DAYBREAK OIL AND GAS, INC. 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 three months endedMay 31, 2022 and in our Annual Report on Form 10-K for the year endedFebruary 28, 2022 . References to "Daybreak", the "Company", "we", "us" or "our" meanDaybreak Oil and Gas, Inc.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements contained in our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") are intended to be covered by the safe harbor provided for under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act.
All statements other than statements of historical fact contained in this MD&A report are inherently uncertain and are forward-looking statements. Statements that relate to results or developments that we anticipate will or may occur in the future are not statements of historical fact. Words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project," "will" and similar expressions identify forward-looking statements. Examples of forward-looking statements include, without limitation, statements about the following:
· Our future operating results;
· Our future capital expenditures;
· Our future financing;
· Our expansion and growth of operations; and
· Our future investments in and acquisitions of crude oil properties.
We have based these forward-looking statements on assumptions and analyses made in light of our experience and our perception of historical trends, current conditions, and expected future developments. However, you should be aware that these forward-looking statements are only our predictions and we cannot guarantee any such outcomes. Future events and actual results may differ materially from the results set forth in or implied in the forward-looking statements. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, the following risks and uncertainties:
· General economic and business conditions;
· National and international pandemics such as the novel coronavirus COVID-19
outbreak;
· Exposure to market risks in our financial instruments;
· Fluctuations in worldwide prices and demand for crude oil;
· Our ability to find, acquire and develop crude oil properties;
· Fluctuations in the levels of our crude oil exploration and development
activities;
· Risks associated with crude oil exploration and development activities;
· Competition for raw materials and customers in the crude oil industry;
· Technological changes and developments in the crude oil industry;
· Legislative and regulatory uncertainties, including proposed changes to federal
tax law and climate change legislation, regulation of hydraulic fracturing and
potential environmental liabilities;
· Our ability to continue as a going concern;
· Our ability to secure financing under any commitments as well as additional
capital to fund operations; and
· Other factors discussed elsewhere in this Form 10-Q and in our other public
filings, press releases, and discussions with Company management.
Our reserve estimates are determined through a subjective process and are subject to periodic revision.
Should one or more of the risks or uncertainties described above or elsewhere in our Form 10-K for the year endedFebruary 28, 2022 and in this Form 10-Q for the three months endedMay 31, 2022 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.
16 Introduction and Overview We are an independent crude oil and natural gas exploration, development and production company. Our basic business model is to increase shareholder value by finding and developing crude oil and natural gas reserves through exploration and development activities, and selling the production from those reserves at a profit. To be successful, we must, over time, be able to find crude oil and natural gas reserves and then sell the resulting production at a price that is sufficient to cover our finding costs, operating expenses, administrative costs and interest expense, plus offer us a return on our capital investment. A secondary means of generating returns can include the sale of either producing or non-producing lease properties. Our long-term success depends on, among many other factors, the acquisition and drilling of commercial grade crude oil and natural gas properties and on the prevailing sales prices for crude oil and natural gas along with associated operating expenses. The volatile nature of the energy markets makes it difficult to estimate future prices of crude oil and natural gas; however, any prolonged period of depressed prices, such as we have experienced in the last 15 months, will have a material adverse effect on our results of operations and financial condition.
Our operations are focused on identifying and evaluating prospective crude oil and natural gas properties and funding projects that we believe have the potential to produce crude oil and natural gas in commercial quantities. We conduct all of our drilling, exploration and production activities inthe United States , and all of our revenues are derived from sales to customers withinthe United States . Currently, we are in the process of developing a multi-well oilfield project inKern County, California and an exploratory joint drilling project inMichigan . Our management cannot provide any assurances that Daybreak will ever operate profitably. While, in the past, we have had positive cash flow from our crude oil operations inCalifornia , 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 endedFebruary 28, 2022 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 inCalifornia . Refer to our discussion in Item 2. Properties, in our Annual Report on Form 10-K for the year endedFebruary 28, 2022 for more information on our multi-well oilfield project inCalifornia and our exploratory joint drilling project inMichigan .
The East Slopes Project is located in the southeastern part of theSan Joaquin Basin nearBakersfield, California . Drilling targets are porous and permeable sandstone reservoirs that exist at depths of 1,200 feet to 4,500 feet. SinceJanuary 2009 , we have participated in the drilling of 25 wells in this project. We have been the Operator at theEast Slopes Project sinceMarch 2009 . The crude oil produced from our acreage in the Vedder Sand is considered heavy oil. 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 theEast Slopes Project produce from five reservoirs at our Sunday, Bear, Black, Ball andDyer 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 theDyer Creek property has one producing well. During the three months endedMay 31, 2022 , we had production from 20 crude oil wells. Our average working interest and net revenue interest ("NRI") in these 20 wells is 36.6% and 28.4%, respectively. We plan on acquiring additional acreage exhibiting the same seismic characteristics and on trend with the Bear, Black andDyer 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. East Slopes Drilling Plans
We plan to spend approximately$435,000 drilling three development wells in the current 2022-2023 fiscal year; however our actual expenditures may vary significantly from this estimate if our plans for exploration and development activities change during the year. 17
InMay 2022 , we acquiredReabold California, LLC ("Reabold") from its previous owner. This property includes producing wells in bothMonterey andContra Costa counties ofCalifornia .
The Burnett Lease as well as the Doud Lease are located in close proximity to one another inMonterey County . They are part of a geological feature named the Monroe Swell. The Burnett Lease presently has two directional wells that are being produced from a depth of 2,900' from the Beedy Sand zone. The oil being produced is 19° gravity. We have future plans of drilling one horizontal well on this lease and to convert and old well bore into a salt water disposal well ("SWDW"). The Doud Lease has four directional well bores with three of those being produced from a depth of 3,300' from the Doud A Sand zone. The oil being produced is 22° gravity. We have future plans of drilling one additional directional well on this lease. The SWDW for the Burnett Lease will be utilized for this lease as well. The Brentwood Lease is located inContra-Costa County . This lease is part of a geological feature named the Meganos Unconformity. There are presently producing two directional wells from this lease as well as one well bore that is shut- in waiting on a SWDW permit to be approved before putting it back in production. The wells are producing from the Second Massive Sand from a depth of between 4,000'-4,500'. The oil being produced is 32° gravity. We have plans to do a work over on the shut-in well to decrease water production and to increase oil production. Sunflower LawsuitSunflower Alliance v.California Department of Conservation ,Geologic Energy Management Division . This case challenges the state agency's compliance with the California Environmental Quality Act (CEQA) with respect to the PAL Reabold 072-00-0001 Project, for wastewater injection into an existing well. The Petition was filed onDecember 29, 2021 in theAlameda County Superior Court . The Petitioner seeks an order setting aside the state agency's approval of a wastewater injection permit; damages are not sought in the lawsuit. OnFebruary 22, 2022 ,Real Party inInterest Reabold California, LLC filed a motion to transfer the case to theContra Costa County Superior Court . OnMarch 22, 2022 , theAlameda County Superior Court ordered the case transferred to theContra Costa County Superior Court . The parties are awaiting notification from theContra Costa County Superior Court that the transfer has been completed. If successful, the lawsuit would prevent Reabold from injecting wastewater into an existing well until any CEQA deficiencies are addressed. TheCalifornia Attorney General is defending the state agency, which disputes Petitioner's claims. At this time, it is unclear when the litigation will be resolved.
Encumbrances
OnOctober 17, 2018 , a working interest partner in theEast Slopes Project inCalifornia filed a UCC financing statement in regards to payables owed to the partner by the Company.
Results of Operations - Three Months Ended
California Crude Oil Prices The prices we receive for crude oil sales inCalifornia from the East Slopes project and fromReabold California, LLC ("Reabold") are based on prices posted for Midway-Sunset andBuena Vista crude oil delivery contracts, respectively. All posted pricing is subject to adjustments that vary by grade of crude oil, transportation costs, market differentials and other local conditions. Both the posted Midway-Sunset andBuena Vista prices generally move in correlation to prices quoted on theNew York Mercantile Exchange (NYMEX") for spotWest Texas intermediate ("WTI") crude oil,Cushing, Oklahoma delivery contracts. California Natural Gas Prices The price we receive for natural gas sales from Reabold is based on ninety-five (95%) of the price published in Natural Gas Intelligence ("NGI") Gas Price Index under the column "Bidweek Averages" for "California", "PG&E Citygate" less an amount per MMBtu equal to the Silverado Path On System As-Available transport date, less the Silverado Path On System transmission shrinkage rate forSilverado . The price we receive generally moves in correlation to prices quoted on theNew York Mercantile Exchange (NYMEX") for spotHenry Hub natural gas
prices. 18 There continues to be a significant amount of volatility in hydrocarbon prices and a corresponding fluctuation in our realized sale price of crude oil does exist. An example of this volatility is that in June of 2014 the monthly average price of WTI oil was$105.79 per barrel and our realized price per barrel of crude oil was$98.78 while inApril 2020 , the monthly average price of WTI crude oil was$16.55 and our monthly realized price was$16.96 per barrel. Finally, inMay 2022 , the monthly average price of WTI oil was$109.55 per barrel and our realized price per barrel of crude oil was$106.56 . This volatility in crude oil prices has continued throughout most of the fiscal year endedFebruary 28, 2022 . Any downward volatility in the price of crude oil will have a prolonged and substantial negative impact on our profitability and cash flow from our producingCalifornia properties. It is beyond our ability to accurately predict crude oil prices over any substantial length of time. A comparison of the average WTI price and the average realized crude oil sales price for the three months endedMay 31, 2022 and 2021 is shown in the table below: Three Months Ended May 31, 2022 May 31, 2021 Percentage Change Average three month WTI crude oil price (Bbl)$ 106.61 $ 63.07 69.0 % Average three month realized crude oil sales price (Bbl)$ 106.12 $ 61.65 72.1 %
For the three months endedMay 31, 2022 , the average WTI price was$106.61 and our average realized crude oil sale price was$106.12 , representing a discount of$0.49 per barrel or 0.5% lower than the average WTI price. In comparison, for the three months endedMay 31, 2021 , the average WTI price was$63.07 and our average realized sale price was$61.65 representing a discount of$1.42 per barrel or 2.3% lower than the average WTI price. Historically, the sale price we receive forCalifornia heavy crude oil has been less than the quoted WTI price because of the lower API gravity of ourCalifornia crude oil in comparison to the API gravity of quoted WTI crude oil.
California Crude Oil Revenue and Production
Crude oil revenue inCalifornia for the three months endedMay 31, 2022 increased$100,315 or 68.1% to$247,615 in comparison to revenue of$147,300 for the three months endedMay 31, 2021 . The average realized sale price of a barrel of crude oil for the three months endedMay 31, 2021 was$106.12 in comparison to$61.65 for the three months endedMay 31, 2021 . The increase in the average realized sale price of a barrel of crude oil of$44.47 or 72.1% accounted for 105.9% of the increase in revenue for the three months endedMay 31, 2022 , offset by a decline of 5.9% in revenue due to the 2.3% decline in production volume. Our net sales volume for the three months endedMay 31, 2022 was 2,333 barrels of crude oil in comparison to 2,389 barrels sold for the three months endedMay 31, 2021 . This decrease in crude oil sales volume of 56 barrels or 2.3% was primarily due to the timing of oil sales that occurred for the three months endedMay 31, 2022 . The gravity of our produced crude oil inCalifornia ranges between 14° API and 16° API. Production for the three months endedMay 31, 2022 was from 20 wells resulting in 1,822 well days of production in comparison to 1,809 well days of production for the three months endedMay 31, 2021 .
Our crude oil sales revenue for the three months ended
Three Months Ended Three Months Ended
May 31, 2022 May 31, 2021
Project Revenue Percentage Revenue PercentageCalifornia - East Slopes Project$ 247,615 100.0 % $
147,300 100.0 %
*Our average realized sale price on a BOE basis for the three months endedMay 31, 2021 was$106.12 in comparison to$61.65 for the three months endedMay 31, 2021 , representing an increase of$44.47 or 72.1% per barrel. Operating Expenses Our total operating expenses for the three months endedMay 31, 2022 were$1,350,172 , an increase of$1,121,873 or 491.4% compared to$228,299 for the three months endedMay 31, 2021 . Operating expenses for the three months endedMay 31, 2022 and 2021 are set forth in the table below: 19 Three Months Ended Three Months Ended May 31, 2022 May 31, 2021 BOE BOE Expenses Percentage Basis Expenses Percentage Basis Production expenses$ 60,717 4.5 %$ 46,726 20.5 % Depreciation, depletion, amortization ("DD&A") 11,776 0.8 % 13,948 6.1 % Transaction expenses 1,025,541 76.0 % - - General and administrative ("G&A") expenses 252,138 18.7 % 167,625 73.4 % Total operating expenses$ 1,350,172 100.0 %$ 578.73 $ 228,299 100.0 %$ 95.56 Production expenses include expenses associated with the production of crude oil. These expenses include pumpers, electricity, road maintenance, control of well insurance, property taxes and well workover costs; and, relate directly to the number of wells that are in production. For the three months endedMay 31, 2022 , these expenses increased by$13,991 or 29.9% to$60,717 in comparison to$46,726 for the three months endedMay 31, 2021 . For the three months endedMay 31, 2022 and 2021, we had 20 wells on production inCalifornia . Production expense on a barrel of oil equivalent ("BOE") basis for the three months endedMay 31, 2022 and 2021 were$26.03 and$19.56 , respectively. Production expenses represented 4.5% and 20.5% of total operating expenses for the three months endedMay 31, 2022 and 2021, respectively. Exploration and drilling expenses include geological and geophysical ("G&G") expenses as well as leasehold maintenance, plugging and abandonment ("P&A") expenses and dry hole expenses. For the three months endedMay 31, 2022 and 2021, these expenses were$-0 -. Exploration and drilling expenses represented 0.0% of total operating expenses for the three months endedMay 31, 2022 and 2021, 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 three months endedMay 31, 2022 , DD&A expenses decreased$2,172 or 15.6% to$11,776 in comparison to$13,948 for the three months endedMay 31, 2021 . On a BOE basis DD&A expense was$5.05 and$5.84 for the three months endedMay 31, 2022 and 2021, respectively. DD&A and impairment expenses represented 0.8% and 6.1% of total operating expenses for the three months endedMay 31, 2022 and 2021, respectively. For the three months endedMay 31, 2022 , we incurred transaction expenses of$1,025,541 related to the acquisition of funding for future drilling and to eliminate our line of credit balance. For the three months endedMay 31, 2021 , we did not incur any related expenses. Transaction expenses represented 76.0% and 0.0% of total operating expenses for the three months endedMay 31, 2022 and 2021, respectively.
General and administrative ("G&A") expenses include the salaries of our six
employees, including management. Other items included in our G&A expenses are
legal and accounting expenses, director fees, stock compensation, travel
expenses, insurance, Sarbanes-Oxley ("SOX") compliance expenses and other
administrative expenses necessary for an operator of crude oil properties as
well as for running a public company. For the three months ended May 31, 2022 ,
these expenses increased $84,513 or 50.49% to $252,138 in comparison to $167,625
for the three months ended May 31, 2021 . Approximately $68,086 or 80.5% of the
increase was directly related to the expense of holding the special shareholders
meeting to approve the acquisition of the Reabold property in California . We are
continuing a program of reducing all of our G&A costs wherever possible. G&A
expenses represented 18.7% and 73.4% of total operating expenses for the three
months ended May 31, 2022 and 2021, respectively.
Interest expense, net for the three months ended May 31, 2022 increased $9,664
or 15.8% to $70,930 in comparison to $61,266 for the three months ended May31, 2021.
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 as seen during the last 18 months and production volumes. Production expenses will fluctuate according to the number and percentage ownership of producing wells as well as the amount of revenues we receive based on the price of crude oil. Exploration and drilling expenses will be dependent upon the amount of capital that we have to invest in future development projects, as well as the success or failure of such projects. Likewise, the amount of DD&A expense will depend upon the factors cited above including the size of our proven reserves base and the market price of energy products. G&A expenses will also fluctuate based on our current requirements, but will generally tend to increase as we expand the business operations of the Company. An ongoing goal of the Company is to improve cash flow to cover the current level of G&A expenses and to fund our drilling programs inCalifornia andMichigan . 20
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 inCalifornia andMichigan and the availability of capital resource financing. There continues to be a significant amount of volatility in hydrocarbon prices and a corresponding fluctuation in our realized sale price of crude oil does exist. An example of this volatility is that in June of 2014 the monthly average price of WTI oil was$105.79 per barrel and our realized price per barrel of crude oil was$98.78 while inApril 2020 , the monthly average price of WTI crude oil was$16.55 and our monthly realized price was$16.96 per barrel. Finally, inMay 2022 , the monthly average price of WTI oil was$109.55 per barrel and our realized price per barrel of crude oil was$106.56 . This volatility in crude oil prices has continued throughout most of the fiscal year endedFebruary 28, 2022 . Any downward volatility in the price of crude oil will have a prolonged and substantial negative impact on our profitability and cash flow from our producingCalifornia properties. It is beyond our ability to accurately predict crude oil prices over any substantial length of time. We plan to spend approximately$435,000 drilling three development wells in the current 2022-2023 fiscal year; however our actual expenditures may vary significantly from this estimate if our plans for exploration and development activities change during the year. 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
Increase Percentage
May 31, 2022 February 28, 2022 (Decrease) Change
Cash $ 1,159,469 $ 139,573 $ 1,019,896 730.7 %
Current assets $ 1,380,571 $ 416,651 $ 963,920 231.3 %
Total assets $ 8,792,745 $ 975,704 $ 7,817,041 801.2 %
Current liabilities $ (3,013,189 ) $ (3,404,735 ) $ (391,546 ) (11.5 %)
Total liabilities $ (3,814,247 ) $ (4,322,908 ) $ (508,661 ) (11.8 %)
Working capital $ (1,632,618 ) $ (2,988,084 ) $ 1,355,466 45.4 %
Our working capital deficit decreased approximately$1.36 million or 45.4% to$1.63 million atMay 31, 2022 in comparison to$2.99 million atFebruary 28, 2022 . The decrease in our working capital deficit was primarily due to the funding we received in conjunction with the Reabold property inCalifornia . 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 we anticipate that we will have to rely on these capital markets to fund future operations and growth. Our business model is focused on acquiring exploration or development properties as well as existing production. Our ability to generate future revenues and operating cash flow will depend on successful exploration, and/or acquisition of crude oil producing properties, which may very likely require us to continue to raise equity or debt capital from outside sources.
Daybreak has ongoing capital commitments to develop certain leases pursuant to
their underlying terms. Failure to meet such ongoing commitments may result in
the loss of the right to participate in future drilling on certain leases or the
loss of the lease itself. These ongoing capital commitments will cause us to
seek additional forms of financing through various methods, including issuing
debt securities, equity securities, bank debt, or combinations of these
instruments which could result in dilution to existing security holders and
increased debt and leverage. The current uncertainty in the credit and capital
markets as well as the instability and volatility in crude oil prices since June
of 2014, has restricted our ability to obtain needed capital. The 2019 novel
coronavirus ("COVID-19") that spread to countries throughout the world including
the United States had a substantial negative impact on the demand for crude oil
and is largely responsible for the decline in crude oil prices. No assurance can
be given that we will be able to obtain funding under any loan commitments or
any additional financing on favorable terms, if at all. Sales of interests in
our assets may be another source of cash flow available to us.
21
The Company's financial statements for the three months endedMay 31, 2022 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 a cumulative net loss since entering the crude oil exploration industry and as of three months endedMay 31, 2022 have an accumulated deficit of$30.7 million and a working capital deficit of$1.6 million which raises substantial doubt about our ability to continue as a going concern. In the current fiscal year, we may continue to seek additional financing for our planned exploration and development activities inCalifornia . We could obtain financing through one or more various methods, including issuing debt securities, equity securities, or bank debt, or combinations of these instruments, which could result in dilution to existing security holders and increased debt and leverage. No assurance can be given that we will be able to obtain funding under any loan commitments or any additional financing on favorable terms, if at all. Sales of interests in our assets may be another source of cash flow.
Changes in Financial Condition
During the three months endedMay 31, 2022 , we received crude oil sales revenue from 20 wells in our East slopes Project inKern County, California . InMay 2022 , we acquiredReabold California, LLC from its previous owner. This property includes four producing wells in bothMonterey andContra Costa counties ofCalifornia . Our commitment to improving corporate profitability remains unchanged. During the three months endedMay 31, 2022 and 2021, crude oil revenue from theEast Slopes Project was$247,615 and$147,300 , respectively. For the three months endedMay 31, 2022 and 2021, we had an operating loss of$1,102,557 and$80,999 , respectively. Our balance sheet atMay 31, 2022 reflects total assets of approximately$8.792 million in comparison to approximately$0.976 million atFebruary 28, 2022 . AtMay 31, 2022 , total liabilities were approximately$3.814 million in comparison to approximately$4.322 million atFebruary 28, 2022 .
Common stock shares issued and outstanding were 384,735,402 and 67,802,273 at
Cash Flows
Changes in the net funds provided by and (used in) our operating, investing and financing activities are set forth in the table below:
Three Months Three Months
Ended Ended Increase Percentage
May 31, 2022 May 31, 2021 (Decrease) Change
Net cash (used in) provided by
operating activities $ (132,636 ) $ 63,339 (195,975 ) (309.4 %)
Net cash used in investing
activities $ - $ (10,584 ) (10,584 ) 100 %
Net cash provided by financing
activities $ 1,152,532 $ 26,440 1,126,092 4,259.0 %
Cash Flow (Used In) Provided By 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 three months endedMay 31, 2022 , cash flow used in operating activities was$132,636 in comparison to cash flow provided by operating activities of$63,339 for the three months endedMay 31, 2021 . This increase of$195,975 in our cash flow used for operating activities included approximately$68,086 in one-time expenses associated with the special shareholders meeting that was held to approve the acquisition of another crude oil and natural gas property,Reabold California, LLC . Additionally, we experienced transaction expenses of$1,025,541 associated with the acquisition and the sale of our common stock. Variations in cash flow from operating activities may impact our level of exploration and development expenditures. Our expenditures in operating activities consist primarily of exploration and drilling expenses, production expenses, geological, geophysical and engineering services and maintenance of existing mineral leases. Our expenses also consist of consulting and professional services, employee compensation, legal, accounting, travel and other G&A expenses that we have incurred in order to address normal and necessary business activities.
Cash Flow Used In Investing Activities
Cash flow from investing activities is derived from changes in oil and gas
property balances and other investment activities. Cash flow used in investing
activities for the three months ended
22
Cash Flow Provided By Financing Activities
Cash flow from financing activities is derived from changes in long-term liability account balances, our borrowing activities or in equity account balances, excluding retained earnings. Cash flow provided by financing activities for the three months endedMay 31, 2022 was$1,152,532 in comparison to$26,440 provided by financing activities in the three months endedMay 31, 2021 . During the three months endedMay 31, 2022 we received$1,987,500 net of transaction expenses from the sale of 128,125,000 shares of our common stock. Additionally, during the three months endedMay 31, 2022 , we paid off the balance of$808,182 on the line of credit withUBS Bank .
The following discussion is a summary of cash flows provided by or used in our
financing activities at
SHORT-TERM AND LONG-TERM BORROWINGS:
Note Payable InDecember 2018 , the Company was able to settle an outstanding balance owed to one of its third-party vendors. This settlement resulted in a$120,000 note payable being issued to the vendor. Additionally, the Company agreed to issue 2,000,000 shares of the Company's common stock as a part of the settlement agreement. Based on the closing price of the Company's common stock on the date of the settlement agreement, the value of the common stock transaction was determined to be$6,000 . The common stock shares were issued during the twelve months endedFebruary 29, 2020 . The note has a maturity date ofJanuary 1, 2022 and bears an interest rate of 10% rate per annum. Monthly interest is accrued and payable onJanuary 1st of each anniversary date until maturity of the note. AtMay 31, 2022 , the principal and accrued interest had not been paid and was outstanding. The accrued interest on the Note was$41,000 and$38,000 atMay 31, 2022 andFebruary 28, 2022 , respectively. Note Payable -Related Party OnDecember 22, 2020 , the Company entered into a Secured Promissory Note (the "Note"), as borrower, withJames Forrest Westmoreland andAngela Marie Westmoreland , Co-Trustees of theJames and Angela Westmoreland Revocable Trust , or its assigns (the "Noteholder"), as the lender.James F. Westmoreland is the Company's Chairman, President and Chief Executive Officer. Pursuant to the Note, the Noteholder loaned the Company an aggregate principal amount of$155,548 . After the deduction of loan fees of$10,929 the net proceeds from the loan were$144,619 . The loan fees are being amortized as original issue discount (OID) over the term of the loan. The interest rate of the loan is 2.25%. The Note requires monthly payments on the Note balance until repaid in full. The maturity date of the Note isDecember 21, 2035 . For the three months endedMay 31, 2022 , the Company made principal payments of$2,128 and amortized debt discount of$182 . The obligations under the Note are secured by a lien on and security interest in the Company's oil and gas assets located inKern 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 theCompany: (a) declare the entire principal amount of the Note, together with all accrued interest thereon and all other amounts payable hereunder, immediately due and payable; (b) exercise any of its remedies with respect to the collateral set forth in the Deed of Trust; and/or (c) exercise any or all of its other rights, powers or remedies under applicable law.
Current portion of note payable -related party balances at
May 31, 2022 February 28, 2022
Note payable -related party, current portion $ 8,888 $ 8,829
Unamortized debt issuance expenses (729 ) (729 )
Note payable - related party, current portion, net $ 8,159 $
8,100
Note payable -related party long-term balances at
May 31, 2022 February 28, 2022
Note payable - related party, non-current $ 134,466 $ 136,710
Unamortized debt issuance expenses (9,168 ) (9,350 ) Note payable- related party, non-current, net$ 125,298 $
127,360
23
Future estimated payments on the outstanding note payable - related party are set forth in the table below:
Twelve month periods ending May 31, 2023$ 8,887 2024 9,126 2025 9,370 2026 9,622 2027 10,715 Thereafter 94,797 Total$ 142,517
Short-term Convertible Note Payable
During the twelve months endedFebruary 28, 2022 , the Company executed a convertible promissory note with a third party for$200,000 . The interest rate was 18% per annum and is payable in kind (PIK) solely by additional shares of the Company's common stock. Regardless of when conversion occurred, a full 12 months of interest would be payable upon conversion. OnMay 5, 2022 , the Company received notice of conversion of the promissory note. The face amount of the note and$36,000 in interest were converted at a rate of$0.0085 per share into 27,764,706 share of the Company's common stock during the three months endedMay 31, 2022 . 12% Subordinated Notes The Company's 12% Subordinated Notes ("the Notes") issued pursuant to aJanuary 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 onJanuary 29th andJuly 29th . OnJanuary 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 toJanuary 29, 2017 . EffectiveJanuary 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 toJanuary 29, 2019 . As a result of the Company restructuring its balance sheet through conversions of related party debt to common stock, the related party 12% Noteholder chose to convert the principal and accrued interest of their Notes to the Company's common stock. The related party Note for$250,000 and accrued interest of$264,986 were converted to common stock at a rate of approximately$0.45 for every dollar of principal and interest resulting in 1,144,415 shares of common stock being issued. During the three months endedMay 31, 2022 , one 12% Note holder chose to convert the principal balance and accrued interest in to the Company's common stock. The$25,000 Note and accrued interest of$10,520 were converted at a rate of approximately$0.45 for every dollar of principal and interest resulting in 78,934 shares of common stock being issued. The Company has informed the remaining 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$290,000 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 precedingDecember 31, 2018 . The accrued interest on the 12% Notes atMay 31, 2022 andFebruary 28, 2022 was$133,480 and$135,229 , respectively. 12% Note balances atMay 31, 2022 andFebruary 28, 2022 are set forth in the table below:May 31, 2022 February 28, 2022
12% Subordinated notes - third party
- -
12% Subordinated notes balance$ 290,000 $ 315,000 Line of Credit The Company had an$890,000 line of credit for working capital purposes withUBS Bank USA ("UBS"), established pursuant to a Credit Line Agreement datedOctober 24, 2011 that was secured by the personal guarantee of its Chairman, President and Chief Executive Officer. OnMay 26, 2022 , the Company paid off the outstanding balance of$809,930 on the line of credit. The payoff of the line of credit was previously approved under terms of the Equity Exchange Agreement in which the Company acquired the Reabold property inCalifornia . The payoff was a part of the use of proceeds from the Company's sale of common stock to a third party. 24 Production Revenue Payable
Beginning inDecember 2018 , the Company conducted a fundraising program to fund the drilling of future wells inCalifornia andMichigan and to settle some of its historical debt. The purchaser(s) of a production revenue payment interest received a production revenue payment on future wells to be drilled inCalifornia andMichigan in exchange for their purchase. As ofMay 31, 2022 , 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$1,077,642 as ofMay 31, 2022 , which is being accounted as interest expense over the estimated period over which payments will be made based on expected future revenue streams. For the three months endedMay 31, 2022 and 2021, amortization of the debt discount on these payables amounted to$30,525 and$31,970 , respectively, which has been included in interest expense in the statements of operations. Production revenue payable balances atMay 31, 2022 andFebruary 28, 2022 are set forth in the table below:May 31, 2022 February 28, 2022
Estimated payments of production revenue payable$ 991,638 $
941,259
Less: unamortized discount (112,476 ) (124,134 )
879,162 817,125
Less: current portion (210,215 ) (78,877 )Net production revenue payable - long term$ 621,461 $
738,248
Encumbrances
On
Operating Leases We lease approximately 988 rentable square feet of office space from an unaffiliated third party for our corporate office located in SpokaneValley, Washington . Additionally, we lease approximately 416 and 695 rentable square feet from unaffiliated third parties for our regional operations office inFriendswood, Texas and storage and auxiliary office space inWallace, Idaho , respectively. The lease inFriendswood is a 12 month lease that expires inOctober 2021 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 andWallace leases are currently on a month-to-month basis. Our lease agreements do not contain any residual value guarantees, restrictive covenants or variable lease payments. We have not entered into
any financing leases. 25 We determine if an arrangement is a lease at inception. Operating leases are recorded in operating lease right of use assets, net, operating lease liability - current, and operating lease liability, long-term on its balance sheet.
Rent expense for the three months ended
Capital Commitments Daybreak has ongoing capital commitments to develop certain leases pursuant to their underlying terms. Failure to meet such ongoing commitments may result in the loss of the right to participate in future drilling on certain leases or the loss of the lease itself. These ongoing capital commitments may also cause us to seek additional capital from sources outside of the Company. The current uncertainty in the credit and capital markets, and the economic downturn, may restrict our ability to obtain needed capital.
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 ourEast Slopes Project located inKern 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 28.5%. InMay 2022 , the Company acquiredReabold California, LLC ("Reabold") from a third party. This property includes producing wells in both theMonterey andContra Costa counties ofCalifornia . This project includes four producing wells. We have a 50% working interest with a 40% net revenue interest in this project. In conjunction with our acquisition of Reabold, the Company was able to secure a capital raise of$2,500,000 through the issuances of the Company's common stock. The Company anticipates its revenue will continue to increase as the Company participates in the drilling of more wells in the East Slopes and Reabold projects inCalifornia . 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. 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
Critical Accounting Policies
Refer to Daybreak's Annual Report on Form 10-K for the fiscal year ended
Off-Balance Sheet Arrangements
As ofMay 31, 2022 , we did not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partners that have been, or are reasonably likely to have, a material effect on our financial position or results of operations. 26
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