan forgiveness may be for
expenses other than payroll expenses. The Company used all loan
proceeds to partially subsidize direct payroll expenses.
Line of Credit
The Company has an existing $890,000 line of credit for working
capital purposes with UBS Bank USA (“UBS”), established pursuant to
a Credit Line Agreement dated October 24, 2011 that is secured by
the personal guarantee of its Chairman, President and Chief
Executive Officer. On July 10, 2017, a $700,000 portion of the
outstanding line of credit balance was converted to a 24 month
fixed term annual interest rate of 3.244% with interest payable
monthly. On July 10, 2019, the 24-month fixed term loan amount of
$700,000 was renewed at the same annual percentage interest rate of
3.244% for an additional 24 months. The remaining principal
balance of the line of credit has a stated reference rate of 0.249%
+ 337.5 basis points with interest payable monthly. The reference
rate is based on the 30 day LIBOR (“London Interbank Offered Rate”)
and is subject to change from UBS.
During the nine months ended November 30, 2020 and 2019, the
Company received advances on the line of credit of $-0- and
$74,000, respectively. During the nine months ended November 30,
2020 and 2019, the Company made payments to the line of credit of
$45,000 and $45,000, respectively. Interest converted to principal
for the nine months ended November 30, 2020 and 2019 was $21,744
and $23,624, respectively. At November 30, 2020 and February 29,
2020, the line of credit had an outstanding balance of $849,145 and
$872,401, respectively.
Note Payable
In December 2018, the Company was able to settle an outstanding
balance owed to one of its third-party vendors. This settlement
resulted in a $120,000 note payable issued to the vendor.
Additionally, the Company agreed to issue 2,000,000 shares of the
Company’s common stock as a part of the settlement agreement. Based
on the closing price of the Company’s common stock on the date of
the settlement agreement, the value of the common stock transaction
was determined to be $6,000. The common stock shares were issued
during the twelve months ended February 29, 2020. The note has a
maturity date of January 1, 2022 and bears an interest rate of 10%
rate per annum. Monthly interest is accrued and payable on January
1st of each anniversary date through maturity of the
note. At November 30, 2020, the note principal balance of $120,000
and the accrued interest had not been paid and were outstanding. At
November 30, 2020 and February 29, 2020, the accrued interest on
the Note was $23,000 and $14,000, respectively.
Encumbrances
On October 17, 2018, a working interest partner in California filed
a UCC financing statement in regards to payable amounts owed to the
partner by the Company. As of November 30, 2020, we had no
encumbrances on our crude oil project in Michigan.
NOTE 8 — LEASES:
The Company leases approximately 988 rentable square feet of office
space from an unaffiliated third party for our corporate office
located in Spokane Valley, Washington. Additionally, we lease
approximately 416 and 695 rentable square feet from unaffiliated
third parties for our regional operations office in Friendswood,
Texas and storage and auxiliary office space in Wallace, Idaho,
respectively. The lease in Friendswood was a 24 month lease that
expired in October 2020. The new lease in Friendswood is a 12 month
lease and as such is considered a short-term lease. The Company has
elected to not apply the recognition requirements of ASC 842 to
this short-term lease. The Spokane Valley and Wallace leases are
also short-term leases currently on a month-to-month basis. The
Company’s lease agreements do not contain any residual value
guarantees, restrictive covenants or variable lease payments. The
Company has not entered into any financing leases.
The Balance Sheet classification of lease assets and liabilities is
as follows:
| |
|
November 30, 2020 |
|
|
February 29, 2020 |
|
|
Assets |
|
|
|
|
|
|
|
|
| Operating
lease right-of use assets, beginning balance |
|
$ |
5,857 |
|
|
$ |
13,787 |
|
|
Current period amortization |
|
|
(5,857 |
) |
|
|
(7,930 |
) |
| Total
operating lease right-of-use asset |
|
|
— |
|
|
|
5,857 |
|
| |
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
| Operating lease
liability – current |
|
|
— |
|
|
|
5,857 |
|
|
Operating lease liability – long-term |
|
|
— |
|
|
|
— |
|
| Total
lease liabilities |
|
$ |
— |
|
|
$ |
5,857 |
|
Rent expense for the nine months ended November 30, 2020 and 2019
was $17,642 and $17,842, respectively.
NOTE 9 — 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 Company’s preferred
stock may be entitled to preference over the common stock with
respect to the distribution of assets of the Company in the event
of liquidation, dissolution, or winding-up of the Company, whether
voluntarily or involuntarily, or in the event of any other
distribution of assets of the Company among its shareholders for
the purpose of winding-up its affairs. The authorized but unissued
shares of preferred stock may be divided into and issued in
designated series from time to time by one or more resolutions
adopted by the Board of Directors. The directors in their sole
discretion shall have the power to determine the relative powers,
preferences, and rights of each series of preferred stock.
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 November 30, 2020 and
February 29, 2020, there were 709,568 shares issued and
outstanding, respectively, that had not been converted into our
common stock. As of November 30, 2020, 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.
|
Fiscal Period Ended |
|
Shares of Series A Preferred
Converted to Common Stock
|
|
Shares of Common Stock
Issued from Conversion
|
|
Number of
Accredited Investors
|
|
Periods prior to February 29,
2014 |
|
662,200 |
|
1,986,600 |
|
41 |
| February 28, 2015 |
|
3,000 |
|
9,000 |
|
1 |
| February 29, 2016 |
|
10,000 |
|
30,000 |
|
1 |
| February 28, 2017 |
|
— |
|
— |
|
— |
| February 28, 2018 |
|
14,997 |
|
44,991 |
|
1 |
| February 28, 2019 |
|
— |
|
— |
|
— |
| February 29, 2020 |
|
— |
|
— |
|
— |
| November 30, 2020 |
|
— |
|
— |
|
— |
|
Totals |
|
690,197 |
|
2,070,591 |
|
44 |
Holders of Series A Preferred shall accrue dividends, in the amount
of 6% of the original purchase price per annum. Dividends may be
paid in cash or common stock at the discretion of the Company.
Dividends are cumulative whether or not in any dividend period or
periods the Company has assets legally available for the payment of
such dividends. Accumulations of dividends on Series A Preferred do
not bear interest. Dividends are payable upon declaration by the
Board of Directors.
As of November 30, 2020 no dividends have been declared or paid.
Dividends earned since issuance for each fiscal year and the nine
months ended November 30, 2020 are set forth in the table
below:
|
Fiscal Period Ended |
|
Shareholders at
Period End
|
|
Accumulated
Dividends
|
|
Periods prior to February 28,
2014 |
|
|
|
$ |
1,447,943 |
|
February 28, 2015 |
|
58 |
|
|
132,634 |
|
February 29, 2016 |
|
57 |
|
|
130,925 |
|
February 28, 2017 |
|
57 |
|
|
130,415 |
|
February 28, 2018 |
|
56 |
|
|
128,231 |
|
February 28, 2019 |
|
56 |
|
|
127,714 |
|
February 29, 2020 |
|
56 |
|
|
128,063 |
|
November 30, 2020 |
|
56 |
|
|
96,223 |
| |
|
|
|
$ |
2,322,148 |
Common Stock
The Company is authorized to issue up to 200,000,000 shares of
$0.001 par value common stock of which 60,491,122 and 53,532,364
shares were issued and outstanding as of November 30, 2020 and
February 29, 2020, respectively.
|
|
|
Common Stock
Balance
|
|
|
Par Value |
|
| Common stock, Issued
and Outstanding, February 28, 2019 |
|
|
51,532,364 |
|
|
|
|
|
| Issuance of
common stock to settle accounts payable |
|
|
2,000,000 |
|
|
$ |
2,000 |
|
| Common stock,
Issued and Outstanding, February 29, 2020 |
|
|
53,532,364 |
|
|
|
|
|
| Issuance of
common stock to settle related party note payable |
|
|
6,958,758 |
|
|
$ |
6,959 |
|
| Common
stock, Issued and Outstanding, November 30, 2020 |
|
|
60,491,122 |
|
|
|
|
|
NOTE 10 — WARRANTS:
During the twelve months ended February 29, 2020 there were 2.1
million warrants issued to a third party for investor relations
services. The fair value of the warrants was determined by the
Black-Scholes pricing model, was $17,689, and is being amortized
over the three year vesting period of the warrants. The
Black-Scholes valuation encompassed the following assumptions: a
risk free interest rate of 1.68%; volatility rate of 260.23%; and a
dividend yield of 0.0%.
The warrants contains a vesting blocking provision that prevents
the vesting of any warrants that such vesting would cause the
warrant holder’s beneficial ownership (as such term is defined in
Section 13d-3 of the Securities Exchange Act of 1934, as amended)
to exceed more than four and ninety-nine one-hundredths percent
(4.99%) of the Company’s outstanding Common Stock. The foregoing
restriction may not be waived by either party.
The warrants vest in equal parts over a three year period beginning
on January 2, 2020 and all warrants expire on January 2, 2024. At
November 30, 2020, both the outstanding warrants and the
exercisable have a weighted average exercise price of $0.01, a
weighted average remaining life of 3.08 years, and an intrinsic
value of -$0-. For the nine months ended November 30, 2020 and
2019, the recorded amount of warrant expense was $4,422 and $2,948,
respectively.
Warrant activity for the nine months ended November 30, 2020 is set
forth in the table below:
| |
|
Warrants |
|
Weighted Average
Exercise Price
|
|
Warrants outstanding, February 29,
2020 |
|
2,100,000 |
|
$ |
0.01 |
| |
|
|
|
|
|
|
Changes during the nine months ended
November 30, 2020: |
|
|
|
|
|
|
Issued |
|
— |
|
$ |
— |
|
Warrants outstanding, November 30,
2020 |
|
2,100,000 |
|
$ |
0.01 |
|
Warrants exercisable, November 30,
2020 |
|
528,507 |
|
$ |
0.01 |
NOTE 11 — INCOME TAXES:
On December 22, 2017, the federal government enacted a tax bill
H.R.1, an act to provide for reconciliation pursuant to Titles II
and V of the concurrent resolution on the budget for fiscal year
2018, commonly referred to as the Tax Cuts and Jobs Act. The Tax
Cuts and Jobs Act contains significant changes to corporate
taxation, including, but not limited to, reducing the U.S. federal
corporate income tax rate from 35% to 21% and modifying or limiting
many business deductions. The Company has re-measured its deferred
tax liabilities based on rates at which they are expected to be
utilized in the future, which is generally 21%.
Reconciliation between actual tax expense (benefit) and income
taxes computed by applying the U.S. federal income tax rate and
state income tax rates to income from continuing operations before
income taxes is set forth in the table below:
| |
|
November 30, 2020 |
|
|
February 29, 2020 |
|
| Computed at U.S. and
state statutory rates |
|
$ |
(153,412 |
) |
|
$ |
(225,186 |
) |
| Permanent differences |
|
|
28,880 |
|
|
|
111,854 |
|
| Changes in
valuation allowance |
|
|
124,532 |
|
|
|
113,332 |
|
|
Total |
|
$ |
— |
|
|
$ |
— |
|
Tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred liabilities are
set forth in the table below:
| |
|
November 30, 2020 |
|
|
February 29, 2020 |
|
| Deferred tax assets: |
|
|
|
|
|
|
|
|
| Net
operating loss carryforwards |
|
$ |
5,578,754 |
|
|
$ |
5,463,014 |
|
| Crude oil properties |
|
|
59,114 |
|
|
|
50,322 |
|
| Stock based compensation |
|
|
66,187 |
|
|
|
66,187 |
|
| Other |
|
|
27,838 |
|
|
|
27,838 |
|
| Less valuation
allowance |
|
|
(5,731,893 |
) |
|
|
(5,607,361 |
) |
|
Total |
|
$ |
— |
|
|
$ |
— |
|
At November 30, 2020, the Company had estimated net operating loss
(“NOL”) carryforwards for federal and state income tax purposes of
approximately $18,695,555 which will begin to expire, if unused,
beginning in 2024. Under the Tax Cuts and Jobs Act, the NOL portion
of the loss incurred in the 2018 and 2020 period of $340,749 and
$339,299, respectively, and the loss incurred for the nine months
ended November 30, 2020 in the amount of $387,867 will not expire
and will carry over indefinitely. The valuation allowance increased
$124,532 for the nine months ended November 30, 2020
and increased approximately $113,332 for the year
ended February 29, 2020, respectively. Section 382 of the Internal
Revenue Code places annual limitations on the Company’s net
operating loss (NOL) carryforward.
The above estimates are based on management’s decisions concerning
elections which could change the relationship between net income
and taxable income. Management decisions are made annually and
could cause estimates to vary significantly. The Company files
federal income tax returns with the United States Internal Revenue
Service and state income tax returns in various state tax
jurisdictions. As a general rule the Company’s tax returns for the
fiscal years after 2017 currently remain subject to examinations by
appropriate tax authorities. None of our tax returns are under
examination at this time.
NOTE 12 — COMMITMENTS AND CONTINGENCIES:
Various lawsuits, claims and other contingencies arise in the
ordinary course of the Company’s business activities. While the
ultimate outcome of any future contingency is not determinable at
this time, management believes that any liability or loss resulting
therefrom will not materially affect the financial position,
results of operations or cash flows of the Company.
The Company, as an owner or lessee and operator of crude oil
properties, is subject to various federal, state and local laws and
regulations relating to discharge of materials into, and protection
of, the environment. These laws and regulations may, among other
things, impose liability on the lessee under a crude oil lease for
the cost of pollution clean-up resulting from operations and
subject the lessee to liability for pollution damages. In some
instances, the Company may be directed to suspend or cease
operations in the affected area. The Company maintains insurance
coverage that is customary in the industry, although the Company is
not fully insured against all environmental risks.
The Company is not aware of any environmental claims existing as of
November 30, 2020. There can be no assurance, however, that current
regulatory requirements will not change or that past non-compliance
with environmental issues will not be discovered on the Company’s
crude oil properties.
NOTE 13 — SUBSEQUENT EVENTS:
On December 22, 2020, the Company entered into a Secured Promissory
Note (the “Note”), as borrower, with James Forrest
Westmoreland and Angela Marie Westmoreland, Co-Trustees of the
James and Angela Westmoreland Revocable Trust, or its assigns (the
“Noteholder”), as the lender. James F. Westmoreland is the
Company’s Chairman, President and Chief Executive Officer. Pursuant
to the Note, the Noteholder loaned the Company an aggregate
principal amount of $155,548. The Note bears an interest rate of
2.25% and requires monthly payments on the Note balance until
repaid in full. The required monthly payment is $1,048. The
maturity date of the Note is December 21, 2036. The obligations
under the Note are secured by a lien on and security interest in
the Company’s oil and gas assets located in Kern County,
California, as described in a deed of trust entered into by the
Company in favor of the Noteholder to secure the obligations under
the Note. Such lien shall be a first priority lien, subject only to
a pre-existing lien filed by a working interest partner of the
Company.
The Company may prepay the Note at any time. Upon the occurrence of
any Event of Default and expiration of any applicable cure period,
and at any time thereafter during the continuance of such event of
default, the Noteholder may at its option, by written notice to the
Company: (a) declare the entire principal amount of the Note,
together with all accrued interest thereon and all other amounts
payable hereunder, immediately due and payable; (b) exercise any of
its remedies with respect to the collateral set forth in the Deed
of Trust; and/or (c) exercise any or all of its other rights,
powers or remedies under applicable law.
ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is management’s assessment of the current
and historical financial and operating results of the Company and
of our financial condition. It is intended to provide information
relevant to an understanding of our financial condition, changes in
our financial condition and our results of operations and cash
flows and should be read in conjunction with our unaudited
financial statements and notes thereto included elsewhere in this
Quarterly Report on Form 10-Q for the nine months ended November
30, 2020 and in our Annual Report on Form 10-K for the year ended
February 29, 2020. References to “Daybreak”, the “Company”, “we”,
“us” or “our” mean Daybreak Oil and Gas, Inc.
Cautionary Statement Regarding Forward-Looking
Statements
Certain statements contained in our Management’s Discussion and
Analysis of Financial Condition and Results of Operations
(“MD&A”) are intended to be covered by the safe harbor provided
for under Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Exchange Act.
All statements other than statements of historical fact contained
in this MD&A report are inherently uncertain and are
forward-looking statements. Statements that relate to results or
developments that we anticipate will or may occur in the future are
not statements of historical fact. Words such as “anticipate,”
“believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,”
“predict,” “project,” “will” and similar expressions identify
forward-looking statements. Examples of forward-looking statements
include, without limitation, statements about the following:
|
· |
Our
future operating results; |
|
· |
Our
future capital expenditures; |
|
· |
Our
expansion and growth of operations; and |
|
· |
Our
future investments in and acquisitions of crude oil
properties. |
We have based these forward-looking statements on assumptions and
analyses made in light of our experience and our perception of
historical trends, current conditions, and expected future
developments. However, you should be aware that these
forward-looking statements are only our predictions and we cannot
guarantee any such outcomes. Future events and actual results may
differ materially from the results set forth in or implied in the
forward-looking statements. Important factors that could cause
actual results to differ materially from our expectations include,
but are not limited to, the following risks and uncertainties:
|
· |
General economic and business
conditions; |
|
· |
National and international pandemics such as the
novel coronavirus COVID-19 outbreak; |
|
· |
Exposure to market risks in our financial
instruments; |
|
· |
Fluctuations in worldwide prices and demand for
crude oil; |
|
· |
Our
ability to find, acquire and develop crude oil
properties; |
|
· |
Fluctuations in the levels of our crude oil
exploration and development activities; |
|
· |
Risks
associated with crude oil exploration and development
activities; |
|
· |
Competition for raw materials and customers in
the crude oil industry; |
|
· |
Technological changes and developments in the
crude oil industry; |
|
· |
Legislative and regulatory uncertainties,
including proposed changes to federal tax law and climate change
legislation, regulation of hydraulic fracturing and potential
environmental liabilities; |
|
· |
Our
ability to continue as a going concern; |
|
· |
Our
ability to secure financing under any commitments as well as
additional capital to fund operations; and |
|
· |
Other
factors discussed elsewhere in this Form 10-Q; in our other public
filings and press releases; and discussions with Company
management. |
Our reserve estimates are determined through a subjective process
and are subject to revision.
In December 2019, the 2019 novel coronavirus (“COVID-19") surfaced
in Wuhan, China. The World Health Organization declared a global
emergency on January 30, 2020, with respect to the outbreak and
several countries, including the United States, Japan and Australia
have initiated travel restrictions to and from China. The full
economic impact of the outbreak is unknown and rapidly evolving.
This widespread health crisis and the governmental restrictions
associated with it, have adversely affected demand for crude oil
and natural gas, depressed crude oil prices, and affected our
ability to access capital. These factors, in turn, have had a
negative impact on our operations, and financial condition as
evidenced by the unprecedented decline in crude oil prices and our
revenues during this same time period.
Should one or more of the risks or uncertainties described above or
elsewhere in our Form 10-K for the year ended February 29, 2020 and
in this Form 10-Q for the nine months ended November 30, 2020
occur, or should any underlying assumptions prove incorrect, our
actual results and plans could differ materially from those
expressed in any forward-looking statements. We specifically
undertake no obligation to publicly update or revise any
information contained in any forward-looking statement or any
forward-looking statement in its entirety, whether as a result of
new information, future events, or otherwise, except as required by
law.
All forward-looking statements attributable to us are expressly
qualified in their entirety by this cautionary statement.
Introduction and Overview
We are an independent crude oil exploration, development and
production company. Our basic business model is to increase
shareholder value by finding and developing crude oil reserves
through exploration and development activities, and selling the
production from those reserves at a profit. To be successful, we
must, over time, be able to find crude oil reserves and then sell
the resulting production at a price that is sufficient to cover our
finding costs, operating expenses, administrative costs and
interest expense, plus offer us a return on our capital investment.
A secondary means of generating returns can include the sale of
either producing or non-producing lease properties.
Our longer-term success depends on, among many other factors, the
acquisition and drilling of commercial grade crude oil properties
and on the prevailing sales prices for crude oil along with
associated operating expenses. The volatile nature of the energy
markets makes it difficult to estimate future prices of crude oil
and natural gas; however, any prolonged period of depressed prices
or market volatility, would have a material adverse effect on our
results of operations and financial condition.
Our operations are focused on identifying and evaluating
prospective crude oil 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.
Our management cannot provide any assurances that Daybreak will
ever operate profitably. While we have positive cash flow from our
crude oil operations in California, we have not yet generated
sustainable positive cash flow or earnings on a company-wide basis.
As a small company, we are more susceptible to the numerous
business, investment and industry risks that have been described in
Item 1A. Risk Factors of our Annual Report on Form 10-K for the
fiscal year ended February 29, 2020 and in Part III, Item 1A. Risk
Factors of this 10-Q Report. Throughout this Quarterly Report on
Form 10-Q, crude oil is shown in barrels (“Bbls”); natural gas is
shown in thousands of cubic feet (“Mcf”) unless otherwise
specified, and hydrocarbon totals are expressed in barrels of crude
oil equivalent (“BOE”).
Below is brief summary of our crude oil projects in California and
Michigan. Refer to our discussion in Item 2. Properties, in our
Annual Report on Form 10-K for the year ended February 29, 2020 for
more information on our multi-well oilfield project in California
and our exploratory joint drilling project in Michigan.
Kern County, California (East Slopes Project)
The East Slopes Project is located in the southeastern part of the
San Joaquin Basin near Bakersfield, California. Drilling targets
are porous and permeable sandstone reservoirs that exist at depths
of 1,200 feet to 4,500 feet. Since January 2009, we have
participated in the drilling of 25 wells in this project. We have
been the Operator at the East Slopes Project since March 2009.
The crude oil produced from our acreage in the Vedder Sand is
considered heavy oil. The gravity of the crude oil ranges from
14° to 16° API (American Petroleum Institute)
gravity and must be heated to separate and remove water prior to
sale. Our crude oil wells in the East Slopes Project produce from
five reservoirs at our Sunday, Bear, Black, Ball and Dyer Creek
locations. The Sunday property has six producing wells, while the
Bear property has nine producing wells. The Black property is the
smallest of all currently producing reservoirs, and currently has
two producing wells at this property. The Ball property also has
two producing wells while the Dyer Creek property has one producing
well. During the nine months ended November 30, 2020 we had
production from 20 vertical crude oil wells. Our average working
interest (“WI”) and net revenue interest (“NRI”) in these 20 wells
is 36.6% and 28.4%, respectively.
When funding is available, we plan on acquiring additional acreage
exhibiting the same seismic characteristics and on trend with the
Bear, Black and Dyer Creek reservoirs. Some of these prospects, if
successful, would utilize the Company’s existing production
facilities. In addition to the current field development, there are
several other exploratory prospects that have been identified from
the seismic data, which we plan to drill in the future.
California Drilling Plans
Planned drilling activity and implementation of our oilfield
development plan will not begin until financing is put in place. We
do not plan to make any capital investments within the East Slopes
Project area for the remainder of the 2020-2021 fiscal year. When
additional financing is secured, we plan to spend approximately
$525,000 drilling four development wells in the 2021-2022 fiscal
year.
Michigan Acreage Acquisition
In January 2017, Daybreak acquired a 30% working interest in 1,400
acres in the Michigan Basin. The leases have been secured and
multiple targets were identified through a 2-D seismic
interpretation. A 3-D seismic survey was obtained in January and
February of 2017. An analysis of the 3-D seismic survey confirmed
the first prospect originally identified on the 2-D seismic, as
well as several additional drilling locations. We have plans to
obtain an additional 3-D survey on the second prospect after
drilling a well on the first prospect. The two prospects are
independent of each other and the success or lack of results of
either prospect does not affect the potential of the other
prospect. The wells will be drilled vertically with conventional
completions and no hydraulic fracturing is anticipated. With the
settlement of our debt obligations to a former lender in December
2018, we acquired an additional 40% working interest, bringing our
aggregate working interest to 70% in Michigan. The first well is
expected to be drilled in the summer of 2021 if new financing is
secured.
Encumbrances
On October 17, 2018, a working interest partner in California filed
a UCC financing statement in regards to payables owed to the
partner by the Company. As of November 30, 2020, we had no
encumbrances on our crude oil project in Michigan.
Results of Operations – Nine months ended November 30, 2020
compared to the nine months ended November 30, 2019
California Crude Oil Prices
The price we receive for crude oil sales in California is based on
prices posted for Midway-Sunset crude oil delivery contracts, less
deductions that vary by grade of crude oil sold and transportation
costs. The posted Midway-Sunset price generally moves in
correlation to, and at a discount to, prices quoted on the New York
Mercantile Exchange (“NYMEX”) for spot West Texas Intermediate
(“WTI”) crude oil, Cushing, Oklahoma delivery contracts. We do not
have any natural gas revenues in California.
There has been a significant amount of volatility in crude oil
prices and a 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 and our realized price per barrel of
crude oil was $98.78. This volatility and decline in crude oil
prices has continued as evidenced by the NYMEX daily closing price
of WTI crude oil on April 20, 2020 when it closed at a negative
$36.98; the April 2020 monthly average WTI price was $16.55; and
our monthly realized price for April 2020 was $16.96 per barrel.
This volatility and decline in the price of crude oil has had a
substantial negative impact on our cash flow from our producing
California properties. While there has been some improvement in
crude oil prices since April 2020, there is no guarantee that this
trend will continue.
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 rebound
to 2014 levels, 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 and average realized crude
oil sales price for the nine months ended November 30, 2020 and
2019 is shown in the table below:
| |
|
Nine Months Ended |
|
|
|
| |
|
November 30, 2020 |
|
November 30, 2019 |
|
Percentage Change |
|
|
Average nine month WTI crude oil price
(Bbl) |
|
$ |
35.07 |
|
$ |
57.51 |
|
(39.0 |
%) |
|
Average nine month realized crude oil
sales price (Bbl) |
|
$ |
32.52 |
|
$ |
60.77 |
|
(46.5 |
%) |
For the nine months ended November 30, 2020, the average WTI price
was $35.07 and our average realized crude oil sale price was
$32.52, representing a discount of $2.55 per barrel or 7.3% lower
than the average WTI price. In comparison, for the nine months
ended November 30, 2019, the average WTI price was $57.51 and our
average realized sale price was $60.77 representing a premium of
$3.26 per barrel or 5.7% higher than the average WTI price.
Historically, the sale price we receive for California heavy crude
oil has been less than the quoted WTI price because of the lower
API gravity of our California crude oil in comparison to the API
gravity of quoted WTI crude oil.
California Crude Oil Revenue and Production
Crude oil revenue in California for the nine months ended November
30, 2020 decreased $227,292 or 45.3% to $274,085 in comparison to
revenue of $501,377 for the nine months ended November 30, 2019.
The average sale price of a barrel of crude oil for the nine months
ended November 30, 2020 was $32.52 in comparison to $60.77 for the
nine months ended November 30, 2019. The decrease of $28.25 or
46.5% per barrel in the average realized price of a barrel of crude
oil accounted for over 100.0% of the decrease in crude oil revenue
for the nine months ended November 30, 2020. The 2019 novel
coronavirus (“COVID-19") that has spread to countries throughout
the world including the United States has had a substantial
negative impact on the demand for crude oil and is largely
responsible for the decline in crude oil prices.
Our net sales volume for the nine months ended November 30, 2020
was 8,427 barrels of crude oil in comparison to 8,250 barrels sold
for the nine months ended November 30, 2019. This increase in crude
oil sales volume of 177 barrels or 2.1% was not sufficient enough
to offset the decrease in revenue due to lower crude oil prices
during the nine months ended November 30, 2020.
The gravity of our produced crude oil in California ranges between
14° API and 16° API. Production for the nine months ended November
30, 2020 was from 20 wells resulting in 5,495 well days of
production in comparison to 5,379 well days of production for the
nine months ended November 30, 2019.
Our crude oil sales revenue for the nine months ended November 30,
2020 and 2019 is set forth in the following table:
| |
|
Nine Months Ended
November 30, 2020
|
|
|
Nine Months Ended
November 30, 2019
|
|
|
Project |
|
Revenue |
|
|
Percentage |
|
|
Revenue |
|
|
Percentage |
|
|
California – East Slopes Project |
|
$ |
274,085 |
|
|
|
100.0 |
% |
|
$ |
501,377 |
|
|
|
100.0 |
% |
*Our average realized sale price on a BOE basis for the nine months
ended November 30, 2020 was $32.52 in comparison to $60.77 for the
nine months ended November 30, 2019, representing a decrease of
$28.25 or 46.5% per barrel.
Operating Expenses
Total operating expenses for the nine months ended November 30,
2020 were $605,954, a decrease of $117,710 or 16.3% compared to
$723,664 for the nine months ended November 30, 2019. Operating
expenses for the nine months ended November 30, 2020 and 2019 are
set forth in the table below:
| |
|
Nine Months Ended
November 30, 2020
|
|
|
Nine Months Ended
November 30, 2019
|
| |
|
Expenses |
|
|
Percentage |
|
|
BOE
Basis
|
|
|
Expenses |
|
|
Percentage |
|
|
BOE
Basis
|
| Production
expenses |
|
$ |
136,218 |
|
|
|
22.5 |
% |
|
|
|
|
|
$ |
134,276 |
|
|
|
18.6 |
% |
|
|
|
| Exploration and
drilling expenses |
|
|
73 |
|
|
|
0.0 |
% |
|
|
|
|
|
|
123 |
|
|
|
0.0 |
% |
|
|
|
| Depreciation,
depletion, amortization (“DD&A”) |
|
|
42,318 |
|
|
|
7.0 |
% |
|
|
|
|
|
|
44,210 |
|
|
|
6.1 |
% |
|
|
|
|
General and administrative (“G&A”) expenses |
|
|
427,345 |
|
|
|
70.5 |
% |
|
|
|
|
|
|
545,055 |
|
|
|
75.3 |
% |
|
|
|
| Total
operating expenses |
|
$ |
605,954 |
|
|
|
100.0 |
% |
|
$ |
71.91 |
|
|
$ |
723,664 |
|
|
|
100.0 |
% |
|
$ |
87.72 |
Production expenses include expenses associated with the production
of crude oil. These expenses include contract pumpers, electricity,
road maintenance, control of well insurance, property taxes and
well workover expenses; and, relate directly to the number of wells
that are in production. For the nine months ended November 30,
2020, these expenses increased by $1,942 or 1.4% to $136,218 in
comparison to $134,276 for the nine months ended November 30, 2019.
For the nine months ended November 30, 2020 and 2019, we had 20
wells on production in California. Production expense on a barrel
of oil equivalent (“BOE”) basis for the nine months ended November
30, 2020 and 2019 was $16.16 and $16.28, respectively. Production
expenses represented 22.5% and 18.6% of total operating expenses
for the nine months ended November 30, 2020 and 2019,
respectively.
Exploration and drilling expenses include geological and
geophysical (“G&G”) expenses as well as leasehold maintenance,
plugging and abandonment (“P&A”) expenses and dry hole
expenses. For the nine months ended November 30, 2020, these
expenses decreased $50 to $73 in comparison to $123 the nine months
ended November 30, 2019. Exploration and drilling expenses
represented 0.0% and 0.0% of total operating expenses for the nine
months ended November 30, 2020 and 2019, respectively.
Depreciation, depletion and amortization (“DD&A”) expenses
relate to equipment, proven reserves and property costs, along with
impairment, and is another component of operating expenses. For the
nine months ended November 30, 2020, DD&A expenses decreased
$1,892 or 4.3% to $42,318 in comparison to $44,210 for the nine
months ended November 30, 2019. On a BOE basis, DD&A expense
was $5.02 and $5.36 for the nine months ended November 30, 2020 and
2019, respectively. DD&A expenses represented 7.0% and 6.1% of
total operating expenses for the nine months ended November 30,
2020 and 2019, respectively.
General and administrative (“G&A”) expenses include the
salaries of our six full-time employees, including management.
During the first three months of the prior fiscal year ended
February 29, 2020, fifty percent (50%) of certain management
salaries were being deferred by the Company. However, effective
June 1, 2019, the salary deferral program ended and those base
salaries were temporarily reduced by half. Additionally, director
fees are being suspended temporarily. Both of these compensation
changes were reviewed by the Board of Directors during June 2020
and based on the financial status of the Company it was decided to
continue these temporary changes. Other items included in our
G&A expenses are legal and accounting expenses, investor
relations fees, travel expenses, insurance expenses and other
administrative expenses necessary for an operator of crude oil
properties as well as for running a public company. For the nine
months ended November 30, 2020, G&A expenses decreased $117,710
or 21.6% to $427,345 in comparison to $545,055 for the nine months
ended November 30, 2019. We received, as Operator, administrative
overhead reimbursement of $39,965 during the nine months ended
November 30, 2020 for the East Slopes Project which was used to
directly offset certain employee salaries. We are continuing a
program of controlling our G&A costs wherever possible. G&A
expenses represented 70.5% and 75.3% of total operating expenses
for the nine months ended November 30, 2020 and 2019,
respectively.
Interest expense, net for the nine months ended November 30, 2020
decreased $242,824 or 57.1% to $182,246 in comparison to $425,070
for the nine months ended November 30, 2019.
Results of Operations – Three months ended November 30, 2020
compared to the three months ended November 30, 2019
A comparison of the average WTI price and average realized crude
oil sales price at our East Slopes Project in California for the
three months ended November 30, 2020 and 2019 is shown in the table
below:
| |
|
Three Months Ended |
|
|
|
| |
|
November 30, 2020 |
|
November 30, 2019 |
|
Percentage Change |
|
|
Average three month WTI crude oil
price (Bbl) |
|
$ |
39.99 |
|
$ |
55.98 |
|
(28.6 |
%) |
| Average three month realized crude oil sales price
(Bbl) |
|
$ |
36.58 |
|
$ |
57.92 |
|
(36.8 |
%) |
For the three months ended November 30, 2020, the average WTI price
was $39.99 and our average realized crude oil sale price was
$36.58, representing a discount of $3.41 per barrel or 8.5% lower
than the average WTI price. In comparison, for the three months
ended November 30, 2019, the average WTI price was $55.98 and our
average realized sale price was $57.92 representing a premium of
$1.94 per barrel or 3.5% higher than the average WTI price.
Historically, the sale price we receive for California heavy crude
oil has been less than the quoted WTI price because of the lower
API gravity of our California crude oil in comparison to the API
gravity of quoted WTI crude oil.
California Crude Oil Revenue and Production
Crude oil revenue in California for the three months ended November
30, 2020, decreased $45,642 or 32.2% to $96,322 in comparison to
revenue of $141,964 for the three months ended November 30, 2019.
The average sale price of a barrel of crude oil for the three
months ended November 30, 2020 was $36.58 in comparison to $57.92
for the three months ended November 30, 2019. The decrease of
$21.34 or 36.8% per barrel in the average realized price of a
barrel of crude oil accounted for over 100.0% of the decrease in
crude oil revenue for the three months ended November 30, 2020.
Our net sales volume for the three months ended November 30, 2020
was 2,633 barrels of crude oil in comparison to 2,451 barrels sold
for the three months ended November 30, 2019. This increase in
crude oil sales volume of 182 barrels or 7.4% was not sufficient
enough to offset the decrease in revenue due to lower crude oil
prices during the three months ended November 30, 2020.
The gravity of our produced crude oil in California ranges between
14° API and 16° API. Production for the three months ended November
30, 2020 was from 20 wells resulting in 1,820 well days of
production in comparison to 1,749 well days of production for the
three months ended November 30, 2019.
Our crude oil sales revenue for the three months ended November 30,
2020 and 2019 is set forth in the following table:
| |
|
Three Months Ended
November 30, 2020
|
|
|
Three Months Ended
November 30, 2019
|
|
|
Project |
|
Revenue |
|
|
Percentage |
|
|
Revenue |
|
|
Percentage |
|
|
California – East Slopes Project |
|
$ |
96,322 |
|
|
|
100.0 |
% |
|
$ |
141,964 |
|
|
|
100.0 |
% |
*Our average realized sale price on a BOE basis for the three
months ended November 30, 2020 was $36.58 in comparison to $57.92
for the three months ended November 30, 2019, representing a
decrease of $21.34 or 36.8% per barrel.
Operating Expenses
Total operating expenses for the three months ended November 30,
2020 were $191,937, a decrease of $22,715 or 10.6% compared to
$214,652 for the three months ended November 30, 2019. Operating
expenses for the three months ended November 30, 2020 and 2019 are
set forth in the table below:
| |
|
Three Months Ended
November 30, 2020
|
|
|
Three Months Ended
November 30, 2019
|
|
| |
|
Expenses |
|
|
Percentage |
|
|
BOE
Basis
|
|
|
Expenses |
|
|
Percentage |
|
|
BOE
Basis
|
|
| Production
expenses |
|
$ |
53,581 |
|
|
|
28.0 |
% |
|
|
|
|
|
$ |
44,733 |
|
|
|
20.8 |
% |
|
|
|
|
| Exploration and
drilling expenses |
|
|
73 |
|
|
|
0.0 |
% |
|
|
|
|
|
|
9 |
|
|
|
0.0 |
% |
|
|
|
|
| Depreciation,
depletion, amortization (“DD&A”) |
|
|
13,491 |
|
|
|
7.0 |
% |
|
|
|
|
|
|
13,288 |
|
|
|
6.2 |
% |
|
|
|
|
|
General and administrative (“G&A”) expenses |
|
|
124,792 |
|
|
|
65.0 |
% |
|
|
|
|
|
|
156,622 |
|
|
|
73.0 |
% |
|
|
|
|
| Total
operating expenses |
|
$ |
191,937 |
|
|
|
100.0 |
% |
|
$ |
72.90 |
|
|
$ |
214,652 |
|
|
|
100.0 |
% |
|
$ |
87.58 |
|
Production expenses for the three months ended November 30, 2020,
increased by $8,848 or 19.8% to $53,581 in comparison to $44,733
for the three months ended November 30, 2019. The increase was
primarily due to increases in property taxes and regulatory
expenses. For the three months ended November 30, 2020 and 2019 we
had 20 wells on production in California. Production expense on a
barrel of oil equivalent (“BOE”) basis for the three months ended
November 30, 2020 and 2019 were $20.35 and $18.25, respectively.
Production expenses represented 28.0% and 20.8% of total operating
expenses for the three months ended November 30, 2020 and 2019,
respectively.
Exploration and drilling expenses for the three months ended
November 30, 2020, increased $64 to $73 in comparison to $9 for the
three months ended November 30, 2019. Exploration and drilling
expenses represented 0.0% and 0.0% of total operating expenses for
the three months ended November 30, 2020 and 2019,
respectively.
DD&A expenses for the three months ended November 30, 2020,
increased $203 or 1.5% to $13,491 in comparison to $13,288 for the
three months ended November 30, 2019. DD&A on a BOE basis was
$5.12 and $5.42 for the three months ended November 30, 2020 and
2019, respectively. DD&A expenses represented 7.0% and 6.2% of
total operating expenses for the three months ended November 30,
2020 and 2019, respectively.
G&A expenses for the three months ended November 30, 2020,
decreased $31,830 or 20.3% to $124,792 in comparison to $156,622
for the three months ended November 30, 2019. Effective June 1,
2019, the salary deferral program that was in place ended and those
base salaries were reduced by half. Additionally, director fees are
being suspended temporarily. Both of these compensation changes
were reviewed by the Board of Directors during June 2020 and based
on the financial status of the Company it was decided to continue
these temporary changes. Other items included in our G&A
expenses are legal and accounting expenses, director fees, investor
relations fees, travel expenses, insurance expenses and other
administrative expenses necessary for an operator of crude oil
properties as well as for running a public company. We received, as
Operator in California, administrative overhead reimbursement of
$13,321 during the three months ended November 30, 2020 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
65.0% and 73.0% of total operating expenses for the three months
ended November 30, 2020 and 2019, respectively.
Interest expense, net for the three months ended November 30, 2020
decreased $95,833 or 63.0% to $56,302 in comparison to $152,135 for
the three months ended November 30, 2019.
Due to the nature of our business, we expect that revenues, as well
as all categories of expenses, will continue to fluctuate
substantially on a quarter-to-quarter and year-to-year basis.
Revenues are highly dependent on the volatility of hydrocarbon
prices and production volumes. Production expenses will fluctuate
according to the number and percentage ownership of producing wells
as well as the amount of revenues we receive based on the price of
crude oil. Exploration and drilling expenses will be dependent upon
the amount of capital that we have to invest in future development
projects, as well as the success or failure of such projects.
Likewise, the amount of DD&A expense will depend upon the
factors cited above including the size of our proven reserves base
and the market price of energy products. G&A expenses will also
fluctuate based on our current requirements, but will generally
tend to increase as we expand the business operations of the
Company. An on-going goal of the Company is to improve cash flow to
cover the current level of G&A expenses and to fund our
drilling programs in California and Michigan.
Capital Resources and Liquidity
Our primary financial resource is our proven crude oil reserve
base. Our ability to fund any future capital expenditure programs
is dependent upon the prices we receive from crude oil sales, the
success of our drilling programs in California and Michigan and the
availability of capital resource financing. There 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, and our realized sale price per barrel of crude oil was
$98.78. This volatility and decline in crude oil prices has
continued as evidenced by the NYMEX daily closing price of WTI
crude oil on April 20, 2020 when it closed at a negative $36.98;
the April 2020 monthly average WTI price was $16.55; and our
monthly realized price for April 2020 was $16.96 per barrel. This
volatility and decline in the price of crude oil has had a
substantial negative impact on our cash flow from our producing
California properties. While there has been some improvement in
crude oil prices since April 2020, there is no guarantee that this
trend will continue. Most recently our average realized price
declined from $60.77 for the nine months ended November 30, 2019 to
$32.52 for the nine months ended November 30, 2020, demonstrating
the continued volatility in crude oil prices. 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 continue to
rebound as there are many factors beyond our control that dictate
the price we receive for our crude oil sales.
In the 2021-2022 fiscal year we plan to spend approximately
$525,000 in capital investments in California when new financing is
secured. 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 unable 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 November 30, 2020 in comparison
to February 29, 2020 are set forth in the table below:
| |
|
|
|
|
|
|
|
Increase |
|
|
Percentage |
|
| |
|
November 30, 2020 |
|
|
February 29, 2020 |
|
|
(Decrease) |
|
|
Change |
|
| Cash |
|
$ |
61,717 |
|
|
$ |
94,043 |
|
|
$ |
(32,326 |
) |
|
|
(34.4 |
%) |
| Current Assets |
|
$ |
246,027 |
|
|
$ |
240,434 |
|
|
$ |
5,593 |
|
|
|
2.3 |
% |
| Total Assets |
|
$ |
888,683 |
|
|
$ |
917,456 |
|
|
$ |
(28,773 |
) |
|
|
(3.1 |
%) |
| Current Liabilities |
|
$ |
(4,432,228 |
) |
|
$ |
(4,063,712 |
) |
|
$ |
368,516 |
|
|
|
9.1 |
% |
| Total Liabilities |
|
$ |
(6,009,148 |
) |
|
$ |
(5,556,063 |
) |
|
$ |
453,085 |
|
|
|
8.2 |
% |
| Working Capital Deficit |
|
$ |
(4,186,201 |
) |
|
$ |
(3,823,278 |
) |
|
$ |
362,923 |
|
|
|
9.5 |
% |
Our working capital deficit increased approximately $0.36 million
or 9.5% to approximately $4.2 million at November 30,
2020 in comparison to approximately $3.8 million at February 29,
2020. The increase in our working capital deficit was due to
an increase in accounts payable, accrued interest, the paycheck
protection program (PPP) loan we received and a decline in our cash
balance offset by a decline in our line of credit balance,
elimination of related party debt, and an increase in our prepaid
assets.
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 positive cash
flow from our operations in California, we will have to rely on the
capital markets to fund future operations and growth. Our business
model is focused on acquiring exploration or development properties
as well as existing production. Our ability to generate future
revenues and operating cash flow will depend on successful
exploration, and/or acquisition of crude oil producing properties,
which may very likely require us to continue to raise equity or
debt capital from outside sources.
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 volatility in
the credit and capital markets as well as the decline in crude oil
prices from June of 2014 price levels has restricted 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. The sale of all or part of
interests in our assets may be another source of cash flow
available to us.
The Company’s financial statements for the nine months ended
November 30, 2020 have been prepared on a going concern basis,
which contemplates the realization of assets and the settlement of
liabilities in the normal course of business. We have incurred net
losses since entering the crude oil exploration industry in 2005,
and as of the nine months ended November 30, 2020, we have an
accumulated deficit of $29.4 million and a working
capital deficit of $4.2 million 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 nine months ended November 30, 2020, we received crude
oil sales revenue from 20 wells in California. Our commitment to
improving corporate profitability remains unchanged. We experienced
a decrease in revenues of $227,292 or 45.3% to $274,085 for the
nine months ended November 30, 2020 in comparison to revenues of
$501,377 for the nine months ended November 30, 2019. The decrease
of $28.25 or 46.5% per barrel in the average realized price of a
barrel of crude oil accounted for over 100.0% of the decrease in
crude oil revenue for the nine months ended November 30, 2020. For
the nine months ended November 30, 2020, we had an operating loss
of $331,869 in comparison to an operating loss of $222,287 for the
nine months ended November 30, 2019.
Our balance sheet at November 30, 2020 reflects total assets of
approximately $0.89 million in comparison to approximately $0.92
million at February 29, 2020. The decrease of $28,773 is primarily
due to cash outflow from operations and depletion of our crude oil
properties.
At November 30, 2020, total liabilities were approximately $6.0
million in comparison to approximately $5.6 million at February 29,
2020. The increase in liabilities of $453,085 was primarily due to
an increase in accounts payable and the paycheck protection program
(PPP) loan.
The issued and outstanding shares of common stock at November 30,
2020 increased by 6,958,758 shares to 60,491,122 in comparison to
the February 29, 2020 balance of 53,532,364 shares as a result of
the conversion of a related party note payable. The common stock
issuance was valued at $27,835.
Additional paid in capital (APIC) increased $25,298 to $24,249,081
at November 30, 2020 from $24,223,783 as a result of the conversion
of a related party note payable.
Cash Flows
Changes in the net funds provided by and (used in) our operating,
investing and financing activities are set forth in the table
below:
| |
|
Nine Months
Ended
November 30, 2020
|
|
|
Nine Months
Ended
November 30, 2019
|
|
|
Increase
(Decrease)
|
|
|
Percentage
Change
|
|
| Net cash used in operating
activities |
|
$ |
(17,019 |
) |
|
$ |
(48,094 |
) |
|
|
31,075 |
|
|
|
64.6 |
% |
| Net cash provided by (used in)
investing activities |
|
$ |
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
— |
|
| Net cash (used in) provided by
financing activities |
|
$ |
(15,307 |
) |
|
$ |
29,000 |
|
|
|
(44,307 |
) |
|
|
(152.8 |
%) |
Cash Flow Used In Operating Activities
Cash flow from operating activities is derived from the production
of our crude oil reserves and changes in the balances of non-cash
accounts, receivables, payables or other non-energy property asset
account balances. For the nine months ended November 30, 2020, cash
flow used in operating activities was $17,019 in comparison to cash
flow used in operating activities of $48,094 for the nine months
ended November 30, 2019. The change in our cash flow used in
operating activities of $31,075 for the nine months ended November
30, 2020 was due to a reduction in our non-cash operating expenses,
an increase in our prepaid assets, liability balances and our net
loss. Changes in non-cash account balances primarily relating to
DD&A and amortization of debt discount. Variations in cash flow
from operating activities may impact our level of exploration and
development expenditures.
Cash Flow Provided By (Used In) Investing Activities
Cash flow from investing activities is derived from changes in
crude oil property balances and any lending activities. Cash flow
provided by (used in) our investing activities for the nine months
ended November 30, 2020 was $-0- in comparison to cash flow
provided by (used in) our investing activities of $-0- for the nine
months ended November 30, 2019.
Cash Flow (Used In) Provided By Financing Activities
Cash flow from financing activities is derived from changes in
long-term liability account balances or in equity account balances,
excluding retained earnings. Cash flow used in our financing
activities was $15,307 for the nine months ended November 30, 2020
in comparison to cash flow provided by our financing activities of
$29,000 for the nine months ended November 30, 2019. This change in
our cash flow provided by (used in) activities was primarily due to
the recognition of annual insurance premium financing activities.
For the nine months ended November 30, 2020, we made total payments
of $45,000 to our line of credit with UBS Bank.
The following discussion is a summary of cash flows provided by,
and used in, the Company’s financing activities at November 30,
2020.
Current debt (Short-term borrowings)
Convertible Promissory Note Payable – Related
Party
During the twelve months ended February 29, 2020, the Company’s
Chairman, President and Chief Executive Officer loaned the Company
$27,835 for general operating expenses under a Convertible Note
Purchase Agreement. The Note had a maturity date of July 12, 2020
and carried no interest, fees or penalties. By the terms of
the Convertible Note Purchase Agreement, Mr. Westmoreland had also
agreed to loan up to an additional $22,165 in funding for the
Company, if and when agreed upon, but this additional amount was
not ever loaned pursuant to the Note.
On July 12, 2020, the Convertible Promissory Note issued on January
14, 2020 matured. The Note was not repaid in full on or prior to
the maturity date, so, pursuant to the terms of the conversion
feature of the Convertible Promissory Note, the $27,835 balance of
the Convertible Note was converted into the Company’s common stock
shares on July 13, 2020. The conversion price was $0.004 per share
resulting in 6,958,758 shares being issued. The balance of the Note
was $-0- and $27,835 at November 30, 2020 and February 29, 2020,
respectively.
12% Subordinated Notes
Our 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 us and accrue interest at 12% per annum,
payable semi-annually on January 29th and July 29th. On January 29,
2015, we and 12 of the 13 holders of the Notes agreed to extend the
maturity date of the Notes for an additional two years to January
29, 2017. Effective January 29, 2017, the maturity date of the
Notes and the expiration date of the warrants that were issued in
conjunction with the Notes were extended for an additional two
years to January 29, 2019. The 980,000 warrants held by ten
noteholders expired on January 29, 2019.
We have informed the Note holders that the payment of principal and
final interest will be late and is subject to future financing
being completed. The Notes principal of $565,000 was payable in
full at the amended maturity date of the Notes, and has not been
paid. Interest continues to accrue on the unpaid $565,000 principal
balance. The terms of the Notes, state that should the Board of
Directors decide that the payment of the principal and any unpaid
interest would impair the financial condition or operations of the
Company, we may then elect a mandatory conversion of the unpaid
principal and interest into our common stock at a conversion rate
equal to 75% of the average closing price of our common stock over
the 20 consecutive trading days preceding December 31, 2018. As of
November 30, 2020, no conversion of the unpaid principal and
interest into the Company’s common stock has occurred. The accrued
interest on the 12% Notes at November 30, 2020 and February 29,
2020 was $323,324 and $272,428, respectively. There was no
unamortized debt discount remaining at November 30, 2019 and
February 28, 2019.
12% Note balances at November 30, 2020 and February 29, 2020 are
set forth in the table below:
| |
|
November 30, 2020 |
|
|
February 29, 2020 |
|
| 12% Subordinated
Notes |
|
$ |
315,000 |
|
|
$ |
315,000 |
|
| 12% Subordinated
Notes – related party |
|
|
250,000 |
|
|
|
250,000 |
|
| Total 12%
Subordinated Notes balance |
|
$ |
565,000 |
|
|
$ |
565,000 |
|
12% Note balances – accrued interest at November 30, 2020 and
February 29, 2020 are set forth in the table below:
| |
|
November 30, 2020 |
|
|
February 29, 2020 |
|
| Accrued interest 12%
Subordinated Notes |
|
$ |
88,338 |
|
|
$ |
59,962 |
|
| Accrued interest
12% Subordinated Notes – related party |
|
|
234,986 |
|
|
|
212,466 |
|
| Total accrued
interest 12% Subordinated Notes |
|
$ |
323,324 |
|
|
$ |
272,428 |
|
The accrued interest owed on the 12% Subordinated Note to the
related party is presented on our Balance Sheets under the caption
Accounts payable – related party rather than under the
caption Accrued interest.
Production Revenue Payable
Since December 2018, the Company has been conducting a fundraising
program to fund the drilling of future wells in California and
Michigan and to settle some of its historical debt. The purchasers
of production payment interests will receive a production revenue
payment on future wells to be drilled in California and Michigan in
exchange for their purchase. As of November 30, 2020, the
production revenue payment program balance was $950,100 of which
$550,100 was owed to a related party - the Company’s Chairman,
President and Chief Executive Officer.
The production payment interest entitles the purchasers to receive
production payments equal to twice their original amount paid,
payable from a percentage of the Company’s future net production
payments from wells drilled after the date of the purchase and
until the Production Payment Target (as described below) is met.
The Company shall pay fifty percent of its net production
payments from the relevant wells to the purchasers until each
purchaser has received two times the purchase price (the
“Production Payment Target”). Once the Company pays the purchasers
amounts equal to the Production Payment Target, it shall thereafter
pay a pro-rated eight percent (8%) of $1.3 million on its net
production payments from the relevant wells to each of the
purchasers. However, if the total raised is less than the target
$1.3 million, then the payment will be a proportionate amount of
the eight percent (8%). Additionally, if the Production Payment
Target is not met within the first three years, the Company shall
pay seventy-five percent of its production payments from the
relevant wells to the purchasers until the Production Payment
Target is met.
The Company accounted for the amounts received from these sales in
accordance with ASC 470-10-25 and 470-10-35 which require amounts
recorded as debt to be amortized under the interest method as
described in ASC 835-30, Interest Method. Consequently, the program
balance of $950,100 has been recognized as a production revenue
payable. The Company determined an effective interest rate based on
future expected cash flows to be paid to the holders of the
production payment interests. This rate represents the discount
rate that equates estimated cash flows with the initial proceeds
received from the sales and is used to compute the amount of
interest to be recognized each period. Estimating the future cash
outflows under this agreement requires the Company to make certain
estimates and assumptions about future revenues and payments and
such estimates are subject to significant variability. Therefore,
the estimates are likely to change which may result in future
adjustments to the accretion of the interest expense and the
amortized cost based carrying value of the related payables.
Accordingly, the Company has estimated the cash flows associated
with the production revenue payments and determined a discount of
$998,879 as of November 30, 2020, which is being accounted as
interest expense over the estimated period over which payments will
be made based on expected future revenue streams. For the nine
months ended November 30, 2020 and 2019, amortization of the debt
discount on these payables amounted to $88,786 and $336,658,
respectively, which has been included in interest expense in the
statements of operations.
Production revenue payable balances at November 30, 2020 and
February 29, 2020 are set forth in the table below:
| |
|
November 30, 2020 |
|
|
February 29, 2020 |
|
| Estimated payments of
production revenue payable |
|
$ |
1,948,979 |
|
|
$ |
2,054,766 |
|
| Less: unamortized
discount |
|
|
(471,922 |
) |
|
|
(666,495 |
) |
| |
|
|
1,477,057 |
|
|
|
1,388,271 |
|
| Less: current
portion |
|
|
(50,269 |
) |
|
|
(43,069 |
) |
| Net production
revenue payable – long-term |
|
$ |
1,426,788 |
|
|
$ |
1,345,202 |
|
Paycheck Protection Program (PPP) Loan
On March 27, 2020, President Trump signed into law the Coronavirus
Aid, Relief, and Economic Security Act commonly referred to as the
CARES Act. One component of the CARES Act was the paycheck
protection program (“PPP”) which provides small business with the
resources needed to maintain their payroll and cover applicable
overhead. The PPP is implemented by the Small Business
Administration (“SBA”) with support from the Department of the
Treasury. The PPP provides funds to pay up to eight weeks of
payroll costs including benefits. Funds can also be used to pay
interest on mortgages, rent, and utilities. The Company applied
for, and was accepted to participate in this program. On May 11,
2020, the Company received funding for approximately $74,355.
The loan is a two-year loan with a maturity date of May 5, 2022.
The loan bears an annual interest rate of 1%. The loan shall be
payable monthly with the first six monthly payments deferred. It is
the Company’s intent to apply for loan forgiveness under the
provisions of Section 1106 of the CARES Act. Loan forgiveness is
subject to the sole approval of the SBA. The Company is eligible
for loan forgiveness in an amount equal to payments made during the
8-week period beginning on the Loan date, with the exception that
no more than 25.0% of the amount of loan forgiveness may be for
expenses other than payroll expenses. The Company used all loan
proceeds to partially subsidize direct payroll expenses. The
Company expects the loan to be fully forgiven.
Line of Credit
The Company has an existing $890,000 line of credit for working
capital purposes with UBS Bank USA (“UBS”), established pursuant to
a Credit Line Agreement dated October 24, 2011 that is secured by
the personal guarantee of its Chairman, President and Chief
Executive Officer. On July 10, 2017 a $700,000 portion of the
outstanding line of credit balance was converted to a 24 month
fixed term annual percentage interest rate of 3.244% with interest
payable monthly. On July 10, 2019, the 24 month fixed term loan
amount of $700,000 was renewed at the same annual percentage
interest rate of 3.244% for an additional 24 months. The remaining
principal balance of the line of credit has a stated reference rate
of 0.249% + 337.5 basis points with interest payable monthly. The
reference rate is based on the 30 day LIBOR (“London Interbank
Offered Rate”) and is subject to change from UBS.
During the nine months ended November 30, 2020 and 2019, the
Company received advances on the line of credit of $-0- and
$74,000, respectively. During the nine months ended November 30,
2020 and 2019, the Company made payments to the line of credit of
$45,000 and $45,000, respectively. Interest converted to principal
for the nine months ended November 30, 2020 and 2019 was $21,744
and $23,624, respectively. At November 30, 2020 and February 29,
2020, the line of credit had an outstanding balance of $849,145 and
$872,401, respectively.
Note Payable
In December 2018, we were able to settle an outstanding balance
owed to one of our third-party vendors. This settlement resulted in
a $120,000 note payable issued to the vendor. Additionally, we
agreed to issue 2,000,000 shares of the Company’s common stock to
the vendor as a part of the settlement. Based on the closing price
of the Company’s common stock on the date of the settlement, the
value of the common stock transaction was determined to be $6,000.
The common stock shares were issued during the twelve months ended
February 29, 2020. The note has a maturity date of January 1, 2022
and bears an interest rate of 10% rate per annum. Monthly interest
is accrued and payable on January 1st of each
anniversary date through maturity of the note. At November 30,
2020, the note principal balance of $120,000 and the accrued
interest had not been paid and were outstanding. At November 30,
2020 and February 29, 2020, the accrued interest on the Note was
$23,000 and $14,000, respectively.
Encumbrances
On October 17, 2018, a working interest partner in California filed
a UCC financing statement in regards to payable amounts owed to the
partner by the Company. As of November 30, 2020, we had no
encumbrances on our crude oil project in Michigan.
Operating Leases
The Company leases approximately 988 rentable square feet of office
space from an unaffiliated third party for our corporate office
located in Spokane Valley, Washington. Additionally, we lease
approximately 416 and 695 rentable square feet from unaffiliated
third parties for our regional operations office in Friendswood,
Texas and storage and auxiliary office space in Wallace, Idaho,
respectively. The lease in Friendswood was a 24 month lease that
expired in October 2020. The new lease in Friendswood is a 12 month
lease and as such is considered a short-term lease. The Company has
elected to not apply the recognition requirements of ASC 842 to
this short-term lease. The Spokane Valley and Wallace leases are
also short-term leases currently on a month-to-month basis. The
Company’s lease agreements do not contain any residual value
guarantees, restrictive covenants or variable lease payments. The
Company has not entered into any financing leases.
The Balance Sheet classification of lease assets and liabilities is
as follows:
| |
|
November 30, 2020 |
|
|
February 29, 2020 |
|
|
Assets |
|
|
|
|
|
|
|
|
| Operating
lease right-of use assets, beginning balance |
|
$ |
5,857 |
|
|
$ |
13,787 |
|
|
Current period amortization |
|
|
(5,857 |
) |
|
|
(7,930 |
) |
| Total
operating lease right-of-use asset |
|
|
— |
|
|
|
5,857 |
|
| |
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
| Operating lease
liability – current |
|
|
— |
|
|
|
5,857 |
|
|
Operating lease liability – long-term |
|
|
— |
|
|
|
— |
|
| Total
lease liabilities |
|
$ |
— |
|
|
$ |
5,857 |
|
Rent expense for the nine months ended November 30, 2020 and 2019
was $17,642 and $17,842, respectively.
Capital Commitments
Daybreak has ongoing capital commitments to develop certain leases
pursuant to their underlying terms. Failure to meet such ongoing
commitments may result in the loss of the right to participate in
future drilling on certain leases or the loss of the lease itself.
These ongoing capital commitments may also cause us to seek
additional capital from sources outside of the Company. The current
uncertainty in the credit and capital markets, and the current
economic downturn in the energy sector, may restrict our ability to
obtain needed capital.
Subsequent Event - Change in Transfer Agent
Effective December 22, 2020, the Company appointed Sedona Equity
Registrar & Transfer, Incorporated (“Sedona”) as its transfer
agent and shareholder support provider. On December 28, 2020, all
of the Company's directly held shares of common stock, files and
information have been transferred from Computershare to Sedona. In
this capacity, Sedona will manage all stock registry requests for
shareholders, including change of address, certificate replacement
and transfer of shares. All stock and investment information will
automatically transfer to Sedona from our former Transfer Agent and
Registrar, Computershare, and no action is required on the part of
the shareholder.
Management Plans to Continue as a Going Concern
We continue to implement plans to enhance Daybreak’s ability to
continue as a going concern. The Company currently has a net
revenue interest in 20 producing crude oil wells in our East Slopes
Project located in Kern County, California. The revenue from these
wells has created a steady and reliable source of revenue for the
Company. Our average working interest in these wells is 36.6% and
the average net revenue interest is 28.4%.
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 volatility 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 November 30, 2020 do not include any
adjustments that might result from the inability to implement or
execute Daybreak’s plans to improve our ability to continue as a
going concern.
Critical Accounting Policies
Refer to Daybreak’s Annual Report on Form 10-K for the fiscal year
ended February 29, 2020.
Off-Balance Sheet Arrangements
As of November 30, 2020, 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.
ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide the
information otherwise required by this Item.
ITEM 4. CONTROLS AND
PROCEDURES
Management’s Evaluation of Disclosure Controls and
Procedures
As of the end of the reporting period, November 30, 2020, an
evaluation was conducted by Daybreak management, including our
President and Chief Executive Officer, who is also serving as our
interim principal finance and accounting officer, as to the
effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Rule 13a-15(e) of the Exchange
Act. Such disclosure controls and procedures are designed to ensure
that information required to be disclosed by a company in the
reports that it files under the Exchange Act is recorded,
processed, summarized and reported within required time periods
specified by the SEC rules and forms. Additionally, it is vital
that such information is accumulated and communicated to our
management, including our President and Chief Executive Officer, in
a manner to allow timely decisions regarding required disclosures.
Based on that evaluation, our management concluded that our
disclosure controls were effective as of November 30, 2020.
Changes in Internal Control over Financial
Reporting
There have not been any changes in the Company’s internal control
over financial reporting during the three months ended November 30,
2020 that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
Limitations
Our management does not expect that our disclosure controls or
internal controls over financial reporting will prevent all errors
or all instances of fraud. A control system, no matter how well
designed and operated, can provide only reasonable, not absolute,
assurance that the control system’s objectives will be met.
Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must
be considered relative to their costs.
Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within our company
have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Controls
can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the
controls. The design of any system of controls is based in part
upon certain assumptions about the likelihood of future events, and
any design may not succeed in achieving its stated goals under all
potential future conditions.
Over time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with
policies or procedures. Because of the inherent limitation of a
cost-effective control system, misstatements due to error or fraud
may occur and not be detected.
PART II
OTHER INFORMATION
ITEM 1. LEGAL
PROCEEDINGS
None
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Form 10-Q
Report, you should carefully consider the various factors discussed
in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K
for the year ended February 29, 2020, which could materially affect
our business, financial condition or future results. Our Annual
Report is available from the SEC at www.sec.gov. The risks
described in this report are not the only risks we face. Additional
risks and uncertainties not currently known to us or that we
currently deem to be immaterial could have a material adverse
effect on our business, financial condition or future results of
operations.
ITEM 6. EXHIBITS
The following Exhibits are filed as part of the report:
(1) Filed
herewith.
(2) Furnished
herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
| DAYBREAK OIL AND GAS, INC. |
| |
|
| By: |
/s/ JAMES F. WESTMORELAND |
| |
James
F. Westmoreland, its |
| |
President, Chief Executive Officer and
interim |
| |
principal finance and accounting
officer |
| |
(Principal Executive Officer, Principal
Financial |
| |
Officer and Principal Accounting
Officer) |
| |
|
| Date: |
January 13, 2021 |
33
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