10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 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.)
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 every Interactive Data File required to be submitted 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 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,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer¨	Accelerated filer¨
Non-accelerated filer¨	Smaller reporting companyþ
	Emerging growth company  ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ¨ 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   ¨ Yes   þ No

At January 14, 2019 the registrant had 51,532,364 outstanding shares of $0.001 par value common stock.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS	3
	Balance Sheets at November 30, 2018 and February 28, 2018 (Unaudited)	3
	Statements of Operations for the Three and Nine Months Ended November 30, 2018 and November 30, 2017 (Unaudited)	4
	Statements of Cash Flows for the Nine Months Ended November 30, 2018 and November 30, 2017 (Unaudited)	5
	NOTES TO UNAUDITED FINANCIAL STATEMENTS	6
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	16
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	29
ITEM 4.	CONTROLS AND PROCEDURES	29
PART II - OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	30
ITEM 1A.	RISK FACTORS	30
ITEM 6.	EXHIBITS	31
Signatures		32

2

PART I

FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

DAYBREAK OIL AND GAS, INC.

Balance Sheets – Unaudited

	As of November 30, 2018		As of February 28, 2018
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	41,651	$	48,535
Restricted cash (short-term time deposit)		-		100,029
Accounts receivable:
Crude oil sales		90,987		104,840
Joint interest participants		55,769		58,452
Prepaid expenses and other current assets		22,992		21,796
Total current assets		211,399		333,652
CRUDE OIL AND NATURAL GAS PROPERTIES, successful efforts method, net
Proved properties		675,258		714,609
Unproved properties		31,187		31,187
PREPAID DRILLING COSTS		16,452		16,452
Total assets	$	934,296	$	1,095,900
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Accounts payable and other accrued liabilities	$	2,023,741	$	2,022,672
Accounts payable – related parties		1,845,741		1,664,845
Accrued interest		3,491,480		1,822,673
Notes payable – related party		250,100		250,100
12% Notes payable, net of discount of $1,351 and $7,429, respectively		313,649		307,571
12% Notes payable – related party, net of discount of $1,072 and $5,897, respectively		248,928		244,103
Debt - current		9,157,794		9,157,794
Line of credit		834,329		873,350
Total current liabilities		18,165,762		16,343,108
LONG TERM LIABILITIES:
Asset retirement obligation		41,265		37,174
Total liabilities		18,207,027		16,380,282
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ DEFICIT:
Preferred stock – 10,000,000 shares authorized, $0.001 par value;		-		-
Series A Convertible Preferred stock – 2,400,000 shares authorized, $0.001 par value, 6% cumulative dividends; 709,568 shares issued and outstanding		710		710
Common stock – 200,000,000 shares authorized; $0.001 par value, 51,532,364 shares issued and outstanding		51,532		51,532
Additional paid-in capital		22,997,759		22,997,759
Accumulated deficit		(40,322,732)		(38,334,383)
Total stockholders’ deficit		(17,272,731)		(15,284,382)
Total liabilities and stockholders’ deficit	$	934,296	$	1,095,900

The accompanying notes are an integral part of these unaudited financial statements

3

DAYBREAK OIL AND GAS, INC.

Statements of Operations – Unaudited

	For the Three Months Ended November 30,				For the Nine Months Ended November 30,
	2018		2017		2018		2017
REVENUE:
Crude oil sales	$	192,436	$	169,532	$	586,139	$	438,295
OPERATING EXPENSES:
Production		41,337		38,229		115,893		130,454
Exploration and drilling (G&G)		-		8,048		992		103,041
Depreciation, depletion, and amortization (DD&A)		18,144		26,190		55,669		77,526
General and administrative		214,304		221,706		661,674		732,755
Total operating expenses		273,785		294,173		834,228		1,043,776
OPERATING LOSS		(81,349)		(124,641)		(248,089)		(605,481)
OTHER EXPENSE:
Interest expense, net		(576,795)		(411,414)		(1,740,260)		(1,366,931)
NET LOSS		(658,144)		(536,055)		(1,988,349)		(1,972,412)
Cumulative convertible preferred stock dividend requirement		(31,841)		(31,841)		(96,223)		(96,741)
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS	$	(689,985)	$	(567,896)	$	(2,084,572)	$	(2,069,153)
NET LOSS PER COMMON SHARE, basic and diluted	$	(0.01)	$	(0.01)	$	(0.04)	$	(0.04)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic and diluted		51,532,364		51,532,364		51,532,364		51,520,666

The accompanying notes are an integral part of these unaudited financial statements

4

DAYBREAK OIL AND GAS, INC.

Statements of Cash Flows – Unaudited

	Nine Months Ended
	November 30, 2018		November 30, 2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,988,349)	$	(1,972,412)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation, depletion, amortization and impairment expense		55,669		77,526
Amortization of debt discount		10,903		10,904
Amortization of deferred financing costs		-		238,598
Reclass of unproved crude oil and natural gas properties to exploration expense		-		51,486
Changes in assets and liabilities:
Accounts receivable – crude oil and natural gas sales		13,853		(24,403)
Accounts receivable - joint interest participants		2,683		(10,897)
Accounts receivable – other		-		(833)
Prepaid expenses and other current assets		(1,196)		(2,570)
Accounts payable and other accrued liabilities		1,069		242,178
Accounts payable - related parties		180,896		185,315
Accrued interest		1,691,486		1,052,851
Net cash used in operating activities		(32,986)		(152,257)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to crude oil and natural gas properties		(12,227)		-
Net cash used in investing activities		(12,227)		-
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt		-		102,700
Additions to line of credit		33,300		65,000
Payments on line of credit		(95,000)		(45,000)
Net cash provided by (used in) financing activities		(61,700)		122,700
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		(106,913)		(29,557)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD		148,564		142,063
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD	$	41,651	$	112,506
CASH PAID FOR:
Interest	$	60,568	$	64,619
Income taxes	$	-	$	-
SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash increase to line of credit due to monthly interest	$	22,680	$	24,093
Proceeds of debt paid directly to accounts payable vendor	$	-	$	10,650
Revision to asset retirement obligation	$	-	$	40,108
Conversion of preferred stock to common stock	$	-	$	45

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 crude oil-exporting countries, the relative strength of the U.S. dollar, weather conditions, the price and availability of alternative fuels, and overall economic conditions, both foreign and domestic.

Basis of Presentation

The accompanying unaudited interim financial statements and notes for the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q for quarterly reports under Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”).  Accordingly, they do not include all of the information and footnote disclosures normally required by accounting principles generally accepted in the United States of America for complete financial statements.

In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements have been included and such adjustments are of a normal recurring nature.  Operating results for the nine months ended November 30, 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 (“DD&A”) 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

Earnings per Share

The Company follows ASC Topic 260, Earnings per Share, to account for the earnings per share.  Basic earnings per common share (“EPS”) calculations are determined by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period.  Diluted earnings per common share calculations are determined by dividing net income (loss) by the weighted average number of common shares and dilutive common share equivalents outstanding.  During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation.

NOTE 2 — GOING CONCERN:

Financial Condition

The Company’s financial statements for the nine months ended November 30, 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 November 30, 2018 has an accumulated deficit of $40,322,732 and a working capital deficit of $17,954,363 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 revenue.  The Company’s average working interest (“WI”) in these wells is 36.6% and the 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 the Company’s 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 November 30, 2018 do not include any adjustments that might result from the inability to implement or execute the Company’s plans to improve its ability to continue as a going concern.

On December 27, 2018, the Company settled its outstanding indebtedness with Maximilian including a release of and termination of all liens and security interests granted to Maximilian with respect to the Company’s California and Michigan Projects.  Please refer to Note 14 – Subsequent Events for further discussion on this transaction.

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 stockholder’s equity (deficit) or statement of cash flows.

7

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 2016-18 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.

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.

	November 30, 2018		November 30, 2017
Cash and cash equivalents	$	41,651	$	12,487
Restricted cash		-		100,019
Total cash, cash equivalents and restricted cash shown in the statement of cash flows	$	41,651	$	112,506

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 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 available for the purchase of crude oil production.  The Company has no natural gas production in California.  At November 30, 2018 and February 28, 2018 this one customer represented 100.0% of the crude oil sales receivable balance.  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 $90,987 and $104,840 at November 30, 2018 and February 28, 2018, respectively were from one customer, Plains Marketing and represent crude oil sales that occurred in November and February 2018, respectively.

Joint interest participant receivables balances of $55,769 and $58,452 at November 30, 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 November 30, 2018 and February 28, 2018 as the joint interest owners have a history of paying their obligations.

At November 30, 2018, the Company owed our 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 $12.6 million or approximately 69.4% of the Company’s total debt.

On December 27, 2018, the Company settled its outstanding indebtedness with Maximilian.  Please refer to Note 14 – Subsequent Events for further discussion about this transaction.

8

NOTE 6 — CRUDE OIL AND NATURAL GAS PROPERTIES:

Crude oil and natural gas property balances at November 30, 2018 and February 28, 2018 are set forth in the table below.

	November 30, 2018		February 28, 2018
Proved leasehold costs	$	115,119	$	115,119
Costs of wells and development		2,298,186		2,293,668
Capitalized exploratory well costs		1,341,494		1,333,785
Cost of proved crude oil and natural gas properties		3,754,799		3,742,572
Accumulated depletion, depreciation, amortization and impairment		(3,079,541)		(3,027,963)
Proved crude oil and natural gas properties, net	$	675,258	$	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	$	706,445	$	745,796

NOTE 7 — ACCOUNTS PAYABLE:

On March 1, 2009, the Company became the operator for its East Slopes Project in California.  Additionally, the Company then assumed certain original defaulting partners’ approximate $1.5 million liability representing a 25% working interest in the drilling and completion costs associated with the East Slopes Project four earning well program.  The Company subsequently sold the same 25% working interest on June 11, 2009.  Of the $1.5 million liability, $244,849 remains unpaid and is included in both the November 30, 2018 and February 28, 2018 accounts payable balances.  Payment of this liability has been delayed until the Company’s cash flow situation improves.  On October 17, 2018, a working interest partner in California filed a UCC financing statement in regards to payables owed to the partner by the Company.  At November 30, 2018, the balance owed this working interest partner was $122,746.

NOTE 8 — ACCOUNTS PAYABLE- RELATED PARTIES:

The November 30, 2018 and February 28, 2018 accounts payable – related parties balances of approximately $1.8 million and $1.7 million respectively, were 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 November 30, 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.  The exercise price of the associated warrants was lowered from $0.14 to $0.07 as part of the Note maturity extension.  There are ten noteholders, holding 980,000 warrants (including 500,000 warrants held by a related party) who have not yet exercised their warrants.  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-

9

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 $10,903 at November 30, 2018 and 2017, respectively.  The unamortized debt discount at November 30, 2018 and February 28, 2018 was $2,423 and $13,326, respectively.

12% Note balances at November 30, 2018 and February 28, 2018 are set forth in the table below:

	November 30, 2018		February 28, 2018
12% Subordinated notes	$	315,000	$	315,000
Debt discount		(1,351)		(7,429)
12% Subordinated notes balance, net	$	313,649	$	307,571

12% Note balances – related parties at November 30, 2018 and February 28, 2018 are set forth in the table below:

	November 30, 2018		February 28, 2018
12% Subordinated notes – related party	$	250,000	$	250,000
Debt discount		(1,072)		(5,897)
12% Subordinated notes – related party balance, net	$	248,928	$	244,103

In conjunction with the Notes private placement, a total of 1,190,000 common stock purchase warrants (including 500,000 held by a related party) 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 November 30, 2018, there were 980,000 warrants (including 500,000 held by a related party) 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	-	-	-
Nine Months Ended November 30, 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.  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.

On October 31, 2016 through the Fourth Amendment to the Amended and Restated Loan and Security Agreement (the “Restructuring Agreement”), the maturity date of the loan was changed to February 28, 2020.

10

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.  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.  Under the terms of the Restructuring Amendment all unpaid interest is currently being accrued.  Accrued interest on the credit facility loan at November 30, 2018 and February 28, 2018 was $3,459,858 and $1,812,128, respectively.  During the nine months ended November 30, 2018 and 2017, the Company received advances of $-0- and $102,700, respectively, under the terms of the credit facility.

On December 27, 2018, the Company settled its outstanding indebtedness with Maximilian including a release and termination of all liens and security interests granted to Maximilian with respect to the Company’s California and Michigan projects.  Please refer to Note 14 – Subsequent Events for further discussion on this transaction.

Maximilian Promissory Note – Michigan Exploratory Joint Drilling Project

The Company has a note payable loan balance to Maximilian of $94,650 as of November 30, 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 November 30, 2018 and February 28, 2018 was $8,774 and $5,158, respectively.  During the nine months ended November 30, 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 November 30, 2018 and February 28, 2018 are set forth in the table below:

	November 30, 2018		February 28, 2018
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		3,468,632		1,817,287
Total Maximilian debt	$	12,626,426	$	10,975,081

On December 27, 2018, the Company settled its outstanding indebtedness with Maximilian including a release and termination of all liens and security interests granted to Maximilian with respect to the Company’s California and Michigan projects.  Please refer to Note 14 – Subsequent Events for further information on this transaction.

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 monthly reference rate of 0.249% + 337.5 basis points with interest payable monthly.  The monthly interest rate on the remaining principal balance for November 2018 was 0.483%.  The reference rate is based on the 30 day LIBOR (“London Interbank Offered Rate”) and is subject to change from UBS.

At November 30, 2018 and February 28, 2018, the line of credit had an outstanding balance of $834,329 and $873,350, respectively.  During the nine months ended November 30, 2018 and 2017, the Company received advances of $33,300 and $65,000 from the line of credit.  Additionally during the nine months ended November 30, 2018, the Company made payments to the line of credit of $95,000 and $45,000, respectively.  Interest incurred for the nine months ended November 30, 2018 and 2017 was $22,680 and $24,903, respectively.

11

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 November 30, 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 November 30, 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.

Fiscal Period Ended	Shares of Series A Preferred Converted to Common Stock	Shares of Common Stock Issued from Conversion	Number of Accredited Investors
February 29, 2008	102,300	306,900	10
February 28, 2009	237,000	711,000	12
February 28, 2010	51,900	155,700	4
February 28, 2011	102,000	306,000	4
February 29, 2012	-	-	-
February 28, 2013	18,000	54,000	2
February 28, 2014	151,000	453,000	9
February 28, 2015	3,000	9,000	1
February 29, 2016	10,000	30,000	1
February 28, 2017	-	-	-
February 28, 2018	14,997	44,991	1
November 30, 2018	-	-	-
Totals	690,197	2,070,591	44

Holders of Series A Preferred shall accrue dividends, in the amount of 6% of the original purchase price per annum.  Dividends may be paid in cash or common stock at the discretion of the Company.  Dividends are cumulative whether or not in any dividend period or periods the Company has assets legally available for the payment of such dividends.  Accumulations of dividends on Series A Preferred do not bear interest.  Dividends are payable upon declaration by the Board of Directors.

As of November 30, 2018 no dividends have been declared or paid.  Dividends earned since issuance for each fiscal year and the nine months ended November 30, 2018 are set forth in the table below:

Fiscal Period Ended	Shareholders at Period End	Accumulated Dividends
February 28, 2007	100	$	155,311
February 29, 2008	90		242,126
February 28, 2009	78		209,973
February 28, 2010	74		189,973
February 28, 2011	70		173,707
February 29, 2012	70		163,624
February 28, 2013	68		161,906
February 28, 2014	59		151,323
February 28, 2015	58		132,634
February 29, 2016	57		130,925
February 28, 2017	57		130,415
February 28, 2018	56		128,231
November 30, 2018	56		96,223
		$	2,066,371

12

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 November 30, 2018 and February 28, 2018, respectively.

	Common Stock Balance	Par Value
Common stock, Issued and Outstanding, February 28, 2017	51,487,373
Conversion of Series A Convertible Preferred Stock to common stock	44,991	$	45
Common stock, Issued and Outstanding, February 28, 2018	51,532,364
Conversion of Series A Convertible Preferred Stock to common stock	-
Common stock, Issued and Outstanding, November 30, 2018	51,532,364

NOTE 11 — WARRANTS:

Warrants outstanding and exercisable as of November 30, 2018 are set forth in the table below:

	Warrants	Exercise Price	Remaining Life (Years)	Exercisable Warrants Remaining
12% Subordinated notes	980,000	$0.07	0.17	980,000
	980,000			980,000

Warrant activity for the nine months ended November 30, 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 nine months ended November 30, 2018:
Issued	-
Expired / Cancelled / Forfeited	6,859,784
Warrants outstanding, November 30, 2018	980,000	$0.07
Warrants exercisable, November 30, 2018	980,000	$0.07

During the nine months ended November 30, 2018, there were no warrants issued, exercised or cancelled.  There were 6,859,784 warrants that expired.  These warrants had been issued to either Maximilian or to third parties in relation to financing that occurred in 2012 and 2013 through Maximilian.  The remaining outstanding warrants as of November 30, 2018, have a weighted average exercise price of $0.07, a weighted average remaining life of 0.17 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.  The Company has re-measured its deferred tax liabilities based on rates at which they are expected to be utilized in the future, which is generally 21%.

Reconciliation between actual tax expense (benefit) and income taxes computed by applying the U.S. federal income tax rate and state income tax rates to income from continuing operations before income taxes is set forth in the table below:

	November 30, 2018		February 28, 2018
Computed at U.S. and state statutory rates	$	(593,325)	$	(981,966)
Permanent differences		1,570		29,060
New tax law adjustment		-		2,912,689
Changes in valuation allowance		591,755		(1,959,783)
Total	$	-	$	-

13

Tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred liabilities are set forth in the table below:

	November 30, 2018		February 28, 2018
Deferred tax assets:
Net operating loss carryforwards	$	9,013,635	$	8,413,128
Crude oil and naturalgas properties		38,682		47,434
Stock based compensation		66,187		66,187
Other		27,838		27,838
Less valuation allowance		(9,146,342)		(8,554,587)
Total	$	-	$	-

At November 30, 2018, the Company had estimated net operating loss (“NOL”) carryforwards for federal and state income tax purposes of approximately $30,206,552 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 $2,963,803 will not expire and will carry over indefinitely.  The valuation allowance increased $591,755 and $1,959,784 for the nine months ended November 30, 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 2014 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 November 30, 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 November 30, 2018 is shown in the table below:

Fiscal Year Ended	Annual Office Lease Obligation
February 28, 2019	$	3,532
February 29, 2020		9,300
February 28, 2021		6,200
February 28, 2022		-
February 28, 2023 and thereafter		-
Totals	$	19,032

14

NOTE 14 — SUBSEQUENT EVENTS:

On December 27, 2018, the Company paid Maximilian $700,000 to finalize a settlement of outstanding indebtedness through its credit facility and Michigan debt in the amount of approximately $12.6 million.  The Company also acquired an additional 40% working interest in the Daybreak’s Michigan Project along with a note receivable from its Michigan Project Partner.  Daybreak now owns a 70% working interest in its Michigan Project.  Furthermore, all liens and security interests granted to Maximilian with respect to the Company’s leases in California and Michigan have been terminated and released.  The effects of this transaction will be reflected on the Company’s financial statements at February 28, 2019.  The $700,000 paid to Maximilian was obtained from private investors (of which $300,000 was from a related party) by selling a Production Payment from future wells to be drilled in California and Michigan.

15

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is management’s assessment of the current and historical financial and operating results of the Company and of our financial condition.  It is intended to provide information relevant to an understanding of our financial condition, changes in our financial condition and our results of operations and cash flows and should be read in conjunction with our unaudited financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q for the nine months ended November 30, 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 crude 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; in our other public filings and press releases; and discussions with Company management.

Our reserve estimates are determined through a subjective process and are subject to revision.

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 nine months ended November 30, 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.

16

Introduction and Overview

We are an independent crude oil and natural gas exploration, development and production company.  Our basic business model is to increase shareholder value by finding and developing crude oil and natural gas reserves through exploration and development activities, and selling the production from those reserves at a profit.  To be successful, we must, over time, be able to find crude oil and natural gas reserves and then sell the resulting production at a price that is sufficient to cover our finding costs, operating expenses, administrative costs and interest expense, plus offer us a return on our capital investment.  A secondary means of generating returns can include the sale of either producing or non-producing lease properties.

Our 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 or market volatility, would have a material adverse effect on our results of operations and financial condition.

Our operations are focused on identifying and evaluating prospective crude oil 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.

On December 27, 2018, the Company paid Maximilian $700,000 to finalize a settlement of outstanding indebtedness through its credit facility and Michigan debt in the amount of approximately $12.6 million.  The Company also acquired an additional 40% working interest in the Daybreak’s Michigan Project along with a note receivable from its Michigan Project Partner.  Daybreak now owns a 70% working interest in its Michigan Project.  Furthermore, all liens and security interests granted to Maximilian with respect to the Company’s leases in California and Michigan have been terminated and released.  The effects of this transaction will be reflected on the Company’s financial statements at February 28, 2019.  The $700,000 paid to Maximilian was obtained from private investors (of which $300,000 was from a related party) by selling a Production Payment from future wells to be drilled in California and Michigan.  The Company intends to raise an additional $600,000 to drill new wells in California and 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, crude oil is shown in barrels (“Bbls”); natural gas is shown in thousands of cubic feet (“Mcf”) unless otherwise specified, and hydrocarbon totals are expressed in barrels of crude oil equivalent (“BOE”).

Below is brief summary of our crude oil projects in California and Michigan.  Refer to our discussion in Item 2. Properties, in our Annual Report on Form 10-K for the year ended February 28, 2018 for more information on our California project and exploratory joint drilling project in Michigan.

Kern County, California (East Slopes Project)

The East Slopes Project is located in the southeastern part of the San Joaquin Basin near Bakersfield, California.  Drilling targets are porous and permeable sandstone reservoirs that exist at depths of 1,200 feet to 4,500 feet.  Since January 2009, we have participated in the drilling of 25 wells in this project.  We have been the Operator at the East Slopes Project since March 2009.

The crude oil produced from our acreage in the Vedder Sand is considered heavy oil.  The gravity of the crude oil ranges from 14° to 16° API (American Petroleum Institute) gravity and must be heated to separate and remove water prior to sale.  Our crude oil wells in the East Slopes Project produce from five reservoirs at our Sunday, Bear, Black, Ball and Dyer Creek locations.  The Sunday property has six producing wells, while the Bear property has nine producing wells.  The Black property is the smallest of all currently producing reservoirs, and currently has two producing wells at this property.  The Ball property also has two producing wells while the Dyer Creek property has one producing well.

During the nine months ended November 30, 2018 we had production from 20 vertical crude oil wells.  Our average working interest and net revenue interest (“NRI”) in these 20 wells is 36.6% and 28.4%, respectively.

17

We plan on acquiring additional acreage 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 put in place.  We plan to spend approximately $300,000 in new capital investments within the East Slopes Project area in the 2019 calendar year if new financing is in place.  Each new development well has a Daybreak net cost of $150,000.

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 spring of 2019.  In the meantime, we continue to maintain our lease position by paying lease rentals and renewing expiring leases.

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 – Nine months ended November 30, 2018 compared to the nine months ended November 30, 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.  The posted Midway-Sunset price generally moves in correlation to, and at a discount to, prices quoted on the New York Mercantile Exchange (“NYMEX”) for spot West Texas Intermediate (“WTI”) Cushing, Oklahoma delivery contracts.  Effective June 1, 2017, we were able to negotiate with our crude oil purchaser the use of a more favorable crude oil pricing schedule.  We do not have any natural gas revenues in California.

There has been a significant amount of volatility in crude oil prices and a dramatic decline in our realized sale price of crude oil since June of 2014, when the monthly average price of WTI crude oil was $105.79 per barrel and our realized price per barrel of crude oil was $98.78.  This 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 overall improvement in crude oil prices for the nine months ended November 30, 2018 in comparison to the nine months ended November 30, 2017, there is no guarantee that this trend will continue.  Most recently the monthly average WTI price of oil has declined from $70.75 in October of 2018 to $56.96 in November 2018 representing the continued volatility in crude oil prices.  It is beyond our ability to accurately predict how long crude oil prices will continue to remain at these lower price levels; when or at what level they may begin to stabilize; or when they may rebound to 2014 levels, as there are many factors beyond our control that dictate the price we receive on our crude oil sales.

A comparison of the average WTI price and average realized crude oil sales price at our East Slopes Project in California for the nine months ended November 30, 2018 and 2017 is shown in the table below:

	Nine Months Ended
	November 30, 2018		November 30, 2017		Percentage Change
Average nine month WTI crude oil price (Bbl)	$	67.09	$	49.64	35.2%
Average nine month realized crude oil sales price (Bbl)	$	67.83	$	45.38	49.5%

18

For the nine months ended November 30, 2018, the average WTI price was $67.09 and our average realized crude oil sale price was $67.83, representing a premium of $0.74 per barrel or 1.1% higher than the average WTI price.  In comparison, for the nine months ended November 30, 2017, the average WTI price was $49.64 and our average realized sale price was $45.38 representing a discount of $4.26 per barrel or 8.6% lower than the average WTI price.  Effective June 1, 2017, we were able to negotiate with our crude oil purchaser the use of a more favorable crude oil pricing schedule that has contributed to increasing the average realized price we receive on our crude 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 nine months ended November 30, 2018 increased $147,844 or 33.7% to $586,139 in comparison to revenue of $438,925 for the nine months ended November 30, 2017.  The average sale price of a barrel of crude oil for the nine months ended November 30, 2018 was $67.83 in comparison to $45.38 for the nine months ended November 30, 2017.  The increase of $22.45 or 49.5% per barrel in the average realized price of a barrel of crude oil accounted for 100.0% of the increase in crude oil revenue for the nine months ended November 30, 2018.  Effective June 1, 2017, we were able to negotiate with our crude oil purchaser the use of a more favorable crude oil pricing schedule that has contributed to increasing the average realized price we receive on our crude oil sales.

Our net sales volume for the nine months ended November 30, 2018 was 8,641 barrels of crude oil in comparison to 9,659 barrels sold for the nine months ended November 30, 2017.  This decrease in crude oil sales volume of 1,018 barrels or 10.5% was due to 21 fewer days of production and the natural decline in reservoir pressure during the nine months ended November 30, 2018.

The gravity of our produced crude oil in California ranges between 14° API and 16° API.  Production for the nine months ended November 30, 2018 was from 20 wells resulting in 5,460 well days of production in comparison to 5,481 well days of production for the nine months ended November 30, 2017.

Our crude oil sales revenue for the nine months ended November 30, 2018 and 2017 is set forth in the following table:

	Nine Months Ended November 30, 2018			Nine Months Ended November 30, 2017
Project	Revenue		Percentage	Revenue		Percentage
California – East Slopes Project	$	586,139	100.0%	$	438,295	100.0%

*Our average realized sale price on a BOE basis for the nine months ended November 30, 2018 was $67.83 in comparison to $45.38 for the nine months ended November 30, 2017, representing an increase of $22.45 or 49.5% per barrel.

Operating Expenses

Total operating expenses for the nine months ended November 30, 2018 were $834,228, a decrease of $209,548 or 20.1% compared to $1,043,776 for the nine months ended November 30, 2017.  The decrease was due to less exploration work associated with our Michigan exploratory joint drilling project in the amount of $102,049 during the prior comparative period and a decrease of $71,081 in G&A expenses.  Operating expenses for the nine months ended November 30, 2018 and 2017 are set forth in the table below:

	Nine Months Ended November 30, 2018					Nine Months Ended November 30, 2017
	Expenses		Percentage	BOE Basis		Expenses		Percentage	BOE Basis
Production expenses	$	115,893	13.9%			$	130,454	12.5%
Exploration and drilling expenses		992	0.1%				103,041	9.9%
Depreciation, depletion, amortization (“DD&A”)		55,669	6.7%				77,526	7.4%
General and administrative (“G&A”) expenses		661,674	79.3%				732,755	70.2%
Total operating expenses	$	834,228	100.0%	$	96.54	$	1,043,776	100.0%	$	108.06

Production expenses include expenses associated with the production of crude oil and natural gas.  These expenses include contract pumpers, electricity, road maintenance, control of well insurance, property taxes and well workover expenses; and, relate directly to the number of wells that are in production.  For the nine months ended November 30, 2018, these expenses decreased by $14,561 or 11.2% to $115,893 in comparison to $130,454 for the nine months ended November 30, 2017.  For the nine months ended November 30, 2018 and 2017, we had 20 wells on production in California.  Production expense on a barrel of oil equivalent (“BOE”) basis for the nine months ended November 30, 2018 and 2017 was $13.41 and $13.51, respectively.  Production expenses represented 13.9% and 12.5% of total operating expenses for the nine months ended November 30, 2018 and 2017, respectively.

19

Exploration and drilling expenses include geological and geophysical (“G&G”) expenses as well as leasehold maintenance, plugging and abandonment (“P&A”) expenses and dry hole expenses.  For the nine months ended November 30, 2018, these expenses decreased $102,049 to $992 in comparison to $103,041 the nine months ended November 30, 2017.  The two primary reasons for the year-to-year decrease was the G&G work on the new Michigan exploratory joint drilling project in the amount of $88,543 and the plug and abandonment (P&A) operations on two non-producing well bores in California for $14,492 representing $103,035 in aggregate that was done during the nine months ended November 30, 2017.  Exploration and drilling expenses represented 0.1% and 9.9% of total operating expenses for the nine months ended November 30, 2018 and 2017, respectively.

Depreciation, depletion and amortization (“DD&A”) expenses relate to equipment, proven reserves and property costs, along with impairment, and is another component of operating expenses.  For the nine months ended November 30, 2018, DD&A expenses decreased $21,857 or 28.2% to $55,669 in comparison to $77,526 for the nine months ended November 30, 2017.  On a BOE basis, DD&A expense was $6.44 and $8.03 for the nine months ended November 30, 2018 and 2017, respectively.  The decrease in DD&A is directly related to the increase in our reserve estimates in comparison to the prior year reserves.  DD&A expenses represented 6.7% and 7.4% of total operating expenses for the nine months ended November 30, 2018 and 2017, respectively.

General and administrative (“G&A”) expenses include the salaries of our six full-time employees, including management.  Fifty percent (50%) of certain management salaries are currently being deferred until the Company’s cash flow improves, however the entire salary expense is recognized under G&A on the statements of operations.  Other items included in our G&A expenses are legal and accounting expenses, director fees, stock compensation, investor relations fees, travel expenses, insurance 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 nine months ended November 30, 2018, G&A expenses decreased $71,081 or 9.7% to $661,674 in comparison to $732,755 for the nine months ended November 30, 2017.  We received, as Operator in California, administrative overhead reimbursement of $39,965 during the nine months ended November 30, 2018 for the East Slopes Project which was used to directly offset certain employee salaries.  We are continuing a program of reducing all of our G&A costs wherever possible.  G&A expenses represented 79.3% and 70.2% of total operating expenses for the nine months ended November 30, 2018 and 2017, respectively.

Interest expense, net for the nine months ended November 30, 2018 increased $373,329 or 27.3% to $1,740,260 in comparison to $1,366,931 for the nine months ended November 30, 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.

Results of Operations – Three months ended November 30, 2018 compared to the three months ended November 30, 2017

A comparison of the average WTI price and average realized crude oil sales price at our East Slopes Project in California for the three months ended November 30, 2018 and 2017 is shown in the table below:

	Three Months Ended
	November 30, 2018		November 30, 2017		Percentage Change
Average three month WTI crude oil price (Bbl)	$	65.98	$	52.68	25.3%
Average three month realized crude oil sales price (Bbl)	$	68.76	$	52.02	32.2%

For the three months ended November 30, 2018, the average WTI price was $65.98 and our average realized crude oil sale price was $68.76, representing a premium of $2.78 per barrel or 4.2% higher than the average WTI price.  In comparison, for the three months ended November 30, 2017, the average WTI price was $52.68 and our average realized sale price was $52.02 representing a discount of $0.66 per barrel or 1.3% lower than the average WTI price.  Effective June 1, 2017, we were able to negotiate with our crude oil purchaser the use of a more favorable crude oil pricing schedule that has contributed to increasing the average realized price we receive on our crude 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 November 30, 2018, increased $22,904 or 13.5% to $192,436 in comparison to revenue of $169,532 for the three months ended November 30, 2017.  The average sale price of a barrel of crude oil for the three months ended November 30, 2018 was $68.76 in comparison to $52.02 for the three months ended November 30, 2017.  The increase of $16.74 or 32.2% per barrel in the average realized price of a barrel of crude oil accounted for 100.0% of the increase in crude oil revenue for the three months ended November 30, 2018.

20

Our net sales volume for the three months ended November 30, 2018 was 2,799 barrels of crude oil in comparison to 3,259 barrels sold for the three months ended November 30, 2017.  This decrease in crude oil sales volume of 460 barrels or 14.1% was due to 37 fewer days of production and the natural decline in reservoir pressure during the three months ended November 30, 2018.

The gravity of our produced crude oil in California ranges between 14° API and 16° API.  Production for the three months ended November 30, 2018 was from 20 wells resulting in 1,783 well days of production in comparison to 1,820 well days of production for the three months ended November 30, 2017.

Our crude oil sales revenue for the three months ended November 30, 2018 and 2017 are set forth in the following table:

	Three Months Ended November 30, 2018			Three Months Ended November 30, 2017
Project	Revenue		Percentage	Revenue		Percentage
California – East Slopes Project	$	192,436	100.0%	$	169,532	100.0%

*Our average realized sale price on a BOE basis for the three months ended November 30, 2018 was $68.76 in comparison to $52.02 for the three months ended November 30, 2017, representing an increase of $16.74 or 32.2% per barrel.

Operating Expenses

Total operating expenses for the three months ended November 30, 2018 were $273,785, a decrease of $20,388 or 6.9% compared to $294,173 for the three months ended November 30, 2017.  Operating expenses for the three months ended November 30, 2018 and 2017 are set forth in the table below:

	Three Months Ended November 30, 2018					Three Months Ended November 30, 2017
	Expenses		Percentage	BOE Basis		Expenses		Percentage	BOE Basis
Production expenses	$	41,337	15.1%			$	38,229	13.0%
Exploration and drilling expenses		-	0.0%				8,048	2.7%
Depreciation, depletion, amortization (“DD&A”)		18,144	6.6%				26,190	8.9%
General and administrative (“G&A”) expenses		214,304	78.3%				221,706	75.4%
Total operating expenses	$	273,785	100.0%	$	97.82	$	294,173	100.0%	$	90.27

For the three months ended November 30, 2018, production expenses increased by $3,108 or 8.1% to $41,337 in comparison to $38,229 for the three months ended November 30, 2017.  For the three months ended November 30, 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 November 30, 2018 and 2017 were $14.77 and $11.73, respectively.  Production expenses represented 15.1% and 13.0% of total operating expenses for the three months ended November 30, 2018 and 2017, respectively.

For the three months ended November 30, 2018, we did not incur any exploration and drilling expenses in comparison to $8,048 for the three months ended November 30, 2017.  Exploration and drilling expenses represented 0.0% and 2.7% of total operating expenses for the three months ended November 30, 2018 and 2017, respectively.

For the three months ended November 30, 2018, DD&A expenses decreased $8,046 or 30.7% to $18,144 in comparison to $26,190 for the three months ended November 30, 2017.  DD&A on a BOE basis was $6.48 and $8.04 for the three months ended November 30, 2018 and 2017, respectively.  The decrease in DD&A is directly related to the increase in our reserve estimates in comparison to the prior year reserves.  DD&A expenses represented 6.6% and 8.9% of total operating expenses for the three months ended November 30, 2018 and 2017, respectively.

For the three months ended November 30, 2018, G&A expenses decreased $7,402 or 3.3% to $214,304 in comparison to $221,706 for the three months ended November 30, 2017.  Fifty percent (50%) of certain employee’s salaries are currently being deferred until the Company’s cash flow improves, however the entire salary expense is recognized under G&A on the statements of operations.  We received, as Operator in California, administrative overhead reimbursement of $13,322 during the three months ended November 30, 2018 for the East Slopes Project which was used to directly offset certain employee salaries.  We are continuing a program of reducing all of our G&A costs wherever possible.  G&A expenses represented 78.3% and 75.4% of total operating expenses for the three months ended November 30, 2018 and 2017, respectively.

21

Interest expense, net for the three months ended November 30, 2018 increased $165,381 or 40.2% to $576,795 in comparison to $411,414 for the three months ended November 30, 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.  The credit facility activity is discussed further in the discussion of the Maximilian Loan Agreement (Credit Facility) under the Current Debt (Short-Term Borrowings) section of this MD&A.

Due to the nature of our business, we expect that revenues, as well as all categories of expenses, will continue to fluctuate substantially on a quarter-to-quarter and year-to-year basis.  Revenues are highly dependent on the volatility of hydrocarbon prices and production volumes.  Production expenses will fluctuate according to the number and percentage ownership of producing wells as well as the amount of revenues we receive based on the price of crude oil.  Exploration and drilling expenses will be dependent upon the amount of capital that we have to invest in future development projects, as well as the success or failure of such projects.  Likewise, the amount of DD&A expense will depend upon the factors cited above including the size of our proven reserves base and the market price of energy products.  G&A expenses will also fluctuate based on our current requirements, but will generally tend to increase as we expand the business operations of the Company.  An on-going goal of the Company is to improve cash flow to cover the current level of G&A expenses and to fund our drilling programs in California and Michigan.

Capital Resources and Liquidity

Our primary financial resource is our proven crude oil reserve base.  Our ability to fund any future capital expenditure programs is dependent upon the prices we receive from crude oil sales, the success of our drilling programs in California and Michigan and the availability of capital resource financing.  There has been a significant amount of volatility in crude oil prices and a dramatic decline in our realized sale price of crude oil since June of 2014, when the monthly average price of WTI crude oil was $105.79 per barrel.  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 overall improvement in crude oil prices for the nine months ended November 30, 2018 in comparison to the nine months ended November 30, 2017, there is no guarantee that this trend will continue.  Most recently, the monthly average WTI price of oil has declined from $70.75 in October of 2018 to $56.96 in November 2018 representing the continued volatility in crude oil prices.  It is beyond our ability to accurately predict how long crude oil prices will continue to remain at these lower price levels; when or at what level they may begin to stabilize; or when they may continue to rebound as there are many factors beyond our control that dictate the price we receive for our crude oil sales.

We plan to spend approximately $300,000 in new capital investments within the East Slopes Project area in the 2019 calendar year if new financing is in place.  Each new development well has a Daybreak net cost of $150,000.  However, our actual expenditures may vary significantly from this estimate if our plans for exploration and development activities change during the year or if we are unable to obtain financing to fund these capital investments.  Factors such as changes in operating margins and the availability of capital resources could increase or decrease our ultimate level of expenditures during the current fiscal year.

Changes in our capital resources at November 30, 2018 in comparison to February 28, 2018 are set forth in the table below:

					Increase		Percentage
	November 30, 2018		February 28, 2018		(Decrease)		Change
Cash	$	41,651	$	48,535	$	(6,884)	(14.2%)
Restricted cash	$	-	$	100,029	$	(100,029)	(100.0%)
Current Assets	$	211,399	$	333,652	$	(122,253)	(36.6%)
Total Assets	$	934,296	$	1,095,900	$	(161,604)	(14.7%)
Current Liabilities	$	(18,165,762)	$	(16,343,108)	$	1,822,654	11.2%
Total Liabilities	$	(18,207,027)	$	(16,380,282)	$	1,826,745	11.2%
Working Capital Deficit	$	(17,954,363)	$	(16,009,456)	$	1,944,907	12.1%

Our working capital deficit increased approximately $1.9 million or 12.1% to $17,954,363 at November 30, 2018 in comparison to $16,009,456 at February 28, 2018.  The increase in our working capital deficit was due to an increase in our accounts payable balances and accrued interest relating to the Maximilian credit facility loan as well as a decrease in both our cash balance and our restricted cash balances.

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.

22

Our business is capital intensive.  Our ability to grow is dependent upon favorably obtaining outside capital and generating cash flows from operating activities necessary to fund our investment activities.  There is no assurance that we will be able to achieve profitability.  Since our future operations will continue to be dependent on successful exploration and development activities and our ability to seek and secure capital from external sources, should we be unable to achieve sustainable profitability this could cause any equity investment in the Company to become worthless.

Major sources of funds in the past for us have included the debt or equity markets and the sale of assets.  While we have positive cash flow from our operations in California, we will have to rely on the capital markets to fund future operations and growth.  Our business model is focused on acquiring exploration or development properties as well as existing production.  Our ability to generate future revenues and operating cash flow will depend on successful exploration, and/or acquisition of crude oil 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 from June of 2014 price levels has restricted our ability to obtain needed capital.  No assurance can be given that we will be able to obtain funding under any loan commitments or any additional financing on favorable terms, if at all.  The sale of all or part of interests in our assets may be another source of cash flow available to us.

The Company’s financial statements for the nine months ended November 30, 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 in 2005, and as of the nine months ended November 30, 2018, we have an accumulated deficit of $40,322,732 and a working capital deficit of $17,954,363 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.

As a subsequent event to the end of our fiscal third quarter, on December 27, 2018, we paid Maximilian $700,000 to finalize a settlement of outstanding indebtedness on our credit facility and Michigan debt in the amount of approximately $12.6 million.  The Company also acquired an additional 40% working interest in the Daybreak’s Michigan Project along with a note receivable from its Michigan Project Partner.  Daybreak now owns a 70% working interest in its Michigan Project.  Furthermore, all liens and security interests granted to Maximilian with respect to the Company’s leases in California and Michigan have been terminated and released.  The effects of this transaction will be reflected on the Company’s financial statements at February 28, 2019.  The $700,000 paid to Maximilian was obtained from private investors (of which $300,000 was from a related party) by selling a Production Payment from future wells to be drilled in California and Michigan.  The Company intends to raise an additional $600,000 to drill new wells in California and Michigan.

Changes in Financial Condition

During the nine months ended November 30, 2018, we received crude oil sales revenue from 20 wells in California.  Our commitment to improving corporate profitability remains unchanged.  We experienced an increase in revenues of $147,844 or 33.7% to $586,139 for the nine months ended November 30, 2018 in comparison to revenues of $438,295 for the nine months ended November 30, 2017.  The increase of $22.45 or 49.5% per barrel in the average realized price of a barrel of crude oil accounted for 100.0% of the increase in crude oil revenue for the nine months ended November 30, 2018.  For the nine months ended November 30, 2018, we had an operating loss of $248,089 in comparison to an operating loss of $605,481 for the nine months ended November 30, 2017.  This improvement in reducing our operating loss was due to both an increase in revenue and a reduction in expenses.

Our balance sheet at November 30, 2018 reflects total assets of approximately $0.9 million in comparison to approximately $1.1 million at February 28, 2018.  This decrease of approximately $0.2 million is primarily due to cash outflow from operations and depletion expense.

23

At November 30, 2018, total liabilities were approximately $18.2 million in comparison to approximately $16.4 million at February 28, 2018.  The increase in liabilities of approximately $1.8 million was due to increases in payables and accrued interest on our credit facility balance with Maximilian.  On December 27, 2018, we paid Maximilian $700,000 to finalize a settlement of outstanding indebtedness through its credit facility and Michigan debt in the amount of approximately $12.6 million.  Refer to the discussion in Capital Resources and Liquidity section of this MD&A for further information on this subsequent event.

The balance of our common stock issued and outstanding of 51,532,364 shares remained unchanged from February 28, 2018.

Cash Flows

Changes in the net funds provided by and (used in) our operating, investing and financing activities are set forth in the table below:

	Nine Months Ended November 30, 2018		Nine Months Ended November 30, 2017		Increase (Decrease)		Percentage Change
Net cash (used in) operating activities	$	(32,986)	$	(152,257)		(119,271)	(78.3%)
Net cash (used in ) investing activities	$	(12,227)	$	-		(12,227)	(100.0%)
Net cash provided by (used in) financing activities	$	(61,700)	$	122,700		(184,400)	(150.3%)

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 nine months ended November 30, 2018, cash flow used in operating activities was $32,986 in comparison to cash flow used in operating activities of $152,217 for the nine months ended November 30, 2017.  This decrease of $119,271 in our cash flow used in operating activities for the nine months ended November 30, 2018 was due to a reduction in our changes of non-cash operating expenses and accounts payable balances offset by changes in our asset and accrued interest balances.  Changes in non-cash account balances relate primarily to DD&A and amortization of debt discount.  Variations in cash flow from operating activities may impact our level of exploration and development expenditures.

Cash Flow (Used In) Investing Activities

Cash flow from investing activities is derived from changes in crude oil and natural gas property balances and any lending activities.  Cash flow used in our investing activities for the nine months ended November 30, 2018 was $12,227 in comparison to cash flow used in our investing activities of -$0- for the nine months ended November 30, 2017.

Cash Flow Provided By (Used In) Financing Activities

Cash flow from financing activities is derived from changes in long-term liability account balances or in equity account balances, excluding retained earnings.  Cash flow used in our financing activities was $61,700 for the nine months ended November 30, 2018 in comparison to cash flow provided by our financing activities of $122,700 for the nine months ended November 30, 2017.  This increase of $184,400 used in our cash flow activities was primarily due to an additional principal payment of $50,000 made to reduce the outstanding balance on the UBS line of credit.  For the nine months ended November 30, 2018, we made total payments of $95,000 to our line of credit with UBS Bank.

The following discussion is a summary of cash flows provided by, and used in, the Company’s financing activities at November 30, 2018.

Current debt (Short-term borrowings)

Related Party

The Company has a note payable-related party loan balance of $250,100 as of November 30, 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.

24

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 $10,903 at November 30, 2018 and 2017.  The unamortized debt discount at November 30, 2018 and February 28, 2018 was $2,423 and $13,326, respectively.

12% Note balances at November 30, 2018 and February 28, 2018 are set forth in the table below:

	November 30, 2018		February 28, 2018
12% Subordinated notes	$	315,000	$	315,000
Debt discount		(1,351)		(7,429)
12% Subordinated notes balance, net	$	313,649	$	307,571

12% Note balances – related parties at November 30, 2018 and February 28, 2018 are set forth in the table below:

	November 30, 2018		February 28, 2018
12% Subordinated notes – related party	$	250,000	$	250,000
Debt discount		(1,072)		(5,897)
12% Subordinated notes – related party balance, net	$	248,928	$	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 November 30, 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	-	-	-
Nine Months Ended November 30, 2018	-	-	-
Totals	150,000	150,000	2

25

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.  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.

On October 31, 2016 through the Fourth Amendment to the Amended and Restated Loan and Security Agreement (the “Restructuring Agreement”), the maturity date of the loan was changed to February 28, 2020.

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.  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.  Under the terms of the Restructuring Amendment all unpaid interest is currently being accrued.  Accrued interest on the credit facility loan at November 30, 2018 and February 28, 2018 was $3,459,858 and $1,812,128, respectively.  During the nine months ended November 30, 2018 and 2017, the Company received advances of $-0- and $102,700, respectively, under the terms of the credit facility.

On December 27, 2018, we paid Maximilian $700,000 to finalize a settlement of outstanding indebtedness on the credit facility and Michigan debt in the amount of approximately $12.6 million.  The settlement included a release and termination of all liens and security interests granted to Maximilian with respect to the Company’s California and Michigan projects.  Refer to the discussion in Capital Resources and Liquidity section of this MD&A for further information on this subsequent event.

Maximilian Promissory Note – Michigan Exploratory Joint Drilling Project

The Company has a note payable loan balance to Maximilian of $94,650 as of November 30, 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 November 30, 2018 and February 28, 2018 was $8,774 and $5,158, respectively.  During the nine months ended November 30, 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 November 30, 2018 and February 28, 2018 are set forth in the table below:

	November 30, 2018		February 28, 2018
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		3,468,632		1,817,287
Total Maximilian debt	$	12,626,426	$	10,975,081

26

On December 27, 2018, we paid Maximilian $700,000 to finalize a settlement of outstanding indebtedness on the credit facility and Michigan debt in the amount of approximately $12.6 million.  The settlement included a release and termination of all liens and security interests granted to Maximilian with respect to the Company’s California and Michigan projects.  Refer to the discussion in Capital Resources and Liquidity section of this MD&A for further information on this subsequent event.

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 November 30, 2018 and February 28, 2018, the line of credit had an outstanding balance of $834,329 and $873,350, respectively.  During the nine months ended November 30, 2018 and 2017, the Company made payments to the line of credit of $95,000 and $45,000, respectively.  Interest incurred for the nine months ended November 30, 2018 and 2017 was $22,680 and $24,903, respectively.

Capital Commitments

Daybreak has ongoing capital commitments to develop certain leases pursuant to their underlying terms.  Failure to meet such ongoing commitments may result in the loss of the right to participate in future drilling on certain leases or the loss of the lease itself.  These ongoing capital commitments may also cause us to seek additional capital from sources outside of the Company.  The current uncertainty in the credit and capital markets, and the current economic downturn in the energy sector, may restrict our ability to obtain needed capital.

Restricted Stock and Restricted Stock Unit Plan

On April 6, 2009, the Board approved the Restricted Stock and Restricted Stock Unit Plan (the “2009 Plan”) allowing the executive officers, directors, consultants and employees of Daybreak and its affiliates to be eligible to receive restricted common stock and restricted common stock unit awards.  Subject to adjustment, the total number of shares of Daybreak common stock that will be available for the grant of awards under the 2009 Plan may not exceed 4,000,000 shares; provided, that, for purposes of this limitation, any stock subject to an award that is forfeited in accordance with the provisions of the 2009 Plan will again become available for issuance under the 2009 Plan.  We believe that awards of this type further align the interests of our employees and our shareholders by providing significant incentives for these employees to achieve and maintain high levels of performance.  Restricted stock and restricted stock units also enhance our ability to attract and retain the services of qualified individuals.

At November 30, 2018, a total of 3,000,000 shares of restricted stock had been awarded under the 2009 Plan, with 2,986,220 shares outstanding and fully vested.  A total of 1,013,780 common stock shares remained available at November 30, 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(2)	-

⁽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 nine months ended November 30, 2018 and 2017, the Company did not recognize any stock compensation expense related to the above restricted stock grants since all issuances have been fully amortized.

27

Management Plans to Continue as a Going Concern

We continue to implement plans to enhance Daybreak’s ability to continue as a going concern.  The Company currently has a net revenue interest in 20 producing crude oil wells in our East Slopes Project located in Kern County, California.  The revenue from these wells has created a steady and reliable source of revenue for the Company.  Our average working interest in these wells is 36.6% and the average net revenue interest is 28.4%.

We anticipate revenues will continue to increase as the Company participates in the drilling of more wells in the East Slopes Project in California and as our drilling operations begin in Michigan.  However given the current volatility and instability in hydrocarbon prices, the timing of any drilling activity in California and Michigan will be dependent on a sustained improvement in hydrocarbon prices and a successful refinancing or restructuring of our credit facility.

We believe that our liquidity will improve when there is a sustained improvement in hydrocarbon prices.  Our sources of funds in the past have included the debt or equity markets and the sale of assets.  While the Company does have positive cash flow from its crude oil properties, it has not yet established a positive cash flow on a company-wide basis.  It will be necessary for the Company to obtain additional funding from the private or public debt or equity markets in the future.  However, we cannot offer any assurance that we will be successful in executing the aforementioned plans to continue as a going concern.

Our financial statements as of November 30, 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.

On December 27, 2018, we paid Maximilian $700,000 to finalize a settlement of outstanding indebtedness on the credit facility and Michigan debt in the amount of approximately $12.6 million.  The settlement included a release and termination of all liens and security interests granted to Maximilian with respect to on the Company’s California and Michigan projects.  Refer to the discussion in Capital Resources and Liquidity section of this MD&A for further information on this subsequent event.

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 November 30, 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.

28

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, we are not required to provide the information otherwise required by this Item.

ITEM 4.  CONTROLS AND PROCEDURES

Management’s Evaluation of Disclosure Controls and Procedures

As of the end of the reporting period, November 30, 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 November 30, 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 November 30, 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.

29

PART II

OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

None

ITEM 1A.  RISK FACTORS

In addition to the other information set forth in this Form 10-Q Report, you should carefully consider the various factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended February 28, 2018, which could materially affect our business, financial condition or future results.  Our Annual Report is available from the SEC at www.sec.gov.  The risks described in this report are not the only risks we face.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial could have a material adverse effect on our business, financial condition or future results of operations.

30

ITEM 6.  EXHIBITS

The following Exhibits are filed as part of the report:

Exhibit

Number

Description

10.1⁽¹⁾

Securities Purchase Agreement dated December 27, 2018 by and between Daybreak Oil and Gas, Inc. and Maximilian Resources, LLC.

10.2⁽¹⁾

Production Payment Interest Purchase Agreement dated December 27, 2018 by and among Daybreak Oil and Gas, Inc. and the purchasers named therein.

31.1⁽²⁾

Certification of principal executive and principal financial officer as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1⁽²⁾

Certification of principal executive and principal financial officer as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS⁽³⁾

XBRL Instance Document

101.SCH⁽³⁾

XBRL Taxonomy Schema

101.CAL⁽³⁾

XBRL Taxonomy Calculation Linkbase

101.DEF⁽³⁾

XBRL Taxonomy Definition Linkbase

101.LAB⁽³⁾

XBRL Taxonomy Label Linkbase

101.PRE⁽³⁾

XBRL Taxonomy Presentation Linkbase

⁽¹⁾

Previously filed as exhibit to Form 8-K on January 3, 2019, and incorporated by reference herein.

⁽²⁾

Filed herewith.

⁽³⁾

Furnished herewith

31

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DAYBREAK OIL AND GAS, INC.
By:	/s/ JAMES F. WESTMORELAND
	James F. Westmoreland, its
	President, Chief Executive Officer and interim
	principal finance and accounting officer
	(Principal Executive Officer, Principal Financial
	Officer and Principal Accounting Officer)
Date:  January 14, 2019

32

EX-31

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:  January 14, 2019

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)

EX-32

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 November 30, 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:  January 14, 2019

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)

XML

Document and Entity Information - shares	9 Months Ended
	Nov. 30, 2018	Jan. 14, 2019
Document And Entity Information
Entity Registrant Name	Daybreak Oil & Gas, Inc.
Entity Central Index Key	0001164256
Document Type	10-Q
Document Period End Date	Nov. 30, 2018
Amendment Flag	false
Current Fiscal Year End Date	--02-28
Is Entity's Reporting Status Current?	Yes
Is Entity Emerging Growth Company?	false
Elected Not To Use the Extended Transition Period	false
Entity Filer Category	Non-accelerated Filer
Entity Small Business	true
Entity Common Stock, Shares Outstanding		51,532,364
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2019

XML

Balance Sheets (Unaudited) - USD ($)	Nov. 30, 2018	Feb. 28, 2018
CURRENT ASSETS:
Cash and cash equivalents	$ 41,651	$ 48,535
Restricted cash (short-term time deposit)		100,029
Accounts receivable:
Crude oil sales	90,987	104,840
Joint interest participants	55,769	58,452
Prepaid expenses and other current assets	22,992	21,796
Total current assets	211,399	333,652
CRUDE OIL AND NATURAL GAS PROPERTIES, successful efforts method, net
Proved properties	675,258	714,609
Unproved properties	31,187	31,187
PREPAID DRILLING COSTS	16,452	16,452
Total assets	934,296	1,095,900
CURRENT LIABILITIES:
Accounts payable and other accrued liabilities	2,023,741	2,022,672
Accounts payable - related parties	1,845,741	1,664,845
Accrued interest	3,491,480	1,822,673
Notes payable, related party	250,100	250,100
12% Notes payable, net of discount	313,649	307,571
12% Notes payable, related party, net of discount	248,928	244,103
Debt, current	9,157,794	9,157,794
Line of credit	834,329	873,350
Total current liabilities	18,165,762	16,343,108
LONG TERM LIABILITIES:
Asset retirement obligation	41,265	37,174
Total liabilities	18,207,027	16,380,282
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock	0	0
Common stock	51,532	51,532
Additional paid-in capital	22,997,759	22,997,759
Accumulated deficit	(40,322,732)	(38,334,383)
Total stockholders' deficit	(17,272,731)	(15,284,382)
Total liabilities and stockholders' deficit	934,296	1,095,900
Series A Convertible Preferred Stock
STOCKHOLDERS' DEFICIT:
Preferred stock	$ 710	$ 710

XML

Balance Sheets (Parenthetical) - USD ($)	Nov. 30, 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	$ 1,351	$ 7,429
12% Subordinated Notes
Unearned debt discount	1,351	7,429
12% Subordinated Notes | Chief Executive Officer
Unearned debt discount	$ 1,072	$ 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%

XML

Statements of Operations (Unaudited) - USD ($)	3 Months Ended		9 Months Ended
	Nov. 30, 2018	Nov. 30, 2017	Nov. 30, 2018	Nov. 30, 2017
REVENUE:
Crude oil sales	$ 192,436	$ 169,532	$ 586,139	$ 438,295
OPERATING EXPENSES:
Production	41,337	38,229	115,893	130,454
Exploration and drilling (G&G)	0	8,048	992	103,041
Depreciation, depletion, and amortization (DD&A)	18,144	26,190	55,669	77,526
General and administrative	214,304	221,706	661,674	732,755
Total operating expenses	273,785	294,173	834,228	1,043,776
OPERATING LOSS	(81,349)	(124,641)	(248,089)	(605,481)
OTHER EXPENSE:
Interest expense, net	(576,795)	(411,414)	(1,740,260)	(1,366,931)
NET LOSS	(658,144)	(536,055)	(1,988,349)	(1,972,412)
Cumulative convertible preferred stock dividend requirement	(31,841)	(31,841)	(96,223)	(96,741)
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS	$ (689,985)	$ (567,896)	$ (2,084,572)	$ (2,069,153)
NET LOSS PER COMMON SHARE, basic and diluted	$ (0.01)	$ (0.01)	$ (0.04)	$ (0.04)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, Basic and diluted	51,532,364	51,532,364	51,532,364	51,520,666

XML

Statements of Cash Flows (Unaudited) - USD ($)	9 Months Ended
	Nov. 30, 2018	Nov. 30, 2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss	$ (1,988,349)	$ (1,972,412)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation, depletion, amortization and impairment expense	55,669	77,526
Amortization of debt discount	10,903	10,904
Amortization of deferred financing costs	0	238,598
Reclass of unproved crude oil and natural gas properties to exploration expenses	0	51,486
Changes in assets and liabilities:
Accounts receivable - crude oil and natural gas sales	13,853	(24,403)
Accounts receivable - joint interest participants	2,683	(10,897)
Accounts receivable - other	0	(833)
Prepaid expenses and other current assets	(1,196)	(2,570)
Accounts payable and other accrued liabilities	1,069	242,178
Accounts payable - related parties	180,896	185,315
Accrued interest	1,691,486	1,052,851
Net cash used in operating activities	(32,986)	(152,257)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to crude oil and natural gas properties	(12,227)	0
Net cash used in investing activities	(12,227)	0
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt	0	102,700
Additions to line of credit	33,300	65,000
Payments on line of credit	(95,000)	(45,000)
Net cash provided by (used in) financing activities	(61,700)	122,700
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH	(106,913)	(29,557)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD	148,564	142,063
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD	41,651	112,506
Cash paid for Interest	60,568	64,619
Cash paid for Income taxes	0	0
SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash increase to line of credit due to monthly interest	22,680	24,093
Proceeds of debt paid directly to accounts payable vendor	0	10,650
Revision to asset retirement obligation	0	40,108
Conversion of preferred stock to common stock	$ 0	$ 45

XML

Organization and Basis of Presentation

9 Months Ended

Nov. 30, 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 crude oil-exporting countries, the relative strength of the U.S. dollar, weather conditions, the price and availability of alternative fuels, and overall economic conditions, both foreign and domestic.

Basis of Presentation

The accompanying unaudited interim financial statements and notes for the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q for quarterly reports under Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”).  Accordingly, they do not include all of the information and footnote disclosures normally required by accounting principles generally accepted in the United States of America for complete financial statements.

In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements have been included and such adjustments are of a normal recurring nature.  Operating results for the nine months ended November 30, 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 (“DD&A”) 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.

Earnings per Share

The Company follows ASC Topic 260, Earnings per Share, to account for the earnings per share.  Basic earnings per common share (“EPS”) calculations are determined by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period.  Diluted earnings per common share calculations are determined by dividing net income (loss) by the weighted average number of common shares and dilutive common share equivalents outstanding.  During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation.

XML

Going Concern

9 Months Ended

Nov. 30, 2018

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Going Concern

NOTE 2 — GOING CONCERN:

Financial Condition

The Company’s financial statements for the nine months ended November 30, 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 November 30, 2018 has an accumulated deficit of $40,322,732 and a working capital deficit of $17,954,363 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 revenue.  The Company’s average working interest (“WI”) in these wells is 36.6% and the 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 the Company’s 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 November 30, 2018 do not include any adjustments that might result from the inability to implement or execute the Company’s plans to improve its ability to continue as a going concern.

On December 27, 2018, the Company settled its outstanding indebtedness with Maximilian including a release of and termination of all liens and security interests granted to Maximilian with respect to the Company’s California and Michigan Projects.  Please refer to Note 14 – Subsequent Events for further discussion on this transaction.

XML

Recent Accounting Pronouncements

9 Months Ended

Nov. 30, 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 stockholder’s equity (deficit) 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 2016-18 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.

XML

Restricted Cash

9 Months Ended

Nov. 30, 2018

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.

	November 30, 2018		November 30, 2017
Cash and cash equivalents	$	41,651	$	12,487
Restricted cash		-		100,019
Total cash, cash equivalents and restricted cash shown in the statement of cash flows	$	41,651	$	112,506

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.

XML

Concentration Risk

9 Months Ended

Nov. 30, 2018

Risks and Uncertainties [Abstract]

Concentration Risk

NOTE 5 — CONCENTRATION 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 available for the purchase of crude oil production.  The Company has no natural gas production in California.  At November 30, 2018 and February 28, 2018 this one customer represented 100.0% of the crude oil sales receivable balance.  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 $90,987 and $104,840 at November 30, 2018 and February 28, 2018, respectively were from one customer, Plains Marketing and represent crude oil sales that occurred in November and February 2018, respectively.

Joint interest participant receivables balances of $55,769 and $58,452 at November 30, 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 November 30, 2018 and February 28, 2018 as the joint interest owners have a history of paying their obligations.

At November 30, 2018, the Company owed our 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 $12.6 million or approximately 69.4% of the Company’s total debt.

On December 27, 2018, the Company settled its outstanding indebtedness with Maximilian.  Please refer to Note 14 – Subsequent Events for further discussion about this transaction.

XML

Crude Oil and Natural Gas Properties

9 Months Ended

Nov. 30, 2018

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 November 30, 2018 and February 28, 2018 are set forth in the table below.

	November 30, 2018		February 28, 2018
Proved leasehold costs	$	115,119	$	115,119
Costs of wells and development		2,298,186		2,293,668
Capitalized exploratory well costs		1,341,494		1,333,785
Cost of proved crude oil and natural gas properties		3,754,799		3,742,572
Accumulated depletion, depreciation, amortization and impairment		(3,079,541)		(3,027,963)
Proved crude oil and natural gas properties, net	$	675,258	$	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	$	706,445	$	745,796

XML

Accounts Payable

9 Months Ended

Nov. 30, 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 in California. Additionally, the Company then assumed certain original defaulting partners’ approximate $1.5 million liability representing a 25% working interest in the drilling and completion costs associated with the East Slopes Project four earning well program. The Company subsequently sold the same 25% working interest on June 11, 2009. Of the $1.5 million liability, $244,849 remains unpaid and is included in both the November 30, 2018 and February 28, 2018 accounts payable balances. Payment of this liability has been delayed until the Company’s cash flow situation improves. On October 17, 2018, a working interest partner in California filed a UCC financing statement in regards to payables owed to the partner by the Company. At November 30, 2018, the balance owed this working interest partner was $122,746. 

XML

Accounts Payable - Related Parties

9 Months Ended

Nov. 30, 2018

Related Party Transactions [Abstract]

Accounts Payable - Related Parties

NOTE 8 — ACCOUNTS PAYABLE- RELATED PARTIES:

The November 30, 2018 and February 28, 2018 accounts payable – related parties balances of approximately $1.8 million and $1.7 million respectively, were 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.

XML

Short-Term and Long-Term Borrowings

9 Months Ended

Nov. 30, 2018

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 November 30, 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.  The exercise price of the associated warrants was lowered from $0.14 to $0.07 as part of the Note maturity extension.  There are ten noteholders, holding 980,000 warrants (including 500,000 warrants held by a related party) who have not yet exercised their warrants.  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 $10,903 at November 30, 2018 and 2017, respectively.  The unamortized debt discount at November 30, 2018 and February 28, 2018 was $2,423 and $13,326, respectively.

12% Note balances at November 30, 2018 and February 28, 2018 are set forth in the table below:

	November 30, 2018		February 28, 2018
12% Subordinated notes	$	315,000	$	315,000
Debt discount		(1,351)		(7,429)
12% Subordinated notes balance, net	$	313,649	$	307,571

12% Note balances – related parties at November 30, 2018 and February 28, 2018 are set forth in the table below:

	November 30, 2018		February 28, 2018
12% Subordinated notes – related party	$	250,000	$	250,000
Debt discount		(1,072)		(5,897)
12% Subordinated notes – related party balance, net	$	248,928	$	244,103

In conjunction with the Notes private placement, a total of 1,190,000 common stock purchase warrants (including 500,000 held by a related party) 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 November 30, 2018, there were 980,000 warrants (including 500,000 held by a related party) 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	-	-	-
Nine Months Ended November 30, 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.  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.

On October 31, 2016 through the Fourth Amendment to the Amended and Restated Loan and Security Agreement (the “Restructuring Agreement”), the maturity date of the loan was changed to February 28, 2020.

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.  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.  Under the terms of the Restructuring Amendment all unpaid interest is currently being accrued.  Accrued interest on the credit facility loan at November 30, 2018 and February 28, 2018 was $3,459,858 and $1,812,128, respectively.  During the nine months ended November 30, 2018 and 2017, the Company received advances of $-0- and $102,700, respectively, under the terms of the credit facility.

On December 27, 2018, the Company settled its outstanding indebtedness with Maximilian including a release and termination of all liens and security interests granted to Maximilian with respect to the Company’s California and Michigan projects.  Please refer to Note 14 – Subsequent Events for further discussion on this transaction.

Maximilian Promissory Note – Michigan Exploratory Joint Drilling Project

The Company has a note payable loan balance to Maximilian of $94,650 as of November 30, 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 November 30, 2018 and February 28, 2018 was $8,774 and $5,158, respectively.  During the nine months ended November 30, 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 November 30, 2018 and February 28, 2018 are set forth in the table below:

	November 30, 2018		February 28, 2018
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		3,468,632		1,817,287
Total Maximilian debt	$	12,626,426	$	10,975,081

On December 27, 2018, the Company settled its outstanding indebtedness with Maximilian including a release and termination of all liens and security interests granted to Maximilian with respect to the Company’s California and Michigan projects.  Please refer to Note 14 – Subsequent Events for further information on this transaction.

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 monthly reference rate of 0.249% + 337.5 basis points with interest payable monthly.  The monthly interest rate on the remaining principal balance for November 2018 was 0.483%.  The reference rate is based on the 30 day LIBOR (“London Interbank Offered Rate”) and is subject to change from UBS.

At November 30, 2018 and February 28, 2018, the line of credit had an outstanding balance of $834,329 and $873,350, respectively.  During the nine months ended November 30, 2018 and 2017, the Company received advances of $33,300 and $65,000 from the line of credit.  Additionally during the nine months ended November 30, 2018, the Company made payments to the line of credit of $95,000 and $45,000, respectively.  Interest incurred for the nine months ended November 30, 2018 and 2017 was $22,680 and $24,903, respectively.

XML

Stockholders' Deficit

9 Months Ended

Nov. 30, 2018

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 November 30, 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 November 30, 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.

Fiscal Period Ended	Shares of Series A Preferred Converted to Common Stock	Shares of Common Stock Issued from Conversion	Number of Accredited Investors
February 29, 2008	102,300	306,900	10
February 28, 2009	237,000	711,000	12
February 28, 2010	51,900	155,700	4
February 28, 2011	102,000	306,000	4
February 29, 2012	-	-	-
February 28, 2013	18,000	54,000	2
February 28, 2014	151,000	453,000	9
February 28, 2015	3,000	9,000	1
February 29, 2016	10,000	30,000	1
February 28, 2017	-	-	-
February 28, 2018	14,997	44,991	1
November 30, 2018	-	-	-
Totals	690,197	2,070,591	44

Holders of Series A Preferred shall accrue dividends, in the amount of 6% of the original purchase price per annum.  Dividends may be paid in cash or common stock at the discretion of the Company.  Dividends are cumulative whether or not in any dividend period or periods the Company has assets legally available for the payment of such dividends.  Accumulations of dividends on Series A Preferred do not bear interest.  Dividends are payable upon declaration by the Board of Directors.

As of November 30, 2018 no dividends have been declared or paid.  Dividends earned since issuance for each fiscal year and the nine months ended November 30, 2018 are set forth in the table below:

Fiscal Period Ended	Shareholders at Period End	Accumulated Dividends
February 28, 2007	100	$	155,311
February 29, 2008	90		242,126
February 28, 2009	78		209,973
February 28, 2010	74		189,973
February 28, 2011	70		173,707
February 29, 2012	70		163,624
February 28, 2013	68		161,906
February 28, 2014	59		151,323
February 28, 2015	58		132,634
February 29, 2016	57		130,925
February 28, 2017	57		130,415
February 28, 2018	56		128,231
November 30, 2018	56		96,223
		$	2,066,371

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 November 30, 2018 and February 28, 2018, respectively.

	Common Stock Balance	Par Value
Common stock, Issued and Outstanding, February 28, 2017	51,487,373
Conversion of Series A Convertible Preferred Stock to common stock	44,991	$	45
Common stock, Issued and Outstanding, February 28, 2018	51,532,364
Conversion of Series A Convertible Preferred Stock to common stock	-
Common stock, Issued and Outstanding, November 30, 2018	51,532,364

XML

Warrants

9 Months Ended

Nov. 30, 2018

Equity [Abstract]

Warrants

NOTE 11 — WARRANTS:

Warrants outstanding and exercisable as of November 30, 2018 are set forth in the table below:

	Warrants	Exercise Price	Remaining Life (Years)	Exercisable Warrants Remaining
12% Subordinated notes	980,000	$0.07	0.17	980,000
	980,000			980,000

Warrant activity for the nine months ended November 30, 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 nine months ended November 30, 2018:
Issued	-
Expired / Cancelled / Forfeited	6,859,784
Warrants outstanding, November 30, 2018	980,000	$0.07
Warrants exercisable, November 30, 2018	980,000	$0.07

During the nine months ended November 30, 2018, there were no warrants issued, exercised or cancelled.  There were 6,859,784 warrants that expired.  These warrants had been issued to either Maximilian or to third parties in relation to financing that occurred in 2012 and 2013 through Maximilian.  The remaining outstanding warrants as of November 30, 2018, have a weighted average exercise price of $0.07, a weighted average remaining life of 0.17 years, and an intrinsic value of $-0-.

XML

Income Taxes

9 Months Ended

Nov. 30, 2018

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.  The Company has re-measured its deferred tax liabilities based on rates at which they are expected to be utilized in the future, which is generally 21%.

Reconciliation between actual tax expense (benefit) and income taxes computed by applying the U.S. federal income tax rate and state income tax rates to income from continuing operations before income taxes is set forth in the table below:

	November 30, 2018		February 28, 2018
Computed at U.S. and state statutory rates	$	(593,325)	$	(981,966)
Permanent differences		1,570		29,060
New tax law adjustment		-		2,912,689
Changes in valuation allowance		591,755		(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:

	November 30, 2018		February 28, 2018
Deferred tax assets:
Net operating loss carryforwards	$	9,013,635	$	8,413,128
Crude oil and natural gas properties		38,682		47,434
Stock based compensation		66,187		66,187
Other		27,838		27,838
Less valuation allowance		(9,146,342)		(8,554,587)
Total	$	-	$	-

At November 30, 2018, the Company had estimated net operating loss (“NOL”) carryforwards for federal and state income tax purposes of approximately $30,206,552 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 $2,963,803 will not expire and will carry over indefinitely.  The valuation allowance increased $591,755 and $1,959,784 for the nine months ended November 30, 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 2014 currently remain subject to examinations by appropriate tax authorities.  None of our tax returns are under examination at this time.

XML

Commitments and Contingencies

9 Months Ended

Nov. 30, 2018

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 November 30, 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 November 30, 2018 is shown in the table below:

Fiscal Year Ended	Annual Office Lease Obligation
February 28, 2019	$	3,532
February 29, 2020		9,300
February 28, 2021		6,200
February 28, 2022		-
February 28, 2023 and thereafter		-
Totals	$	19,032

XML

Subsequent Events

9 Months Ended

Nov. 30, 2018

Subsequent Events [Abstract]

Subsequent Events

NOTE 14 — SUBSEQUENT EVENTS:

On December 27, 2018, the Company paid Maximilian $700,000 to finalize a settlement of outstanding indebtedness through its credit facility and Michigan debt in the amount of approximately $12.6 million.  The Company also acquired an additional 40% working interest in the Daybreak’s Michigan Project along with a note receivable from its Michigan Project Partner.  Daybreak now owns a 70% working interest in its Michigan Project.  Furthermore, all liens and security interests granted to Maximilian with respect to the Company’s leases in California and Michigan have been terminated and released.  The effects of this transaction will be reflected on the Company’s financial statements at February 28, 2019.  The $700,000 paid to Maximilian was obtained from private investors (of which $300,000 was from a related party) by selling a Production Payment from future wells to be drilled in California and Michigan.

XML

Accounting Policies (Policies)

9 Months Ended

Nov. 30, 2018

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 nine months ended November 30, 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

Use of Estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions.  These estimates and assumptions may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period.  Actual results could differ materially from those estimates.  The accounting policies most affected by management’s estimates and assumptions are as follows:

• The reliance on estimates of proved reserves to compute the provision for depreciation, depletion and amortization (“DD&A”) and to determine the amount of any impairment of proved properties;

• The valuation of unproved acreage and proved crude oil 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

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.

Earnings Per Share

Earnings per Share

The Company follows ASC Topic 260, Earnings per Share, to account for the earnings per share.  Basic earnings per common share (“EPS”) calculations are determined by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period.  Diluted earnings per common share calculations are determined by dividing net income (loss) by the weighted average number of common shares and dilutive common share equivalents outstanding.  During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation.

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 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 stockholder’s equity (deficit) 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.

XML

Restricted Cash (Tables)

9 Months Ended

Nov. 30, 2018

Cash and Cash Equivalents [Abstract]

Schedule of Restricted Cash and Cash Equivalents

	November 30, 2018		November 30, 2017
Cash and cash equivalents	$	41,651	$	12,487
Restricted cash		-		100,019
Total cash, cash equivalents and restricted cash shown in the statement of cash flows	$	41,651	$	112,506

XML

Crude Oil and Natural Gas Properties (Tables)

9 Months Ended

Nov. 30, 2018

Oil and Gas Exploration and Production Industries Disclosures [Abstract]

Capitalized Costs Relating to Crude Oil and Natural Gas Activities

	November 30, 2018		February 28, 2018
Proved leasehold costs	$	115,119	$	115,119
Costs of wells and development		2,298,186		2,293,668
Capitalized exploratory well costs		1,341,494		1,333,785
Cost of proved crude oil and natural gas properties		3,754,799		3,742,572
Accumulated depletion, depreciation, amortization and impairment		(3,079,541)		(3,027,963)
Proved crude oil and natural gas properties, net	$	675,258	$	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	$	706,445	$	745,796

XML

Short-Term and Long-Term Borrowings (Tables)

9 Months Ended

Nov. 30, 2018

Debt Disclosure [Abstract]

Schedule of Short-Term Debt

	November 30, 2018		February 28, 2018
12% Subordinated notes	$	315,000	$	315,000
Debt discount		(1,351)		(7,429)
12% Subordinated notes balance, net	$	313,649	$	307,571

	November 30, 2018		February 28, 2018
12% Subordinated notes – related party	$	250,000	$	250,000
Debt discount		(1,072)		(5,897)
12% Subordinated notes – related party balance, net	$	248,928	$	244,103

Schedule of Shares Issued and Warrants Exercised in Conjunction with Private Placement

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	-	-	-
Nine Months Ended November 30, 2018	-	-	-
Totals	150,000	150,000	2

Schedule of Line of Credit Facilities

	November 30, 2018		February 28, 2018
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		3,468,632		1,817,287
Total Maximilian debt	$	12,626,426	$	10,975,081

XML

Stockholders' Deficit (Tables)

9 Months Ended

Nov. 30, 2018

Equity [Abstract]

Schedule of Stockholder's Equity

Fiscal Period Ended	Shares of Series A Preferred Converted to Common Stock	Shares of Common Stock Issued from Conversion	Number of Accredited Investors
February 29, 2008	102,300	306,900	10
February 28, 2009	237,000	711,000	12
February 28, 2010	51,900	155,700	4
February 28, 2011	102,000	306,000	4
February 29, 2012	-	-	-
February 28, 2013	18,000	54,000	2
February 28, 2014	151,000	453,000	9
February 28, 2015	3,000	9,000	1
February 29, 2016	10,000	30,000	1
February 28, 2017	-	-	-
February 28, 2018	14,997	44,991	1
November 30, 2018	-	-	-
Totals	690,197	2,070,591	44

Schedule of Dividends Payable

Fiscal Period Ended	Shareholders at Period End	Accumulated Dividends
February 28, 2007	100	$	155,311
February 29, 2008	90		242,126
February 28, 2009	78		209,973
February 28, 2010	74		189,973
February 28, 2011	70		173,707
February 29, 2012	70		163,624
February 28, 2013	68		161,906
February 28, 2014	59		151,323
February 28, 2015	58		132,634
February 29, 2016	57		130,925
February 28, 2017	57		130,415
February 28, 2018	56		128,231
November 30, 2018	56		96,223
		$	2,066,371

Schedule of Common Stock Outstanding

	Common Stock Balance	Par Value
Common stock, Issued and Outstanding, February 28, 2017	51,487,373
Conversion of Series A Convertible Preferred Stock to common stock	44,991	$	45
Common stock, Issued and Outstanding, February 28, 2018	51,532,364
Conversion of Series A Convertible Preferred Stock to common stock	-
Common stock, Issued and Outstanding, November 30, 2018	51,532,364

XML

Warrants (Tables)

9 Months Ended

Nov. 30, 2018

Equity [Abstract]

Schedule of Stockholders' Equity Note Warrants and Rights

	Warrants	Exercise Price	Remaining Life (Years)	Exercisable Warrants Remaining
12% Subordinated notes	980,000	$0.07	0.17	980,000
	980,000			980,000

Schedule of Warrant Activity

	Number of Warrants	Weighted Average Exercise Price
Warrants outstanding, February 28, 2018	7,839,784	$0.05
Changes during the nine months ended November 30, 2018:
Issued	-
Expired / Cancelled / Forfeited	6,859,784
Warrants outstanding, November 30, 2018	980,000	$0.07
Warrants exercisable, November 30, 2018	980,000	$0.07

XML

Income Taxes (Tables)

9 Months Ended

Nov. 30, 2018

Income Tax Disclosure [Abstract]

Schedule of Components of Income Tax Expense Benefit

	November 30, 2018		February 28, 2018
Computed at U.S. and state statutory rates	$	(593,325)	$	(981,966)
Permanent differences		1,570		29,060
New tax law adjustment		-		2,912,689
Changes in valuation allowance		591,755		(1,959,783)
Total	$	-	$	-

Schedule of Deferred Tax Assets and Liabilities

	November 30, 2018		February 28, 2018
Deferred tax assets:
Net operating loss carryforwards	$	9,013,635	$	8,413,128
Crude oil and natural gas properties		38,682		47,434
Stock based compensation		66,187		66,187
Other		27,838		27,838
Less valuation allowance		(9,146,342)		(8,554,587)
Total	$	-	$	-

XML

Commitments and Contingencies (Tables)

9 Months Ended

Nov. 30, 2018

Commitments and Contingencies Disclosure [Abstract]

Schedule of Future Minimum Rental Payments for Operating Leases

Fiscal Year Ended	Annual Office Lease Obligation
February 28, 2019	$	3,532
February 29, 2020		9,300
February 28, 2021		6,200
February 28, 2022		-
February 28, 2023 and thereafter		-
Totals	$	19,032

XML

Going Concern (Details Narrative)	Nov. 30, 2018 USD ($) Number	Feb. 28, 2018 USD ($)
Accumulated deficit	$ (40,322,732)	$ (38,334,383)
Working capital deficit	$ 17,954,363
Average Working and Net Revenue Interest | East Slopes Project
Number of producing oil wells, net revenue interest | Number	20
Average working interest	36.60%
Average net revenue interest	28.40%

XML

Restricted Cash - Schedule of Restricted Cash and Cash Equivalents (Details) - USD ($)	Nov. 30, 2018	Feb. 28, 2018	Nov. 30, 2017	Feb. 28, 2017
Cash and Cash Equivalents [Abstract]
Cash and cash equivalents	$ 41,651	$ 48,535	$ 12,487
Restricted cash		100,029	100,019
Total cash, cash equivalents and restricted cash shown in the statement of cash flows	$ 41,651	$ 148,564	$ 112,506	$ 142,063

XML

Concentration Risk (Details Narrative) - USD ($)	9 Months Ended
	Nov. 30, 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 November 30, 2018 and February 28, 2018 this one customer represented 100.0% of crude oil sales receivable balance. 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.
Concentration risk, percent	100.00%
Accounts receivable balances	$ 90,987	$ 104,840
Joint interest participant receivable balances	$ 55,769	$ 58,452
Maximilian Investors LLC
Concentration risk, percent	69.40%
Line of credit	$ 12,600,000

XML

Crude Oil and Natural Gas Properties - Capitalized Costs Relating to Crude Oil and Natural Gas Activities (Details) - USD ($)	Nov. 30, 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	2,298,186	2,293,668
Capitalized exploratory well costs	1,341,494	1,333,785
Cost of proved crude oil and natural gas properties	3,754,799	3,742,572
Accumulated depletion, depreciation, amortization and impairment	(3,079,541)	(3,027,963)
Proved crude oil and natural gas properties, net	675,258	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	$ 706,445	$ 745,796

XML

Accounts Payable (Details Narrative) - USD ($)	9 Months Ended
	Nov. 30, 2018	Feb. 28, 2018
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	$ 244,849

XML

Accounts Payable - Related Parties (Details Narrative) - USD ($)	Nov. 30, 2018	Feb. 28, 2018
Related Party Transactions [Abstract]
Accounts payable, related parties	$ 1,845,741	$ 1,664,845

XML

Short-Term and Long-Term Borrowings - Schedule of Short-Term Debt (Details) - USD ($)	Nov. 30, 2018	Feb. 28, 2018
Short-term Debt [Line Items]
Debt discount	$ (1,351)	$ (7,429)
12% Subordinated notes balance, net	313,649	307,571
12% Subordinated notes balance, related party, net	248,928	244,103
12% Subordinated Notes
Short-term Debt [Line Items]
12% Subordinated notes	315,000	315,000
Debt discount	(1,351)	(7,429)
12% Subordinated notes balance, net	313,649	307,571
12% Subordinated Notes | Chief Executive Officer
Short-term Debt [Line Items]
12% Subordinated notes	250,000	250,000
Debt discount	(1,072)	(5,897)
12% Subordinated notes balance, related party, net	$ 248,928	$ 244,103

XML

Short-Term and Long-Term Borrowings - Schedule of Shares Issued and Warrants Exercised with Private Placement (Details)	9 Months Ended	12 Months Ended
	Nov. 30, 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
Accredited investors | Number	44
12% Subordinated Notes
Warrants exercised | shares	150,000	0	0	0	50,000	100,000
Shares of common stock issued | shares	150,000	0	0	0	50,000	100,000
Accredited investors | Number	2	0	0	0	1	1

XML

Short-Term and Long-Term Borrowings - Schedule of Line of Credit Facilities (Details) - USD ($)	Nov. 30, 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	3,468,632	1,817,287
Total maximum debt	$ 12,626,426	$ 10,975,081

XML

Short-Term and Long-Term Borrowings (Details Narrative) - USD ($)	9 Months Ended		12 Months Ended
	Nov. 30, 2018	Nov. 30, 2017	Feb. 28, 2018	Feb. 28, 2017	Feb. 28, 2014	Feb. 28, 2013	Feb. 28, 2010
Debt Instrument [Line Items]
Amortization of debt discount	$ 10,903	$ 10,904
Line of credit, amount outstanding	834,329		$ 873,350
Payments on line of credit	95,000	45,000
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	102,700
Credit facility, expiration date						Oct. 31, 2016
Minimum commitment fee						$ 2,500,000
Accrued interest	3,459,858		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	8,774		$ 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, expiration date				Feb. 28, 2020
Line of Credit | UBS Bank USA
Debt Instrument [Line Items]
Maximum borrowing	890,000		890,000
Credit facility, advances	33,300	65,000
Line of credit, amount outstanding	834,329		$ 873,350
Payments on line of credit	95,000	45,000
Line of credit, interest expense	$ 22,680	24,903
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 monthly interest rate on the remaining principal balance for November 2018 was 0.483%. 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		$ 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		$ 29,075
Weighted average risk free interest rate	1.22%		1.22%
Weighted average volatility rate	378.73%		378.73%
Amortization of debt discount	$ 10,903	$ 10,903
Unamortized debt discount	2,423		$ 13,326
Chief Executive Officer
Debt Instrument [Line Items]
Notes payable, related party	$ 250,100		$ 250,100
Related Party | 12% Subordinated Notes
Debt Instrument [Line Items]
Warrants issued	500,000
Warrants outstanding	500,000

XML

Stockholders' Deficit - Conversions of Series A Preferred Stock (Details)	9 Months Ended	12 Months Ended
	Nov. 30, 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
Shares of common stock issued from conversion	2,070,591
Accredited investors | Number	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

XML

Stockholders' Deficit - Preferred Stock Dividends Earned (Details)	9 Months Ended	12 Months Ended
	Nov. 30, 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	$ 96,223	$ 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	$ 2,066,371

XML

Stockholders' Deficit - Schedule of Common Stock Outstanding (Details) - USD ($)	9 Months Ended	12 Months Ended
	Nov. 30, 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

XML

Stockholders' Deficit (Details Narrative)	9 Months Ended	12 Months Ended
	Nov. 30, 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
Shares of common stock issued from conversion	2,070,591
Accredited investors | Number	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

XML

Warrants - Schedule of Stockholders' Equity Note Warrants and Rights (Details) - $ / shares	9 Months Ended
	Nov. 30, 2018	Feb. 28, 2018
Class of Warrant or Right [Line Items]
Remaining life (years)	7 months
12% Subordinated Notes
Class of Warrant or Right [Line Items]
Warrants	980,000	980,000
Exercise price	$ 0.07	$ 0.07
Remaining life (years)	4 months
Exercisable warrants remaining	980,000

XML

Warrants - Schedule of Warrant Activity (Details)	9 Months Ended
	Nov. 30, 2018 $ / shares shares
Share-based Compensation Arrangement by Share-based Payment Award, Non-Option Equity Instruments, Outstanding [Roll Forward]
Warrants outstanding, beginning of period	7,839,784
Issued
Expired / Cancelled / Forfeited	6,859,784
Warrants outstanding, end of period	980,000
Warrants exercisable, end of period	980,000
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Weighted Average Grant Date
Weighted average exercise price of warrants outstanding, beginning of period | $ / shares	$ 0.05
Weighted average exercise price of warrants outstanding, end of period | $ / shares	0.07
Weighted average exercise price of warrants exercisable, end of period | $ / shares	$ 0.07

XML

Warrants (Details Narrative)	9 Months Ended
	Nov. 30, 2018 USD ($) $ / shares shares
Equity [Abstract]
Warrants expired | shares	6,859,784
Weighted average exercise price | $ / shares	$ 0.07
Weighted average remaining life	7 months
Intrinsic value | $	$ 0

XML

Income Taxes - Income Tax Expense Benefit Reconciliation (Details) - USD ($)	9 Months Ended	12 Months Ended
	Nov. 30, 2018	Feb. 28, 2018
Income Tax Expense Benefit Continuing Operations Income Tax Reconciliation
Computed at U.S. and state statutory rates	$ (593,325)	$ (981,966)
Permanent differences	1,570	29,060
New tax law adjustment	0	2,912,689
Changes in valuation allowance	591,755	(1,959,783)
Income tax expense (benefit)	$ 0	$ 0

XML

Income Taxes - Deferred Tax Assets and Liabilities (Details) - USD ($)	Nov. 30, 2018	Feb. 28, 2018
Deferred tax assets:
Net operating loss carryforwards	$ 9,013,635	$ 8,413,128
Crude oil and natural gas properties	38,682	47,434
Stock based compensation	66,187	66,187
Other	27,838	27,838
Less valuation allowance	(9,146,342)	(8,554,587)
Deferred tax assets, net	$ 0	$ 0

XML

Income Taxes (Details Narrative) - USD ($)	9 Months Ended	12 Months Ended
	Nov. 30, 2018	Feb. 28, 2018
Income Tax Disclosure [Abstract]
Reduction in corporate income tax rate	21.00%
Net operating loss carryforwards, federal and state, approximate	$ 30,206,552
NOL portion of loss incurred under the Tax Cuts and Jobs Act	$ 2,963,803
Net operating loss carryforwards, expiration date	Feb. 28, 2024
Approximate increase in valuation allowance	$ 591,755	$ 1,959,784

XML

Commitments and Contingencies - Schedule of Future Minimum Rental Payments for Operating Leases (Details)	Nov. 30, 2018 USD ($)
Commitments and Contingencies Disclosure [Abstract]
February 28, 2019	$ 3,532
February 29, 2020	9,300
February 28, 2021	6,200
February 28, 2022	0
February 28, 2023 and thereafter	0
Totals	$ 19,032

XML

Subsequent Events (Details Narrative) - USD ($)		1 Months Ended	9 Months Ended
		Dec. 31, 2018	Nov. 30, 2018	Nov. 30, 2017
Subsequent Event [Line Items]
Repayment of revolving credit facility balance			$ 95,000	$ 45,000
Subsequent Event | Revolving Credit Facility | Maximilian Loan
Subsequent Event [Line Items]
Repayment of revolving credit facility balance	[1]	$ 700,000
Extinguishment of debt		$ 12,600,000
Settlement, description		The Company acquired an additional 40% working interest in the Daybreak's Michigan Project along with a note receivable from its Michigan Project Partner.  Daybreak now owns a 70% working interest in its Michigan Project.  Furthermore, all encumbrances have been removed from all the Company's leases in California and Michigan.  The effects of this transaction will be reflected on the Company's financial statements at February 28, 2019.  The $700,000 paid to Maximilian was obtained from private investors by selling a Production Payment from future wells to be drilled in California and Michigan. No additional debt was created from this Production Payment sale.

[1] The $700,000 paid to Maximilian was obtained from private investors (of which $300,000 was from a related party).