NOTES TO FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION AND BASIS OF PRESENTATION:
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 Companys 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 Companys crude oil and natural gas production is sold under contracts that are market-sensitive. Accordingly, the Companys 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.
NOTE 2 GOING CONCERN:
Financial Condition
Daybreaks financial statements for the twelve months ended February 29, 2020 and February 28, 2019 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. Daybreak has incurred net losses since inception and has accumulated a deficit of approximately $28.9 million and a working capital deficit of approximately $3.8 million, which raises substantial doubt about the Companys 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 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 Companys average working interest in these wells is 36.6% and the average net revenue interest is 28.4% for these same wells.
The Company anticipates revenue will continue to increase as the Company participates in the drilling of more wells in the East Slopes Project in California and our project in Michigan. However given the current decline and instability in hydrocarbon prices, the timing of any drilling activity in California will be dependent on a sustained improvement in hydrocarbon prices and success in securing financing for the Companys drilling program.
The Company believes that our liquidity will improve when there is a sustained improvement in hydrocarbon prices. Daybreaks sources of funds in the past have included the debt or equity markets and the sale of assets. While the Company has experienced periodic 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.
Daybreaks financial statements as of February 29, 2020 and February 28, 2019 do not include any adjustments that might result from the inability to implement or execute Daybreaks plans to improve our ability to continue as a going concern.
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NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
Cash equivalents include demand deposits with banks and all highly liquid investments with original maturities of three months or less. The Company has in the past maintained balances in financial institutions where deposits may exceed the federally insured deposit limit of $250,000. The Company has not experienced any losses from such accounts and does not believe it is exposed to any significant credit risk on cash.
Accounts Receivable
The Company routinely assesses the recoverability of all material trade and other receivables. The Company accrues a reserve on a receivable when, based on the judgment of management, it is probable that a receivable will not be collected and the amount of any reserve may be reasonably estimated. Actual write-offs may exceed the recorded allowance. Substantially all of the Companys trade accounts receivable result from crude oil in California or joint interest billings to its working interest partners in California. This concentration of customers and joint interest owners may impact the Companys overall credit risk as these entities could be affected by similar changes in economic conditions as well as other related factors. Trade accounts receivable are generally not collateralized. There were no allowances for doubtful accounts for the Companys trade accounts receivable at February 29, 2020 and February 28, 2019.
Crude Oil and Natural Gas Properties
The Company uses the successful efforts method of accounting for crude oil and natural gas property acquisition, exploration, development, and production activities. Costs to acquire mineral interests in crude oil and natural gas properties, to drill and equip exploratory wells that find proved reserves, and to drill and equip development wells are capitalized as incurred. Costs to drill exploratory wells that are unsuccessful in finding proved reserves are expensed as incurred. In addition, the geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed as incurred. Costs to operate and maintain wells and field equipment are expensed as incurred.
Capitalized proved property acquisition costs are amortized by field using the unit-of-production method based on estimated proved reserves. Capitalized exploration well costs and development costs (plus estimated future dismantlement, surface restoration, and property abandonment costs, net of equipment salvage values) are amortized in a similar fashion (by field) based on their estimated proved developed reserves. Support equipment and other property and equipment are depreciated over their estimated useful lives.
Pursuant to the provisions of Financial Accounting Standards Codification (ASC) Topic 360, Property, Plant and Equipment the Company reviews proved crude oil and natural gas properties and other long-lived assets for impairment. These reviews are predicated by events and circumstances, such as downward revision of the reserve estimates or commodity prices that indicate a decline in the recoverability of the carrying value of such properties. The Company estimates the future cash flows expected in connection with the properties and compares such future cash flows to the carrying amount of the properties to determine if the carrying amount is recoverable. When the carrying amounts of the properties exceed their estimated undiscounted future cash flows, the carrying amounts of the properties are reduced to their estimated fair value. The factors used to determine fair value include, but are not limited to, estimates of proved reserves, future commodity prices, the timing of future production, future capital expenditures and a risk-adjusted discount rate. These estimates of future product prices may differ from current market prices of crude oil and natural gas. Any downward revisions to managements estimates of future production or product prices could result in an impairment of the Companys crude oil and natural gas properties in subsequent periods. Unproved crude oil and natural gas properties that are individually significant are also periodically assessed for impairment of value. An impairment loss for unproved crude oil and natural gas properties is recognized at the time of impairment by providing an impairment allowance.
The Company did not recognize any asset impairment for the twelve months ended February 29, 2020 and February 28, 2019.
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On the retirement or sale of a partial unit of proved property, the cost is charged to accumulated DD&A with a resulting gain or loss recognized in income.
Property and Equipment
Fixed assets are stated at cost. Depreciation on vehicles is provided using the straight-line method over expected useful lives of three years. Depreciation on machinery and equipment is provided using the straight-line method over expected useful life of three years. Depreciation of production facilities and natural gas pipelines are recorded using the unit-of-production method based on estimated reserves.
Long Lived Assets
The Company reviews long-lived assets and identifiable intangibles whenever events or circumstances indicate that the carrying amounts of such assets may not be fully recoverable. The Company evaluates the recoverability of long-lived assets by measuring the carrying amounts of the assets against the estimated undiscounted cash flows associated with these assets. If this evaluation indicates that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the assets' carrying value, the assets are adjusted to their fair values (based upon discounted cash flows).
Fair Value of Financial Instruments
The carrying value of short-term financial instruments including cash, receivables, prepaid expenses, accounts payable, and other accrued liabilities, short-term liabilities and the line of credit approximated their fair values due to the relatively short period to maturity for these instruments. The long-term notes payable approximates fair value since the related rates of interest approximate current market rates.
Share Based Payments
Stock awards are accounted for under FASB ASC Topic 718, Compensation-Stock Compensation (ASC 718). Under ASC 718, compensation for all share-based payment awards is based on estimated fair value at the grant date. The value of the portion of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service periods, if any.
The Company estimates the fair value of stock purchase warrants on the grant date using the Black-Scholes option pricing model (Black-Scholes Model) as its method of valuation for warrant awards granted during the year. The Companys determination of fair value of warrant awards on the date of grant using an option-pricing model is affected by the Companys stock price, as well as assumptions regarding a number of subjective variables. These variables include, but are not limited to, the Companys expected price volatility over the term of the awards and discount rates assumed.
Earnings (Loss) per Share of Common Stock
Basic earnings (loss) per share of Common Stock is calculated by dividing net earnings (loss) available to common stockholders by the weighted average number of common shares issued and outstanding during the year. Diluted earnings per share is computed based on the weighted average number of common shares outstanding, increased by dilutive Common Stock equivalents. For the year ended February 29, 2020, Common Stock equivalents are excluded from the calculations since their effect is anti-dilutive due to the Companys net loss. For the year ended February 28, 2019, the weighted average number of common shares outstanding was increased by the dilutive 709,568 Series A Preferred shares, which are convertible to common shares on a 1:3 ratio. The dilutive effect increased the weighted average shares outstanding number by 2,128,704 shares to 53,661,068.
Concentration of Credit Risk
Substantially all of the Companys accounts receivable result from crude oil sales in California or joint interest billings to its working interest partners in California. This concentration of customers and joint interest owners may impact the Companys overall credit risk as these entities could be affected by similar changes in economic conditions as well as other related factors.
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At the Companys East Slopes project in California we deal with only one buyer for the purchase of all crude oil production. The Company has no natural gas production in California. At February 29, 2020 and February 28, 2019, this one individual customer represented 100.0% of crude oil sales receivable from operations. If this buyer is unable to resell its products or if they lose a significant sales contract then the Company may incur difficulties in selling its crude oil production.
The Companys accounts receivable in California for crude oil sales at February 29, 2020 and February 28, 2019, respectively are set forth in the table below.
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
February 29, 2020
|
|
February 28, 2019
|
Project
|
|
Customer
|
|
Accounts
Receivable
Crude Oil
Sales
|
|
Percentage
|
|
Accounts
Receivable
Crude Oil
Sales
|
|
Percentage
|
California East Slopes Project (Crude oil)
|
|
Plains Marketing
|
|
$
|
56,910
|
|
100.0%
|
|
$
|
75,410
|
|
100.0%
|
Revenue Recognition
On March 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers, and the series of related ASUs that followed under ASC Topic 606 (collectively, Topic 606). Under Topic 606, revenue will generally be recognized upon delivery of our produced crude oil and natural gas volumes to our customers. Our customer sales contracts include only crude oil sales in California. Under Topic 606, each unit (crude oil barrel) of commodity product represents a separate performance obligation which is sold at variable prices, determinable on a monthly basis. The pricing provisions of our crude oil contracts are primarily tied to a market index with certain adjustments based on factors such as delivery, product quality and prevailing supply and demand conditions in the geographic areas in which we operate. We will allocate the transaction price to each performance obligation and recognize revenue upon delivery of the commodity product when the customer obtains control. Control of our produced crude oil volumes passes to our customers when the oil is measured by a trucking oil ticket. The Company has no control over the crude oil after this point and the measurement at this point dictates the amount on which the customers payment is based. Our crude oil revenue stream includes volumes burdened by royalty and other joint owner working interests. Our revenues are recorded and presented on our financial statements net of the royalty and other joint owner working interests. Our revenue stream does not include any payments for services or ancillary items other than sale of crude oil. We record revenue in the month our crude oil production is delivered to the purchaser.
Adoption of the provisions of Topic 606 did not change our pattern of timing of revenue recognition. We utilized the full retrospective method for adoption of Topic 606, and in accordance with this method our financial statements for periods prior to March 1, 2018 were not materially affected or revised. We do not anticipate a material impact on our financial statements on an ongoing basis.
Asset Retirement Obligation (ARO)
The Company follows the provisions of FASB ASC Topic 410, Asset Retirement and Environmental Obligations (ASC 410), which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This standard requires that the Company recognize the fair value of a liability for an asset retirement obligation (ARO) in the period in which it is incurred. The ARO is capitalized as part of the carrying value of the assets to which it is associated, and depreciated over the useful life of the asset. The ARO and the related asset retirement cost are recorded when an asset is first drilled, constructed or purchased. The asset retirement cost is determined and discounted to present value using a credit-adjusted risk-free rate. After initial recording, the liability is increased for the passage of time, with the increase being reflected as accretion expense in the statements of operations. Subsequent adjustments in the cost estimate are reflected in the ARO liability and the amounts continue to be amortized over the useful life of the related long-lived assets.
Suspended Well Costs
The Company accounts for any suspended well costs in accordance with FASB ASC Topic 932, Extractive Activities Oil and Gas (ASC 932). ASC 932 states that exploratory well costs should continue to be capitalized if: (1) a sufficient quantity of reserves are discovered in the well to justify its completion as a producing well and (2) sufficient progress is made in assessing the reserves and the economic and operating feasibility of the well. If the exploratory well costs do not meet both of these criteria, these costs should be expensed, net of any salvage value. Additional annual disclosures are required to provide information about managements evaluation of capitalized exploratory well costs.
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In addition, ASC 932 requires annual disclosure of: (1) net changes from period to period of capitalized exploratory well costs for wells that are pending the determination of proved reserves, (2) the amount of exploratory well costs that have been capitalized for a period greater than one year after the completion of drilling and (3) an aging of exploratory well costs suspended for greater than one year, designating the number of wells the aging is related to. Further, the disclosures should describe the activities undertaken to evaluate the reserves and the projects, the information still required to classify the associated reserves as proved and the estimated timing for completing the evaluation.
Income Taxes
The Company follows the provisions of FASB ASC Topic 740, Income Taxes (ASC 740). As required under ASC 740, the Company accounts for income taxes using an asset and liability approach, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statements and tax bases of assets and liabilities at the applicable tax rates. A valuation allowance is utilized when it is more likely than not, that some portion of, or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under ASC 740, the Company recognizes tax benefits only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% (percent) likely to be realized upon settlement. A liability for unrecognized tax benefits is recorded for any tax benefits claimed in our tax returns that do not meet these recognition and measurement standards.
Use of Estimates and Assumptions
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 reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates. The accounting policies most affected by managements estimates and assumptions are as follows:
·
The reliance on estimates of proved reserves to compute the provision for depreciation, depletion and amortization and to determine the amount of any impairment of proved properties;
·
The valuation of unproved acreage and proved crude oil and natural gas properties to determine the amount of any impairment of crude oil and natural gas properties;
·
Judgment regarding the productive status of in-progress exploratory wells to determine the amount of any provision for abandonment; and
·
Estimates regarding the timing and cost of future abandonment obligations; and,
·
Estimates regarding projected cash flows used in determining the production payable discount.
Recent Accounting Pronouncements
Accounting Standards Issued and Adopted
On June 20, 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The amendments in this ASU expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantors own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. For public entities, the amendments in this ASU are effective for annual periods beginning after December 15, 2018. Adoption of the provisions of this ASU did not have a material impact on our financial statements.
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In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) and subsequent amendments to the initial guidance: ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01 (collectively, Topic 842). ASU 2016-02 increases the transparency and comparability of leases among entities and requires an entity to recognize a right-of-use asset (ROU) and lease liability for all leases and provide enhanced disclosures. Recognition, measurement, and presentation of expenses depends on classification as a finance lease or an operating lease. The Company has determined that it has only operating leases. ASC 842 supersedes the lease accounting guidance in ASC 840 Leases. On March 1, 2019, the Company adopted Topic 842 using the modified retrospective approach and the impact of the adoption of ASC 842 resulted in the recognition of a right of use asset and lease payable obligation on the Companys Balance Sheets of approximately $13,787. Results for reporting periods after March 1, 2019 are presented under Topic 842, while prior periods have not been adjusted. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification. Refer to Note 10 Leases.
NOTE 4 ACCOUNTS RECEIVABLE:
Accounts receivable consists primarily of receivables from the sale of crude oil production by the Company and receivables from the Companys working interest partners in crude oil projects in which the Company acts as Operator of the project.
Crude oil sales receivables balances of $56,910 and $75,410 at February 29, 2020 and February 28, 2019, represent crude oil sales that occurred in February 2020 and 2019, respectively.
Joint interest participant receivables balances of $38,366 and $54,883 at February 29, 2020 and February 28, 2019, respectively, represent amounts due from working interest partners in California, where the Company is the Operator.
There were no allowances for doubtful accounts for the Companys trade accounts receivable at February 29, 2020 and February 28, 2019.
NOTE 5 CRUDE OIL PROPERTIES:
Crude oil property balances at February 29, 2020 and February 28, 2019 are set forth in the table below:
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|
|
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| |
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February 29, 2020
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|
February 28, 2019
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Proved leasehold costs
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$
|
115,119
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|
$
|
115,119
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Unproved leasehold costs
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|
55,978
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|
|
55,768
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Costs of wells and development
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2,278,190
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|
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2,285,054
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Capitalized exploratory well costs
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1,341,494
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|
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1,341,494
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Total cost of oil and gas properties
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3,790,781
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|
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3,797,435
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Accumulated depletion, depreciation amortization and impairment
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(3,136,068)
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|
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(3,085,043)
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Oil and gas properties, net
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$
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654,713
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$
|
712,392
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For the twelve months ended February 29, 2020 and February 28, 2019, the Company recognized depletion expense of $51,025 and $57,081, respectively which is included in DD&A in the statement of operations.
NOTE 6 ASSET RETIREMENT OBLIGATION (ARO)
The Companys financial statements reflect the provisions of ASC 410. The ARO primarily represents the estimated present value of the amount the Company will incur to plug, abandon and remediate its producing properties at the end of their productive lives, in accordance with applicable state laws. The Company determines the ARO on its crude oil and natural gas properties by calculating the present value of estimated cash flows related to the liability. As of February 29, 2020 and February 28, 2019, ARO obligations were considered to be long-term based on the estimated timing of the anticipated cash flows. For the twelve months ended February 29, 2020 and February 28, 2019, the Company recognized accretion expense of $4,418 and $5,553, respectively which is included in DD&A in the statement of operations.
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Changes in the asset retirement obligations for the twelve months ended February 29, 2020 and February 28, 2019 are set forth in the table below.
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February 28, 2019
|
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February 28, 2019
|
Asset retirement obligation, beginning of period
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$
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29,595
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$
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37,174
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Accretion expense
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4,418
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|
|
5,553
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Revisions to asset retirement obligation
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|
(6,864)
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|
|
(13,132)
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Asset retirement obligation, end of period
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$
|
27,149
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|
$
|
29,595
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NOTE 7 ACCOUNTS PAYABLE:
On March 1, 2009, the Company became the operator for the East Slopes Project located in Kern County, California. Additionally, the Company then assumed certain original defaulting partners approximate $1.5 million liability representing a 25% working interest in the drilling and completion costs associated with the East Slopes Project four earning wells program. The Company subsequently sold the 25% working interest on June 11, 2009. Approximately $244,849 of the $1.5 million default remains unpaid and is included in the February 29, 2020 and February 28, 2019 accounts payable balance. Payment of this liability has been delayed until the Companys 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 February 29, 2020, the balance owed this working interest partner was $101,544 and is included in the approximate $1.6 million accounts payable balance.
NOTE 8 ACCOUNTS PAYABLE- RELATED PARTIES:
The February 29, 2020 and February 28, 2019 accounts payable related parties balances of $919,888 and $1,920,897, respectively, were comprised primarily of deferred salaries of one of the Companys Executive Officers and certain employees; directors fees; expense reimbursements; and deferred interest payments on a 12% Subordinated Notes owed to the Companys Chairman, President and Chief Executive Officer. On August 22, 2019, an agreement was reached between the Company and the Companys Chairman, President and Chief Executive Officer whereby all deferred salary owed by the Company to this related party was forgiven. The agreement has an effective date of June 1, 2019. This agreement resulted in a decrease of approximately $882,043 in net salary payable from the prior related party payables balance. This agreement also resulted in a decrease of $123,414 in estimated payroll taxes from accounts payable balances. Additionally, on August 22, 2019 the three Non-Employee Directors of the Company to whom director fees were owed agreed to forgive 50% (fifty percent) of the amounts owed to each individual director. These agreements had an effective date of June 1, 2019 and resulted in a reduction of $209,688 in the related party payables balance. The total amount of liability forgiveness was approximately $1.2 million and was recorded as an addition to additional paid in capital (APIC). Payment of any other deferred items has been delayed until the Companys cash flow situation improves.
NOTE 9 SHORT-TERM AND LONG-TERM BORROWINGS:
Note Payable Related Party
The Companys Chairman, President and Chief Executive Officer had loaned to the Company in previous fiscal years an aggregate $250,100 that was used for a variety of corporate purposes. In connection with its debt reduction efforts, the Company entered into a Note Payoff Agreement with this related party. Pursuant to the Note Payoff Agreement, the Company issued as payment in full of the Notes, a production payment interest in certain of the Companys production revenue from the drilling of future wells in California and Michigan. The production payment interest was granted for a deemed consideration amount of the balance of the Notes and made pursuant to a Production Payment Interest Purchase Agreement dated as of August 22, 2019. The grant was made on the same terms as the Company has sold production payment interests to other third parties in the 2018-2019 fiscal year pursuant to its previously disclosed program. For further information on the production revenue program refer to the Production Revenue Payable section below.
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Convertible Promissory Note
During the twelve months ended February 29, 2020, the Companys Chairman, President and Chief Executive Officer loaned the Company $27,835 for general operating expenses under a Convertible Note Purchase Agreement. The Note has a maturity date of 180 days, or July 12, 2020 and carries no interest, fees or penalties. The Company may prepay the Note at any time. If the Note is not repaid in full on or before the Maturity Date then, on the day following the Maturity Date, the Note will automatically convert into that number of Conversion Shares equal to the quotient obtained by dividing (x) the outstanding principal balance of the Note on the date of such conversion by (y) a Conversion Price of $0.004.
12% Subordinated Notes
The Companys 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 was extended for an additional two years to January 29, 2019. The 980,000 warrants held by ten noteholders expired on January 29, 2019.
The Company has informed the Note holders that the payment of principal and final interest will be late and is subject to future financing being completed. The Notes principal of $565,000 was payable in full at the amended maturity date of the Notes, and has not been paid. Interest continues to accrue on the unpaid $565,000 principal balance. The terms of the Notes, state that should the Board of Directors, on any future 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 Companys common stock at a conversion rate equal to 75% of the average closing price of the Companys common stock over the 20 consecutive trading days preceding December 31, 2018. The accrued interest on the 12% Notes at February 29, 2020 and February 28, 2019 was $272,428 and $204,361, respectively. Amortization expense was $-0- and $13,326 at February 29, 2020 and February 28, 2019, respectively. There was no unamortized debt discount remaining at February 29, 2020 and February 28, 2019.
12% Note balances at February 29, 2020 and February 28, 2019 are set forth in the table below:
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|
|
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| |
|
February 29, 2020
|
|
February 28, 2019
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12% Subordinated Notes
|
$
|
315,000
|
|
$
|
315,000
|
Debt discount
|
|
-
|
|
|
-
|
Net 12% Subordinated Note balance
|
$
|
315,000
|
|
$
|
315,000
|
12% Note balances related parties at February 29, 2020 and February 28, 2019 are set forth in the table below:
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|
|
|
| |
|
February 29, 2020
|
|
February 28, 2019
|
12% Subordinated Notes related party
|
$
|
250,000
|
|
$
|
250,000
|
Debt discount
|
|
-
|
|
|
-
|
Net 12% Subordinated Note related party balance
|
$
|
250,000
|
|
$
|
250,000
|
The accrued interest owed on the 12% Subordinated Note to the related party is presented on the Companys Balance Sheets under the caption Accounts payable related party rather than under the caption Accrued interest.
Maximilian Credit Facility and Loan Agreement
In December 2018, Daybreak reached an agreement with the Receiver for Maximilian Resources LLC, a Delaware limited liability company and successor by assignment to Maximilian Investors LLC (Maximilian) that had been appointed by the United States District Court for the Eastern District of New York, Southern Division to settle all of the Companys debt obligations with Maximilian in regards to the existing credit facility, loan agreements Michigan promissory notes plus accrued interest. The amount of this settlement was $700,000, which resulted in a gain on debt settlement of approximately $11.9 million. This gain on debt settlement, along with the accounts payable settlement gain is reflected in the Statements of Operations under the category Other Income (Expense) for the twelve months ended February 28, 2019. The Company also acquired an additional 40% working interest in its Michigan project as a result of this settlement agreement. Effective with the acquisition of this additional interest, the Company recorded an increase of $24,581 in unproved properties Michigan.
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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 our President and Chief Executive Officer. On July 10, 2017, a $700,000 portion of the outstanding credit line balance was converted to a 24-month fixed term annual interest rate of 3.244% with interest payable monthly. On July 10, 2019, the 24-month fixed term loan amount of $700,000 was renewed at the same annual percentage interest rate of 3.244% for an additional 24 months. The remaining balance of the credit line has a stated reference rate of 0.249% + 337.5 basis points with interest payable monthly. The reference rate is based on the 30-day LIBOR (London Interbank Offered Rate) and is subject to change from UBS.
During the twelve months ended February 29, 2020 and February 28, 2019, we received advances on the line of credit of $74,000 and $33,300, respectively. During the twelve months ended February 29, 2020 and February 28, 2019, the Company made payments to the line of credit of $60,000 and $110,000, respectively. Interest converted to principal for the twelve months ended February 29, 2020 and February 28, 2019 was $31,548 and $30,203, respectively. At February 29, 2020 and February 28, 2019, the line of credit had an outstanding balance of $872,401 and $826,853, respectively.
Note Payable
In December 2018, the Company was able to settle an outstanding balance owed to one of its third-party vendors. This settlement resulted in a $120,000 note payable being issued to the vendor. Additionally, the Company agreed to issue 2,000,000 shares of the Companys common stock as a part of the settlement agreement. Based on the closing price of the Companys common stock on the date of the settlement agreement, the value of the common stock transaction was determined to be $6,000. The common stock shares were issued during the twelve months ended February 29, 2020. The settlement resulted in the Company recognizing a gain on debt settlement of approximately $411,000 for the twelve months ended February 28, 2019. This gain on debt settlement is reflected in the Statements of Operations under the category Other Income (Expense). The note has a maturity date of January 1, 2022 and bears an interest rate of 10% rate per annum. Monthly interest is accrued and payable on January 1st of each anniversary date until maturity of the note. At February 29, 2020, the accrued interest had not been paid and was outstanding. The accrued interest on the Note was $14,000 and $2,000 at February 29, 2020 and February 28, 2019, respectively.
Production Revenue Payable
Since December 2018, the Company has been conducting a fundraising program to fund the drilling of future wells in California and Michigan and to settle some of its existing historical debt. The purchasers of production payment interests receive a production revenue payment on future wells to be drilled in California and Michigan in exchange for their purchase. On August 22, 2019, the Company entered into a Note Payoff Agreement with the Companys Chairman, President and Chief Executive Officer as payment in full of the $250,100 in Notes referenced above, a production payment interest in certain of the Companys production revenue from the drilling of future wells in California and Michigan. The production payment interest was granted for a deemed consideration amount of the balance of the Notes. The grant was made on the same terms as the Company has sold production payment interests to other third parties in the 2018-2019 fiscal year pursuant to its previously disclosed program. As of February 29, 2020 and February 28, 2019, the production revenue payment program balance was $950,100 and $700,000, respectively of which $550,100 and $300,000, respectively was owed to a related party - the Companys 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 Companys 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.
67
The Company accounted for the amounts received from these sales in accordance with ASC 470-10-25 and 470-10-35 which require amounts recorded as debt to be amortized under the interest method as described in ASC 835-30, Interest Method. Consequently, the program balance of $950,100 has been recognized as a production revenue payable. The Company determined an effective interest rate based on future expected cash flows to be paid to the holders of the production payment interests. This rate represents the discount rate that equates estimated cash flows with the initial proceeds received from the sales and is used to compute the amount of interest to be recognized each period. Estimating the future cash outflows under this agreement requires the Company to make certain estimates and assumptions about future revenues and payments and such estimates are subject to significant variability. Therefore, the estimates are likely to change which may result in future adjustments to the accretion of the interest expense and the amortized cost based carrying value of the related payables.
Accordingly, the Company has estimated the cash flows associated with the production revenue payments and determined a discount of $1,104,666 as of February 29, 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 twelve months ended February 29, 2020 and February 28, 2019, amortization of the debt discount on these payables amounted to $361,583 and $76,588, respectively, which has been included in interest expense in the statements of operations.
Production revenue payable balances at February 28, 2019 and 2018 are set forth in the table below:
|
|
|
|
| |
|
February 29, 2020
|
|
February 28, 2019
|
Estimated payments of production revenue payable
|
$
|
2,054,766
|
|
$
|
2,020,353
|
Less: unamortized discount
|
|
(666,495)
|
|
|
(1,243,765)
|
|
|
1,388,271
|
|
|
776,588
|
Less: current portion
|
|
(43,069)
|
|
|
(247,868)
|
Net production revenue payable long term
|
$
|
1,345,202
|
|
$
|
528,720
|
Encumbrances
On October 17, 2018, a working interest partner in California filed a UCC financing statement in regards to payable amounts owed to the partner by the Company. As of February 29, 2020, we had no encumbrances on our crude oil project in Michigan.
NOTE 10 LEASES:
The Company leases approximately 988 rentable square feet of office space from an unaffiliated third party for our corporate office located in Spokane Valley, Washington. Additionally, we lease approximately 416 and 695 rentable square feet from unaffiliated third parties for our regional operations office in Friendswood, Texas and storage and auxiliary office space in Wallace, Idaho, respectively. The lease in Friendswood is a 24-month lease that expires in October 2020. The Companys lease for Friendswood does not include an option to renew. The Spokane Valley and Wallace leases are currently on a month-to-month basis. The Companys 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 Company determines if an arrangement is a lease at inception. Operating leases are recorded in operating lease right of use assets, net, operating lease liability current, and operating lease liability long-term on its balance sheet.
Operating lease assets represent the Companys right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As the Companys leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate used at adoption was 5.85%. Significant judgement is required when determining the Companys incremental borrowing rate. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
68
The Balance Sheet classification of lease assets and liabilities was as follows:
|
| |
|
February 29, 2020
|
Assets
|
|
|
Operating lease right-of-use assets, beginning balance
|
$
|
13,787
|
Current period amortization
|
|
(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
|
Future minimum lease payments as of February 29, 2020 under non-cancellable operating leases are as follows:
|
|
| |
Fiscal Year Ended
|
|
Annual Office
Lease Obligation
|
February 28, 2021
|
|
$
|
6,200
|
Total lease payments
|
|
|
6,200
|
Less: imputed interest
|
|
|
(343)
|
Operating lease liability
|
|
|
5,857
|
Less: operating lease liability current
|
|
|
5,857
|
Operating lease liability, long-term
|
|
$
|
-
|
Rent expense for the twelve months ended February 29, 2020 and February 28, 2019 was $23,489 and $23,489, respectively.
NOTE 11 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 Companys 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. In July 2006, we completed a private placement of the Series A Preferred that resulted in the issuance of 1,399,765 shares to 100 accredited investors.
The following is a summary of the rights and preferences of the Series A Preferred.
Voluntary Conversion:
The Series A Preferred that is currently issued and outstanding is eligible to be converted by the shareholder at any time into three shares of the Companys common stock. For the twelve months ended February 29, 2020 and February 28, 2019, there were no conversions of Series A Preferred that occurred.
At February 29, 2020 there were 709,568 shares issued and outstanding that had not been converted into our common stock. As of February 29, 2020, 44 accredited investors 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 is set forth in the table below.
69
|
|
|
|
|
| |
Fiscal Period
|
|
Shares of Series A
Preferred Converted
to Common Stock
|
|
Shares of
Common Stock
Issued from
Conversion
|
|
Number of
Accredited
Investors
|
Year Ended February 29, 2008
|
|
102,300
|
|
306,900
|
|
10
|
Year Ended February 28, 2009
|
|
237,000
|
|
711,000
|
|
12
|
Year Ended February 28, 2010
|
|
51,900
|
|
155,700
|
|
4
|
Year Ended February 28, 2011
|
|
102,000
|
|
306,000
|
|
4
|
Year Ended February 29, 2012
|
|
-
|
|
-
|
|
-
|
Year Ended February 28, 2013
|
|
18,000
|
|
54,000
|
|
2
|
Year Ended February 28, 2014
|
|
151,000
|
|
453,000
|
|
9
|
Year Ended February 28, 2015
|
|
3,000
|
|
9,000
|
|
1
|
Year Ended February 29, 2016
|
|
10,000
|
|
30,000
|
|
1
|
Year Ended February 28, 2017
|
|
-
|
|
-
|
|
-
|
Year Ended February 28, 2018
|
|
14,997
|
|
44,991
|
|
1
|
Year Ended February 28, 2019
|
|
-
|
|
-
|
|
-
|
Year Ended February 29, 2020
|
|
-
|
|
-
|
|
-
|
Totals
|
|
690,197
|
|
2,070,591
|
|
44
|
Automatic Conversion:
The Series A Preferred shall be automatically converted into the Companys common stock if the common stock into which the Series A Preferred are convertible the Companys common stock closes at or above $3.00 per share for 20 out of 30 trading days.
Dividend:
Holders of Series A Preferred shall be paid 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 from the date of the final closing of the private placement, whether or not in any dividend period or periods we have assets legally available for the payment of such dividends. Accumulations of dividends on shares of Series A Preferred do not bear interest. Dividends are payable upon declaration by the Board of Directors. There have been no cash or common stock dividends declared by the Board of Directors to date.
Cumulative dividends earned for each twelve month period since issuance are set forth in the table below:
|
|
|
|
| |
Fiscal Year 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
|
February 28, 2019
|
|
56
|
|
|
127,714
|
February 29, 2020
|
|
56
|
|
|
128,063
|
|
|
|
|
$
|
2,225,925
|
Liquidation Preference:
In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holders of the Series A Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of common stock by reason of their ownership thereof, and subject to the rights of any series of preferred stock that may rank on liquidation prior to the Series A Preferred, an amount equal to all accrued or declared but unpaid dividends on such shares, for each share of Series A Preferred then held by them. The remaining assets shall be distributed ratably to the holders of common stock and Series A Preferred on a common equivalent basis. Certain other events, as described in our Amended and Restated Articles of Incorporation, including a
70
consolidation or merger of the Company or the disposition of the Companys assets, may trigger the payment of the liquidation preference to the holders of Series A Preferred.
Voting Rights:
The holders of the Series A Preferred will vote together with the common stock and not as a separate class except as specifically provided or as otherwise required by law. Each share of the Series A Preferred shall have a number of votes equal to the number of shares of common stock then issuable upon conversion of such shares of Series A Preferred.
Common Stock
The Company is authorized to issue up to 200,000,000 shares of $0.001 par value Common Stock of which 53,532,364 and 51,532,364 shares were issued and outstanding as of February 29, 2020 and February 28, 2019, respectively.
|
|
|
| |
|
Common Stock
Balance
|
|
Par Value
|
Common stock, Issued and Outstanding, February 28, 2018
|
51,532,364
|
|
|
|
Share issuances during the twelve months ended February 28, 2019
|
-
|
|
$
|
-
|
Common stock, Issued and Outstanding, February 28, 2019
|
51,532,364
|
|
|
|
Share issuances during the twelve months ended February 29, 2020
|
2,000,000
|
|
$
|
2,000
|
Common stock, Issued and Outstanding, February 29, 2020
|
53,532,364
|
|
|
|
During the twelve months ended February 29, 2020, the Company issued 2,000,000 shares of its common stock. These shares were issued as part of an accounts payable settlement with a third-party vendor. Based on the closing price of the Companys common stock on the settlement agreement date, the value of the common stock transaction was determined to be $6,000. For the twelve months ended February 28, 2019, there were no issuances of the Companys common stock.
All shares of common stock are equal to each other with respect to voting, liquidation, dividend and other rights. Owners of shares of common stock are entitled to one vote for each share of common stock owned at any shareholders meeting. Holders of shares of common stock are entitled to receive such dividends as may be declared by the Board of Directors out of funds legally available therefore; and upon liquidation, are entitled to participate pro rata in a distribution of assets available for such a distribution to shareholders.
There are no conversion, preemptive, or other subscription rights or privileges with respect to any shares of our common stock. Our stock does not have cumulative voting rights, which means that the holders of more than 50% of the shares voting in an election of directors may elect all of the directors if they choose to do so. In such event, the holders of the remaining shares aggregating less than 50% would not be able to elect any directors.
NOTE 12 WARRANTS:
During the twelve months ended February 29, 2020 there were 2.1 million warrants issued to a third party for investor relations services. The fair value of the warrants was determined by the Black-Scholes pricing model, was $17,689, and is being amortized over the three year vesting period of the warrants. The Black-Scholes valuation encompassed the following assumptions: a risk free interest rate of 1.68%; volatility rate of 260.23%; and a dividend yield of 0.0%. The warrant contains a vesting blocking provision that prevents the vesting of any warrants that such vesting would cause the warrant holders beneficial ownership (as such term is defined in Section 13d-3 of the Securities Exchange Act of 1934, as amended) to exceed more than four and ninety-nine one-hundredths percent (4.99%) of the Companys outstanding Common Stock. The foregoing restriction may not be waived by either party. The warrants vest in equal parts over a three year period beginning on January 2, 2020 and all warrants expire on January 2, 2024. At February 28, 2019, there were no outstanding or exercisable warrants. As of February 29, 2020, both the outstanding warrants and the exercisable have a weighted average exercise price of $0.01, a weighted average remaining life of 3.83 years, and an intrinsic value of -$0-. For the twelve months ended February 29, 2020, the recorded amount of warrant expense was $6,879.
71
Warrant activity for the twelve months ended February 29, 2020 and February 28, 2019 is set forth in the table below:
|
|
|
|
| |
|
|
Warrants
|
|
Weighted Average
Exercise Price
|
Warrants outstanding, February 28, 2018
|
|
7,839,784
|
|
$
|
0.05
|
|
|
|
|
|
|
Changes during the twelve months ended February 28, 2019:
|
|
|
|
|
|
Expired / Cancelled / Forfeited
|
|
(7,839,784)
|
|
|
|
Warrants outstanding, February 28, 2019
|
|
-
|
|
$
|
-
|
|
|
|
|
|
|
Changes during the twelve months ended February 29, 2020:
|
|
|
|
|
|
Issued
|
|
2,100,000
|
|
$
|
0.01
|
Warrants outstanding, February 29, 2020
|
|
2,100,000
|
|
$
|
0.01
|
Warrants exercisable, February 29, 2020
|
|
190,000
|
|
$
|
0.01
|
The detail of the expired warrants during the twelve months ended February 28, 2019 is set forth in the table below:
|
|
|
|
|
| |
|
|
Warrants
|
|
Exercise
Price
|
|
Exercisable Warrants
Remaining
|
12% Subordinated Notes
|
|
980,000
|
|
$0.07
|
|
-0-
|
Warrants issued for Kentucky crude oil project
|
|
3,498,601
|
|
$0.04
|
|
-0-
|
Warrants issued for Kentucky debt financing
|
|
2,623,951
|
|
$0.04
|
|
-0-
|
Warrants issued for Kentucky debt financing
|
|
309,503
|
|
$0.214
|
|
-0-
|
Warrants issued in share-for-warrant exchange
|
|
427,729
|
|
$0.04
|
|
-0-
|
|
|
7,839,784
|
|
|
|
-0-
|
NOTE 13 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 rate to income from continuing operations before income taxes is as follows:
|
|
|
|
| |
|
February 29, 2020
|
|
February 28, 2019
|
Computed at U.S. and state statutory rates (29.84%)
|
$
|
(225,186)
|
|
$
|
3,035,442
|
Permanent differences
|
|
111,854
|
|
|
25,116
|
Changes in valuation allowance
|
|
113,332
|
|
|
(3,060,558)
|
Total
|
$
|
-
|
|
$
|
-
|
Tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred liabilities are presented below:
|
|
|
|
| |
|
February 29, 2020
|
|
February 28, 2019
|
Deferred tax assets:
|
|
|
|
|
|
Net operating loss carryforwards
|
$
|
5,463,014
|
|
$
|
5,361,767
|
Oil and gas properties
|
|
50,322
|
|
|
38,237
|
Stock based compensation
|
|
66,187
|
|
|
66,187
|
Other
|
|
27,838
|
|
|
27,838
|
Less valuation allowance
|
|
(5,607,361)
|
|
|
(5,494,029)
|
Total
|
$
|
-
|
|
$
|
-
|
72
At February 29, 2020, the Company had a net operating loss (NOL) carryforwards for federal and state income tax purposes of approximately $18,307,668, 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 year ended February 28, 2018 of $340,749 and the loss incurred for the year ended February 29, 2020 in the amount of $339,299 will not expire and will carry over indefinitely. The valuation allowance increased approximately $113,332 for the year ended February 29, 2020 and decreased approximately $3,060,558 for the year ended February 28, 2019. Section 382 Rule of the Internal Revenue Code will place annual limitations on the Companys NOL carryforward.
The above estimates are based upon managements decisions concerning certain elections that could change the relationship between net income and taxable income. Management decisions are made annually and could cause the estimates to vary significantly. The Companys 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 Companys tax returns for the fiscal years after 2015 currently remain subject to examinations by appropriate tax authorities. None of our tax returns are under examination at this time.
NOTE 14 COMMITMENTS AND CONTINGENCIES:
Various lawsuits, claims and other contingencies arise in the ordinary course of the Companys business activities. While the ultimate outcome of the aforementioned contingencies are 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 oil and 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 an oil and gas lease for the cost of pollution cleanup 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 February 29, 2020. There can be no assurance, however, that current regulatory requirements will not change, or past non-compliance with environmental issues will not be discovered on the Companys oil and gas properties.
NOTE 15 SUBSEQUENT EVENTS:
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act commonly referred to as the CARES Act. One component of the CARES Act was the paycheck protection program (PPP) which provides small business with the resources needed to maintain their payroll and cover applicable overhead. The PPP is implemented by the Small Business Administration (SBA) with support from the Department of the Treasury. The PPP provides funds to pay up to eight weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities. The Company applied for, and was accepted to participate in this program. On May 11, 2020, the Company received funding for approximately $74,365. The receipt of these funds will be reflected in the Companys first quarter financial statements covering the three month period ended May 31, 2020.
The loan is a two-year loan with a maturity date of May 5, 2022. The loan bears an annual interest rate of 1%. The loan shall be payable monthly with the first six monthly payments deferred. It is the Companys 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 the following 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:
(i)
Payroll expenses
(ii)
Rent; and
(iii)
Utility payments
73
On May 28, 2020, the Company filed an 8-K Report with the Securities and Exchange Commission (SEC), to rely on the SECs Order under Section 36 of the Securities Exchange Act of 1934, Granting Exemptions From Specified Provisions of the Exchange Act and Certain Rules Thereunder, issued March 4, 2020 (Release No. 34-88318). The purpose of the 8-K filing is for the Company to notify the SEC that due to circumstances related to COVID-19, the Company will be filing its Annual Report on Form 10-K after the normal filing deadline of May 29, 2020, but at a date before July 13, 2020 (the end of the 45 day extension period).
NOTE 16 SUPPLEMENTARY INFORMATION FOR CRUDE OIL PRODUCING ACTIVITIES (UNAUDITED)
Capitalized Costs Relating to Crude Oil and Natural Gas Producing Activities
|
|
|
|
| |
|
As of
February 29, 2020
|
|
As of
February 28, 2019
|
Proved leasehold costs
|
|
|
|
|
|
Mineral Interests
|
$
|
115,119
|
|
$
|
115,119
|
Wells, equipment and facilities
|
|
3,619,684
|
|
|
3,626,548
|
Total Proved Properties
|
|
3,734,803
|
|
|
3,741,667
|
|
|
|
|
|
|
Unproved properties
|
|
|
|
|
|
Mineral Interests
|
|
55,978
|
|
|
55,768
|
Uncompleted wells, equipment and facilities
|
|
-
|
|
|
-
|
Total unproved properties
|
|
55,978
|
|
|
55,768
|
|
|
|
|
|
|
Less accumulated depreciation, depletion amortization and impairment
|
|
(3,136,068)
|
|
|
(3,085,043)
|
Net capitalized costs
|
$
|
654,713
|
|
$
|
712,392
|
Costs Incurred in Oil and Gas Producing Activities
|
|
|
|
| |
|
12 Months Ended
|
|
12 Months Ended
|
|
February 29, 2020
|
|
February 28, 2019
|
Acquisition of proved properties
|
$
|
-
|
|
$
|
-
|
Acquisition of unproved properties
|
|
210
|
|
|
55,768
|
Development costs
|
|
-
|
|
|
-
|
Exploration costs
|
|
-
|
|
|
-
|
Total costs incurred
|
$
|
210
|
|
$
|
55,768
|
Results of Operations from Oil and Gas Producing Activities
|
|
|
|
| |
|
12 Months Ended
|
|
12 Months Ended
|
|
February 29, 2020
|
|
February 28, 2019
|
Oil and gas revenues
|
$
|
663,512
|
|
$
|
742,857
|
Production costs
|
|
(180,982)
|
|
|
(148,944)
|
Exploration expenses
|
|
(123)
|
|
|
(8,412)
|
Depletion, depreciation and amortization
|
|
(55,443)
|
|
|
(62,634)
|
Impairment of oil properties
|
|
-
|
|
|
-
|
Result of oil and gas producing operations before income taxes
|
|
426,964
|
|
|
522,867
|
Provision for income taxes
|
|
-
|
|
|
-
|
Results of oil and gas producing activities
|
$
|
426,964
|
|
$
|
522,867
|
Proved Reserves
The Companys proved oil and natural gas reserves have been estimated by the certified independent engineering firm, PGH Petroleum and Environmental Engineers, LLC. Proved reserves are the estimated quantities that geologic and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are the quantities expected to be recovered through existing wells with existing equipment and operating methods when the estimates were made. Due to the inherent uncertainties and the limited nature of reservoir data, such estimates are subject to change as additional information becomes available. The reserves actually recovered and the timing of production of these reserves may be substantially different from the original estimate. Revisions result primarily from new information obtained from development drilling and production history; acquisitions of oil and natural gas properties; and changes in economic factors.
74
As of February 29, 2020, our total reserves were comprised of our working interest in East Slopes Project located in Kern County, California.
Our proved reserves are summarized in the table below:
|
|
|
|
|
| |
|
|
Oil (Barrels)
|
|
Natural Gas (Mcf)
|
|
BOE (Barrels)
|
Proved reserves:
|
|
|
|
|
|
|
February 28, 2018
|
|
428,067
|
|
-
|
|
428,067
|
Revisions(1)
|
|
20,501
|
|
-
|
|
20,501
|
Discoveries and extensions
|
|
17,185
|
|
-
|
|
17,185
|
Production
|
|
(11,492)
|
|
-
|
|
(11,492)
|
February 28, 2019
|
|
454,261
|
|
-
|
|
454,261
|
Revisions(2)
|
|
40,003
|
|
-
|
|
40,003
|
Discoveries and extensions
|
|
12,726
|
|
-
|
|
12,726
|
Production
|
|
(11,013)
|
|
-
|
|
(11,013)
|
February 29, 2020
|
|
495,977
|
|
-
|
|
495,977
|
(1)
The revisions of previous estimates resulted from an increase in the estimated economic life of the reservoirs due to higher realized crude oil prices in the energy markets.
(2)
The revisions of previous estimates resulted from an improvement of reservoir performance offset by lower realized crude oil prices in the energy markets.
The Companys proved reserves are set forth in the table below.
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Developed
|
|
Undeveloped
|
|
Total Reserves
|
|
|
Oil (Bbls)
|
|
BOE (Bbls)
|
|
Oil (Bbls)
|
|
BOE (Bbls)
|
|
Oil (Bbls)
|
|
BOE (Bbls)
|
February 29, 2020
|
|
113,779
|
|
113,779
|
|
382,198
|
|
382,198
|
|
495,977
|
|
495,977
|
February 28, 2019
|
|
118,114
|
|
118,114
|
|
336,147
|
|
336,147
|
|
454,261
|
|
454,261
|
February 28, 2018
|
|
109,475
|
|
109,475
|
|
318,592
|
|
318,592
|
|
428,067
|
|
428,067
|
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves
The following information is based on the Companys best estimate of the required data for the Standardized Measure of Discounted Future Net Cash Flows as of February 29, 2020 and February 28, 2019 in accordance with ASC 932, Extractive Activities Oil and Gas which requires the use of a 10% discount rate. This information is not the fair market value, nor does it represent the expected present value of future cash flows of the Companys proved oil and gas reserves.
Future cash inflows for the years ended February 29, 2020 and February 28, 2019 were estimated as specified by the SEC through calculation of an average price based on the 12-month unweighted arithmetic average of the first-day-of-the-month price for the period from March through February during each respective fiscal year. The resulting net cash flow are reduced to present value by applying a 10% discount factor.
|
|
|
|
| |
|
12 Months Ended
|
|
February 29, 2020
|
|
February 28, 2019
|
Future cash inflows
|
$
|
29,585,007
|
|
$
|
29,454,301
|
Future production costs(1)
|
|
(13,481,167)
|
|
|
(14,871,201)
|
Future development costs
|
|
(3,063,750)
|
|
|
(2,923,125)
|
Future income tax expenses(2)
|
|
-
|
|
|
-
|
Future net cash flows
|
|
13,040,090
|
|
|
11,659,975
|
10% annual discount for estimated timing of cash flows
|
|
(8,387,948)
|
|
|
(6,743,304)
|
Standardized measure of discounted future net cash flows at the end of the fiscal year
|
$
|
4,652,142
|
|
$
|
4,916,671
|
(1)
Production costs include crude oil and natural gas operations expense, production ad valorem taxes, transportation costs and G&A expense supporting the Companys crude oil and natural gas operations.
(2)
The Company has sufficient tax deductions and allowances related to proved crude oil and natural gas reserves to offset future net revenues.
75
Average hydrocarbon prices are set forth in the table below.
|
|
|
|
| |
|
Average Price
|
|
Natural
|
|
Crude Oil (Bbl)
|
|
Gas (Mcf)
|
Year ended February 29, 2020(1)
|
$
|
60.25
|
|
$
|
-
|
Year ended February 28, 2019(1)
|
$
|
63.58
|
|
$
|
-
|
Year ended February 28, 2018(1)
|
$
|
52.89
|
|
$
|
-
|
(1)
Average prices were based on 12-month unweighted arithmetic average of the first-day-of-the-month prices for the period from March through February during each respective fiscal year.
Future production and development costs, which include dismantlement and restoration expense, are computed by estimating the expenditures to be incurred in developing and producing the Companys proved crude oil and natural gas reserves at the end of the year, based on year-end costs, and assuming continuation of existing economic conditions.
Sources of Changes in Discounted Future Net Cash Flows
Principal changes in the aggregate standardized measure of discounted future net cash flows attributable to the Companys proved crude oil and natural gas reserves, as required by ASC 932, at fiscal year-end are set forth in the table below.
|
|
|
|
| |
|
12 Months Ended
|
|
February 29, 2020
|
|
February 28, 2019
|
Standardized measure of discounted future net cash flows at the beginning of the year
|
$
|
4,916,671
|
|
$
|
3,248,153
|
Extensions, discoveries and improved recovery, less related costs
|
|
48,310
|
|
|
211,980
|
Revisions of previous quantity estimates
|
|
463,375
|
|
|
277,525
|
Net changes in prices and production costs
|
|
57,891
|
|
|
1,062,126
|
Accretion of discount
|
|
491,667
|
|
|
324,815
|
Sales of oil produced, net of production costs
|
|
(482,530)
|
|
|
(593,913)
|
Development costs incurred during the period
|
|
-
|
|
|
12,227
|
Changes in future development costs
|
|
(9,152)
|
|
|
(39,109)
|
Changes in timing of future production
|
|
(834,090)
|
|
|
412,867
|
Net changes in income taxes
|
|
-
|
|
|
-
|
Standardized measure of discounted future net cash flows at the end of the year
|
$
|
4,652,142
|
|
$
|
4,916,671
|
76