DAYBREAK OIL AND GAS, INC. The following discussion is management's assessment of the current and historical financial and operating results of the Company and of our financial condition. It is intended to provide information relevant to an understanding of our financial condition, changes in our financial condition and our results of operations and cash flows and should be read in conjunction with our unaudited financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q for the nine months endedNovember 30, 2020 and in our Annual Report on Form 10-K for the year endedFebruary 29, 2020 . References to "Daybreak", the "Company", "we", "us" or "our" meanDaybreak Oil and Gas, Inc.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements contained in our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") are intended to be covered by the safe harbor provided for under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act.
All statements other than statements of historical fact contained in this MD&A report are inherently uncertain and are forward-looking statements. Statements that relate to results or developments that we anticipate will or may occur in the future are not statements of historical fact. Words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project," "will" and similar expressions identify forward-looking statements. Examples of forward-looking statements include, without limitation, statements about the following:
· Our future operating results;
· Our future capital expenditures;
· Our future financing;
· Our expansion and growth of operations; and
· Our future investments in and acquisitions of crude oil properties.
We have based these forward-looking statements on assumptions and analyses made in light of our experience and our perception of historical trends, current conditions, and expected future developments. However, you should be aware that these forward-looking statements are only our predictions and we cannot guarantee any such outcomes. Future events and actual results may differ materially from the results set forth in or implied in the forward-looking statements. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, the following risks and uncertainties:
· General economic and business conditions;
· National and international pandemics such as the novel coronavirus COVID-19
outbreak;
· Exposure to market risks in our financial instruments;
· Fluctuations in worldwide prices and demand for crude oil;
· Our ability to find, acquire and develop crude oil properties;
· Fluctuations in the levels of our crude oil exploration and development
activities;
· Risks associated with crude oil exploration and development activities;
· Competition for raw materials and customers in the crude oil industry;
· Technological changes and developments in the crude oil industry;
· Legislative and regulatory uncertainties, including proposed changes to federal
tax law and climate change legislation, regulation of hydraulic fracturing and
potential environmental liabilities;
· Our ability to continue as a going concern;
· Our ability to secure financing under any commitments as well as additional
capital to fund operations; and
· Other factors discussed elsewhere in this Form 10-Q; 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.
InDecember 2019 , the 2019 novel coronavirus ("COVID-19") surfaced inWuhan, China . TheWorld Health Organization declared a global emergency onJanuary 30, 2020 , with respect to the outbreak and several countries, includingthe United States ,Japan andAustralia have initiated travel restrictions to and fromChina . The full economic impact of the outbreak is unknown and rapidly evolving. This widespread health crisis and the governmental restrictions associated with it, have adversely affected demand for crude oil and natural gas, depressed crude oil prices, and affected our ability to access capital. These factors, in turn, have had a negative impact on our operations, and financial condition as evidenced by the unprecedented decline in crude oil prices and our revenues during this same time period. 17 Should one or more of the risks or uncertainties described above or elsewhere in our Form 10-K for the year endedFebruary 29, 2020 and in this Form 10-Q for the nine months endedNovember 30, 2020 occur, or should any underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. We specifically undertake no obligation to publicly update or revise any information contained in any forward-looking statement or any forward-looking statement in its entirety, whether as a result of new information, future events, or otherwise, except
as required by law.
All forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement.
Introduction and Overview We are an independent crude oil exploration, development and production company. Our basic business model is to increase shareholder value by finding and developing crude oil reserves through exploration and development activities, and selling the production from those reserves at a profit. To be successful, we must, over time, be able to find crude oil reserves and then sell the resulting production at a price that is sufficient to cover our finding costs, operating expenses, administrative costs and interest expense, plus offer us a return on our capital investment. A secondary means of generating returns can include the sale of either producing or non-producing lease properties. Our longer-term success depends on, among many other factors, the acquisition and drilling of commercial grade crude oil properties and on the prevailing sales prices for crude oil along with associated operating expenses. The volatile nature of the energy markets makes it difficult to estimate future prices of crude oil and natural gas; however, any prolonged period of depressed prices or market volatility, would have a material adverse effect on our results of operations and financial condition. Our operations are focused on identifying and evaluating prospective crude oil properties and funding projects that we believe have the potential to produce crude oil or natural gas in commercial quantities. We conduct all of our drilling, exploration and production activities inthe United States , and all of our revenues are derived from sales to customers withinthe United States . Currently, we are in the process of developing a multi-well oilfield project inKern County, California and an exploratory joint drilling project inMichigan . Our management cannot provide any assurances that Daybreak will ever operate profitably. While we have positive cash flow from our crude oil operations inCalifornia , we have not yet generated sustainable positive cash flow or earnings on a company-wide basis. As a small company, we are more susceptible to the numerous business, investment and industry risks that have been described in Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year endedFebruary 29, 2020 and in Part III, Item 1A. Risk Factors of this 10-Q Report. Throughout this Quarterly Report on Form 10-Q, crude oil is shown in barrels ("Bbls"); natural gas is shown in thousands of cubic feet ("Mcf") unless otherwise specified, and hydrocarbon totals are expressed in barrels of crude oil equivalent ("BOE"). Below is brief summary of our crude oil projects inCalifornia andMichigan . Refer to our discussion in Item 2. Properties, in our Annual Report on Form 10-K for the year endedFebruary 29, 2020 for more information on our multi-well oilfield project inCalifornia and our exploratory joint drilling project inMichigan .
The East Slopes Project is located in the southeastern part of theSan Joaquin Basin nearBakersfield, California . Drilling targets are porous and permeable sandstone reservoirs that exist at depths of 1,200 feet to 4,500 feet. SinceJanuary 2009 , we have participated in the drilling of 25 wells in this project. We have been the Operator at theEast Slopes Project sinceMarch 2009 . The crude oil produced from our acreage in the Vedder Sand is considered heavy oil. The 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 theEast Slopes Project produce from five reservoirs at our Sunday, Bear, Black, Ball andDyer Creek locations. The Sunday property has six producing wells, while the Bear property has nine producing wells. The Black property is the smallest of all currently producing reservoirs, and currently has two producing wells at this property. The Ball property also has two producing wells while theDyer Creek property has one producing well. During the nine months endedNovember 30, 2020 we had production from 20 vertical crude oil wells. Our average working interest ("WI") and net revenue interest ("NRI") in these 20 wells is 36.6% and 28.4%, respectively.
When funding is available, we plan on acquiring additional acreage exhibiting
the same seismic characteristics and on trend with the Bear, Black and
18
California Drilling Plans
Planned drilling activity and implementation of our oilfield development plan will not begin until financing is put in place. We do not plan to make any capital investments within theEast Slopes Project area for the remainder of the 2020-2021 fiscal year. When additional financing is secured, we plan to spend approximately$525,000 drilling four development wells in the 2021-2022 fiscal year. Michigan Acreage Acquisition
InJanuary 2017 , Daybreak acquired a 30% working interest in 1,400 acres in theMichigan Basin . The leases have been secured and multiple targets were identified through a 2-D seismic interpretation. A3-D seismic survey was obtained in January and February of 2017. An analysis of the3-D seismic survey confirmed the first prospect originally identified on the 2-D seismic, as well as several additional drilling locations. We have plans to obtain an additional3-D survey on the second prospect after drilling a well on the first prospect. The two prospects are independent of each other and the success or lack of results of either prospect does not affect the potential of the other prospect. The wells will be drilled vertically with conventional completions and no hydraulic fracturing is anticipated. With the settlement of our debt obligations to a former lender inDecember 2018 , we acquired an additional 40% working interest, bringing our aggregate working interest to 70% inMichigan . The first well is expected to be drilled in the summer of 2021 if new financing is secured. Encumbrances
On
Results of Operations - Nine months ended
California Crude Oil Prices The price we receive for crude oil sales inCalifornia 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 theNew York Mercantile Exchange ("NYMEX") for spot West Texas Intermediate ("WTI") crude oil,Cushing, Oklahoma delivery contracts. We do not have any natural
gas revenues inCalifornia .
There has been a significant amount of volatility in crude oil prices and a dramatic decline in our realized sale price of crude oil since June of 2014, when the monthly average price of WTI crude oil was$105.79 per barrel and our realized price per barrel of crude oil was$98.78 . This volatility and decline in crude oil prices has continued as evidenced by the NYMEX daily closing price of WTI crude oil onApril 20, 2020 when it closed at a negative$36.98 ; theApril 2020 monthly average WTI price was$16.55 ; and our monthly realized price forApril 2020 was$16.96 per barrel. This volatility and decline in the price of crude oil has had a substantial negative impact on our cash flow from our producingCalifornia properties. While there has been some improvement in crude oil prices sinceApril 2020 , there is no guarantee that this trend will continue. It is beyond our ability to accurately predict how long crude oil prices will continue to remain at these lower price levels; when or at what level they may begin to stabilize; or when they may rebound to 2014 levels, as there are many factors beyond our control that dictate the price we receive on our crude oil sales. A comparison of the average WTI price and average realized crude oil sales price for the nine months endedNovember 30, 2020 and 2019 is shown in the table below: Nine Months Ended November 30, 2020 November 30, 2019 Percentage Change Average nine month WTI crude oil price (Bbl) $ 35.07 $ 57.51 (39.0 %) Average nine month realized crude oil sales price (Bbl) $ 32.52 $ 60.77 (46.5 %) For the nine months endedNovember 30, 2020 , the average WTI price was$35.07 and our average realized crude oil sale price was$32.52 , representing a discount of$2.55 per barrel or 7.3% lower than the average WTI price. In comparison, for the nine months endedNovember 30, 2019 , the average WTI price was$57.51 and our average realized sale price was$60.77 representing a premium of$3.26 per barrel or 5.7% higher than the average WTI price. Historically, the sale price we receive forCalifornia heavy crude oil has been less than the quoted WTI price because of the lower API gravity of ourCalifornia crude oil in comparison to the API gravity of quoted WTI crude oil. 19
California Crude Oil Revenue and Production
Crude oil revenue inCalifornia for the nine months endedNovember 30, 2020 decreased$227,292 or 45.3% to$274,085 in comparison to revenue of$501,377 for the nine months endedNovember 30, 2019 . The average sale price of a barrel of crude oil for the nine months endedNovember 30, 2020 was$32.52 in comparison to$60.77 for the nine months endedNovember 30, 2019 . The decrease of$28.25 or 46.5% per barrel in the average realized price of a barrel of crude oil accounted for over 100.0% of the decrease in crude oil revenue for the nine months endedNovember 30, 2020 . The 2019 novel coronavirus ("COVID-19") that has spread to countries throughout the world includingthe United States has had a substantial negative impact on the demand for crude oil and is largely responsible for the decline in crude oil prices. Our net sales volume for the nine months endedNovember 30, 2020 was 8,427 barrels of crude oil in comparison to 8,250 barrels sold for the nine months endedNovember 30, 2019 . This increase in crude oil sales volume of 177 barrels or 2.1% was not sufficient enough to offset the decrease in revenue due to lower crude oil prices during the nine months endedNovember 30, 2020 . The gravity of our produced crude oil inCalifornia ranges between 14° API and 16° API. Production for the nine months endedNovember 30, 2020 was from 20 wells resulting in 5,495 well days of production in comparison to 5,379 well days of production for the nine months endedNovember 30, 2019 .
Our crude oil sales revenue for the nine months ended
Nine Months Ended Nine Months Ended
November 30, 2020 November 30, 2019
Project Revenue Percentage Revenue PercentageCalifornia - East Slopes Project$ 274,085 100.0 % $
501,377 100.0 %
*Our average realized sale price on a BOE basis for the nine months ended
Operating Expenses
Total operating expenses for the nine months ended
Nine Months Ended Nine Months Ended
November 30, 2020 November 30, 2019
BOE BOE
Expenses Percentage Basis Expenses Percentage Basis
Production expenses $ 136,218 22.5 % $ 134,276 18.6 %
Exploration and drilling expenses 73 0.0 % 123 0.0 %
Depreciation, depletion, amortization
("DD&A") 42,318 7.0 % 44,210 6.1 %
General and administrative ("G&A")
expenses 427,345 70.5 % 545,055 75.3 %
Total operating expenses $ 605,954 100.0 % $ 71.91 $ 723,664 100.0 % $ 87.72
Production expenses include expenses associated with the production of crude
oil. These expenses include contract pumpers, electricity, road maintenance,
control of well insurance, property taxes and well workover expenses; and,
relate directly to the number of wells that are in production. For the nine
months ended November 30, 2020 , these expenses increased by $1,942 or 1.4% to
$136,218 in comparison to $134,276 for the nine months ended November 30, 2019 .
For the nine months ended November 30, 2020 and 2019, we had 20 wells on
production in California . Production expense on a barrel of oil equivalent
("BOE") basis for the nine months ended November 30, 2020 and 2019 was $16.16
and $16.28 , respectively. Production expenses represented 22.5% and 18.6% of
total operating expenses for the nine months ended November 30, 2020 and 2019,
respectively.
Exploration and drilling expenses include geological and geophysical ("G&G")
expenses as well as leasehold maintenance, plugging and abandonment ("P&A")
expenses and dry hole expenses. For the nine months ended November 30, 2020 ,
these expenses decreased $50 to $73 in comparison to $123 the nine months ended
November 30, 2019 . Exploration and drilling expenses represented 0.0% and 0.0%
of total operating expenses for the nine months ended November 30, 2020 and
2019, respectively.
20
Depreciation, depletion and amortization ("DD&A") expenses relate to equipment,
proven reserves and property costs, along with impairment, and is another
component of operating expenses. For the nine months ended November 30, 2020 ,
DD&A expenses decreased $1,892 or 4.3% to $42,318 in comparison to $44,210 for
the nine months ended November 30, 2019 . On a BOE basis, DD&A expense was $5.02
and $5.36 for the nine months ended November 30, 2020 and 2019, respectively.
DD&A expenses represented 7.0% and 6.1% of total operating expenses for the nine
months ended November 30, 2020 and 2019, respectively.
General and administrative ("G&A") expenses include the salaries of our six
full-time employees, including management. During the first three months of the
prior fiscal year ended February 29, 2020 , fifty percent (50%) of certain
management salaries were being deferred by the Company. However, effective June
1, 2019 , the salary deferral program ended and those base salaries were
temporarily reduced by half. Additionally, director fees are being suspended
temporarily. Both of these compensation changes were reviewed by the Board of
Directors during June 2020 and based on the financial status of the Company it
was decided to continue these temporary changes. Other items included in our G&A
expenses are legal and accounting expenses, investor relations fees, travel
expenses, insurance expenses and other administrative expenses necessary for an
operator of crude oil properties as well as for running a public company. For
the nine months ended November 30, 2020 , G&A expenses decreased $117,710 or
21.6% to $427,345 in comparison to $545,055 for the nine months ended November
30, 2019 . We received, as Operator, administrative overhead reimbursement of
$39,965 during the nine months ended November 30, 2020 for the East Slopes
Project which was used to directly offset certain employee salaries. We are
continuing a program of controlling our G&A costs wherever possible. G&A
expenses represented 70.5% and 75.3% of total operating expenses for the nine
months ended November 30, 2020 and 2019, respectively.
Interest expense, net for the nine months ended
Results of Operations - Three months ended
A comparison of the average WTI price and average realized crude oil sales price at ourEast Slopes Project inCalifornia for the three months endedNovember 30, 2020 and 2019 is shown in the table below: Three Months Ended November 30, 2020 November 30, 2019 Percentage Change Average three month WTI crude oil price (Bbl) $ 39.99 $ 55.98 (28.6 %) Average three month realized crude oil sales price (Bbl) $ 36.58 $ 57.92 (36.8 %) For the three months endedNovember 30, 2020 , the average WTI price was$39.99 and our average realized crude oil sale price was$36.58 , representing a discount of$3.41 per barrel or 8.5% lower than the average WTI price. In comparison, for the three months endedNovember 30, 2019 , the average WTI price was$55.98 and our average realized sale price was$57.92 representing a premium of$1.94 per barrel or 3.5% higher than the average WTI price. Historically, the sale price we receive forCalifornia heavy crude oil has been less than the quoted WTI price because of the lower API gravity of ourCalifornia crude oil in comparison to the API gravity of quoted WTI crude oil.
California Crude Oil Revenue and Production
Crude oil revenue inCalifornia for the three months endedNovember 30, 2020 , decreased$45,642 or 32.2% to$96,322 in comparison to revenue of$141,964 for the three months endedNovember 30, 2019 . The average sale price of a barrel of crude oil for the three months endedNovember 30, 2020 was$36.58 in comparison to$57.92 for the three months endedNovember 30, 2019 . The decrease of$21.34 or 36.8% per barrel in the average realized price of a barrel of crude oil accounted for over 100.0% of the decrease in crude oil revenue for the three months endedNovember 30, 2020 . Our net sales volume for the three months endedNovember 30, 2020 was 2,633 barrels of crude oil in comparison to 2,451 barrels sold for the three months endedNovember 30, 2019 . This increase in crude oil sales volume of 182 barrels or 7.4% was not sufficient enough to offset the decrease in revenue due to lower crude oil prices during the three months endedNovember 30, 2020 . The gravity of our produced crude oil inCalifornia ranges between 14° API and 16° API. Production for the three months endedNovember 30, 2020 was from 20 wells resulting in 1,820 well days of production in comparison to 1,749 well days of production for the three months endedNovember 30, 2019 . 21
Our crude oil sales revenue for the three months ended
Three Months Ended Three Months Ended
November 30, 2020 November 30, 2019
Project Revenue Percentage Revenue PercentageCalifornia - East Slopes Project$ 96,322 100.0 % $
141,964 100.0 %
*Our average realized sale price on a BOE basis for the three months ended
Operating Expenses
Total operating expenses for the three months ended
Three Months Ended Three Months Ended
November 30, 2020 November 30, 2019
BOE BOE
Expenses Percentage Basis Expenses Percentage Basis
Production expenses $ 53,581 28.0 % $ 44,733 20.8 %
Exploration and drilling expenses 73 0.0 % 9 0.0 %
Depreciation, depletion,
amortization ("DD&A") 13,491 7.0 % 13,288 6.2 %
General and administrative ("G&A")
expenses 124,792 65.0 % 156,622 73.0 %
Total operating expenses $ 191,937 100.0 % $ 72.90 $ 214,652 100.0 % $ 87.58 Production expenses for the three months endedNovember 30, 2020 , increased by$8,848 or 19.8% to$53,581 in comparison to$44,733 for the three months endedNovember 30, 2019 . The increase was primarily due to increases in property taxes and regulatory expenses. For the three months endedNovember 30, 2020 and 2019 we had 20 wells on production inCalifornia . Production expense on a barrel of oil equivalent ("BOE") basis for the three months endedNovember 30, 2020 and 2019 were$20.35 and$18.25 , respectively. Production expenses represented 28.0% and 20.8% of total operating expenses for the three months endedNovember 30, 2020 and 2019, respectively. Exploration and drilling expenses for the three months endedNovember 30, 2020 , increased$64 to$73 in comparison to$9 for the three months endedNovember 30, 2019 . Exploration and drilling expenses represented 0.0% and 0.0% of total operating expenses for the three months endedNovember 30, 2020 and 2019, respectively. DD&A expenses for the three months endedNovember 30, 2020 , increased$203 or 1.5% to$13,491 in comparison to$13,288 for the three months endedNovember 30, 2019 . DD&A on a BOE basis was$5.12 and$5.42 for the three months endedNovember 30, 2020 and 2019, respectively. DD&A expenses represented 7.0% and 6.2% of total operating expenses for the three months endedNovember 30, 2020 and 2019, respectively. G&A expenses for the three months endedNovember 30, 2020 , decreased$31,830 or 20.3% to$124,792 in comparison to$156,622 for the three months endedNovember 30, 2019 . EffectiveJune 1, 2019 , the salary deferral program that was in place ended and those base salaries were reduced by half. Additionally, director fees are being suspended temporarily. Both of these compensation changes were reviewed by the Board of Directors duringJune 2020 and based on the financial status of the Company it was decided to continue these temporary changes. Other items included in our G&A expenses are legal and accounting expenses, director fees, investor relations fees, travel expenses, insurance expenses and other administrative expenses necessary for an operator of crude oil properties as well as for running a public company. We received, as Operator inCalifornia , administrative overhead reimbursement of$13,321 during the three months endedNovember 30, 2020 for theEast Slopes Project which was used to directly offset certain employee salaries. We are continuing a program of reducing all of our G&A costs wherever possible. G&A expenses represented 65.0% and 73.0% of total operating expenses for the three months endedNovember 30, 2020 and 2019, respectively. Interest expense, net for the three months endedNovember 30, 2020 decreased$95,833 or 63.0% to$56,302 in comparison to$152,135 for the three months
endedNovember 30, 2019 . 22
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 inCalifornia andMichigan .
Capital Resources and Liquidity
Our primary financial resource is our proven crude oil reserve base. Our ability to fund any future capital expenditure programs is dependent upon the prices we receive from crude oil sales, the success of our drilling programs inCalifornia andMichigan and the availability of capital resource financing. There has been a significant amount of volatility in crude oil prices and dramatic decline in our realized sale price of crude oil since June of 2014, when the monthly average price of WTI crude oil was$105.79 per barrel, and our realized sale price per barrel of crude oil was$98.78 . This volatility and decline in crude oil prices has continued as evidenced by the NYMEX daily closing price of WTI crude oil onApril 20, 2020 when it closed at a negative$36.98 ; theApril 2020 monthly average WTI price was$16.55 ; and our monthly realized price forApril 2020 was$16.96 per barrel. This volatility and decline in the price of crude oil has had a substantial negative impact on our cash flow from our producingCalifornia properties. While there has been some improvement in crude oil prices sinceApril 2020 , there is no guarantee that this trend will continue. Most recently our average realized price declined from$60.77 for the nine months endedNovember 30, 2019 to$32.52 for the nine months endedNovember 30, 2020 , demonstrating the continued volatility in crude oil prices. It is beyond our ability to accurately predict how long crude oil prices will continue to remain at these lower price levels; when or at what level they may begin to stabilize; or when they may continue to rebound as there are many factors beyond our control that dictate the price we receive for our crude oil sales. In the 2021-2022 fiscal year we plan to spend approximately$525,000 in capital investments inCalifornia when new financing is secured. However, our actual expenditures may vary significantly from this estimate if our plans for exploration and development activities change during the year or if we are unable to obtain financing to fund these capital investments. Factors such as changes in operating margins and the availability of capital resources could increase or decrease our ultimate level of expenditures during the current fiscal year.
Changes in our capital resources at
Increase Percentage
November 30, 2020 February 29, 2020 (Decrease) Change
Cash $ 61,717 $ 94,043 $ (32,326 ) (34.4 %)
Current Assets $ 246,027 $ 240,434 $ 5,593 2.3 %
Total Assets $ 888,683 $ 917,456 $ (28,773 ) (3.1 %)
Current Liabilities $ (4,432,228 ) $ (4,063,712 ) $ 368,516 9.1 %
Total Liabilities $ (6,009,148 ) $ (5,556,063 ) $ 453,085 8.2 %
Working Capital Deficit $ (4,186,201 ) $ (3,823,278 ) $ 362,923 9.5 %
Our working capital deficit increased approximately $0.36 million or 9.5% to
approximately $4.2 million at November 30, 2020 in comparison to approximately
$3.8 million at February 29, 2020 . The increase in our working capital deficit
was due to an increase in accounts payable, accrued interest, the paycheck
protection program (PPP) loan we received and a decline in our cash balance
offset by a decline in our line of credit balance, elimination of related party
debt, and an increase in our prepaid assets.
While we have ongoing positive cash flow from our crude oil operations in
California , we have not yet been able to generate sufficient cash flow to cover
all of our G&A and interest expense requirements. We anticipate an increase in
our cash flow will occur when we are able to return to our planned drilling
program that will result in an increase in the number of wells on production.
Our business is capital intensive. Our ability to grow is dependent upon
favorably obtaining outside capital and generating cash flows from operating
activities necessary to fund our investment activities. There is no assurance
that we will be able to achieve profitability. Since our future operations will
continue to be dependent on successful exploration and development activities
and our ability to seek and secure capital from external sources, should we be
unable to achieve sustainable profitability this could cause any equity
investment in the Company to become worthless.
23
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 inCalifornia , we will have to rely on the capital markets to fund future operations and growth. Our business model is focused on acquiring exploration or development properties as well as existing production. Our ability to generate future revenues and operating cash flow will depend on successful exploration, and/or acquisition of crude oil producing properties, which may very likely require us to continue to raise equity or debt capital from outside sources.
Daybreak has ongoing capital commitments to develop certain leases pursuant to their underlying terms. Failure to meet such ongoing commitments may result in the loss of the right to participate in future drilling on certain leases or the loss of the lease itself. These ongoing capital commitments will cause us to seek additional forms of financing through various methods, including issuing debt securities, equity securities, bank debt, or combinations of these instruments which could result in dilution to existing security holders and increased debt and leverage. The current volatility in the credit and capital markets as well as the decline in crude oil prices from June of 2014 price levels has restricted our ability to obtain needed capital. No assurance can be given that we will be able to obtain funding under any loan commitments or any additional financing on favorable terms, if at all. The sale of all or part of interests in our assets may be another source of cash flow available to us. The Company's financial statements for the nine months endedNovember 30, 2020 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. We have incurred net losses since entering the crude oil exploration industry in 2005, and as of the nine months endedNovember 30, 2020 , we have an accumulated deficit of$29.4 million and a working capital deficit of$4.2 million which raises substantial doubt about our ability to continue as a going concern. In the current fiscal year, we will continue to seek additional financing for our planned exploration and development activities inCalifornia andMichigan . We could obtain financing through one or more various methods, including issuing debt securities, equity securities, or bank debt, or combinations of these instruments, which could result in dilution to existing security holders and increased debt and leverage. No assurance can be given that we will be able to obtain funding under any loan commitments or any additional financing on favorable terms, if at all. Sales of interests in our assets may be another source of cash flow.
Changes in Financial Condition
During the nine months endedNovember 30, 2020 , we received crude oil sales revenue from 20 wells inCalifornia . Our commitment to improving corporate profitability remains unchanged. We experienced a decrease in revenues of$227,292 or 45.3% to$274,085 for the nine months endedNovember 30, 2020 in comparison to revenues of$501,377 for the nine months endedNovember 30, 2019 . The decrease of$28.25 or 46.5% per barrel in the average realized price of a barrel of crude oil accounted for over 100.0% of the decrease in crude oil revenue for the nine months endedNovember 30, 2020 . For the nine months endedNovember 30, 2020 , we had an operating loss of$331,869 in comparison to an operating loss of$222,287 for the nine months endedNovember 30, 2019 . Our balance sheet atNovember 30, 2020 reflects total assets of approximately$0.89 million in comparison to approximately$0.92 million atFebruary 29, 2020 . The decrease of$28,773 is primarily due to cash outflow from operations and depletion of our crude oil properties. AtNovember 30, 2020 , total liabilities were approximately$6.0 million in comparison to approximately$5.6 million atFebruary 29, 2020 . The increase in liabilities of$453,085 was primarily due to an increase in accounts payable and the paycheck protection program (PPP) loan. The issued and outstanding shares of common stock atNovember 30, 2020 increased by 6,958,758 shares to 60,491,122 in comparison to theFebruary 29, 2020 balance of 53,532,364 shares as a result of the conversion of a related party note payable. The common stock issuance was valued at$27,835 . Additional paid in capital (APIC) increased$25,298 to$24,249,081 atNovember 30, 2020 from$24,223,783 as a result of the conversion of a related party
note payable. 24 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 Nine Months
Ended Ended
November 30, November 30, Increase Percentage
2020 2019 (Decrease) Change
Net cash used in operating
activities $ (17,019 ) $ (48,094 ) 31,075 64.6 %
Net cash provided by (used in)
investing activities $ - $ - - -
Net cash (used in) provided by
financing activities $ (15,307 ) $ 29,000 (44,307 ) (152.8 %)
Cash Flow Used In Operating Activities
Cash flow from operating activities is derived from the production of our crude oil reserves and changes in the balances of non-cash accounts, receivables, payables or other non-energy property asset account balances. For the nine months endedNovember 30, 2020 , cash flow used in operating activities was$17,019 in comparison to cash flow used in operating activities of$48,094 for the nine months endedNovember 30, 2019 . The change in our cash flow used in operating activities of$31,075 for the nine months endedNovember 30, 2020 was due to a reduction in our non-cash operating expenses, an increase in our prepaid assets, liability balances and our net loss. Changes in non-cash account balances primarily relating to DD&A and amortization of debt discount. Variations in cash flow from operating activities may impact our level of exploration and development expenditures.
Cash Flow Provided By (Used In) Investing Activities
Cash flow from investing activities is derived from changes in crude oil property balances and any lending activities. Cash flow provided by (used in) our investing activities for the nine months endedNovember 30, 2020 was$-0 - in comparison to cash flow provided by (used in) our investing activities of$-0 - for the nine months endedNovember 30, 2019 .
Cash Flow (Used In) Provided By Financing Activities
Cash flow from financing activities is derived from changes in long-term liability account balances or in equity account balances, excluding retained earnings. Cash flow used in our financing activities was$15,307 for the nine months endedNovember 30, 2020 in comparison to cash flow provided by our financing activities of$29,000 for the nine months endedNovember 30, 2019 . This change in our cash flow provided by (used in) activities was primarily due to the recognition of annual insurance premium financing activities. For the nine months endedNovember 30, 2020 , we made total payments of$45,000 to our line of credit withUBS Bank .
The following discussion is a summary of cash flows provided by, and used in,
the Company's financing activities at
Current debt (Short-term borrowings)
Convertible Promissory Note Payable -
During the twelve months endedFebruary 29, 2020 , the Company's Chairman, President and Chief Executive Officer loaned the Company$27,835 for general operating expenses under a Convertible Note Purchase Agreement. The Note had a maturity date ofJuly 12, 2020 and carried no interest, fees or penalties. By the terms of the Convertible Note Purchase Agreement,Mr. Westmoreland had also agreed to loan up to an additional$22,165 in funding for the Company, if and when agreed upon, but this additional amount was not ever loaned pursuant to the Note. OnJuly 12, 2020 , the Convertible Promissory Note issued onJanuary 14, 2020 matured. The Note was not repaid in full on or prior to the maturity date, so, pursuant to the terms of the conversion feature of the Convertible Promissory Note, the$27,835 balance of the Convertible Note was converted into the Company's common stock shares onJuly 13, 2020 . The conversion price was$0.004 per share resulting in 6,958,758 shares being issued. The balance of the Note was$-0 - and$27,835 atNovember 30, 2020 andFebruary 29, 2020 , respectively. 25 12% Subordinated Notes
Our 12% Subordinated Notes ("the Notes") issued pursuant to a January 2010
private placement offering to accredited investors, resulted in $595,000 in
gross proceeds (of which $250,000 was from a related party) to us and accrue
interest at 12% per annum, payable semi-annually on January 29th and July 29th .
On January 29, 2015 , we and 12 of the 13 holders of the Notes agreed to extend
the maturity date of the Notes for an additional two years to January 29, 2017 .
Effective January 29, 2017 , the maturity date of the Notes and the expiration
date of the warrants that were issued in conjunction with the Notes were
extended for an additional two years to January 29, 2019 . The 980,000 warrants
held by ten noteholders expired on January 29, 2019 .
We have informed the Note holders that the payment of principal and final
interest will be late and is subject to future financing being completed. The
Notes principal of $565,000 was payable in full at the amended maturity date of
the Notes, and has not been paid. Interest continues to accrue on the unpaid
$565,000 principal balance. The terms of the Notes, state that should the Board
of Directors decide that the payment of the principal and any unpaid interest
would impair the financial condition or operations of the Company, we may then
elect a mandatory conversion of the unpaid principal and interest into our
common stock at a conversion rate equal to 75% of the average closing price of
our common stock over the 20 consecutive trading days preceding December 31,
2018 . As of November 30, 2020 , no conversion of the unpaid principal and
interest into the Company's common stock has occurred. The accrued interest on
the 12% Notes at November 30, 2020 and February 29, 2020 was $323,324 and
$272,428 , respectively. There was no unamortized debt discount remaining at
November 30, 2019 and February 28, 2019 .
12% Note balances at November 30, 2020 and February 29, 2020 are set forth in
the table below:
November 30, 2020 February 29, 2020
12% Subordinated Notes $ 315,000 $ 315,00012% Subordinated Notes - related party 250,000
250,000
Total 12% Subordinated Notes balance $ 565,000 $
565,000
12% Note balances - accrued interest at
November 30, 2020 February 29, 2020
Accrued interest 12% Subordinated Notes $ 88,338 $ 59,962
Accrued interest 12% Subordinated Notes - related
party 234,986 212,466
Total accrued interest 12% Subordinated Notes $ 323,324 $ 272,428
The accrued interest owed on the 12% Subordinated Note to the related party is presented on our Balance Sheets under the caption Accounts payable - related party rather than under the caption Accrued interest. Production Revenue Payable
SinceDecember 2018 , the Company has been conducting a fundraising program to fund the drilling of future wells inCalifornia andMichigan and to settle some of its historical debt. The purchasers of production payment interests will receive a production revenue payment on future wells to be drilled inCalifornia andMichigan in exchange for their purchase. As ofNovember 30, 2020 , the production revenue payment program balance was$950,100 of which$550,100 was owed to a related party - the Company's Chairman, President and Chief Executive Officer. The production payment interest entitles the purchasers to receive production payments equal to twice their original amount paid, payable from a percentage of the Company's future net production payments from wells drilled after the date of the purchase and until the Production Payment Target (as described below) is met. The Company shall pay fifty percent of its net production payments from the relevant wells to the purchasers until each purchaser has received two times the purchase price (the "Production Payment Target"). Once the Company pays the purchasers amounts equal to the Production Payment Target, it shall thereafter pay a pro-rated eight percent (8%) of$1.3 million on its net production payments from the relevant wells to each of the purchasers. However, if the total raised is less than the target$1.3 million , then the payment will be a proportionate amount of the eight percent (8%). Additionally, if the Production Payment Target is not met within the first three years, the Company shall pay seventy-five percent of its production payments from the relevant wells to the purchasers until the Production Payment Target is met. 26 The Company accounted for the amounts received from these sales in accordance with ASC 470-10-25 and 470-10-35 which require amounts recorded as debt to be amortized under the interest method as described in ASC 835-30, Interest Method. Consequently, the program balance of$950,100 has been recognized as a production revenue payable. The Company determined an effective interest rate based on future expected cash flows to be paid to the holders of the production payment interests. This rate represents the discount rate that equates estimated cash flows with the initial proceeds received from the sales and is used to compute the amount of interest to be recognized each period. Estimating the future cash outflows under this agreement requires the Company to make certain estimates and assumptions about future revenues and payments and such estimates are subject to significant variability. Therefore, the estimates are likely to change which may result in future adjustments to the accretion of the interest expense and the amortized cost based carrying value of the related payables. Accordingly, the Company has estimated the cash flows associated with the production revenue payments and determined a discount of$998,879 as ofNovember 30, 2020 , which is being accounted as interest expense over the estimated period over which payments will be made based on expected future revenue streams. For the nine months endedNovember 30, 2020 and 2019, amortization of the debt discount on these payables amounted to$88,786 and$336,658 , respectively, which has been included in interest expense in the statements of operations.
Production revenue payable balances at
November 30, 2020 February 29, 2020
Estimated payments of production revenue payable $ 1,948,979
$ 2,054,766
Less: unamortized discount (471,922 ) (666,495 )
1,477,057 1,388,271
Less: current portion (50,269 ) (43,069 )Net production revenue payable - long-term $ 1,426,788 $ 1,345,202
Paycheck Protection Program (PPP) Loan
OnMarch 27, 2020 ,President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act commonly referred to as the CARES Act. One component of the CARES Act was the paycheck protection program ("PPP") which provides small business with the resources needed to maintain their payroll and cover applicable overhead. The PPP is implemented by theSmall Business Administration ("SBA") with support from theDepartment of the Treasury . The PPP provides funds to pay up to eight weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities. The Company applied for, and was accepted to participate in this program. OnMay 11, 2020 , the Company received funding for approximately$74,355 . The loan is a two-year loan with a maturity date ofMay 5, 2022 . The loan bears an annual interest rate of 1%. The loan shall be payable monthly with the first six monthly payments deferred. It is the Company's intent to apply for loan forgiveness under the provisions of Section 1106 of the CARES Act. Loan forgiveness is subject to the sole approval of the SBA. The Company is eligible for loan forgiveness in an amount equal to payments made during the 8-week period beginning on the Loan date, with the exception that no more than 25.0% of the amount of loan forgiveness may be for expenses other than payroll expenses. The Company used all loan proceeds to partially subsidize direct payroll expenses. The Company expects the loan to be fully forgiven. Line of Credit The Company has an existing$890,000 line of credit for working capital purposes withUBS Bank USA ("UBS"), established pursuant to a Credit Line Agreement datedOctober 24, 2011 that is secured by the personal guarantee of its Chairman, President and Chief Executive Officer. OnJuly 10, 2017 a$700,000 portion of the outstanding line of credit balance was converted to a 24 month fixed term annual percentage interest rate of 3.244% with interest payable monthly. OnJuly 10, 2019 , the 24 month fixed term loan amount of$700,000 was renewed at the same annual percentage interest rate of 3.244% for an additional 24 months. The remaining principal balance of the line of credit has a stated reference rate of 0.249% + 337.5 basis points with interest payable monthly. The reference rate is based on the 30 day LIBOR ("London Interbank Offered Rate") and is subject
to change fromUBS . During the nine months endedNovember 30, 2020 and 2019, the Company received advances on the line of credit of$-0 - and$74,000 , respectively. During the nine months endedNovember 30, 2020 and 2019, the Company made payments to the line of credit of$45,000 and$45,000 , respectively. Interest converted to principal for the nine months endedNovember 30, 2020 and 2019 was$21,744 and$23,624 , respectively. AtNovember 30, 2020 andFebruary 29, 2020 , the line of credit had an outstanding balance of$849,145 and$872,401 , respectively. 27 Note Payable
InDecember 2018 , we were able to settle an outstanding balance owed to one of our third-party vendors. This settlement resulted in a$120,000 note payable issued to the vendor. Additionally, we agreed to issue 2,000,000 shares of the Company's common stock to the vendor as a part of the settlement. Based on the closing price of the Company's common stock on the date of the settlement, the value of the common stock transaction was determined to be$6,000 . The common stock shares were issued during the twelve months endedFebruary 29, 2020 . The note has a maturity date ofJanuary 1, 2022 and bears an interest rate of 10% rate per annum. Monthly interest is accrued and payable onJanuary 1st of each anniversary date through maturity of the note. AtNovember 30, 2020 , the note principal balance of$120,000 and the accrued interest had not been paid and were outstanding. AtNovember 30, 2020 andFebruary 29, 2020 , the accrued interest on the Note was$23,000 and$14,000 , respectively. Encumbrances
On
Operating Leases The Company leases approximately 988 rentable square feet of office space from an unaffiliated third party for our corporate office located in SpokaneValley, Washington . Additionally, we lease approximately 416 and 695 rentable square feet from unaffiliated third parties for our regional operations office inFriendswood, Texas and storage and auxiliary office space inWallace, Idaho , respectively. The lease inFriendswood was a 24 month lease that expired inOctober 2020 . The new lease inFriendswood is a 12 month lease and as such is considered a short-term lease. The Company has elected to not apply the recognition requirements of ASC 842 to this short-term lease.The Spokane Valley andWallace leases are also short-term leases currently on a month-to-month basis. The Company's lease agreements do not contain any residual value guarantees, restrictive covenants or variable lease payments. The Company has not entered into any financing leases. The Balance Sheet classification of lease assets and liabilities is as follows: November 30, 2020 February 29, 2020 Assets Operating lease right-of use assets, beginning balance $ 5,857 $ 13,787 Current period amortization (5,857 ) (7,930 ) Total operating lease right-of-use asset - 5,857
Liabilities
Operating lease liability - current - 5,857 Operating lease liability - long-term -
-
Total lease liabilities $ - $ 5,857
Rent expense for the nine months ended
Capital Commitments
Daybreak has ongoing capital commitments to develop certain leases pursuant to their underlying terms. Failure to meet such ongoing commitments may result in the loss of the right to participate in future drilling on certain leases or the loss of the lease itself. These ongoing capital commitments may also cause us to seek additional capital from sources outside of the Company. The current uncertainty in the credit and capital markets, and the current economic downturn in the energy sector, may restrict our ability to obtain needed capital.
Subsequent Event - Change in Transfer Agent
EffectiveDecember 22, 2020 , the Company appointedSedona Equity Registrar & Transfer, Incorporated ("Sedona") as its transfer agent and shareholder support provider. OnDecember 28, 2020 , all of the Company's directly held shares of common stock, files and information have been transferred from Computershare to Sedona. In this capacity, Sedona will manage all stock registry requests for shareholders, including change of address, certificate replacement and transfer of shares. All stock and investment information will automatically transfer to Sedona from our former Transfer Agent and Registrar, Computershare, and no action is required on the part of the shareholder.
Management Plans to Continue as a Going Concern
We continue to implement plans to enhance Daybreak's ability to continue as a going concern. The Company currently has a net revenue interest in 20 producing crude oil wells in ourEast Slopes Project located inKern County, California . The revenue from these wells has created a steady and reliable source of revenue for the Company. Our average working interest in these wells is 36.6% and the average net revenue interest is 28.4%. 28 We anticipate revenues will continue to increase as the Company participates in the drilling of more wells in theEast Slopes Project inCalifornia and as our drilling operations begin inMichigan . However given the current volatility and instability in hydrocarbon prices, the timing of any drilling activity inCalifornia andMichigan 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 ofNovember 30, 2020 do not include any adjustments that might result from the inability to implement or execute Daybreak's plans to improve our ability to continue as a going concern. Critical Accounting Policies
Refer to Daybreak's Annual Report on Form 10-K for the fiscal year ended
Off-Balance Sheet Arrangements
As ofNovember 30, 2020 , we did not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partners that have been, or are reasonably likely to have, a material effect on our financial position or results of operations. 29
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