UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2018
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.) |
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| 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)
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 ¨ |
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| Non-accelerated filer ¨ | (Do not check if a smaller reporting company) | Smaller reporting company þ |
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| Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes þ No
At July 11, 2018 the registrant had 51,532,364 outstanding shares of $0.001 par value common stock.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
PART II - OTHER INFORMATION
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ITEM 1. | 26 | |
| ITEM 1A. | 26 | |
ITEM 6. | 27 | |
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| 28 |
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAYBREAK OIL AND GAS, INC.
Balance Sheets – Unaudited
The accompanying notes are an integral part of these unaudited financial statements
3
DAYBREAK OIL AND GAS, INC.
Statements of Operations – Unaudited
The accompanying notes are an integral part of these unaudited financial statements
4
DAYBREAK OIL AND GAS, INC.
Statements of Cash Flows – Unaudited
The accompanying notes are an integral part of these unaudited financial statements
5
DAYBREAK OIL AND GAS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION:
Organization
Originally incorporated as Daybreak Uranium, Inc., (“Daybreak Uranium”) under the laws of the State of Washington on March 11, 1955, Daybreak Uranium was organized to explore for, acquire, and develop mineral properties in the Western United States. During 2005, management of the Company decided to enter the crude oil and natural gas exploration and production industry. On October 25, 2005, the Company shareholders approved a name change from Daybreak Mines, Inc. to Daybreak Oil and Gas, Inc. (referred to herein as “Daybreak” or the “Company”) to better reflect the business of the Company.
All of the Company’s crude oil and natural gas 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 and natural gas. These commodity prices are subject to wide fluctuations and market uncertainties due to a variety of factors that are beyond the control of the Company. These factors include the level of global demand for petroleum products, foreign supply of crude oil and natural gas, the establishment of and compliance with production quotas by oil-exporting countries, the relative strength of the U.S. dollar, weather conditions, the price and availability of alternative fuels, and overall economic conditions, both foreign and domestic.
Basis of Presentation
The accompanying unaudited interim financial statements and notes for the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q for quarterly reports under Section 13 or 15 (d) of the Securities Exchange Act of 1934 (the “Exchange Act”). Accordingly, they do not include all of the information and footnote disclosures normally required by accounting principles generally accepted in the United States of America for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements have been included and such adjustments are of a normal recurring nature. Operating results for the three months ended May 31, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending February 28, 2019.
These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2018.
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 and to determine the amount of any impairment of proved properties;
·
The valuation of unproved acreage and proved crude oil and natural gas properties to determine the amount of any impairment of crude oil and natural gas properties;
·
Judgment regarding the productive status of in-progress exploratory wells to determine the amount of any provision for abandonment; and
·
Estimates regarding abandonment obligations.
Reclassifications
Certain reclassifications have been made to conform the prior period’s financial information to the current period’s presentation. These reclassifications had no effect on previously reported net loss or accumulated deficit.
6
NOTE 2 — GOING CONCERN:
Financial Condition
The Company’s financial statements for the three months ended May 31, 2018 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company has incurred net losses since entering the crude oil and natural gas exploration industry and as of May 31, 2018 has an accumulated deficit of $39,043,046 and a working capital deficit of $16,709,806, 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 in these wells is 36.6% and the average net revenue interest (“NRI”) is 28.4% for these same wells.
The Company anticipates its revenue will continue to increase as the Company participates in the drilling of more wells in the East Slopes Project in California and as our exploratory drilling project begins in Michigan. However, given the current 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.
The Company believes that our 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. While the Company has experienced revenue growth, which has resulted in positive cash flow from its crude oil and natural gas properties, it has not yet established a positive cash flow on a company-wide basis. It will be necessary for the Company to obtain additional funding from the private or public debt or equity markets in the future. However, the Company cannot offer any assurance that it will be successful in executing the aforementioned plans to continue as a going concern.
Daybreak’s financial statements as of May 31, 2018 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.
NOTE 3 — RECENT ACCOUNTING PRONOUNCEMENTS:
Accounting Standards Issued and Adopted
In May 2014, the FASB issued ASC updated No. 2014-09, Revenue from Contracts with Customers (Topic 606 (ASU 2014-09). Under the amendments in this update, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in this update are effective for fiscal years and interim periods within those years beginning after December 15, 2017 and supersedes any previous revenue recognition guidance. Implementation of Topic 606 was done using the modified retrospective approach. Adoption of this new standard did not have an impact on the Company’s balance sheet, statement of operations, statement of stockholders’ equity or statement of cash flows.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”). The update is effective for years beginning December 15, 2017, including interim reporting periods within those fiscal years. Early adoption is permitted. The purpose of Update 216-18 is to clarify guidance and presentation related to restricted cash in the Statements of Cash Flows. The amendment requires beginning-of-period and end-of-period total amounts shown on the Statements of Cash Flows to include cash and cash equivalents as well as restricted cash and restricted cash equivalents. Adoption of this new standard did not have a material impact on the Company’s financial statements.
7
NOTE 4 — RESTRICTED CASH:
A reconciliation of cash, cash equivalents and restricted cash reported within the statement of financial position that sum to the total of the same such cash amounts shown in the statement of cash flows is set forth in the table below.
|
| May 31, 2018 |
| February 28, 2018 | ||
| Cash and cash equivalents | $ | 25,070 |
| $ | 48,535 |
| Restricted cash |
| - |
|
| 100,029 |
| Total cash, cash equivalents and restricted cash shown in the statement of cash flows | $ | 25,070 |
| $ | 148,564 |
Amounts included in restricted cash represent those required to be set aside in the form of a short-term time deposit (CD) pledged as collateral in connection with any obligation for plugging, abandonment and site remediation requirements for our crude oil operations in California. Effective March 19, 2018, the collateral requirement obligation was rescinded. These funds then became available for the Company to use for regular business purposes.
NOTE 5 — CONCENTRATION OF CREDIT RISK:
Substantially all of the Company’s trade accounts receivable result from crude oil and natural gas sales or joint interest billings to its working interest partners. This concentration of customers and joint interest owners may impact the 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 May 31, 2018 and February 28, 2018 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.
The Company’s accounts receivable balances from California crude oil sales of $106,652 and $104,840 at May 31, 2018 and February 28, 2018, respectively were from one customer, Plains Marketing. Crude oil sales receivables balances at May 31, 2018 and February 28, 2018 represent crude oil sales that occurred in May and February 2018, respectively.
Joint interest participant receivables balances of $96,464 and $58,452 at May 31, 2018 and February 28, 2018, 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 May 31, 2018 and February 28, 2018, as the joint interest owners have a history of paying their obligations.
At May 31, 2018, the Company owed its principal lender, Maximilian Resources LLC, a Delaware limited liability company and successor by assignment to Maximilian Investors LLC (either party, as appropriate, is referred to in these notes to the financial statements as “Maximilian”), an aggregate $11.5 million or approximately 67.8% of the Company’s total debt. The Company is currently considered to be in default on its credit facility loan with Maximilian. As a result of this concentration of debt, the Company may be susceptible to any economic challenges faced by Maximilian, which is currently in receivership. For further information on the Maximilian credit facility and loan balances refer to Note 9.
NOTE 6 — CRUDE OIL AND NATURAL GAS PROPERTIES:
Crude oil and natural gas property balances at May 31, 2018 and February 28, 2018 are set forth in the table below.
|
| May 31, 2018 |
| February 28, 2018 | ||
| Proved leasehold costs | $ | 115,119 |
| $ | 115,119 |
| Costs of wells and development |
| 2,302,645 |
|
| 2,293,668 |
| Capitalized exploratory well costs |
| 1,333,785 |
|
| 1,333,785 |
| Cost of proved crude oil and natural gas properties |
| 3,751,549 |
|
| 3,742,572 |
| Accumulated depletion, depreciation, amortization and impairment |
| (3,043,937) |
|
| (3,027,963) |
| Total proved crude oil and natural gas properties, net | $ | 707,612 |
| $ | 714,609 |
| Michigan unproved crude oil and natural gas properties |
| 31,187 |
|
| 31,187 |
| Total proved and unproved crude oil and natural gas properties, net | $ | 738,799 |
| $ | 745,796 |
8
NOTE 7 — ACCOUNTS PAYABLE:
On March 1, 2009, the Company became the operator for its East Slopes Project. Additionally, the Company then assumed certain original defaulting partners’ approximate $1.5 million liability representing a 25% working interest in the drilling and completion costs associated with the East Slopes Project four earning well program. The Company subsequently sold the same 25% working interest on June 11, 2009. Of the $1.5 million liability, $244,849 remains unpaid and is included in the May 31, 2018 accounts payable balance. Payment of this liability has been delayed until the Company’s cash flow situation improves.
NOTE 8 — ACCOUNTS PAYABLE- RELATED PARTIES:
The May 31, 2018 and February 28, 2018 accounts payable – related parties balances of $1,718,931 and $1,664,845 respectively, comprised primarily of deferred salaries 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 President and Chief Executive Officer. Payment of these deferred items has been delayed until the Company’s cash flow situation improves.
NOTE 9 — SHORT-TERM AND LONG-TERM BORROWINGS:
Current debt (Short-term borrowings)
Note Payable – Related Party
The Company has a note payable-related party loan balance of $250,100 as of May 31, 2018 and February 28, 2018. The Company’s Chairman, President and Chief Executive Officer has loaned the Company an aggregate $250,100 that was used for a variety of corporate purposes including an escrow requirement on a loan commitment; maturity extension fees on third party loans; and a reduction of principal on the Company’s credit line with UBS Bank. These loans are non-interest bearing loans and repayment will be made upon a mutually agreeable date in the future.
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. There are ten noteholders, holding 980,000 warrants, who have not yet exercised their warrants. The exercise price of the associated warrants was lowered from $0.14 to $0.07 as part of the Note maturity extension. The Notes principal of $565,000 is payable in full at the amended maturity date of the Notes. The fair value of the warrant modification, as determined by the Black-Scholes option pricing model, was $29,075 and was recognized as a discount to debt and is being amortized over the extended maturity date of the Notes. The Black-Scholes valuation encompassed the following weighted average assumptions: a risk free interest rate of 1.22%; volatility of 378.73%; and dividend yield of 0.0%.
The Notes principal of $565,000 is payable in full at the amended maturity date of the Notes. Should the Board of Directors, on the maturity date, decide that the payment of the principal and any unpaid interest would impair the financial condition or operations of the Company, the Company may then elect a mandatory conversion of the unpaid principal and interest into the 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. Amortization expense was $3,634 and $3,635, respectively at May 31, 2018 and 2017. The unamortized debt discount at May 31, 2018 and February 28, 2018 was $9,692 and $13,326, respectively.
12% Note balances at May 31, 2018 and February 28, 2018 are set forth in the table below:
|
| May 31, 2018 |
| February 28, 2018 | ||
| 12% Subordinated notes | $ | 315,000 |
| $ | 315,000 |
| Debt discount |
| (5,403) |
|
| (7,429) |
| 12% Subordinated notes balance, net | $ | 309,597 |
| $ | 307,571 |
9
12% Note balances – related parties at May 31, 2018 and February 28, 2018 are set forth in the table below:
|
| May 31, 2018 |
| February 28, 2018 | ||
| 12% Subordinated notes – related party | $ | 250,000 |
| $ | 250,000 |
| Debt discount |
| (4,289) |
|
| (5,897) |
| 12% Subordinated notes – related party balance, net | $ | 245,711 |
| $ | 244,103 |
In conjunction with the Notes private placement, a total of 1,190,000 common stock purchase warrants were issued at a rate of two warrants for every dollar raised through the private placement. The warrants have an amended exercise price of $0.07 and an amended expiration date of January 29, 2019. The 12% Note warrants that have been exercised are set forth in the table below. At February 28, 2018, there were 980,000 warrants that were not exercised and had not expired.
Maximilian Loan Agreement (Credit Facility)
On October 31, 2012, the Company entered into a loan agreement with Maximilian Resources LLC, a Delaware limited liability company and successor by assignment to Maximilian Investors LLC (either party, as appropriate, is referred to in these notes to the financial statements as “Maximilian”), which provided for a revolving credit facility of up to $20 million, that matured on October 31, 2016, with a minimum commitment of $2.5 million. On October 31, 2016 through the Fourth Amendment to the Amended and Restated Loan and Security Agreement, the maturity date of the loan was changed to February 28, 2020.
In August 2013, the Company amended its loan agreement with Maximilian thereby increasing the amount of the credit facility to $90 million and reduced the annual interest rate to 12%. The Company evaluated the amendment of the revolving credit facility under ASC 470-50-40 and determined that the Company’s borrowing capacity under the amended loan agreement exceeded its borrowing capacity under the old loan agreement. Consequently, the unamortized discount and deferred financing costs as of the date of amendment were amortized over the term of the loan agreement. Due to the Company’s default on the Maximilian loan, all unamortized discount and deferred financing costs were fully amortized during the twelve months ended February 28, 2018.
On October 31, 2016, the Company entered into a Fourth Amendment to the Amended and Restated Loan and Security Agreement with Maximilian, which amended the Company’s loan agreement with Maximilian (the “Restructuring Agreement”). Pursuant to the Restructuring Agreement, in exchange for the proceeds it received from the Kentucky Sale, Maximilian and the Company have agreed to a commitment by Maximilian to advance up to $250,000 in financing to the Company over the following six month period and the pursuit of the Michigan exploratory joint drilling project using the $250,000 set aside from the Kentucky Sale.
As a result of the decline in hydrocarbon prices that started in June of 2014, the Company has been unable to make any type of interest or principal payments required under the amended terms of its credit facility with Maximilian since December of 2015. Under the terms of the Restructuring Amendment all unpaid interest is currently being accrued. Accrued interest on the credit facility loan at May 31, 2018 and February 28, 2018 was $2,363,369 and $1,812,128, respectively. The Company is currently considered to be in default under the terms of its credit facility loan and interest is being accrued at the rate of 23.8% since March 1, 2018. Maximilian is currently in receivership. The United States District Court for the Eastern District of New York, Southern Division has hired consultants to assist in finding a new lender to assume the Maximilian credit facility. No assurances can be made as to who the new lender will be or how the structure of the loan will affect the Company.
During the three months ended May 31, 2018 and 2017, the Company received advances of $-0- and $35,000, respectively, under the terms of the credit facility.
10
Maximilian Promissory Note – Michigan Exploratory Joint Drilling Project
The Company has a note payable loan balance to Maximilian of $94,650 as of May 31, 2018 and February 28, 2018. The Company has received $94,650 in aggregate from multiple advances since January 2017 from Maximilian under a separate promissory note agreement dated January 17, 2017 and amended on February 10, 2017 regarding the development of an exploratory joint drilling project in Michigan. Advances under this agreement are subject to a 5% (five percent) per annum interest rate. In the event of a default of any of the Company’s obligations under the promissory note, the amounts due may be called immediately due and payable at Maximilian’s option.
Due to a lack of available funding from Maximilian, we have been unable to spud a well on the Michigan project. The Company is currently considered to be in default under the terms of its loan agreement. Maximilian is currently in receivership. The United States District Court for the Eastern District of New York, Southern Division has hired consultants to assist in finding a new lender. No assurances can be made as to who the new lender will be or how the structure of the loan will affect the Company. Accrued interest on the Michigan promissory note at May 31, 2018 and February 28, 2018 was $6,368 and $5,158, respectively. During the three months ended May 31, 2018 and 2017, the Company received advances of $-0- and $10,650. The $10,650 was paid directly to the Operator of the Michigan project by Maximilian on the Company’s behalf.
In accordance with the guidance found in ASC-470-10-45, the entire balance of both the Maximilian credit facility loan and the Michigan loan is presented under the current liabilities section of the balance sheets. Current debt balances at May 31, 2018 and February 28, 2018 are set forth in the table below:
Encumbrances
The Company’s debt obligations, pursuant to the above mentioned credit facility loan agreement and promissory notes entered into by and between Maximilian and the Company are secured by a perfected first priority security interest in substantially all of the personal property of the Company, and two mortgages; one covering its leases in California and the other covering its leases in Michigan.
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, $700,000 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. 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.
At May 31, 2018 and February 28, 2018, the line of credit had an outstanding balance of $815,913 and $873,350, respectively. During the three months ended May 31, 2018 and 2017, the Company made payments to the line of credit of $65,000 and $15,000, respectively. Interest incurred for the three months ended May 31, 2018 and 2017 was $7,564 and $9,059, respectively.
NOTE 10 — STOCKHOLDERS’ DEFICIT:
Preferred Stock
The Company is authorized to issue up to 10,000,000 shares of preferred stock with a par value of $0.001. The 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.
11
Series A Convertible Preferred Stock
The Company has designated 2,400,000 shares of the 10,000,000 preferred shares as Series A Convertible Preferred Stock (“Series A Preferred”), with a $0.001 par value. At May 31, 2018 and February 28, 2018, there were 709,568 shares issued and outstanding, respectively, that had not been converted into our common stock. As of May 31, 2018, 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.
Holders of Series A Preferred shall accrue dividends, in the amount of 6% of the original purchase price per annum. Dividends may be paid in cash or common stock at the discretion of the Company. Dividends are cumulative whether or not in any dividend period or periods we have assets legally available for the payment of such dividends. Accumulations of dividends on Series A Preferred do not bear interest. Dividends are payable upon declaration by the Board of Directors.
As of May 31, 2018 no dividends have been declared or paid. Dividends earned since issuance for each fiscal year and the three months ended May 31, 2018 are set forth in the table below:
Common Stock
The Company is authorized to issue up to 200,000,000 shares of $0.001 par value common stock of which 51,532,364 shares were issued and outstanding as of May 31, 2018 and February 28, 2018, respectively.
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NOTE 11 — WARRANTS:
Warrants outstanding and exercisable as of May 31, 2018 are set forth in the table below:
|
|
| Warrants |
| Exercise Price |
| Remaining Life (Years) |
| Exercisable Warrants Remaining |
| 12% Subordinated notes |
| 980,000 |
| $0.07 |
| 0.67 |
| 980,000 |
| Warrants issued for Kentucky oil project |
| 3,498,601 |
| $0.04 |
| 0.25 |
| 3,498,601 |
| Warrants issued for Kentucky debt financing |
| 2,623,951 |
| $0.04 |
| 0.25 |
| 2,623,951 |
| Warrants issued for Kentucky debt financing |
| 309,503 |
| $0.214 |
| 0.25 |
| 309,503 |
| Warrants issued in share-for-warrant exchange |
| 427,729 |
| $0.04 |
| 0.25 |
| 427,729 |
|
|
| 7,839,784 |
|
|
|
|
| 7,839,784 |
Warrant activity for the three months ended May 31, 2018 is set forth in the table below:
|
|
| Number of Warrants |
| Weighted Average Exercise Price |
| Warrants outstanding, February 28, 2018 |
| 7,839,784 |
| $0.05 |
|
|
|
|
|
|
| Changes during the three months ended May 31, 2018: |
|
|
|
|
| Issued |
| - |
|
|
| Expired / Cancelled / Forfeited |
| - |
|
|
| Warrants outstanding, May 31, 2018 |
| 7,839,784 |
| $0.05 |
|
|
|
|
|
|
| Warrants exercisable, May 31, 2018 |
| 7,839,784 |
| $0.05 |
During the three months ended May 31, 2018, there were no warrants issued, exercised, cancelled or that expired. The remaining outstanding warrants as of May 31, 2018, have a weighted average exercise price of $0.05, a weighted average remaining life of 0.3 years, and an intrinsic value of $-0-.
NOTE 12 — INCOME TAXES:
On December 22, 2017, the federal government enacted a tax bill H.R.1, an act to provide for reconciliation pursuant to Titles II and V of the concurrent resolution on the budget for fiscal year 2018, commonly referred to as the Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act contains significant changes to corporate taxation, including, but not limited to, reducing the U.S. federal corporate income tax rate from 35% to 21% and modifying or limiting many business deductions. We re-measured 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:
|
| May 31, 2018 |
| February 28, 2018 | ||
| Computed at U.S. and state statutory rates | $ | (211,652) |
| $ | (981,966) |
| Permanent differences |
| 93 |
|
| 29,060 |
| New tax law adjustment |
| - |
|
| 2,912,689 |
| Changes in valuation allowance |
| 211,559 |
|
| (1,959,783) |
| Total | $ | - |
| $ | - |
Tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred liabilities are set forth in the table below:
|
| May 31, 2018 |
| February 28, 2018 | ||
| Deferred tax assets: |
|
|
|
|
|
| Net operating loss carryforwards | $ | 8,636,371 |
| $ | 8,413,128 |
| Crude oil and natural gas properties |
| 35,751 |
|
| 47,434 |
| Stock based compensation |
| 66,187 |
|
| 66,187 |
| Other |
| 27,838 |
|
| 27,838 |
| Less valuation allowance |
| (8,766,147) |
|
| (8,554,587) |
| Total | $ | - |
| $ | - |
13
At May 31, 2018, Daybreak had estimated net operating loss (“NOL”) carryforwards for federal and state income tax purposes of approximately $28,942,265 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 period of $1,088,884 will not expire and will carry over indefinitely. The valuation allowance increased $211,559 and $1,959,783 for the three months ended May 31, 2018 and the year ended February 28, 2018, 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 2012 currently remain subject to examinations by appropriate tax authorities. None of our tax returns are under examination at this time.
NOTE 13 — COMMITMENTS AND CONTINGENCIES:
Various lawsuits, claims and other contingencies arise in the ordinary course of the Company’s business activities. While the ultimate outcome of any future contingency is not determinable at this time, management believes that any liability or loss resulting therefrom will not materially affect the financial position, results of operations or cash flows of the Company.
The Company, as an owner or lessee and operator of crude oil and natural gas properties, is subject to various federal, state and local laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability on the lessee under a crude oil and natural gas lease for the cost of pollution clean-up resulting from operations and subject the lessee to liability for pollution damages. In some instances, the Company may be directed to suspend or cease operations in the affected area. The Company maintains insurance coverage that is customary in the industry, although the Company is not fully insured against all environmental risks.
The Company is not aware of any environmental claims existing as of May 31, 2018. 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 and natural gas properties.
The Company’s minimum annual office rental lease commitments by fiscal year as of May 31, 2018 is shown in the table below:
| Fiscal Year Ended |
| Annual Office Lease Obligation | |
| February 28, 2019 |
| $ | 6,897 |
| February 29, 2020 |
|
| - |
| February 28, 2021 |
|
| - |
| February 28, 2022 |
|
| - |
| February 28, 2023 and thereafter |
|
| - |
| Totals |
| $ | 6,897 |
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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 three months ended May 31, 2018 and in our Annual Report on Form 10-K for the year ended February 28, 2018. References to “Daybreak”, the “Company”, “we”, “us” or “our” mean Daybreak Oil and Gas, Inc.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements contained in our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) are intended to be covered by the safe harbor provided for under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act.
All statements other than statements of historical fact contained in this MD&A report are inherently uncertain and are forward-looking statements. Statements that relate to results or developments that we anticipate will or may occur in the future are not statements of historical fact. Words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will” and similar expressions identify forward-looking statements. Examples of forward-looking statements include, without limitation, statements about the following:
·
Our future operating results;
·
Our future capital expenditures;
·
Our future financing;
·
Our expansion and growth of operations; and
·
Our future investments in and acquisitions of oil and natural gas properties.
We have based these forward-looking statements on assumptions and analyses made in light of our experience and our perception of historical trends, current conditions, and expected future developments. However, you should be aware that these forward-looking statements are only our predictions and we cannot guarantee any such outcomes. Future events and actual results may differ materially from the results set forth in or implied in the forward-looking statements. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, the following risks and uncertainties:
·
General economic and business conditions;
·
Exposure to market risks in our financial instruments;
·
Fluctuations in worldwide prices and demand for crude oil and natural gas;
·
Our ability to find, acquire and develop crude oil and natural gas properties;
·
Fluctuations in the levels of our crude oil and natural gas exploration and development activities;
·
Risks associated with crude oil and natural gas exploration and development activities;
·
Competition for raw materials and customers in the crude oil and natural gas industry;
·
Technological changes and developments in the crude oil and natural gas industry;
·
Legislative and regulatory uncertainties, including proposed changes to federal tax law and climate change legislation, regulation of hydraulic fracturing and potential environmental liabilities;
·
Our ability to continue as a going concern;
·
Our ability to secure financing under any commitments as well as additional capital to fund operations; and
·
Other factors discussed elsewhere in this Form 10-Q and in our other public filings, press releases, and discussions with Company management.
Our reserve estimates are determined through a subjective process and are subject to periodic revision.
Should one or more of the risks or uncertainties described above or elsewhere in our Form 10-K for the year ended February 28, 2018 and in this Form 10-Q for the three months ended May 31, 2018 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.
15
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 longer-term success depends on, among many other factors, the acquisition and drilling of commercial grade crude oil and natural gas properties and on the prevailing sales prices for crude oil and natural gas along with associated operating expenses. The volatile nature of the energy markets makes it difficult to estimate future prices of crude oil and natural gas; however, any prolonged period of depressed prices would have a material adverse effect on our results of operations and financial condition.
Our operations are focused on identifying and evaluating prospective crude oil and natural gas properties and funding projects that we believe have the potential to produce crude oil or natural gas in commercial quantities. We conduct all of our drilling, exploration and production activities in the United States, and all of our revenues are derived from sales to customers within the United States. Currently, we are in the process of developing a multi-well oilfield project in Kern County, California and an exploratory joint drilling project in Michigan.
Our management cannot provide any assurances that Daybreak will ever operate profitably. We have not been able to generate sustained positive earnings on a Company-wide basis. As a small company, we are more susceptible to the numerous business, investment and industry risks that have been described in Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended February 28, 2018 and in Part III, Item 1A. Risk Factors of this 10-Q Report. Throughout this Quarterly Report on Form 10-Q, oil is shown in barrels (“Bbls”); natural gas is shown in thousands of cubic feet (“Mcf”) unless otherwise specified, and hydrocarbon totals are expressed in barrels of oil equivalent (“BOE”).
Below is brief summary of our crude oil projects in California and Michigan. Refer to our discussion in Item 2. Properties, in our Annual Report on Form 10-K for the year ended February 28, 2018 for more information on the California project.
Kern County, California (East Slopes Project)
The East Slopes Project is located in the southeastern part of the San Joaquin Basin near Bakersfield, California. Drilling targets are porous and permeable sandstone reservoirs that exist at depths of 1,200 feet to 4,500 feet. Since January 2009, we have participated in the drilling of 25 wells in this project. We have been the Operator at the East Slopes Project since March 2009.
The crude oil produced from our acreage from the Vedder Sand is considered heavy oil. The crude oil ranges from 14° to 16° API gravity and must be heated to separate and remove water prior to sale. Our crude oil wells in the East Slopes Project produce from five reservoirs at our Sunday, Bear, Black, Ball and Dyer Creek locations. The Sunday property has six producing wells, while the Bear property has nine producing wells. The Black property is the smallest of all currently producing reservoirs, and currently has two producing wells at this property. The Ball property also has two producing wells while the Dyer Creek property has one producing well.
During the three months ended May 31, 2018 we had production from 20 vertical crude oil wells. Our average working interest and NRI in these 20 wells is 36.6% and 28.4%, respectively.
There are several other similar prospects on trend with the Bear, Black and Dyer Creek reservoirs exhibiting the same seismic characteristics. Some of these prospects, if successful, would utilize the 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 there is a sustained improvement in crude oil prices and additional financing is in put in place. We plan to spend approximately $10,000 in new capital investments within the East Slopes Project area in the 2018 – 2019 fiscal year if no new financing is in place. If new financing is secured, we plan to drill four development wells for a total of $525,000.
16
Michigan Acreage Acquisition
In January 2017, Daybreak acquired a 30% working interest in 1,400 acres in the Michigan Basin where we have two shallow crude oil prospects. The leases have been secured and multiple targets have been identified through a 2-D seismic interpretation. A 3-D seismic survey was obtained in January and February of 2017. An analysis of the seismic survey confirmed the prospect identified on the 2-D seismic, as well as identified several additional drilling locations. We will obtain an additional 3-D survey to better delineate the other locations before a drilling program commences. The wells will be drilled vertically with conventional completions and no hydraulic fracturing will be required. The first well is expected to be drilled during the late summer of 2018. We plan to spend approximately $300,000 if new financing is secured.
Encumbrances
The Company’s debt obligations, pursuant to a credit facility loan agreement and promissory notes entered into by and between Maximilian Resources LLC, a Delaware limited liability company and successor by assignment to Maximilian Investors LLC, a Delaware limited liability company, as lender, (either party, as appropriate, is referred to in this Quarterly Report on Form 10-Q as “Maximilian”), and the Company are secured by a perfected first priority security interest in substantially all of the personal property of the Company, and two mortgages; one covering our leases in California and the other covering our leases in Michigan. For further information on the credit facility loan agreements and promissory note with Maximilian refer to the discussion under the caption “Current debt (Short-term borrowings)” in the MD&A portion of this Quarterly report on Form 10-Q.
Results of Operations – Three Months Ended May 31, 2018 compared to the Three Months Ended May 31, 2017
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. We do not have any natural gas revenues in California.
There has been a significant amount of volatility in crude oil prices and dramatic decline in our realized sale price of crude oil since June of 2014, when the monthly average price of WTI crude oil was $105.79 per barrel. This decline in the price of crude oil has had a substantial negative impact on our cash flow from our producing California properties. While there has been an improvement in crude oil prices for the three months ended May 31, 2018 in comparison to the three months ended May 31, 2017 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 start to rebound as there are many factors beyond our control that dictate the price we receive on our crude oil sales.
A comparison of the average WTI price and the average realized crude oil sales price for the three months ended May 31, 2018 and 2017 is shown in the table below:
|
|
| Three Months Ended |
|
| ||||
|
|
| May 31, 2018 |
| May 31, 2017 |
| Percentage Change | ||
| Average three month WTI crude oil price |
| $ | 66.32 |
| $ | 49.62 |
| 33.7% |
| Average three month realized crude oil sales price (Bbl) |
| $ | 65.88 |
| $ | 41.62 |
| 58.3% |
For the three months ended May 31, 2018, the average WTI price was $66.32 and our average realized crude oil sale price was $65.88, representing a discount of $0.44 per barrel or 0.7% lower than the average WTI price. In comparison, for the three months ended May 31, 2017, the average WTI price was $49.62 and our average realized sale price was $41.62 representing a discount of $8.00 per barrel or 16.1% lower than the average WTI price. Effective June 1, 2017, we were able to negotiate with our oil purchaser the use of a more favorable oil pricing schedule that has contributed to increasing the average realized price we receive on oil sales. 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 May 31, 2018 increased $43,209 or 32.3% to $176,933 in comparison to revenue of $133,724 for the three months ended May 31, 2017. The average sale price of a barrel of crude oil for the three months ended May 31, 2018 was $65.88 in comparison to $41.62 for the three months ended May 31, 2017. The increase of $24.26 per barrel or 58.3% in the average realized price of a barrel of crude oil accounted for 100% of the increase in crude oil revenue for the three months ended May 31, 2018. Effective June 1, 2017, we were able to negotiate with our oil purchaser the use of a more favorable oil pricing schedule that has contributed to increasing the average realized price we receive on oil sales.
17
Our net sales volume for the three months ended May 31, 2018 was 2,686 barrels of crude oil in comparison to 3,213 barrels sold for the three months ended May 31, 2017. This decrease in crude oil sales volume of 527 barrels or 16.4% was primarily due to the natural decline in reservoir pressure during the three months ended May 31, 2018.
The gravity of our produced crude oil in California ranges between 14° API and 16° API. Production for the three months ended May 31, 2018 was from 20 wells resulting in 1,837 well days of production in comparison to 1,828 well days of production for the three months ended May 31, 2017.
Our crude oil sales revenue for the three months ended May 31, 2018 and 2017 is set forth in the following table:
|
|
| Three Months Ended May 31, 2018 |
| Three Months Ended May 31, 2017 | ||||||
Project |
| Revenue |
| Percentage |
| Revenue |
| Percentage | ||
| California – East Slopes Project |
| $ | 176,933 |
| 100.0% |
| $ | 133,724 |
| 100.0% |
*Our average realized sale price on a BOE basis for the three months ended May 31, 2018 was $65.88 in comparison to $41.62 for the three months ended May 31, 2017, representing an increase of $24.26 or 58.3% per barrel.
Operating Expenses
Our total operating expenses for the three months ended May 31, 2018 were $303,688, a decrease of $117,445 or 27.9% compared to $421,133 for the three months ended May 31, 2017. The decrease was primarily due to work done prior to drilling of the initial well at our new Michigan exploratory joint drilling project during the three months ended May 31, 2017 in the amount of $77,849 and reductions in both our DD&A and G&A expenses. Operating expenses for the three months ended May 31, 2018 and 2017 are set forth in the table below:
Production expenses include expenses associated with the production of crude oil and natural gas. These expenses include pumpers, electricity, road maintenance, control of well insurance, property taxes and well workover costs; and, relate directly to the number of wells that are in production. For the three months ended May 31, 2018, these expenses decreased by $4,961 or 10.4% to $42,807 in comparison to $47,768 for the three months ended May 31, 2017. For the three months ended May 31, 2018 and 2017 we had 20 wells on production in California. Production expense on a barrel of oil equivalent (“BOE”) basis for the three months ended May 31, 2018 and 2017 were $15.94 and $14.87, respectively. Production expenses represented 14.1% of total operating expenses.
Exploration and drilling expenses include geological and geophysical (“G&G”) expenses as well as leasehold maintenance, plugging and abandonment (“P&A”) expenses and dry hole expenses. For the three months ended May 31, 2018, these expenses decreased $92,218 to $129 in comparison to $92,347 for the three months ended May 31, 2017. The primary reason for the decrease was work done prior to drilling of the initial well at our new Michigan exploratory joint drilling project during the three months ended May 31, 2017. Exploration and drilling expenses represented 0.0% of total operating expenses.
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 ended May 31, 2018, DD&A expenses decreased $8,429 or 32.8% to $17,290 in comparison to $25,719 for the three months ended May 31, 2017. On a BOE basis DD&A expense was $6.44 and $8.01 for the three months ended May 31, 2018 and 2017, respectively. DD&A and impairment expenses represented 5.7% of total operating expenses.
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 and natural gas properties as well as for running a public company. For the three months ended May 31, 2018, these expenses decreased $11,837 or 4.6% to $243,462 in comparison to $255,299 for the three months ended May 31, 2017. For the three months ended May 31, 2018, we received, as Operator, administrative overhead reimbursement of $13,322 for the East Slopes Project which was used to directly
18
offset certain employee salaries. We are continuing a program of reducing all of our G&A costs wherever possible. G&A expenses represented 80.2% of total operating expenses for the three months ended May 31, 2018.
Interest expense, net for the three months ended May 31, 2018 increased $102,029 or 21.3% to $581,908 in comparison to $479,879 for the three months ended May 31, 2017. The increase in interest expense was due to the higher default rate of interest on our credit facility with Maximilian. Refer to the discussion below under the caption Current debt (Short-term borrowings) for more information on the Maximilian credit facility loan.
Due to the nature of our business, we expect that revenues, as well as all categories of expenses, will continue to fluctuate substantially on a quarter-to-quarter and year-to-year basis. Revenue are highly dependent on the volatility of hydrocarbon prices and production volumes. Production expenses will fluctuate according to the number and percentage ownership of producing wells as well as the amount of revenues we receive based on the price of crude oil. Exploration and drilling expenses will be dependent upon the amount of capital that we have to invest in future development projects, as well as the success or failure of such projects. Likewise, the amount of DD&A expense will depend upon the factors cited above including the size of our proven reserves base and the market price of energy products. G&A expenses will also fluctuate based on our current requirements, but will generally tend to increase as we expand the business operations of the Company. An ongoing goal of the Company is to improve cash flow to cover the current level of G&A expenses and to fund our drilling programs in California and Michigan.
Capital Resources and Liquidity
Our primary financial resource is our proven crude oil reserve base. Our ability to fund any future capital expenditure programs is dependent upon the prices we receive from crude oil sales, the success of our drilling programs in California and Michigan and the availability of capital resource financing. There has been a significant amount of volatility in crude oil prices and dramatic decline in our realized sale price of crude oil since June of 2014, when the monthly average price of WTI crude oil was $105.79 per barrel. This decline in the price of crude oil has had a substantial negative impact on our cash flow from our producing California properties. While there has been an improvement in crude oil prices for the three months ended May 31, 2018 in comparison to the three months ended May 31, 2017 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 start to rebound as there are many factors beyond our control that dictate the price we receive on our crude oil sales.
In the current fiscal year we plan to spend approximately $525,000 in capital investments in California and $300,000 in Michigan if 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 not able to obtain financing to fund these capital investments. Factors such as changes in operating margins and the availability of capital resources could increase or decrease our ultimate level of expenditures during the current fiscal year.
Changes in our capital resources at May 31, 2018 in comparison with February 28, 2018 are set forth in the table below:
|
| May 31, 2018 |
| February 28, 2018 |
| Increase (Decrease) |
| Percentage Change | |||
| Cash | $ | 25,070 |
| $ | 48,535 |
| $ | (23,465) |
| (48.3%) |
| Restricted cash | $ | - |
| $ | 100,029 |
| $ | (100,029) |
| (100.0%) |
| Current assets | $ | 246,272 |
| $ | 333,652 |
| $ | (87,380) |
| (26.2%) |
| Total assets | $ | 1,001,523 |
| $ | 1,095,900 |
| $ | (94,377) |
| (8.6%) |
| Current liabilities | $ | (16,956,078) |
| $ | (16,343,108) |
| $ | 612,970 |
| 3.8% |
| Total liabilities | $ | (16,994,568) |
| $ | (16,380,282) |
| $ | 614,286 |
| 3.8% |
| Working capital | $ | (16,709,806) |
| $ | (16,009,456) |
| $ | 700,350 |
| 4.4% |
Our working capital deficit increased approximately $700,350 or 4.4% to $16,709,806 at May 31, 2018 in comparison to $16,009,456 at February 28, 2018. The increase in our working capital deficit was due to an increase in accounts payable and accrued interest as well as a decrease in both our cash balance and our short-term time deposit.
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.
19
Major sources of funds in the past for us have included the debt or equity markets and the sale of assets. While we have achieved positive cash flow from operations in California, we will have to rely on these capital markets to fund future operations and growth. Our business model is focused on acquiring exploration or development properties as well as existing production. Our ability to generate future revenues and operating cash flow will depend on successful exploration, and/or acquisition of crude oil and natural gas producing properties, which may very likely require us to continue to raise equity or debt capital from outside sources.
Daybreak has ongoing capital commitments to develop certain leases pursuant to their underlying terms. Failure to meet such ongoing commitments may result in the loss of the right to participate in future drilling on certain leases or the loss of the lease itself. These ongoing capital commitments will cause us to seek additional forms of financing through various methods, including issuing debt securities, equity securities, bank debt, or combinations of these instruments which could result in dilution to existing security holders and increased debt and leverage. The current volatility in the credit and capital markets as well as the decline in crude oil prices since June of 2014, may restrict our ability to obtain needed capital. No assurance can be given that we will be able to obtain funding under any loan commitments or any additional financing on favorable terms, if at all. Sales of interests in our assets may be another source of cash flow available to us.
The Company’s financial statements for the three months ended May 31, 2018 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. We have incurred net losses since entering the crude oil and natural gas exploration industry and as of three months ended May 31, 2018 have an accumulated deficit of $39,043,046 and a working capital deficit of $16,709,806 which raises substantial doubt about our ability to continue as a going concern.
In the current fiscal year, we will continue to seek additional financing for our planned exploration and development activities in California and Michigan. We could obtain financing through one or more various methods, including issuing debt securities, equity securities, or bank debt, or combinations of these instruments, which could result in dilution to existing security holders and increased debt and leverage. No assurance can be given that we will be able to obtain funding under any loan commitments or any additional financing on favorable terms, if at all. Sales of interests in our assets may be another source of cash flow.
Changes in Financial Condition
During the three months ended May 31, 2018, we received crude oil sales revenue from 20 wells in California. Our commitment to improving corporate profitability remains unchanged. During the three months ended May 31, 2018, we had an operating loss of $126,755 in comparison to an operating loss of $287,409 for the three months ended May 31, 2017. An increase of $24.26 per barrel BOE in our average realized price of crude oil for the three months ended May 31, 2018 resulted in a revenue increase of $43,209 or 32.3% in comparison to the three months ended May 31, 2017. Our sales volume declined by 527 Bbls (barrels) from 3,213 Bbls during the three months ended May 31, 2017 to 2,686 Bbls during the three months ended May 31, 2018.
Our balance sheet at May 31, 2018 reflects total assets of approximately $1.0 million in comparison to approximately $1.1 million at February 28, 2018. This decrease is primarily due to cash outflow from operations.
At May 31, 2018, total liabilities were approximately $17.0 million in comparison to approximately $16.4 million at February 28, 2018. The increase in liabilities was due to increases in payables and accrued interest on our credit facility balance with Maximilian.
The issued and outstanding shares of common stock at May 31, 2018 and February 28, 2018 remained unchanged at 51,532,364 shares.
Cash Flows
Changes in the net funds provided by and (used in) our operating, investing and financing activities are set forth in the table below:
|
| Three Months Ended May 31, 2018 |
| Three Months Ended May 31, 2017 |
| Increase (Decrease) |
| Percentage Change | |||
| Net cash used in operating activities | $ | (49,517) |
| $ | (22,170) |
|
| 27,347 |
| 123.4% |
| Net cash used in investing activities | $ | (8,977) |
| $ | - |
|
| (8,977) |
| (100.0%) |
| Net cash provided by (used in) financing activities | $ | (65,000) |
| $ | 20,000 |
|
| (85,000) |
| (425.0%) |
20
Cash Flow Used In Operating Activities
Cash flow from operating activities is derived from the production of our crude oil and natural gas reserves and changes in the balances of non-cash accounts, receivables, payables or other non-energy property asset account balances. For the three months ended May 31, 2018, cash flow used in operating activities was $49,517 in comparison to $22,170 used in operating activities for the three months ended May 31, 2017. This increase of $27,337 in our cash flow used in operating activities for the three months ended May 31, 2018 was due to a reduction in both our non-cash operating expenses and net loss offset by increases in both our accounts receivable and accounts payable for the three months ended May 31, 2018 in comparison to the three months ended May 31, 2017. Variations in cash flow from operating activities may impact our level of exploration and development expenditures.
Cash Flow Used In Investing Activities
Cash flow from investing activities is derived from changes in oil and gas property balances and other investment activities. Cash flow used in investing activities for the three months ended May 31, 2018 was $8,977 in comparison to $-0- for the three months ended May 31, 2017. This increase in cash flow used in investing activities was due to improvements in the water disposal system at our production facility in California.
Cash Flow Provided By (Used In) Financing Activities
Cash flow from financing activities is derived from changes in long-term liability account balances, our borrowing activities or in equity account balances, excluding retained earnings. Cash flow used in financing activities for the three months ended May 31, 2018 was $65,000 an increase of $85,000 in comparison to the $20,000 provided by financing activities in the three months ended May 31, 2017. For the three months ended May 31, 2018, we made payments of $65,000 to our line of credit with UBS Bank.
The following discussion is a summary of cash flows provided by or used in our financing activities at May 31, 2018.
Current debt (Short-term borrowings)
Related Party
The Company has a note payable-related party loan balance of $250,100 as of May 31, 2018 and February 28, 2018. The Company’s Chairman, President and Chief Executive Officer has loaned the Company an aggregate $250,100 that was used for a variety of corporate purposes including an escrow requirement on a loan commitment; maturity extension fees on third party loans; and a reduction of principal on the Company’s credit line with UBS Bank. These loans are non-interest bearing loans and repayment will be made upon a mutually agreeable date in the future.
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. There are ten noteholders, holding 980,000 warrants, who have not yet exercised their warrants. The exercise price of the associated warrants was lowered from $0.14 to $0.07 as a part of the Note maturity extension. The Notes principal of $565,000 is payable in full at the amended maturity date of the Notes. The fair value of the warrant modification, as determined by the Black-Scholes option pricing model, was $29,075 and was recognized as a discount to debt and is being amortized over the extended maturity date of the Notes. The Black-Scholes valuation encompassed the following weighted average assumptions: a risk free interest rate of 1.22%; volatility of 378.73%; and dividend yield of 0.0%.
The Notes principal of $565,000 is payable in full at the amended maturity date of the Notes. Should the Board of Directors, on the maturity date, decide that the payment of the principal and any unpaid interest would impair the financial condition or operations of the Company, the Company may then elect a mandatory conversion of the unpaid principal and interest into the 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. Amortization expense was $3,634 and $3,635, respectively at May 31, 2018 and 2017. The unamortized debt discount at May 31, 2018 and February 28, 2018 was $9,692 and $13,326, respectively.
21
12% Note balances at May 31, 2018 and February 28, 2018 are set forth in the table below:
|
| May 31, 2018 |
| February 28, 2018 | ||
| 12% Subordinated notes | $ | 315,000 |
| $ | 315,000 |
| Debt discount |
| (5,403) |
|
| (7,429) |
| 12% Subordinated notes balance, net | $ | 309,597 |
| $ | 307,571 |
12% Note balances – related parties at May 31, 2018 and February 28, 2018 are set forth in the table below:
|
| May 31, 2018 |
| February 28, 2018 | ||
| 12% Subordinated notes – related party | $ | 250,000 |
| $ | 250,000 |
| Debt discount |
| (4,289) |
|
| (5,897) |
| 12% Subordinated notes – related party balance, net | $ | 245,711 |
| $ | 244,103 |
In conjunction with the Notes private placement, a total of 1,190,000 common stock purchase warrants were issued at a rate of two warrants for every dollar raised through the private placement. The warrants have an amended exercise price of $0.07 and an amended expiration date of January 29, 2019. The 12% Note warrants that have been exercised are set forth in the table below. At February 28, 2018, there were 980,000 warrants that were not exercised and had not expired.
Fiscal Period |
| Warrants Exercised |
| Shares of Common Stock Issued |
| Number of Accredited Investors |
| Year Ended February 28, 2014 |
| 100,000 |
| 100,000 |
| 1 |
| Year Ended February 28, 2015 |
| 50,000 |
| 50,000 |
| 1 |
| Year Ended February 29, 2016 |
| - |
| - |
| - |
| Year Ended February 28, 2017 |
| - |
| - |
| - |
| Year Ended February 28, 2018 |
| - |
| - |
| - |
| Three Months May 31, 2018 |
| - |
| - |
| - |
| Totals |
| 150,000 |
| 150,000 |
| 2 |
Maximilian Loan Agreement (Credit Facility)
On October 31, 2012, the Company entered into a loan agreement with Maximilian Resources LLC, a Delaware limited liability company and successor by assignment to Maximilian Investors LLC (either party, as appropriate, is referred to in these notes to the financial statements as “Maximilian”), which provided for a revolving credit facility of up to $20 million, that matured on October 31, 2016, with a minimum commitment of $2.5 million. On October 31, 2016 through the Fourth Amendment to the Amended and Restated Loan and Security Agreement, the maturity date of the loan was changed to February 28, 2020.
In August 2013, the Company amended its loan agreement with Maximilian thereby increasing the amount of the credit facility to $90 million and reduced the annual interest rate to 12%. The Company evaluated the amendment of the revolving credit facility under ASC 470-50-40 and determined that the Company’s borrowing capacity under the amended loan agreement exceeded its borrowing capacity under the old loan agreement. Consequently, the unamortized discount and deferred financing costs as of the date of amendment were amortized over the term of the loan agreement. Due to the Company’s default on the Maximilian loan, all unamortized discount and deferred financing costs were fully amortized during the twelve months ended February 28, 2018.
On October 31, 2016, the Company entered into a Fourth Amendment to the Amended and Restated Loan and Security Agreement with Maximilian, which amended the Company’s loan agreement with Maximilian (the “Restructuring Agreement”). Pursuant to the Restructuring Agreement, in exchange for the proceeds it received from the Kentucky Sale, Maximilian and the Company have agreed to a commitment by Maximilian to advance up to $250,000 in financing to the Company over the following six month period and the pursuit of the Michigan exploratory joint drilling project using the $250,000 set aside from the Kentucky Sale.
As a result of the decline in hydrocarbon prices that started in June of 2014, the Company has been unable to make any type of interest or principal payments required under the amended terms of its credit facility with Maximilian since December of 2015. Under the terms of the Restructuring Amendment all unpaid interest is currently being accrued. Accrued interest on the credit facility loan at May 31, 2018 and February 28, 2018 was $2,363,369 and $1,812,128, respectively. The Company is currently considered to be in default under the terms of its credit facility loan and interest is being accrued at the rate of 23.8% since March 1, 2018. Maximilian is currently in receivership. The United States District Court for the Eastern District of New York, Southern Division has hired consultants to assist in finding a new lender to assume the Maximilian credit facility. No assurances can be made as to who the new lender will be or how the structure of the loan will affect the Company.
During the three months ended May 31, 2018 and 2017, the Company received advances of $-0- and $35,000, respectively, under the terms of the credit facility.
22
Maximilian Promissory Note – Michigan Exploratory Joint Drilling Project
The Company has a note payable loan balance to Maximilian of $94,650 as of May 31, 2018 and February 28, 2018. The Company has received $94,650 in aggregate from multiple advances since January 2017 from Maximilian under a separate promissory note agreement dated January 17, 2017 and amended on February 10, 2017 regarding the development of an exploratory joint drilling project in Michigan. Advances under this agreement are subject to a 5% (five percent) per annum interest rate. In the event of a default of any of the Company’s obligations under the promissory note, the amounts due may be called immediately due and payable at Maximilian’s option.
Due to a lack of available funding from Maximilian, we have been unable to spud a well on the Michigan project. The Company is currently considered to be in default under the terms of its loan agreement. Maximilian is currently in receivership. The United States District Court for the Eastern District of New York, Southern Division has hired consultants to assist in finding a new lender. No assurances can be made as to who the new lender will be or how the structure of the loan will affect the Company. Accrued interest on the Michigan promissory note at May 31, 2018 and February 28, 2018 was $6,368 and $5,158, respectively. During the three months ended May 31, 2018 and 2017, the Company received advances of $-0- and $10,650. The $10,650 was paid directly to the Operator of the Michigan project by Maximilian on the Company’s behalf.
In accordance with the guidance found in ASC-470-10-45, the entire balance of both the Maximilian credit facility loan and the Michigan loan is presented under the current liabilities section of the balance sheets. Current debt balances at May 31, 2018 and February 28, 2018 are set forth in the table below:
Encumbrances
The Company’s debt obligations, pursuant to the above mentioned credit facility loan agreement and promissory notes entered into by and between Maximilian and the Company are secured by a perfected first priority security interest in substantially all of the personal property of the Company, and two mortgages; one covering its leases in California and the other covering its leases in Michigan.
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. 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.
At May 31, 2018 and February 28, 2018, the line of credit had an outstanding balance of $815,913 and $873,350, respectively. During the three months ended May 31, 2018 and 2017, the Company made payments to the line of credit of $65,000 and $15,000, respectively. Interest incurred for the three months ended May 31, 2018 and 2017 was $7,564 and $9,059, 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 economic downturn, may restrict our ability to obtain needed capital.
Restricted Stock and Restricted Stock Unit Plan
On April 6, 2009, the Board approved the Restricted Stock and Restricted Stock Unit Plan (the “2009 Plan”) allowing the executive officers, directors, consultants and employees of Daybreak and its affiliates to be eligible to receive restricted Common Stock and restricted Common Stock unit awards. Subject to adjustment, the total number of shares of Daybreak Common Stock that will be available for the grant of awards under the 2009 Plan may not exceed 4,000,000 shares; provided, that, for purposes of this limitation, any stock subject to an award that is forfeited in accordance with the provisions of the 2009 Plan will again become available for
23
issuance under the 2009 Plan. We believe that awards of this type further align the interests of our employees and our shareholders by providing significant incentives for these employees to achieve and maintain high levels of performance. Restricted stock and restricted stock units also enhance our ability to attract and retain the services of qualified individuals.
At May 31, 2018, a total of 3,000,000 shares of restricted stock had been awarded and remained outstanding under the 2009 Plan, and 2,986,220 of the shares had fully vested. A total of 1,013,780 Common Stock shares remained available at May 31, 2018 for issuance pursuant to the 2009 Plan. A summary of the 2009 Plan issuances is set forth in the table below:
| Grant Date |
| Shares Awarded |
| Vesting Period |
| Shares Vested(1) |
| Shares Returned(2) |
| Shares Outstanding (Unvested) |
| 4/7/2009 |
| 1,900,000 |
| 3 Years |
| 1,900,000 |
| - |
| - |
| 7/16/2009 |
| 25,000 |
| 3 Years |
| 25,000 |
| - |
| - |
| 7/16/2009 |
| 625,000 |
| 4 Years |
| 619,130 |
| 5,870 |
| - |
| 7/22/2010 |
| 25,000 |
| 3 Years |
| 25,000 |
| - |
| - |
| 7/22/2010 |
| 425,000 |
| 4 Years |
| 417,090 |
| 7,910 |
| - |
|
|
| 3,000,000 |
|
|
| 2,986,220(1) |
| 13,780 |
| - |
(1)
Does not include shares that were withheld to satisfy such tax liability upon vesting of a restricted award by a Plan Participant, and subsequently returned to the 2009 Plan.
(2)
Reflects the number of common shares that were withheld pursuant to the settlement of the number of shares with a fair market value equal to such tax withholding liability, to satisfy such tax liability upon vesting of a restricted award by a Plan Participant.
For the three months ended May 31, 2018, the Company did not recognize any stock compensation expense related to the above restricted stock grants since all issuances have been fully amortized.
Management Plans to Continue as a Going Concern
We continue to implement plans to enhance 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 May 31, 2018 do not include any adjustments that might result from the inability to implement or execute Daybreak’s plans to improve our ability to continue as a going concern.
Critical Accounting Policies
Refer to Daybreak’s Annual Report on Form 10-K for the fiscal year ended February 28, 2018.
Off-Balance Sheet Arrangements
As of May 31, 2018, 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.
24
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, May 31, 2018, an evaluation was conducted by Daybreak management, including our President and Chief Executive Officer, who is also serving as our interim principal finance and accounting officer, as to the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) of the Exchange Act. Such disclosure controls and procedures are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods specified by the SEC rules and forms. Additionally, it is vital that such information is accumulated and communicated to our management, including our President and Chief Executive Officer, in a manner to allow timely decisions regarding required disclosures. Based on that evaluation, our management concluded that our disclosure controls were effective as of May 31, 2018.
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 May 31, 2018 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.
25
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the period ended February 28, 2018, which could materially affect our business, financial condition or future results. The risks described in this report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial could have a material adverse effect on our business, financial condition and results of operations.
26
ITEM 6. EXHIBITS
The following Exhibits are filed as part of the report:
Exhibit
Number
Description
101.INS(2)
XBRL Instance Document
101.SCH(2)
XBRL Taxonomy Schema
101.CAL(2)
XBRL Taxonomy Calculation Linkbase
101.DEF(2)
XBRL Taxonomy Definition Linkbase
101.LAB(2)
XBRL Taxonomy Label Linkbase
101.PRE(2)
XBRL Taxonomy Presentation Linkbase
(1)
Filed herewith.
(2)
Furnished herewith.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| DAYBREAK OIL AND GAS, INC. | |
|
|
|
| By: | /s/ JAMES F. WESTMORELAND |
|
| James F. Westmoreland, its |
|
| President, Chief Executive Officer and interim |
|
| principal finance and accounting officer |
|
| (Principal Executive Officer, Principal Financial |
|
| Officer and Principal Accounting Officer) |
|
|
|
| Date: July 11, 2018 | |
28
Exhibit 31.1
Certification
I, James F. Westmoreland, certify that:
(1)
I have reviewed this interim report on Form 10-Q of Daybreak Oil and Gas, Inc.
(2)
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3)
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4)
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
(5)
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: July 11, 2018
By /s/ JAMES F. WESTMORELAND
James F. Westmoreland, President, Chief Executive Officer
and interim principal finance and accounting officer
(Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Interim Report of Daybreak Oil and Gas, Inc. on Form 10-Q for the period ending May 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, the undersigned, in the capacity and on the date indicated below, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: July 11, 2018
By /s/ JAMES F. WESTMORELAND
James F. Westmoreland, President, Chief Executive Officer
and interim principal finance and accounting officer
(Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)
Document and Entity Information - shares |
3 Months Ended | |
|---|---|---|
May 31, 2018 |
Jul. 12, 2018 |
|
| Document And Entity Information | ||
| Entity Registrant Name | Daybreak Oil & Gas, Inc. | |
| Entity Central Index Key | 0001164256 | |
| Document Type | 10-Q | |
| Document Period End Date | May 31, 2018 | |
| Amendment Flag | false | |
| Current Fiscal Year End Date | --02-28 | |
| Is Entity a Well-known Seasoned Issuer? | No | |
| Is Entity a Voluntary Filer? | No | |
| Is Entity's Reporting Status Current? | Yes | |
| Entity Filer Category | Smaller Reporting Company | |
| Entity Common Stock, Shares Outstanding | 51,532,364 | |
| Document Fiscal Period Focus | Q1 | |
| Document Fiscal Year Focus | 2018 |
Balance Sheets (Parenthetical) - USD ($) |
May 31, 2018 |
Feb. 28, 2018 |
|---|---|---|
| Preferred stock, par value in dollars | $ 0.001 | $ 0.001 |
| Preferred stock, shares authorized | 10,000,000 | 10,000,000 |
| Preferred stock, shares issued | 0 | 0 |
| Preferred stock, shares outstanding | 0 | 0 |
| Common stock, par value in dollars | $ 0.001 | $ 0.001 |
| Common stock, shares authorized | 200,000,000 | 200,000,000 |
| Common stock, shares issued | 51,532,364 | 51,532,364 |
| Common stock, shares outstanding | 51,532,364 | 51,532,364 |
| Unearned debt discount, current | $ 5,403 | $ 7,429 |
| Unearned debt discount, related party, current | $ 4,289 | $ 5,897 |
| Series A Convertible Preferred Stock | ||
| Preferred stock, par value in dollars | $ 0.001 | $ 0.001 |
| Preferred stock, shares authorized | 2,400,000 | 2,400,000 |
| Preferred stock, shares issued | 709,568 | 709,568 |
| Preferred stock, shares outstanding | 709,568 | 709,568 |
| Preferred stock, cumulative dividend rate | 6.00% | 6.00% |
Statements of Operations (Unaudited) - USD ($) |
3 Months Ended | |
|---|---|---|
May 31, 2018 |
May 31, 2017 |
|
| REVENUE: | ||
| Crude oil sales | $ 176,933 | $ 133,724 |
| OPERATING EXPENSES: | ||
| Production | 42,807 | 47,768 |
| Exploration, drilling and abandonment | 129 | 92,347 |
| Depreciation, depletion, and amortization | 17,290 | 25,719 |
| General and administrative | 243,462 | 255,299 |
| Total operating expenses | 303,688 | 421,133 |
| OPERATING LOSS | (126,755) | (287,409) |
| OTHER EXPENSE: | ||
| Interest expense, net | (581,908) | (479,879) |
| NET LOSS | (708,663) | (767,288) |
| Cumulative convertible preferred stock dividend requirement | (32,191) | (32,709) |
| NET LOSS AVAILABLE TO COMMON SHAREHOLDERS | $ (740,854) | $ (799,997) |
| NET LOSS PER COMMON SHARE, Basic and diluted | $ (0.01) | $ (0.02) |
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, Basic and diluted | 51,532,364 | 51,521,566 |
Organization and Basis of Presentation |
3 Months Ended |
|---|---|
May 31, 2018 | |
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
| Organization and Basis of Presentation | NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION:
Organization
Originally incorporated as Daybreak Uranium, Inc., (“Daybreak Uranium”) under the laws of the State of Washington on March 11, 1955, Daybreak Uranium was organized to explore for, acquire, and develop mineral properties in the Western United States. During 2005, management of the Company decided to enter the crude oil and natural gas exploration and production industry. On October 25, 2005, the Company shareholders approved a name change from Daybreak Mines, Inc. to Daybreak Oil and Gas, Inc. (referred to herein as “Daybreak” or the “Company”) to better reflect the business of the Company.
All of the Company’s crude oil and natural gas 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 and natural gas. These commodity prices are subject to wide fluctuations and market uncertainties due to a variety of factors that are beyond the control of the Company. These factors include the level of global demand for petroleum products, foreign supply of crude oil and natural gas, the establishment of and compliance with production quotas by oil-exporting countries, the relative strength of the U.S. dollar, weather conditions, the price and availability of alternative fuels, and overall economic conditions, both foreign and domestic.
Basis of Presentation
The accompanying unaudited interim financial statements and notes for the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q for quarterly reports under Section 13 or 15 (d) of the Securities Exchange Act of 1934 (the “Exchange Act”). Accordingly, they do not include all of the information and footnote disclosures normally required by accounting principles generally accepted in the United States of America for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements have been included and such adjustments are of a normal recurring nature. Operating results for the three months ended May 31, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending February 28, 2019.
These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2018.
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 and to determine the amount of any impairment of proved properties; • The valuation of unproved acreage and proved crude oil and natural gas properties to determine the amount of any impairment of crude oil and natural gas properties; • Judgment regarding the productive status of in-progress exploratory wells to determine the amount of any provision for abandonment; and • Estimates regarding abandonment obligations.
Reclassifications
Certain reclassifications have been made to conform the prior period’s financial information to the current period’s presentation. These reclassifications had no effect on previously reported net loss or accumulated deficit. |
Going Concern |
3 Months Ended |
|---|---|
May 31, 2018 | |
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
| Going Concern | NOTE 2 — GOING CONCERN:
Financial Condition
The Company’s financial statements for the three months ended May 31, 2018 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company has incurred net losses since entering the crude oil and natural gas exploration industry and as of May 31, 2018 has an accumulated deficit of $39,043,046 and a working capital deficit of $16,709,806, 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 in these wells is 36.6% and the average net revenue interest (“NRI”) is 28.4% for these same wells.
The Company anticipates its revenue will continue to increase as the Company participates in the drilling of more wells in the East Slopes Project in California and as our exploratory drilling project begins in Michigan. However, given the current 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.
The Company believes that our 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. While the Company has experienced revenue growth, which has resulted in positive cash flow from its crude oil and natural gas properties, it has not yet established a positive cash flow on a company-wide basis. It will be necessary for the Company to obtain additional funding from the private or public debt or equity markets in the future. However, the Company cannot offer any assurance that it will be successful in executing the aforementioned plans to continue as a going concern.
Daybreak’s financial statements as of May 31, 2018 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.
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Recent Accounting Pronouncements |
3 Months Ended |
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May 31, 2018 | |
| Accounting Changes and Error Corrections [Abstract] | |
| Recent Accounting Pronouncements | NOTE 3 — RECENT ACCOUNTING PRONOUNCEMENTS:
Accounting Standards Issued and Adopted
In May 2014, the FASB issued ASC updated No. 2014-09, Revenue from Contracts with Customers (Topic 606 (ASU 2014-09). Under the amendments in this update, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in this update are effective for fiscal years and interim periods within those years beginning after December 15, 2017 and supersedes any previous revenue recognition guidance. Implementation of Topic 606 was done using the modified retrospective approach. Adoption of this new standard did not have an impact on the Company’s balance sheet, statement of operations, statement of stockholders’ equity or statement of cash flows.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”). The update is effective for years beginning December 15, 2017, including interim reporting periods within those fiscal years. Early adoption is permitted. The purpose of Update 216-18 is to clarify guidance and presentation related to restricted cash in the Statements of Cash Flows. The amendment requires beginning-of-period and end-of-period total amounts shown on the Statements of Cash Flows to include cash and cash equivalents as well as restricted cash and restricted cash equivalents. Adoption of this new standard did not have a material impact on the Company’s financial statements. |
Restricted Cash |
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| Cash and Cash Equivalents [Abstract] | |||||||||||||||||||||||||
| Restricted Cash | NOTE 4 — RESTRICTED CASH:
A reconciliation of cash, cash equivalents and restricted cash reported within the statement of financial position that sum to the total of the same such cash amounts shown in the statement of cash flows is set forth in the table below.
Amounts included in restricted cash represent those required to be set aside in the form of a short-term time deposit (CD) pledged as collateral in connection with any obligation for plugging, abandonment and site remediation requirements for our crude oil operations in California. Effective March 19, 2018, the collateral requirement obligation was rescinded. These funds then became available for the Company to use for regular business purposes. |
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Concentration of Credit Risk |
3 Months Ended |
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May 31, 2018 | |
| Risks and Uncertainties [Abstract] | |
| Concentration of Credit Risk | NOTE 5 — CONCENTRATION OF CREDIT RISK:
Substantially all of the Company’s trade accounts receivable result from crude oil and natural gas sales or joint interest billings to its working interest partners. This concentration of customers and joint interest owners may impact the 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 May 31, 2018 and February 28, 2018 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.
The Company’s accounts receivable balances from California crude oil sales of $106,652 and $104,840 at May 31, 2018 and February 28, 2018, respectively were from one customer, Plains Marketing. Crude oil sales receivables balances at May 31, 2018 and February 28, 2018 represent crude oil sales that occurred in May and February 2018, respectively.
Joint interest participant receivables balances of $96,464 and $58,452 at May 31, 2018 and February 28, 2018, 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 May 31, 2018 and February 28, 2018, as the joint interest owners have a history of paying their obligations.
At May 31, 2018, the Company owed its principal lender, Maximilian Resources LLC, a Delaware limited liability company and successor by assignment to Maximilian Investors LLC (either party, as appropriate, is referred to in these notes to the financial statements as “Maximilian”), an aggregate $11.5 million or approximately 67.8% of the Company’s total debt. The Company is currently considered to be in default on its credit facility loan with Maximilian. As a result of this concentration of debt, the Company may be susceptible to any economic challenges faced by Maximilian, which is currently in receivership. For further information on the Maximilian credit facility and loan balances refer to Note 9.
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Crude Oil and Natural Gas Properties |
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| Oil and Gas Exploration and Production Industries Disclosures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Crude Oil and Natural Gas Properties | NOTE 6 — CRUDE OIL AND NATURAL GAS PROPERTIES:
Crude oil and natural gas property balances at May 31, 2018 and February 28, 2018 are set forth in the table below.
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Accounts Payable |
3 Months Ended |
|---|---|
May 31, 2018 | |
| Payables and Accruals [Abstract] | |
| Accounts Payable | NOTE 7 — ACCOUNTS PAYABLE:
On March 1, 2009, the Company became the operator for its East Slopes Project. Additionally, the Company then assumed certain original defaulting partners’ approximate $1.5 million liability representing a 25% working interest in the drilling and completion costs associated with the East Slopes Project four earning well program. The Company subsequently sold the same 25% working interest on June 11, 2009. Of the $1.5 million liability, $244,849 remains unpaid and is included in the May 31, 2018 accounts payable balance. Payment of this liability has been delayed until the Company’s cash flow situation improves.
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Accounts Payable - Related Parties |
3 Months Ended |
|---|---|
May 31, 2018 | |
| Related Party Transactions [Abstract] | |
| Accounts Payable - Related Parties | NOTE 8 — ACCOUNTS PAYABLE- RELATED PARTIES:
The May 31, 2018 and February 28, 2018 accounts payable – related parties balances of $1,718,931 and $1,664,845 respectively, comprised primarily of deferred salaries 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 President and Chief Executive Officer. Payment of these deferred items has been delayed until the Company’s cash flow situation improves.
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Short-Term and Long-Term Borrowings |
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| Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Short-Term and Long-Term Borrowings | NOTE 9 — SHORT-TERM AND LONG-TERM BORROWINGS:
Current debt (Short-term borrowings)
Note Payable – Related Party
The Company has a note payable-related party loan balance of $250,100 as of May 31, 2018 and February 28, 2018. The Company’s Chairman, President and Chief Executive Officer has loaned the Company an aggregate $250,100 that was used for a variety of corporate purposes including an escrow requirement on a loan commitment; maturity extension fees on third party loans; and a reduction of principal on the Company’s credit line with UBS Bank. These loans are non-interest bearing loans and repayment will be made upon a mutually agreeable date in the future.
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. There are ten noteholders, holding 980,000 warrants, who have not yet exercised their warrants. The exercise price of the associated warrants was lowered from $0.14 to $0.07 as part of the Note maturity extension. The Notes principal of $565,000 is payable in full at the amended maturity date of the Notes. The fair value of the warrant modification, as determined by the Black-Scholes option pricing model, was $29,075 and was recognized as a discount to debt and is being amortized over the extended maturity date of the Notes. The Black-Scholes valuation encompassed the following weighted average assumptions: a risk free interest rate of 1.22%; volatility of 378.73%; and dividend yield of 0.0%.
The Notes principal of $565,000 is payable in full at the amended maturity date of the Notes. Should the Board of Directors, on the maturity date, decide that the payment of the principal and any unpaid interest would impair the financial condition or operations of the Company, the Company may then elect a mandatory conversion of the unpaid principal and interest into the 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. Amortization expense was $3,634 and $3,635, respectively at May 31, 2018 and 2017. The unamortized debt discount at May 31, 2018 and February 28, 2018 was $9,692 and $13,326, respectively.
12% Note balances at May 31, 2018 and February 28, 2018 are set forth in the table below:
12% Note balances – related parties at May 31, 2018 and February 28, 2018 are set forth in the table below:
In conjunction with the Notes private placement, a total of 1,190,000 common stock purchase warrants were issued at a rate of two warrants for every dollar raised through the private placement. The warrants have an amended exercise price of $0.07 and an amended expiration date of January 29, 2019. The 12% Note warrants that have been exercised are set forth in the table below. At February 28, 2018, there were 980,000 warrants that were not exercised and had not expired.
Maximilian Loan Agreement (Credit Facility)
On October 31, 2012, the Company entered into a loan agreement with Maximilian Resources LLC, a Delaware limited liability company and successor by assignment to Maximilian Investors LLC (either party, as appropriate, is referred to in these notes to the financial statements as “Maximilian”), which provided for a revolving credit facility of up to $20 million, that matured on October 31, 2016, with a minimum commitment of $2.5 million. On October 31, 2016 through the Fourth Amendment to the Amended and Restated Loan and Security Agreement, the maturity date of the loan was changed to February 28, 2020.
In August 2013, the Company amended its loan agreement with Maximilian thereby increasing the amount of the credit facility to $90 million and reduced the annual interest rate to 12%. The Company evaluated the amendment of the revolving credit facility under ASC 470-50-40 and determined that the Company’s borrowing capacity under the amended loan agreement exceeded its borrowing capacity under the old loan agreement. Consequently, the unamortized discount and deferred financing costs as of the date of amendment were amortized over the term of the loan agreement. Due to the Company’s default on the Maximilian loan, all unamortized discount and deferred financing costs were fully amortized during the twelve months ended February 28, 2018.
On October 31, 2016, the Company entered into a Fourth Amendment to the Amended and Restated Loan and Security Agreement with Maximilian, which amended the Company’s loan agreement with Maximilian (the “Restructuring Agreement”). Pursuant to the Restructuring Agreement, in exchange for the proceeds it received from the Kentucky Sale, Maximilian and the Company have agreed to a commitment by Maximilian to advance up to $250,000 in financing to the Company over the following six month period and the pursuit of the Michigan exploratory joint drilling project using the $250,000 set aside from the Kentucky Sale.
As a result of the decline in hydrocarbon prices that started in June of 2014, the Company has been unable to make any type of interest or principal payments required under the amended terms of its credit facility with Maximilian since December of 2015. Under the terms of the Restructuring Amendment all unpaid interest is currently being accrued. Accrued interest on the credit facility loan at May 31, 2018 and February 28, 2018 was $2,363,369 and $1,812,128, respectively. The Company is currently considered to be in default under the terms of its credit facility loan and interest is being accrued at the rate of 23.8% since March 1, 2018. Maximilian is currently in receivership. The United States District Court for the Eastern District of New York, Southern Division has hired consultants to assist in finding a new lender to assume the Maximilian credit facility. No assurances can be made as to who the new lender will be or how the structure of the loan will affect the Company.
During the three months ended May 31, 2018 and 2017, the Company received advances of $-0- and $35,000, respectively, under the terms of the credit facility.
Maximilian Promissory Note – Michigan Exploratory Joint Drilling Project
The Company has a note payable loan balance to Maximilian of $94,650 as of May 31, 2018 and February 28, 2018. The Company has received $94,650 in aggregate from multiple advances since January 2017 from Maximilian under a separate promissory note agreement dated January 17, 2017 and amended on February 10, 2017 regarding the development of an exploratory joint drilling project in Michigan. Advances under this agreement are subject to a 5% (five percent) per annum interest rate. In the event of a default of any of the Company’s obligations under the promissory note, the amounts due may be called immediately due and payable at Maximilian’s option.
Due to a lack of available funding from Maximilian, we have been unable to spud a well on the Michigan project. The Company is currently considered to be in default under the terms of its loan agreement. Maximilian is currently in receivership. The United States District Court for the Eastern District of New York, Southern Division has hired consultants to assist in finding a new lender. No assurances can be made as to who the new lender will be or how the structure of the loan will affect the Company. Accrued interest on the Michigan promissory note at May 31, 2018 and February 28, 2018 was $6,368 and $5,158, respectively. During the three months ended May 31, 2018 and 2017, the Company received advances of $-0- and $10,650. The $10,650 was paid directly to the Operator of the Michigan project by Maximilian on the Company’s behalf.
In accordance with the guidance found in ASC-470-10-45, the entire balance of both the Maximilian credit facility loan and the Michigan loan is presented under the current liabilities section of the balance sheets. Current debt balances at May 31, 2018 and February 28, 2018 are set forth in the table below:
Encumbrances
The Company’s debt obligations, pursuant to the above mentioned credit facility loan agreement and promissory notes entered into by and between Maximilian and the Company are secured by a perfected first priority security interest in substantially all of the personal property of the Company, and two mortgages; one covering its leases in California and the other covering its leases in Michigan.
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, $700,000 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. 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.
At May 31, 2018 and February 28, 2018, the line of credit had an outstanding balance of $815,913 and $873,350, respectively. During the three months ended May 31, 2018 and 2017, the Company made payments to the line of credit of $65,000 and $15,000, respectively. Interest incurred for the three months ended May 31, 2018 and 2017 was $7,564 and $9,059, respectively. |
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Stockholders' Deficit |
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| Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stockholders' Deficit | NOTE 10 — STOCKHOLDERS’ DEFICIT:
Preferred Stock
The Company is authorized to issue up to 10,000,000 shares of preferred stock with a par value of $0.001. The 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 May 31, 2018 and February 28, 2018, there were 709,568 shares issued and outstanding, respectively, that had not been converted into our common stock. As of May 31, 2018, 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.
Holders of Series A Preferred shall accrue dividends, in the amount of 6% of the original purchase price per annum. Dividends may be paid in cash or common stock at the discretion of the Company. Dividends are cumulative whether or not in any dividend period or periods we have assets legally available for the payment of such dividends. Accumulations of dividends on Series A Preferred do not bear interest. Dividends are payable upon declaration by the Board of Directors.
As of May 31, 2018 no dividends have been declared or paid. Dividends earned since issuance for each fiscal year and the three months ended May 31, 2018 are set forth in the table below:
Common Stock
The Company is authorized to issue up to 200,000,000 shares of $0.001 par value common stock of which 51,532,364 shares were issued and outstanding as of May 31, 2018 and February 28, 2018, respectively.
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Warrants |
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| Warrants | NOTE 11 — WARRANTS:
Warrants outstanding and exercisable as of May 31, 2018 are set forth in the table below:
Warrant activity for the three months ended May 31, 2018 is set forth in the table below:
During the three months ended May 31, 2018, there were no warrants issued, exercised, cancelled or that expired. The remaining outstanding warrants as of May 31, 2018, have a weighted average exercise price of $0.05, a weighted average remaining life of 0.3 years, and an intrinsic value of $-0-.
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Income Taxes |
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| Income Tax Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income Taxes | NOTE 12 — INCOME TAXES:
On December 22, 2017, the federal government enacted a tax bill H.R.1, an act to provide for reconciliation pursuant to Titles II and V of the concurrent resolution on the budget for fiscal year 2018, commonly referred to as the Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act contains significant changes to corporate taxation, including, but not limited to, reducing the U.S. federal corporate income tax rate from 35% to 21% and modifying or limiting many business deductions. We re-measured 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:
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:
At May 31, 2018, Daybreak had estimated net operating loss (“NOL”) carryforwards for federal and state income tax purposes of approximately $28,942,265 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 period of $1,088,884 will not expire and will carry over indefinitely. The valuation allowance increased $211,559 and $1,959,783 for the three months ended May 31, 2018 and the year ended February 28, 2018, 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 2012 currently remain subject to examinations by appropriate tax authorities. None of our tax returns are under examination at this time.
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Commitments and Contingencies |
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| Commitments and Contingencies Disclosure [Abstract] | |||||||||||||||||||||||||||||
| Commitments and Contingencies | NOTE 13 — COMMITMENTS AND CONTINGENCIES:
Various lawsuits, claims and other contingencies arise in the ordinary course of the Company’s business activities. While the ultimate outcome of any future contingency is not determinable at this time, management believes that any liability or loss resulting therefrom will not materially affect the financial position, results of operations or cash flows of the Company.
The Company, as an owner or lessee and operator of crude oil and natural gas properties, is subject to various federal, state and local laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability on the lessee under a crude oil and natural gas lease for the cost of pollution clean-up resulting from operations and subject the lessee to liability for pollution damages. In some instances, the Company may be directed to suspend or cease operations in the affected area. The Company maintains insurance coverage that is customary in the industry, although the Company is not fully insured against all environmental risks.
The Company is not aware of any environmental claims existing as of May 31, 2018. 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 and natural gas properties.
The Company’s minimum annual office rental lease commitments by fiscal year as of May 31, 2018 is shown in the table below:
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Accounting Policies (Policies) |
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| Accounting Policies [Abstract] | ||||
| Basis of Presentation | Basis of Presentation
The accompanying unaudited interim financial statements and notes for the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q for quarterly reports under Section 13 or 15 (d) of the Securities Exchange Act of 1934 (the “Exchange Act”). Accordingly, they do not include all of the information and footnote disclosures normally required by accounting principles generally accepted in the United States of America for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements have been included and such adjustments are of a normal recurring nature. Operating results for the three months ended May 31, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending February 28, 2019.
These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2018. |
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| Use of Estimates | 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 and to determine the amount of any impairment of proved properties; • The valuation of unproved acreage and proved crude oil and natural gas properties to determine the amount of any impairment of crude oil and natural gas properties; • Judgment regarding the productive status of in-progress exploratory wells to determine the amount of any provision for abandonment; and • Estimates regarding abandonment obligations. |
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| Reclassifications |
Certain reclassifications have been made to conform the prior period’s financial information to the current period’s presentation. These reclassifications had no effect on previously reported net loss or accumulated deficit. |
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| Accounting Standards Issued and Adopted | Accounting Standards Issued and Adopted
In May 2014, the FASB issued ASC updated No. 2014-09, Revenue from Contracts with Customers (Topic 606 (ASU 2014-09). Under the amendments in this update, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in this update are effective for fiscal years and interim periods within those years beginning after December 15, 2017 and supersedes virtually all previous revenue recognition guidance. Implementation of Topic 606 was done using the modified retrospective approach. Adoption of this new standard did not have an impact on the Company’s balance sheet, statement of operations, statement of stockholders’ equity or statement of cash flows.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”). The update is effective for years beginning December 15, 2017, including interim reporting periods within those fiscal years. Early adoption is permitted. The purpose of Update 216-18 is to clarify guidance and presentation related to restricted cash in the Statements of Cash Flows. The amendment requires beginning-of-period and end-of-period total amounts shown on the Statements of Cash Flows to include cash and cash equivalents as well as restricted cash and restricted cash equivalents. The Company has evaluated the impact and timing of the adoption of ASU 2016-18 and has concluded it will not have a material impact on its financial statements. |
Restricted Cash (Tables) |
3 Months Ended | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
May 31, 2018 | |||||||||||||||||||||||||
| Cash and Cash Equivalents [Abstract] | |||||||||||||||||||||||||
| Schedule of Restricted Cash and Cash Equivalents |
|
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Crude Oil and Natural Gas Properties (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
May 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Oil and Gas Exploration and Production Industries Disclosures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Capitalized Costs Relating to Crude Oil and Natural Gas Activities |
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Short-Term and Long-Term Borrowings (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
May 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Short-Term Debt |
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| Schedule of Shares Issued and Warrants Exercised in Conjunction with Private Placement |
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| Schedule of Line of Credit Facilities |
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Stockholders' Deficit (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
May 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Stockholder's Equity |
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| Schedule of Dividends Payable |
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| Schedule of Common Stock Outstanding |
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Warrants (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
May 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Stockholders' Equity Note Warrants and Rights |
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| Schedule of Warrant Activity |
|
Income Taxes (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
May 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Income Tax Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Components of Income Tax Expense Benefit |
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| Schedule of Deferred Tax Assets and Liabilities |
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Commitments and Contingencies (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
May 31, 2018 | |||||||||||||||||||||||||||||
| Commitments and Contingencies Disclosure [Abstract] | |||||||||||||||||||||||||||||
| Schedule of Future Minimum Rental Payments for Operating Leases |
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Going Concern (Details Narrative) |
May 31, 2018
USD ($)
Number
|
Feb. 28, 2018
USD ($)
|
|---|---|---|
| Accumulated deficit | $ (39,043,046) | $ (38,334,383) |
| Working capital deficit | $ 16,709,806 | |
| Average Working and Net Revenue Interest | East Slopes Project | ||
| Number of producing wells, net revenue interest | Number | 20 | |
| Average working interest | 36.60% | |
| Average net revenue interest | 28.40% |
Restricted Cash - Schedule of Restricted Cash and Cash Equivalents (Details) - USD ($) |
May 31, 2018 |
Feb. 28, 2018 |
May 31, 2017 |
Feb. 28, 2017 |
|---|---|---|---|---|
| Cash and Cash Equivalents [Abstract] | ||||
| Cash and cash equivalents | $ 25,070 | $ 48,535 | ||
| Restricted cash | 0 | 100,029 | ||
| Total cash, cash equivalents and restricted cash shown in the statement of cash flows | $ 25,070 | $ 148,564 | $ 139,893 | $ 142,063 |
Concentration of Credit Risk (Details Narrative) - USD ($) |
3 Months Ended | |
|---|---|---|
May 31, 2018 |
Feb. 28, 2018 |
|
| Concentration of risk, description | At the Company’s East Slopes project in California there is only one buyer available for the purchase of all crude oil production. The Company has no natural gas production in California. At May 31, 2018 and February 28, 2018 this one customer represented 100.0% of crude oil sales receivable. If this buyer is unable to resell its products or if they lose a significant sales contract then the Company may incur difficulties in selling its crude oil production. | |
| Concentration risk, percent | 100.00% | |
| Sales receivables | $ 106,652 | $ 104,840 |
| Joint interest participants receivables | $ 96,464 | $ 58,452 |
| Maximilian Investors LLC | ||
| Concentration risk, percent | 67.80% | |
| Line of credit | $ 11,500,000 |
Crude Oil and Natural Gas Properties - Capitalized Costs Relating to Crude Oil and Natural Gas Activities (Details) - USD ($) |
May 31, 2018 |
Feb. 28, 2018 |
|---|---|---|
| Oil and Natural Gas Property, Successful Effort Method, Net | ||
| Proved leasehold costs | $ 115,119 | $ 115,119 |
| Costs of wells and development | 2,302,645 | 2,293,668 |
| Capitalized exploratory well costs | 1,333,785 | 1,333,785 |
| Cost of proved crude oil and natural gas properties | 3,751,549 | 3,742,572 |
| Accumulated depletion, depreciation, amortization and impairment | (3,043,937) | (3,027,963) |
| Total proved crude oil and natural gas properties, net | 707,612 | 714,609 |
| Michigan unproved crude oil and natural gas properties | 31,187 | 31,187 |
| Total proved and unproved crude oil and natural gas properties, net | $ 738,799 | $ 745,796 |
Accounts Payable (Details Narrative) |
3 Months Ended |
|---|---|
|
May 31, 2018
USD ($)
| |
| Payables and Accruals [Abstract] | |
| Acquisition and disposition of East Slopes Project | On March 1, 2009, the Company became the operator for the East Slopes Project. The Company 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 25% working interest on June 11, 2009. |
| Accounts payable balance | $ 244,849 |
Accounts Payable - Related Parties (Details Narrative) - USD ($) |
May 31, 2018 |
Feb. 28, 2018 |
|---|---|---|
| Related Party Transactions [Abstract] | ||
| Accounts payable, related parties | $ 1,718,931 | $ 1,664,845 |
Short-Term and Long-Term Borrowings - Schedule of Short-Term Debt (Details) - USD ($) |
May 31, 2018 |
Feb. 28, 2018 |
|---|---|---|
| Short-term Debt [Line Items] | ||
| 12% Notes payable, net | $ 309,597 | $ 307,571 |
| 12% Subordinated Notes | ||
| Short-term Debt [Line Items] | ||
| Convertible subordinated debt, current | 315,000 | 315,000 |
| Debt discount | (5,403) | (7,429) |
| 12% Notes payable, net | 309,597 | 307,571 |
| 12% Subordinated Notes | Chief Executive Officer | ||
| Short-term Debt [Line Items] | ||
| Convertible subordinated debt, current | 250,000 | 250,000 |
| Debt discount | (4,289) | (5,897) |
| 12% Notes payable, net | $ 245,711 | $ 244,103 |
Short-Term and Long-Term Borrowings - Schedule of Shares Issued and Warrants Exercised with Private Placement (Details) |
3 Months Ended | 12 Months Ended | ||||
|---|---|---|---|---|---|---|
|
May 31, 2018
Number
shares
|
Feb. 28, 2018
Number
shares
|
Feb. 28, 2017
Number
shares
|
Feb. 29, 2016
Number
shares
|
Feb. 28, 2015
Number
shares
|
Feb. 28, 2014
Number
shares
|
|
| Warrants exercised | 150,000 | |||||
| Shares of common stock issued | 150,000 | |||||
| Accredited investors | Number | 44 | 44 | ||||
| 12% Subordinated Notes | ||||||
| Warrants exercised | 0 | 0 | 0 | 50,000 | 100,000 | |
| Shares of common stock issued | 0 | 0 | 0 | 50,000 | 100,000 | |
| Accredited investors | Number | 0 | 0 | 0 | 1 | 1 | |
Short-Term and Long-Term Borrowings - Schedule of Line of Credit Facilities (Details) - USD ($) |
May 31, 2018 |
Feb. 28, 2018 |
|---|---|---|
| Line of Credit Facility [Line Items] | ||
| Subtotal debt | $ 9,157,794 | $ 9,157,794 |
| Revolving Credit Facility | ||
| Line of Credit Facility [Line Items] | ||
| Credit facility balance | 9,063,144 | 9,063,144 |
| Michigan exploratory joint drilling debt | 94,650 | 94,650 |
| Subtotal debt | 9,157,794 | 9,157,794 |
| Accrued interest on credit facility and Michigan exploratory joint drilling debt | 2,369,737 | 1,817,287 |
| Total maximum debt | $ 11,527,531 | $ 10,975,081 |
Short-Term and Long-Term Borrowings (Details Narrative) - USD ($) |
3 Months Ended | 12 Months Ended | |||||
|---|---|---|---|---|---|---|---|
May 31, 2018 |
May 31, 2017 |
Feb. 28, 2018 |
Feb. 28, 2017 |
Feb. 28, 2014 |
Feb. 28, 2013 |
Feb. 28, 2010 |
|
| Debt Instrument [Line Items] | |||||||
| Warrants outstanding | 7,839,784 | ||||||
| Amortization of debt discount | $ 3,634 | $ 3,635 | |||||
| Unamortized debt discount | 5,403 | $ 7,429 | |||||
| Line of credit, amount outstanding | 815,913 | 873,350 | |||||
| Payments on line of credit | 65,000 | 15,000 | |||||
| Notes payable, related party | 250,100 | 250,100 | |||||
| Revolving Credit Facility | Maximilian Loan | |||||||
| Debt Instrument [Line Items] | |||||||
| Maximum borrowing | $ 20,000,000 | ||||||
| Credit facility, advances | 0 | 35,000 | |||||
| Credit facility, expiration date | Feb. 28, 2020 | ||||||
| Minimum commitment fee | $ 2,500,000 | ||||||
| Accrued interest | 2,363,396 | 1,812,128 | |||||
| Revolving Credit Facility | Maximilian Loan | Michigan Exploratory Joint Drilling Project | |||||||
| Debt Instrument [Line Items] | |||||||
| Line of credit, amount outstanding | $ 94,650 | $ 94,650 | |||||
| Line of credit, interest rate description | Advances under this agreement are subject to a 5% per annum interest rate. | Advances under this agreement are subject to a 5% per annum interest rate. | |||||
| Payments made on behalf of the company | $ 10,650 | ||||||
| Accrued interest | $ 6,368 | 5,158 | |||||
| Revolving Credit Facility | Maximilian - Amended and Restated Loan Agreement | |||||||
| Debt Instrument [Line Items] | |||||||
| Maximum borrowing | $ 90,000,000 | ||||||
| Line of credit facility, interest rate | 12.00% | ||||||
| Revolving Credit Facility | Maximilian - Fourth Amendment to Amended and Restated Loan Agreement | |||||||
| Debt Instrument [Line Items] | |||||||
| Credit facility, description | Pursuant to the Restructuring Agreement, in exchange for the proceeds it received from the Kentucky Sale, Maximilian and the Company have agreed to a commitment by Maximilian to advance up to $250,000 in financing to the Company over the next six months and the pursuit of the Michigan exploratory joint drilling project using the $250,000 set aside from the Kentucky Sale. | ||||||
| Maximum borrowing | $ 250,000 | ||||||
| Line of Credit | UBS Bank USA | |||||||
| Debt Instrument [Line Items] | |||||||
| Maximum borrowing | 890,000 | 890,000 | |||||
| Line of credit, amount outstanding | 815,913 | $ 873,350 | |||||
| Payments on line of credit | 65,000 | 15,000 | |||||
| Line of credit, interest expense | $ 7,564 | $ 9,059 | |||||
| Line of credit, interest rate description | Payable monthly at a stated reference rate of 0.249% + 337.5 basis points. The reference rate is based on the 30 day LIBOR ("London Interbank Offered Rate") and is subject to change from UBS. | On July 10, 2017 a portion of the outstanding credit line balance, $700,000, was converted to a 24 month fixed term annual interest rate of 3.244% with interest payable monthly. The remaining balance of the credit line 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. | |||||
| 12% Subordinated Notes | |||||||
| Debt Instrument [Line Items] | |||||||
| Interest rate | 12.00% | ||||||
| Maturity date | Jan. 29, 2019 | Jan. 29, 2019 | Jan. 29, 2017 | ||||
| Payment terms | Payable semi-annually on January 29th and July 29th. Should the Board of Directors, on the maturity date, decide that the payment of the principal and any unpaid interest would impair the financial condition or operations of the Company, the Company may then elect a mandatory conversion of the unpaid principal and interest into the 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. | ||||||
| Proceeds from subordinate notes | $ 595,000 | ||||||
| Subordinate note, principal | $ 565,000 | ||||||
| Warrants issued | 1,190,000 | 1,190,000 | |||||
| Warrants outstanding | 980,000 | 980,000 | |||||
| Warrants, exercise price | $ 0.07 | $ 0.07 | |||||
| Fair value of warrants | $ 29,075 | ||||||
| Weighted average risk free interest rate | 1.22% | ||||||
| Weighted average volatility rate | 378.73% | ||||||
| Amortization of debt discount | $ 3,634 | $ 14,538 | $ 3,635 | ||||
| Unamortized debt discount | 9,692 | 13,326 | |||||
| Chief Executive Officer | |||||||
| Debt Instrument [Line Items] | |||||||
| Notes payable, related party | $ 250,100 | $ 250,100 | |||||
Stockholders' Deficit - Conversions of Series A Preferred Stock (Details) |
3 Months Ended | 12 Months Ended | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
May 31, 2018
Number
shares
|
Feb. 28, 2018
Number
shares
|
Feb. 28, 2017
Number
shares
|
Feb. 29, 2016
Number
shares
|
Feb. 28, 2015
Number
shares
|
Feb. 28, 2014
Number
shares
|
Feb. 28, 2013
Number
shares
|
Feb. 29, 2012
Number
shares
|
Feb. 28, 2011
Number
shares
|
Feb. 28, 2010
Number
shares
|
Feb. 28, 2009
Number
shares
|
Feb. 29, 2008
Number
shares
|
|
| Series A preferred shares converted to common stock | 690,197 | 690,197 | ||||||||||
| Shares of common stock issued from conversion | 2,070,591 | 2,070,591 | ||||||||||
| Accredited investors | Number | 44 | 44 | ||||||||||
| Series A Convertible Preferred Stock | ||||||||||||
| Series A preferred shares converted to common stock | 0 | 14,997 | 0 | 10,000 | 3,000 | 151,000 | 18,000 | 0 | 102,000 | 51,900 | 237,000 | 102,300 |
| Shares of common stock issued from conversion | 0 | 44,991 | 0 | 30,000 | 9,000 | 453,000 | 54,000 | 0 | 306,000 | 155,700 | 711,000 | 306,900 |
| Accredited investors | Number | 0 | 1 | 0 | 1 | 1 | 9 | 2 | 0 | 4 | 4 | 12 | 10 |
Stockholders' Deficit - Preferred Stock Dividends Earned (Details) |
3 Months Ended | 12 Months Ended | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
May 31, 2018
USD ($)
Number
|
Feb. 28, 2018
USD ($)
Number
|
Feb. 28, 2017
USD ($)
Number
|
Feb. 29, 2016
USD ($)
Number
|
Feb. 28, 2015
USD ($)
Number
|
Feb. 28, 2014
USD ($)
Number
|
Feb. 28, 2013
USD ($)
Number
|
Feb. 29, 2012
USD ($)
Number
|
Feb. 28, 2011
USD ($)
Number
|
Feb. 28, 2010
USD ($)
Number
|
Feb. 28, 2009
USD ($)
Number
|
Feb. 29, 2008
USD ($)
Number
|
Feb. 28, 2007
USD ($)
Number
|
|
| Equity [Abstract] | |||||||||||||
| Preferred shareholders at period end | Number | 56 | 56 | 57 | 57 | 58 | 59 | 68 | 70 | 70 | 74 | 78 | 90 | 100 |
| Earned dividends | $ 32,191 | $ 128,231 | $ 130,415 | $ 130,925 | $ 132,634 | $ 151,323 | $ 161,906 | $ 163,624 | $ 173,707 | $ 189,973 | $ 209,973 | $ 242,126 | $ 155,311 |
| Total accumulated dividends | $ 2,002,339 | ||||||||||||
Stockholders' Deficit - Schedule of Common Stock Outstanding (Details) - USD ($) |
3 Months Ended | 12 Months Ended |
|---|---|---|
May 31, 2018 |
Feb. 28, 2018 |
|
| Equity [Abstract] | ||
| Common stock, Issued and Outstanding, beginning of period | 51,532,364 | 51,487,373 |
| Conversion of Series A Convertible Preferred Stock to common stock | 0 | 44,991 |
| Common stock, Issued and Outstanding, end of period | 51,532,364 | 51,532,364 |
| Conversion of Series A Convertible Preferred Stock to common stock, par value | $ 45 |
Stockholders' Deficit (Details Narrative) |
3 Months Ended | 12 Months Ended | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
May 31, 2018
Number
$ / shares
shares
|
Feb. 28, 2018
Number
$ / shares
shares
|
Feb. 28, 2017
Number
shares
|
Feb. 29, 2016
Number
shares
|
Feb. 28, 2015
Number
shares
|
Feb. 28, 2014
Number
shares
|
Feb. 28, 2013
Number
shares
|
Feb. 29, 2012
Number
shares
|
Feb. 28, 2011
Number
shares
|
Feb. 28, 2010
Number
shares
|
Feb. 28, 2009
Number
shares
|
Feb. 29, 2008
Number
shares
|
|
| Preferred stock, par value in dollars | $ / shares | $ 0.001 | $ 0.001 | ||||||||||
| Preferred stock, shares authorized | 10,000,000 | 10,000,000 | ||||||||||
| Preferred stock, shares issued | 0 | 0 | ||||||||||
| Preferred stock, shares outstanding | 0 | 0 | ||||||||||
| Series A preferred shares converted to common stock | 690,197 | 690,197 | ||||||||||
| Shares of common stock issued from conversion | 2,070,591 | 2,070,591 | ||||||||||
| Accredited investors | Number | 44 | 44 | ||||||||||
| Common stock, par value in dollars | $ / shares | $ 0.001 | $ 0.001 | ||||||||||
| Common stock, shares authorized | 200,000,000 | 200,000,000 | ||||||||||
| Common stock, shares issued | 51,532,364 | 51,532,364 | ||||||||||
| Common stock, shares outstanding | 51,532,364 | 51,532,364 | 51,487,373 | |||||||||
| Series A Convertible Preferred Stock | ||||||||||||
| Preferred stock, par value in dollars | $ / shares | $ 0.001 | $ 0.001 | ||||||||||
| Preferred stock, shares authorized | 2,400,000 | 2,400,000 | ||||||||||
| Preferred stock, shares issued | 709,568 | 709,568 | ||||||||||
| Preferred stock, shares outstanding | 709,568 | 709,568 | ||||||||||
| Series A preferred shares converted to common stock | 0 | 14,997 | 0 | 10,000 | 3,000 | 151,000 | 18,000 | 0 | 102,000 | 51,900 | 237,000 | 102,300 |
| Shares of common stock issued from conversion | 0 | 44,991 | 0 | 30,000 | 9,000 | 453,000 | 54,000 | 0 | 306,000 | 155,700 | 711,000 | 306,900 |
| Preferred stock, cumulative dividend rate | 6.00% | 6.00% | ||||||||||
| Accredited investors | Number | 0 | 1 | 0 | 1 | 1 | 9 | 2 | 0 | 4 | 4 | 12 | 10 |
Warrants (Details Narrative) - 12% Subordinated Notes |
3 Months Ended |
|---|---|
|
May 31, 2018
USD ($)
$ / shares
| |
| Weighted average exercise price | $ / shares | $ 0.05 |
| Weighted average remaining life | 7 months |
| Intrinsic value | $ | $ 0 |
Income Taxes - Income Tax Expense Benefit Reconciliation (Details) - USD ($) |
3 Months Ended | 12 Months Ended |
|---|---|---|
May 31, 2018 |
Feb. 28, 2018 |
|
| Income Tax Expense Benefit Continuing Operations Income Tax Reconciliation | ||
| Computed at U.S. and state statutory rates | $ (211,652) | $ (981,966) |
| Permanent differences | 93 | 29,060 |
| New tax law adjustment | 0 | 2,912,689 |
| Changes in valuation allowance | 211,559 | (1,959,783) |
| Income tax expense (benefit) | $ 0 | $ 0 |
Income Taxes - Deferred Tax Assets and Liabilities (Details) - USD ($) |
May 31, 2018 |
Feb. 28, 2018 |
|---|---|---|
| Deferred tax assets: | ||
| Net operating loss carryforwards | $ 8,636,371 | $ 8,413,128 |
| Crude oil and natural gas properties | 35,751 | 47,434 |
| Stock based compensation | 66,187 | 66,187 |
| Other | 27,838 | 27,838 |
| Less valuation allowance | (8,766,147) | (8,554,587) |
| Deferred tax assets, net | $ 0 | $ 0 |
Income Taxes (Details Narrative) - USD ($) |
3 Months Ended | 12 Months Ended |
|---|---|---|
May 31, 2018 |
Feb. 28, 2018 |
|
| Income Tax Disclosure [Abstract] | ||
| Net operating loss carryforwards, federal and state, approximate | $ 28,942,265 | |
| NOL portion of loss incurred under the Tax Cuts and Jobs Act | $ 1,088,884 | |
| Net operating loss carryforwards, expiration date | Feb. 28, 2024 | |
| Approximate increase in valuation allowance | $ 211,559 | $ 1,959,783 |
Commitments and Contingencies - Schedule of Future Minimum Rental Payments for Operating Leases (Details) |
May 31, 2018
USD ($)
|
|---|---|
| Commitments and Contingencies Disclosure [Abstract] | |
| February 28, 2019 | $ 6,897 |
| February 29, 2020 | 0 |
| February 28, 2021 | 0 |
| February 28, 2022 | 0 |
| February 28, 2023 and thereafter | 0 |
| Totals | $ 6,897 |