UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB/A
AMENDMENT
NO. 2
(Mark
One)
[ X
]
|
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
fiscal year ended February 29, 2008
[
]
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period ______ to _______
Commission
file number 000-50107
DAYBREAK
OIL AND GAS, INC.
(Name of
small business issuer in its charter)
Washington
|
|
91-0626366
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification
No.)
|
601
W. Main Ave., Suite 1012, Spokane, WA
|
99201
|
(Address
of principal executive offices)
|
(Zip
code)
|
Issuer’s
telephone number, including area code: (509) 232-7674
Securities
registered under Section 12(b) of the Exchange Act: None
Securities
registered under Section 12(g) of the Exchange Act: Common Stock, par
value $0.001 per share
Check
whether issuer is not required to file reports pursuant to Section 13 or 15(d)
of the Exchange Act.
¨
Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes
þ
No
¨
Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form and no disclosure will be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
¨
No
þ
The
registrant’s revenues for its most recent fiscal year were
$1,017,604.
The
aggregate market value of the voting and non-voting stock held by non-affiliates
of the registrant, based on the closing price of $0.45 on May 20, 2008, as
reported by the Over the Counter Bulletin Board was $20,054,834.
At May
20, 2008, the registrant had 44,566,299 outstanding shares of $0.001 par value
common stock.
Documents
Incorporated by Reference:
Part III
of the Form 10-KSB incorporates by reference certain portions of the
registrant’s proxy statement for its 2008 annual meeting of shareholders to be
filed with the Commission not later than 120 days after the end of the fiscal
year covered by this report.
Transitional
Small Business Disclosure Format (Check one): Yes
¨
No
þ
EXPLANATORY
NOTE
Daybreak
Oil and Gas, Inc. (the “Company” or “Daybreak”) is filing this Amendment No. 2
on Form 10-KSB/A (“Amendment No.2”) to amend our Annual Report on Form 10-KSB
for the year ended February 29, 2008 which was originally filed with the
Securities and Exchange Commission (the “SEC”) on May 27, 2008 as amended by
Amendment No. 1 on Form 10-KSB/A (“Amendment No. 1”) filed with the SEC on July
14, 2008 (together, the “Original Filing”).
The
purpose of this
A
mendment No. 2 is to respond
to comments received from the SEC’s Division of Corporation Finance by
clarifying certain items in the Original Filing, and restating the Company’s
financial statements, and to make certain other corrections to our prior
disclosure, as detailed below. In response to comments and a review
by the SEC, the Company determined that it should follow the guidance of
Statement of Financial Accounting Standards No. 123R (“FAS 123R”) Share-Based
Payment and FSP EITF 00-19-2 Accounting for Registration Payment Arrangements in
its accounting treatment of warrants offered by the Company in February 2008 to
participants of the two private placement offerings that occurred in 2006 (the
“Warrants”). The financial statements are being restated to recognize a non-cash
expense for the recordable valuation of the Warrants in accordance with FAS
123R.
This
Amendment No. 2 amends the following: (i) Part I Item 1, Description
of Business, Risk Factors; (ii) Part I, Item 2, Description of
Properties; (iii) Part II, Item 5, Market for Common Equity, Related Stockholder
Matters and Small Business Issuer Purchase of Equity Securities, to revise
discussion of goodwill warrants issued to private placement participants; (iv)
Part II, Item 6, Management’s Discussion and Analysis or Plan of Operation, to
revise discussion of financial results based on the restated financial
statements; (v) Part II, Item 7, Financial Information, all Financial
Statements; to (a) restate the financial statements as discussed above, and
correct the Net Loss Per Common Share from continuing operations on the
Statement of Operations for the comparative fiscal year which was reported as a
greater loss per share than actually occurred, (b) amend Note 2, Summary of
Significant Accounting Policies – Concentration of Credit Risk, (c) Note 11,
Warrants, to correct reporting errors in the warrant table, which resulted in
the inadvertent reporting of incorrect data regarding the number of exercisable
warrants remaining but had no effect on any financial data reported in the
Original Filing; (d) Note 12, Income Taxes, to report revised calculations
based on the restated financial statements; (e) add a new Note 14,
Restatement, (f) amend the Supplementary Information for Oil and Gas Producing
Activities; (vi) Item 8A, Controls and Procedures, (vii) Item 13, Exhibits, to
include (a) a copy of the Consent of the Company’s independent engineering firm,
included as Exhibit 23.2; and (b) new certifications by our principal executive
and principal financial officer, included as Exhibits 31.1 and
32.1.
Pursuant
to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, this
Amendment No. 2 amends these Items 2, 7, 8A and 13 in their
entirety.
This
Amendment No. 2 continues to reflect the financial position of the Company as of
the date of the original filing and, except as disclosed in this Explanatory
Note, we have not updated the disclosure contained herein to reflect events that
have occurred since the date of the Original Filing.
Pursuant
to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, this
Amendment No. 2 contains new certifications of our Chief Executive Officer and
Chief Financial Officer. All other exhibits as filed in our Form
10-KSB filed on May 27, 2008 are hereby incorporated by
reference. This amendment does not reflect events occurring after the
filing of the Original Form 10-KSB, and does not modify or update the
disclosures therein in any way other than as required to reflect the matters
described above. Accordingly, this Amendment No. 2 should be read in
conjunction with our other filings made with the Securities and Exchange
Commission.
TABLE
OF CONTENTS
CAUTIONARY
STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
We
believe that some statements contained in this 10-KSB annual report relate to
results or developments that we anticipate will or may occur in the future and
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 statements
about the following:
-
Our
future operating results,
-
Our
future capital expenditures,
-
Our
expansion and growth of operations, and
-
Our
future investments in and acquisitions of oil and natural gas
properties.
We have
based these forward-looking statements on assumptions and analyses made in light
of our experience and our perception of historical trends, current conditions,
and expected future developments. However, you should be aware that
these forward-looking statements are only our predictions and we cannot
guarantee any such outcomes. Future events and actual results may
differ materially from the results set forth in or implied in the
forward-looking statements. Factors that might cause such a
difference include:
-
General
economic and business conditions,
-
Exposure
to market risks in our financial instruments,
-
Fluctuations
in worldwide prices and demand for oil and natural gas,
-
Fluctuations
in the levels of our oil and natural gas exploration and development
activities,
-
Risks
associated with oil and natural gas exploration and development
activities,
-
Competition
for raw materials and customers in the oil and natural gas
industry,
-
Technological
changes and developments in the oil and natural gas industry,
-
Regulatory
uncertainties and potential environmental liabilities,
-
Additional
matters discussed under “Risk Factors.”
PART
I
ITEM 1.
|
DESCRIPTION
OF BUSINESS
|
Background
Daybreak
Oil and Gas, Inc. (referred to herein as “we,” “our,” “Daybreak” or the
“Company”) was originally incorporated in the State of Washington on March 11,
1955 as Daybreak Uranium, Inc. The Company was established for the purpose of
mineral exploration and development on claims or leased lands throughout the
western United States. In August 1955, we acquired the assets of Morning Sun
Uranium, Inc. By the late 1950s, the Company had ceased to be a producing mining
company and thereafter engaged in mineral exploration. In May 1964, to reflect
the diversity of its mineral holdings, the Company changed its name to Daybreak
Mines, Inc. The trading symbol for the Company became DBRM.
Our
subsequent efforts in the acquisition, exploration and development of
potentially viable commercial properties were unsuccessful. By February 1967, we
had ceased active operations. After that time, our activities were confined to
annual assessment and maintenance work on our Idaho mineral properties and other
general and administrative functions. In November 2004, we sold our mineral
rights in approximately 340 acres in Shoshone County, Idaho.
Oil and Gas
Overview
Effective
March 1, 2005, we undertook a new business direction for the Company; that of an
exploration and development company in the oil and gas industry. We
have become an early stage oil and gas exploration and development company with
projects in Alabama, California Louisiana and Texas. In October of
2005, to better reflect this new direction of the Company, our shareholders
approved changing our name to Daybreak Oil and Gas, Inc. Our common
stock is quoted on the OTC Bulletin Board (OTC.BB) market under the symbol
DBRM.OB.
We are
actively pursuing oil and gas opportunities through joint ventures with industry
partners as a means of limiting our drilling risk. Our prospects are
generally brought to us by other oil and gas companies or
individuals. We identify and evaluate prospective oil and gas
properties to determine both the degree of risk and the commercial potential of
the project. We are currently developing projects that offer a mix of
low risk with a potential of steady reliable revenue as well as projects with a
higher risk, but that may also have a larger return. We strive to use modern 3-D
(three dimensional) seismic technology to help us identify potential drilling
targets and to minimize our risk. We seek to maximize the value of
our asset base by exploring and developing properties that have both production
and reserve growth potential.
We seek out
other industry partners to maintain a balanced working interest in all of our
projects. We also seek acquisitions that will complement our
exploration portfolio.
In many
instances, we strive to be operator of our oil and gas properties. As
the operator, we are more directly in control of the costs of drilling,
completion and production operations on our projects. Additionally, operatorship
increases the expertise of Daybreak personnel in significant oil and gas
operations including lease negotiations, governmental reporting, permitting,
drilling, completion, production operations and marketing.
Historical Business
Development
Effective
March 1, 2005, we undertook a new business direction for the Company, that of an
exploration and development company in the oil and gas industry. We
have become an early stage exploration and development company with projects in
Alabama, California, Louisiana and Texas.
Between
March 22, 2005 and August 31, 2005, we borrowed a total of $168,821 from six
officers, directors or shareholders to fund operating capital
needs.
In April
of 2005, we signed two oil and gas exploration and development agreements for
exploration projects located in Texas (Ginny South and Pearl
Projects).
From June
through December 2005, we conducted a private placement of our common stock. The
proceeds were used to pay for lease, exploration and drilling expenses of the
Company as well as working capital. Net proceeds to the Company were
$1,087,500.
In July
2005, we entered into an exploration agreement with an industry partner and
three Geotechnical professionals to jointly develop an AMI (Area of Mutual
Interest) located in the San Joaquin Basin of California (East Slopes
Project).
In
September 2005, we entered into an exploration agreement to jointly develop an
AMI located in northeast Louisiana (Tuscaloosa Project).
In
November 2005, we agreed to participate in a five well re-entry program in the
Saxet Deep Field in Corpus Christi, Texas.
In
December 2005, we borrowed $60,000 to help finance exploration activities as
well as increase operating capital. Additionally, we drilled our
first well (Ginny South) in San Patricio County, Texas. The well was
unsuccessful and consequently plugged and abandoned.
In
January 2006, we drilled our second well, the Tensas Farms et al “F-1” location
on the Tuscaloosa Project in NE Louisiana. The well was completed and placed
into commercial production in June of 2006. The well was shut-in due
to technical issues with water production in November 2006. Additionally on
January 13, 2006, a seventh director was appointed to the Board of Directors.
This individual was Terrence J. Dunne, a shareholder and 10% control person at
the time.
Between
January 25, 2006 and February 8, 2006, we borrowed a total of $806,700 from
seven shareholders to help finance exploration activities as well as increase
operating capital.
Between
February 24, 2006 and March 6, 2006, we borrowed $325,001 from four shareholders
to meet operating capital needs.
On March
8, 2006, we and our working interest partners purchased a 50% interest in the
mineral rights for 28,000 acres that were located within the original AMI of the
Tuscaloosa Project located in NE Louisiana.
From
March through May 2006, we conducted a private placement of our common stock
that raised net proceeds of $5,188,257 for use in acquiring leases, funding our
drilling program and meeting our working capital needs.
On March
30, 2006, we agreed to jointly participate in an exploration project at the
Krotz Springs Field located in St. Landry Parish, Louisiana.
In May
2006, we started the first re-entry of five wells in the Saxet Deep Field near
the Corpus Christi, Texas airport. We also agreed to jointly participate in
exploration projects located in St. Landry Parish, Louisiana (North Shuteston)
and in Alberta, Canada (40 Mile Coulee). In an effort to conserve cash flow, we
financed our 40% ownership in the pipeline that is connected to the “F-1” well
on the Tuscaloosa Project in NE Louisiana.
In July
2006, we conducted a private placement of our preferred stock that raised net
proceeds of $3,626,204 for use in acquiring leases, funding our drilling program
and meeting working capital needs.
In August
2006, we finalized an agreement for the refurbishment of a drilling rig.
Daybreak had the right to exclusive use of the drilling rig for a three-year
period. From August through November 2006, we advanced $800,000 for
the refurbishment of the rig. In May 2007, the drilling rig was sold
and the note receivable plus interest was paid off. Additionally on
August 3rd, Eric L. Moe was appointed as the eighth member of the Board of
Directors and to the position of Chief Executive Officer.
In
December 2006, we agreed to jointly participate in an oilfield re-entry project
in East Gilbertown Field located in Choctaw County, Alabama. Additionally, we
drilled two more exploratory wells as part of the Tuscaloosa Project located in
Tensas and Franklin Parishes, Louisiana. The “F-3” well (Tensas
Parish) was completed and placed into commercial production in February 2007.
From late July through November 2007 the well was shut-in or produced only
sporadically due to downstream gas sales issues. In November 2007, the F-3 was
shut in pending installation of mechanical lifting equipment and is expected to
return to production in the second quarter of 2008. The “B-1” well
(Franklin Parish) was drilled and tested, but was not commercially
productive. Further evaluation of this well is pending.
In
January 2007, we commenced drilling the Haas-Hirsch No. 1 well located in the
East Krotz Springs Field, St. Landry Parish, Louisiana. This well was completed
and was placed into commercial production in May 2007. Additionally
in January, a ninth director was appointed to the Board of
Directors. This individual was Timothy R. Lindsey, who has over
thirty years experience in global oil and gas exploration, production,
technology and business development.
In May
2007, we commenced procedures to attempt to resolve the technical production
problems associated with the Tuscaloosa “F-1” well. Our efforts
resulted in the successful re-establishment of production from this well in
mid-July 2007. However, as a result of downstream gas sales issues
covering both the F-1 and F-3 wells in the Tuscaloosa Project, these two wells
were shut in beginning in late July 2007 through November 2007. The
wells were allowed to sporadically produce throughout this time period, but as a
result of the well production continually being interrupted, the wells now
require the use of mechanical lifting equipment to continue commercial
production. The “F-1” returned to full-time commercial production in January
2008. It is anticipated the F-3 well will return to production in the
second quarter of 2008.
In
September 2007, we commenced drilling operations on the Tensas Farms et al A-1
well in the Tuscaloosa project in Louisiana. The well was
successfully completed and commenced production in December 2007. The well
achieved “payout” status (recovery of all drilling and completion costs) in
March 2008.
From
October 2007 through December 2007, a high resolution 3-D seismic survey program
was conducted on the portion of our California properties that are a part of the
Chevron seismic farm-in area. The seismic will be used to determine
four initial drilling prospects in which Daybreak will have a 50% working
interest and a 25% revenue interest before royalties to
leaseholders.
In
December 2007, we drilled and completed the Tensas Farms et al F-2 well, also in
the Tuscaloosa project. Further evaluation of this well is
pending.
On
December 14, 2007, we underwent a change in the management of
Daybreak. Robert N. Martin, President resigned from that position and
was appointed Senior Vice-President, Exploration; Chief Executive Officer Eric
L. Moe resigned from the Company; Timothy R. Lindsey formerly an outside
director was appointed interim President and Chief Executive Officer; Chief
Financial Officer Terrence J. Dunne resigned from the Company; and Controller
Thomas C. Kilbourne resigned from that position but continued as an employee of
Daybreak. James F. Westmoreland, formerly a finance and accounting
consultant to Daybreak, was appointed interim Chief Financial
Officer.
On
December 18, 2007, the Board of Directors voted to reduce the number of Board
positions to three. Subsequently, the following individuals resigned
their positions and offices with the Board of Directors of Daybreak; Robert N.
Martin, Eric L. Moe, Terrence J. Dunne, Jeffrey R. Dworkin, Thomas C. Kilbourne
and Michael Curtis. Karol L. Adams, formerly a consultant to
Daybreak, was appointed Corporate Secretary.
On
January 18, 2008, we signed a purchase and sale agreement (“PSA”) with an
undisclosed buyer for the sale of our Tuscaloosa project interests for $8
million in cash. The transaction closed in three tranches; the first
closing for $2 million occurred on January 18, 2008; the second closing for
$500,000 occurred on April 30, 2008; and the final closing for $5.5 million
occurred on June 12, 2008 and was subject to customary closing adjustments. The
sale includes Daybreak's interests in the Tensas Farms et al F-1, F-3, B-1, A-1
and F-2 wells; and all of its acreage and infrastructure in the project
area. Under terms of the PSA, the effective date for each closing was
January 1, 2008.
On March
24, 2008 James F. Meara was appointed to our Board of Directors, thereby
expanding the Company's Board to four members.
On April
3, 2008, James F. Westmoreland, formerly interim Chief Financial Officer, was
appointed Executive Vice President and Chief Financial Officer; Karol L. Adams
was appointed Chief Compliance Officer in addition to the Corporate Secretary
duties; Thomas C. Kilbourne was appointed Controller and Assistant Secretary;
and Daybreak adopted a series of corporate responsibility statements and
employee guidelines.
Competition
We
compete with independent oil and gas companies for exploration prospects,
property acquisitions and for the equipment and labor required to operate and
develop these properties. Many of our competitors have substantially
greater financial and other resources than we have. These competitors
may be able to pay more for exploratory prospects and may be able to define,
evaluate, bid for and purchase a greater number of properties and prospects than
we can. A detailed discussion of these and other risks and
uncertainties that could cause actual results and events to differ materially
from such forward-looking statements is included in “Risk Factors” beginning on
page 10 of this 10-KSB annual report.
Significant
Customers
At each
of our property locations in Alabama, Louisiana and Texas, we have oil and gas
sales contracts with one dominant purchaser in each respective
area. Due to the scarcity of distribution pipelines or sole
distributors, we do not have many options for choosing to whom we will sell our
oil and gas. If these purchasers are unable to resell their products or if they
lose a significant sales contract then we may incur difficulties in selling our
oil and gas.
Title to
Properties
As is
customary in the oil and natural gas industry, we make only a cursory review of
title to undeveloped oil and natural gas leases at the time we acquire
them. However, before drilling commences, we search the title, and
remedy most material defects before we actually begin drilling the
well. To the extent title opinions or other investigations reflect
title defects, we (rather than the seller or lessor of the undeveloped property)
typically are obligated to cure any such title defects at our
expense. If we are unable to remedy or cure any title defects so that
it would not be prudent for us to commence drilling operations on the property,
we could suffer a loss of our entire investment in the property. We
believe that we have good title to our oil and natural gas properties, some of
which are subject to immaterial encumbrances, easements, and
restrictions.
Long Term
Success
Our
success depends on the successful acquisition, exploration and development of
commercial grade oil and gas properties as well as the prevailing prices for oil
and natural gas to generate future revenues and operating cash
flow. Oil and natural gas prices have been extremely volatile in
recent years and are affected by many factors outside our
control. This volatile nature of the energy markets makes it
difficult to estimate future prices of oil and natural gas; however, any
prolonged period of depressed prices would have a material adverse effect on our
results of operations and financial condition. Such pricing factors
are largely beyond our control, and may result in fluctuations in our
earnings. We believe there are significant opportunities available to
us in the oil and gas exploration and development industry.
Regulation
The
exploration and development of oil and gas properties are subject to various
types of federal, state and local laws and regulations. These laws
and regulations govern a wide range of matters, including the drilling and
spacing of wells, allowable rates of production, restoration of surface areas,
plugging and abandonment of wells and specific requirements for the operation of
wells.
Laws and
regulations relating to our business frequently change, and future laws and
regulations, including changes to existing laws and regulations, could adversely
affect our business.
RISK
FACTORS
The
following risk factors together with other information set forth in this Form
10-KSB, should be carefully considered by current and future investors in our
securities. An investment in our securities involves substantial
risks. If any of the following risks actually occur, our financial
condition and our results of operations could be materially and adversely
affected. Additional risks and uncertainties not presently known to
us may also impair our business operations. In any such case, the
trading price of our common stock could decline, and you could lose all, or a
part, of your investment.
Risks
related to investment in our Company
We
have experienced significant operating losses in the past and there can be no
assurance that we will become profitable in the future even with the sale of our
Tuscaloosa property
The
Company reported a net loss of $5,596,617 for the fiscal year ended February 29,
2008, and a cumulative net loss from inception through February 29, 2008 of
$22,815,299. While we do have enough cash to operate an extensive exploration
and drilling program over the next twelve months, without successful exploration
and development of properties your investment in the Company could become
devalued or worthless.
We
are an early stage oil and gas exploration company with a limited operating
history on which to base an investment decision
We have a
limited history of oil and gas production and have minimal proven
reserves. To date, we have had limited revenues and have not yet
generated a sustainable positive cash flow or earnings. The Company
cannot provide any assurances that we will ever operate
profitability. As a result of our limited operating history, we are
more susceptible to business risks. These risks include unforeseen
capital requirements, failure to establish business relationships, and
competitive disadvantages against larger and more established
companies.
The resale of shares offered in
private placements could depress the value of the shares
Shares of
the Company’s Common Stock have been offered and sold in private placements at
significant discounts to the trading price of the common stock at the time of
the offering. Sales of substantial amounts of common stock eligible
for future sale in the public market, or the availability of shares for sale,
including shares issued upon exercise of outstanding warrants, could adversely
affect the prevailing market price of our common stock and our ability to raise
capital by an offering of equity securities.
We
have paid our officers and directors significant amounts in the form of
salaries, consulting fees, and stock which could have an adverse affect on our
net operating results and earnings per share
For the
fiscal year ended February 29, 2008, we paid our officers and directors a total
of $600,000 in cash for services.
For the
fiscal year ended February 28, 2007, we paid our officers and directors a total
of $553,941 in cash for services. During this same period, we granted these
individuals 1,050,000 shares of unregistered common stock with a fair value of
$2,206,500 at the grant date for services.
For the
fiscal year ended February 28, 2006, we paid our officers and directors a total
of $60,050 in cash for services. During this same period, we granted these
individuals 2,783,000 shares of unregistered common stock with a fair value of
$2,010,730 at the grant date for services.
These
payments were all approved by the Board of Directors. All
compensation payments are accounted for as administrative expenses. These
compensation payments have had, and may continue to have, an adverse impact on
our net results from operations, and earnings (or losses) per
share.
We
are an exploration stage company implementing a new business plan making it
difficult to evaluate our chance for success
We are an
exploration stage company with a limited operating history upon which to base an
evaluation of our current business and future prospects. We started
in the oil and gas exploration and development industry in March
2005. We are in the early stages of the implementation of our
business plan. Based on this limited history, investors do not have a
proven basis upon which to determine the probability of our business
success.
The
oil and gas business is highly competitive placing us at an operating
disadvantage
We expect
to be at a competitive disadvantage in (a) seeking to acquire suitable oil and
or gas drilling prospects; (b) undertaking exploration and development; and (c)
seeking additional financing. We base our preliminary decisions
regarding the acquisition of oil and or gas prospects and undertaking of
drilling ventures upon general and inferred geology and economic
assumptions. This public information is also available to our
competitors.
In
addition, we compete with large oil and gas companies with longer operating
histories and greater financial resources than us. These larger
competitors, by reason of their size and greater financial strength, can more
easily:
-
access
capital markets;
-
recruit
more qualified personnel;
-
absorb
the burden of any changes in laws and regulation in applicable
jurisdictions;
-
handle
longer periods of reduced prices of gas and oil;
-
acquire
and evaluate larger volumes of critical information;
-
compete
for industry-offered business ventures.
These
disadvantages could create negative results for our business plan and future
operations.
We
cannot guarantee financial results, making it more difficult to raise additional
capital
Since our
inception, we have suffered recurring losses from start-up operations and have
depended on external financing to sustain our operations. During the
year ended February 29, 2008, we reported a net loss of $5.6 million. If
exploration efforts are unsuccessful in establishing proved reserves and
exploration activities cease, the amounts accumulated as unproved costs will be
charged against earnings as impairments. Potential investors may be
dissuaded from investing in the Company based on historical
results.
Our
ability to reach and maintain profitable operating results is dependant on our
ability to find, acquire, and develop oil and gas properties
Our
future performance depends upon our ability to find, acquire, and develop oil
and gas reserves that are economically recoverable. Without
successful exploration and acquisition activities, we will not be able to
develop reserves or generate production revenues to achieve and maintain
profitable operating results. No assurance can be given that we will
be able to find, acquire or develop these reserves on acceptable
terms. We also cannot assure that commercial quantities of oil and
gas deposits will be discovered that are sufficient to enable us to recover our
exploration and development costs. Although certain management
personnel have significant experience in the oil and gas industry, we have not
yet established a history of locating and developing properties that have
economically feasible oil and gas reserves.
To
execute our business plan we will need to develop current projects and expand
our operations requiring significant capital expenditures which we may be unable
to fund
We have a
history of net losses and expect that our operating expenses will continue over
the next 12 months as we continue to implement our business plan. Our
business plan contemplates the development of our current exploration projects
and the expansion of our business by identifying, acquiring, and developing
additional oil and gas properties.
We need
to rely on external sources of financing to meet the capital requirements
associated with the development of our current properties and the expansion of
our oil and gas operations. We plan to obtain the funding we need
through debt and equity markets, as well as property
dispositions. There is no assurance that we will be able to obtain
additional funding when it is required or that it will be available to us on
commercially acceptable terms.
We also
intend to make offers to acquire oil and gas properties in the ordinary course
of our business. If these offers are accepted, our capital needs will
increase substantially. If we fail to obtain the funding that we need
when it is required, we may have to forego or delay potentially valuable
opportunities to acquire new oil and gas properties. In addition,
without the necessary funding, we may default on existing funding commitments to
third parties and forfeit or dilute our rights in existing oil and gas property
interests.
When
we make the determination to invest in oil or gas properties we rely upon
geological and engineering estimates which involve a high level of
uncertainty
Geologic
and engineering data are used to determine the probability that a reservoir of
oil or natural gas exists at a particular location. This data is also
used to determine whether oil and natural gas are recoverable from a
reservoir. Recoverability is ultimately subject to the accuracy of
data including, but not limited to, geological characteristics of the reservoir,
structure, reservoir fluid properties, the size and boundaries of the drainage
area, reservoir pressure, and the anticipated rate of pressure depletion. Also
the increasing costs of production operations may render some deposits
uneconomic to extract.
The
evaluation of these and other factors is based upon available seismic data,
computer modeling, well tests and information obtained from production of oil
and natural gas from adjacent or similar properties. There is a high
degree of risk in proving existence and recoverability of reserves and actual
recoveries of proved reserves can differ materially from original
estimates. Accordingly, reserve estimates may be subject to downward
adjustment. Actual production, revenue and expenditures will likely
vary from estimates, and such variances may be material.
Our
financial condition will deteriorate if we are unable to retain our interests in
our leased oil and gas properties
All of
our properties are held under interests in oil and gas mineral
leases. If we fail to meet the specific requirements of each lease,
the lease may be terminated or otherwise expire. We cannot be assured
that we will be able to meet our obligations under each lease. The
termination or expiration of our “working interests” (interests created by the
execution of an oil and gas lease) relating to these leases would impair our
financial condition and results of operations.
We will
need significant additional funds to meet capital calls, drilling and other
production costs in our effort to explore, produce, develop and sell the natural
gas and oil produced by our leases. We may not be able to obtain any
such additional funds on acceptable terms.
Title
deficiencies could render our oil and gas leases worthless; thus damaging the
financial condition of our business
The
existence of a material title deficiency can render a lease worthless, resulting
in a large expense to our business. We rely upon the judgment of oil
and gas lease brokers who perform the field work and examine records in the
appropriate governmental office before attempting to place under lease a
specific mineral interest. This is a customary practice in the oil
and gas industry.
We
anticipate that we, or the person or company acting as “operator” (the
individual or company responsible for the exploration, exploitation and
production of an oil or natural gas well or lease, usually pursuant to the terms
of a joint operating agreement among the various parties owning the working
interest in the well) on the properties that we lease, will examine title prior
to any well being drilled. Even after taking these precautions,
deficiencies in the marketability of the title to the leases may still
arise. Such deficiencies may render some leases worthless, negatively
impacting the financial condition of the Company.
Reliance
on certain third party vendors for outsourced services could be detrimental to
our business plan
To
maximize the use of our otherwise limited capital and human resources, we rely
on third party vendors for outsourced drilling, exploration and other
operational services. This practice could allow us to achieve cost
savings and operational efficiencies. However, the use of outsourced
resources could expose us to greater risk should we be unable to source critical
vendors on a cost budgeted and timely basis.
Furthermore,
the use of outsourced resources could minimize our ability to control the work
product and accountability of such vendors. If any of these
relationships with third-party service providers are terminated or are
unavailable on commercially acceptable terms, our business plan will be
adversely affected.
If
we as operators, or our operators of our oil and gas projects fail to maintain
adequate insurance, our business could be exposed to significant
losses
Our oil
and gas projects are subject to risks inherent in the oil and gas
industry. These risks involve explosions, uncontrollable flows of
oil, gas or well fluids, pollution, fires, earthquakes and other environmental
issues. These risks could result in substantial losses due to injury
and loss of life, severe damage to and destruction of property and equipment,
pollution and other environmental damage. As protection against these
operating hazards we maintain insurance coverage to include physical damage and
comprehensive general liability. However, we are not fully insured in
all aspects of our business. For projects in which we function as the
operator, the occurrence of a significant event against which we are not
adequately covered by insurance could have a material adverse effect on our
financial position.
In the
projects in which we are not the operator, we require the operator to maintain
insurance of various types to cover our operations with policy limits and
retention liability customary in the industry. The occurrence of a
significant adverse event on any of these projects if they are not fully covered
by insurance could result in the loss of all or part of our
investment. The loss of this project investment could have a material
adverse effect on our financial condition and results of
operations.
We
have limited control over the activities on properties we do not operate, which
could reduce or negate the expected returns on these investments
We
currently conduct our oil and gas exploration and development activities in
joint ventures with other industry partners. We have reserved the
right to participate in management decisions through operating agreements with
our partners, but do not have ultimate decision-making authority.
In many
cases, success in the operation of our properties will be dependent on the
expertise and financial resources of our joint venture partners and third-party
operators. Our dependence on the operator and other working interest
owners resulting in our limited ability to control the operation could adversely
affect the realization of our expected returns and lead to unexpected future
costs.
We
are not in control of our own oil and gas distribution systems and are therefore
dependent on the sales contracts of oil and gas resellers to provide a market
for us, which could result in our not being able to produce from our
wells
In each
of our producing properties, there is only one market available to purchase our
oil and gas production. If that reseller were to lose a significant
sales contract or customer then we might not be able to produce an otherwise
productive well because of a lack of a market in which to sell oil or
gas. Additionally, we are subject to the traditional seasonal energy
demands that exist in the oil and gas industry.
We
may lose key management personnel which could endanger the future success of our
oil and gas operations
Our
Interim President and Chief Executive Officer, our Chief Financial Officer, our
Senior Vice-President, Exploration and one director have substantial experience
in the oil and gas business. The balance of the management team has
limited experience in managing or conducting oil and gas
operations. The loss of any of these individuals, particularly our
Interim President and Chief Executive Officer or our Chief Financial Officer
could adversely affect our business. If one or more members of our
management team dies, becomes disabled or voluntarily terminates employment with
us, there is no assurance that a suitable or comparable substitute will be
found.
We
have disclosed material weakness in our disclosure controls and procedures which
could erode investor confidence, jeopardize our ability to obtain insurance and
limit our ability to attract qualified persons to serve the Company
In our
fiscal 2007 and 2008 annual and quarterly SEC filings, we disclosed material
weaknesses in our disclosure controls and procedures. Predicated by
the identification of these weaknesses, we have carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures.
We have
evaluated our internal controls over financial reporting and based upon those
evaluations, concluded that our disclosure controls and procedures were in need
of improvement and were not effective to ensure timely reporting under the
Exchange Act. We are working to correct this situation as quickly and
effectively as possible with new processes and controls.
We are
required to evaluate our internal controls under Section 404 of the
Sarbanes-Oxley Act of 2002 (“SOX”), and any adverse results from such evaluation
could result in a loss of investor confidence in our financial reports and have
an adverse effect on the price of our shares of common stock.
Pursuant
to Section 404 of SOX, beginning with this annual report on Form 10-KSB for the
fiscal year ended February 29, 2008, we are required to furnish a report by
management on our internal controls over financial reporting. This
report contains among other matters, an assessment of the effectiveness of our
internal control over financial reporting, including a statement as to whether
or not our internal control over financial reporting is
effective. This assessment must include disclosure of any material
weaknesses in our internal control over financial reporting identified by our
management.
During
the evaluation and testing process, we did identify one or more material
weaknesses in our internal control over financial reporting, and are therefore
unable to assert that such internal control is effective. Since we
are unable to assert that our internal control over financial reporting is
effective (or if our auditors are unable to attest in the future that our
management’s report is fairly stated or they are unable in the future to express
an opinion on the effectiveness of our internal controls), we could lose
investor confidence in the accuracy and completeness of our financial reports,
which could have a material adverse effect on our stock price.
Failure
to comply with these rules may make it more difficult for us to obtain certain
types of insurance, including director and officer liability
insurance. We may be forced to accept reduced policy limits and
coverage and/or incur substantially higher costs to obtain the same or similar
coverage. The impact of these events could also make it more
difficult for us to attract and retain qualified persons to serve on our Board
of Directors, on committees of our Board of Directors, or as executive
officers.
The
market price of our common stock could be volatile, which may cause the
investment value of our stock to decline
Our
common stock is quoted on the OTC Bulletin Board (OTC.BB) market under the
symbol DBRM.OB. From July 2, 2007 to December 13, 2007, our stock was
quoted in the OTC pink sheet market, due to SEC filing delinquencies. Having
satisfied financial filing compliance standards, we returned to being quoted on
the OTC Bulletin Board market after the filing of our second fiscal quarter 2008
10-QSB report.
The
Bulletin Board market is characterized by low trading volume. Because
of this limited liquidity, shareholders may be unable to sell their shares at or
above the cost of their purchase prices. The trading price of our
shares has experienced wide fluctuations and these shares may be subject to
similar fluctuations in the future.
The
trading price of our common stock may be affected by a number of factors
including events described in the risk factors set forth in this 10-KSB report,
as well as our operating results, financial condition, announcements of drilling
activities, general conditions in the oil and gas exploration and development
industry, and other events or factors.
In recent
years, broad stock market indices, in general, and smaller capitalization
companies, in particular, have experienced substantial price
fluctuations. In a volatile market, we may experience wide
fluctuations in the market price of our common stock. These
fluctuations may have a negative effect on the market price of our common
stock.
Privately
placed issuances of our common stock have and may continue to dilute ownership
interests which could have an adverse effect on our stock prices
Our
authorized capital stock consists of 200,000,000 shares of common stock and
10,000,000 shares of preferred stock. As of February 29, 2008, there
were 44,293,299 shares of common stock and 1,297,465 shares of Series A
Convertible Preferred stock issued and outstanding.
As of
February 29, 2008, the Company had sold, in a private placement sale to seven
accredited investors, 605,000 shares at $0.25 per share resulting in gross
proceeds of $151,250. Since this offering began, the price of our
common stock has ranged from a low of $0.25 to a high of $0.36.
On
December 28, 2007, the Company closed on a private placement sale of 2,497,000
shares to thirteen accredited investors at $0.25 per share resulting in gross
proceeds of $624,250. This private placement sale had been underway since
October 19, 2007. At the time of the offering, the price of our common stock
ranged from a low of $0.33 to a high of $0.48.
On July
18, 2006, the Company closed on a private placement sale of 1,399,765 units at
$3.00 per unit resulting in gross proceeds of $4,199,291. Each unit
sold was comprised of one share of Series A Convertible Preferred stock and two
common stock purchase warrants. The warrants are exercisable at a price of $2.00
and expire on July 19, 2011. The 100 investors in this private placement were
issued 1,399,765 shares of Series A Convertible Preferred stock and 2,799,527
common stock purchase warrants.
The
placement agent for the offering earned an additional 419,930 common stock
purchase warrants. At the time of the offering, the common stock component
prices of the private placement units were significantly lower than the trading
price of our common stock.
On May
19, 2006, the Company closed on a private placement sale of 4,013,602 units at
$1.50 per unit resulting in gross proceeds of $6,020,404. Each unit
sold was comprised of two shares of common stock and one common stock purchase
warrant. The warrants are exercisable at a price of $2.00 and expire on May 20,
2011. The 118 investors in this private placement were issued 8,027,206 shares
of common stock and 4,013,602 common stock purchase warrants.
The
placement agent for the offering earned an additional 1,204,082 common stock
purchase warrants. At the time of the offering, the common stock component
prices of the private placement units were significantly lower than the trading
price of our common stock.
In
addition to the completed private placements, we may in the future, issue
additional previously authorized and unissued common stock. These
events may result in the further dilution of the ownership interests of our
present shareholders and purchasers of common stock offered in this
prospectus.
Historically
we have, and likely will continue to issue additional shares of our common stock
in connection with the compensation of personnel, future acquisitions, private
placements, or for other business purposes. Future issuances of
substantial amounts of these equity securities could have a material adverse
effect on the market price of our common stock, and would result in further
dilution of existing stock ownership.
Preferred
stock has been issued with greater rights than the common stock issued which may
dilute and depress the investment value of the common stock
investments
Our
articles of incorporation currently authorize the issuance of 10,000,000 shares
of $0.001 par value preferred stock. In June 2006, the Board of
Directors authorized 2,400,000 shares of preferred stock to be designated as
Series A Convertible Preferred stock. The Board of Directors has the
power to issue shares without shareholder approval, and such shares can be
issued with such rights, preferences, and limitations as may be determined by
our Board of Directors.
On July
18, 2006, the Company closed on a private placement sale of 1,399,765 units at
$3.00 per unit resulting in gross proceeds of $4,199,291. Each unit
sold was comprised of one Series A Convertible Preferred share and two common
stock purchase warrants. Each Series A Convertible Preferred share
can be converted to three common stock shares at any time. The warrants are
exercisable at a price of $2.00 and expire on July 18, 2011. The 100
investors in this private placement were issued a total of 1,399,765 Series A
Convertible Preferred shares and 2,799,527 common stock purchase warrants. The
placement agent for the offering earned an additional 419,930 common stock
purchase warrants.
As of
February 29, 2008, 1,297,465 shares of Series A Convertible preferred stock were
issued and outstanding. The rights of the holders of common stock are
subject to and may be adversely affected by the rights and preferences afforded
to the holders of these preferred shares. The rights and preferences
of the issued preferred shares include:
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automatic
convertibility into common stock if after the effective date of the
registration statement the Company’s common stock closes at or above $3.00 per
share for twenty (20) out of thirty trading days (30) days;
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cumulative
dividends in the amount of 6% of the original purchase price per annum,
payable upon declaration by the board of directors;
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the
ability to vote together with the common stock with a number of votes equal to
the number of shares of common stock to be issued upon conversion of the
preferred stock.
The
issuance of the Series A Convertible Preferred shares could delay, discourage,
hinder or preclude an unsolicited acquisition of our Company. In
addition, the issuance of these preferred shares could make it less likely that
shareholders receive a premium for their shares as a result of any such attempt
to acquire the Company. Further, this issuance could adversely affect
the market price of, and the voting and other rights, of the holders of
outstanding shares of common stock.
Although
we have no current plans to issue any additional preferred stock, future
issuances of preferred stock may also have more advantageous features than our
common stock in terms of dividends, liquidation and voting rights.
We
may seek to raise additional funds in the future through debt financing which
may impose operational restrictions and may further dilute existing ownership
interests
We expect
to seek to raise additional capital in the future to help fund our acquisition,
development, and production of oil and natural gas reserves. Debt
financing, if available, may require restrictive covenants which may limit our
operating flexibility. Future debt financing may also involve debt
instruments that are convertible into or exercisable for common
stock. As mentioned above, the conversion of the debt to equity
financing may dilute the equity position of our shareholders.
Principal
shareholders and directors control the Company through substantial voting
power
Our two
largest principal beneficial shareholders, along with six current directors and
officers of the Company own and control about 25.5% percent of our outstanding
common stock.
Our
shareholders do not have the right to cumulative voting in the election of our
directors. Cumulative voting could allow a minority group to elect at
least one director to our board. Because there is no provision for
cumulative voting, a minority group will not be able to elect any
directors. Conversely, if our principal beneficial shareholders and
directors wish to act in concert, they would be able to vote to appoint
directors of their choice, and otherwise directly or indirectly, control the
direction and operation of the Company.
We
do not anticipate paying dividends on our common stock which could devalue the
market value of these securities
We have
not paid any cash dividends on our common stock since our
inception. We do not anticipate paying cash dividends in the
foreseeable future. Any dividends paid in the future will be at the
complete discretion of our board of directors. For the foreseeable
future, we anticipate that we will retain any revenues which we may generate
from our operations. These retained revenues will be used to finance
and develop the growth of the Company. Prospective investors should
be aware that the absence of dividend payments could negatively affect the
market value of our common stock.
Pursuant
to SEC Rules our common stock is classified as a “penny stock’ increasing the
risk of investment in these shares
Our
common stock is designated as “penny stock” and thus may be more illiquid than
shares traded on an exchange or on NASDAQ. The SEC has adopted rules
(Rules 15g-2 through l5g-6 of the Exchange Act) which define “penny stocks” and
regulate broker-dealer practices in connection with transactions with these
stocks. Penny stocks generally are any non-NASDAQ or non-exchange
listed equity securities with a price of less than $5.00, subject to certain
exceptions. The “penny stock rules” require a broker-dealer
to:
-
deliver
a standardized risk disclosure document prepared by the SEC;
-
provide
the customer with current bid and offer quotations for the penny
stock;
-
include
the compensation of the broker-dealer and its salesperson in the
transaction;
-
provide
monthly account statements showing the market value of each penny stock held
in the customer’s account;
-
make a
special written determination that the penny stock is a suitable investment
for the purchaser and receive the purchaser’s written agreement to the
transaction.
The
“penny stock” reporting and disclosure requirements may have the effect of
reducing the level of trading activity in the secondary market for a stock that
is subject to these rules. The market liquidity for the shares could
be severely and adversely affected by limiting the ability of broker-dealers to
sell these shares. In addition, the ability of purchasers in this
offering to sell their stock in any secondary market could be adversely
restricted.
Due
to limited and sporadic trading volume, investors may not be able to resell
their shares of common stock at favorable times and prices
Although
our common stock has been quoted on the OTC Bulletin Board for several years,
the trading in our stock has been limited and sporadic. Although
trading volume has increased over the past fiscal year, it has still been
sporadic. The trading volume during this period has ranged from
several hundred thousand shares to as few as no shares traded on certain
days. A consistently active trading market for our common stock may
never be developed, or sustained if it emerges. In addition, the
price of our common stock on the OTC Bulletin Board has been extremely
volatile. Low volume or lack of demand for these securities may make
it more difficult for you to sell such shares at a price or at a time that would
be favorable. We cannot assure you that you will be able to sell your
shares at an attractive price relative to the price you are paying or that you
will be able to sell these securities in a timely fashion.
An
investment in the common stock of our Company will not provide any federal
income tax benefits for the shareholders
Investors
should be aware that they will not receive any of the federal income tax
benefits available to individuals investing as limited partners in oil and gas
partnership programs. Any income tax advantages will inure solely to
the benefit of the Company and will not be passed through to any
shareholders.
Risks Related to Our
Industry
We
are subject to complex laws and regulations that can negatively impact the cost,
manner and feasibility of conducting our business
Our
business is governed by numerous laws and regulations at various levels of
government. These laws and regulations govern the operation and
maintenance of our facilities, the discharge of materials into the environment
and other environmental protection issues. These laws and regulations
may, among other potential consequences, require that we:
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acquire
permits before the commencement of drilling;
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restrict
the substances that can be released into the environment with drilling and
production activities;
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limit
or prohibit drilling activities on protected areas;
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require
that reclamation measures be taken to prevent pollution from former
operations;
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require
remedial measures to be taken with respect to contaminated
property.
The costs
of complying with environmental laws and regulations could negatively impact our
financial condition and results of operations. Future changes in
environmental laws and regulations could occur that may result in stricter
standards and enforcement which could further negatively impact our
business.
The
volatility of oil and natural gas prices could adversely affect our
business
Our
future revenues, profitability and growth of our investments in oil and gas
properties depend to a large degree on prevailing oil and gas
prices. These prices tend to fluctuate significantly in response to
factors beyond our control. These factors include, but are not
limited to, the continued threat of escalating war in the Middle East and
actions of the Organization of Petroleum Exporting Countries and its maintenance
of production constraints. Additional factors include, the U.S.
economic environment, weather conditions, the availability of alternate fuel
sources, transportation interruption, the impact of drilling levels on crude oil
and natural gas supply, and environmental issues. The prices for oil
and natural gas have varied substantially over time based on general supply and
demand and may in the future decline. These prices have been and are
likely to remain volatile. Significant declines in these prices owing
to this volatility will adversely affect our business and consequently our
shareholders.
The
success of our business is dependent on our ability to produce sufficient
quantities of oil and gas which may be adversely affected by a number of factors
outside of our control
The
business of exploring for and producing oil and gas involves a substantial risk
of investment loss. Drilling oil and gas wells involves the risk that
the wells may be unproductive or that, although productive, that the wells may
not produce oil and/or gas in economic quantities. Other hazards,
such as unusual or unexpected geological formations, pressures, fires, blowouts,
loss of circulation of drilling fluids may substantially delay or prevent
completion of any well. Adverse weather conditions can also hinder
drilling operations. In addition, a “productive well” (a well that is
producing oil or gas or that is capable of production) may become uneconomic due
to pressure depletion, water encroachment, mechanical difficulties, etc, which
impair or prevent the production of oil and/or gas from the well; or, due to
increased production costs.
There can
be no assurance that oil and gas will be produced from the properties in which
we have interests. Governmental permitting requirements and
regulations may delay or deter drilling in some areas. Further, the
marketability of any oil or gas that we acquire or discover may be influenced by
numerous factors beyond our control. We cannot predict how these
factors may affect our business.
The
unavailability or high cost of drilling rigs and related equipment could
adversely affect our ability to execute our exploration and exploitation plans
on a timely and economic basis
Increased
oil and natural gas prices have stimulated increased demand and resulted in
escalated prices for drilling rigs, crews, and associated equipment, supplies
and services. This demand has created a shortage of drilling rigs and
crews as the number of wells being drilled have vastly increased. The
inability to secure drilling rigs and crews may delay development of properties
in which we acquire an interest, resulting in the untimely and costly expiration
of certain leases. Drilling delays and the loss of leases could have
a material negative effect on our business operations and financial
condition.
Employees and
Consultants
In
December 2007, both the management and the Board of Directors of Daybreak were
restructured to allow for future growth and increased efficiency within the
Company. Robert N. Martin, President resigned from that position and
was appointed Senior Vice-President, Exploration; Chief Executive Officer Eric
L. Moe resigned from the Company; Timothy R. Lindsey formerly an outside
director was appointed interim President and Chief Executive Officer; Chief
Financial Officer Terrence J. Dunne resigned from the Company; and Controller
Thomas C. Kilbourne resigned from that position but continued as an employee of
Daybreak. James F. Westmoreland, formerly a finance and accounting
consultant to Daybreak, was appointed interim Chief Financial
Officer.
On
December 18, 2007, the Board of Directors voted to reduce the number of Board
positions to three. Subsequently, the following individuals resigned
their positions and offices with the Board of Directors of Daybreak; Robert N.
Martin, Eric L. Moe, Terrence J. Dunne, Jeffrey R. Dworkin, Thomas C. Kilbourne
and Michael Curtis. Karol L. Adams, formerly a consultant to
Daybreak, was appointed Corporate Secretary.
On March
24, 2008 James F. Meara was appointed to our Board of Directors. The
addition of Mr. Meara expanded the Company's board to four members.
On April
3, 2008, James F. Westmoreland, formerly interim Chief Financial Officer, was
appointed Executive Vice President and Chief Financial Officer; Karol L. Adams
was appointed Chief Compliance Officer in addition to the Corporate Secretary
duties; Thomas C. Kilbourne was appointed Controller and Assistant Secretary;
and Daybreak adopted a series of corporate responsibility statements and
employee guidelines.
We
currently have seven employees located throughout four states. We may
hire more employees in the next fiscal year as needed. All other
services are currently contracted for with independent
contractors. The Company has not obtained “key man” life insurance on
any of its officers or directors.
The
Daybreak Oil and Gas, Inc. corporate office is located at 601 W. Main Ave.,
Suite 1012, Spokane, Washington 99201-0613. Our telephone number
is (509) 232-7674.
Our
regional operations office is located at 16225 Park Ten Place, Suite 500,
Houston, Texas 77084. The telephone number of our office in
Houston is (281) 994-4021.
Availability of SEC
Filings
You may
read and copy any materials we file with the SEC at the SEC’s Public Reference
Room at 450 Fifth Street, NW, Washington, DC 20549. You can
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC maintains an Internet site that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The address
of that site is (http://www.sec.gov).
Website / Available
Information
Our
website can be found at
www.daybreakoilandgas.com
. Our
Annual Reports on Form 10-KSB, Quarterly Reports on Form 10-QSB, Current Reports
on Form 8-K and amendments to those reports filed or furnished with the U.S.
Securities and Exchange Commission, or SEC, pursuant to Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, or the Exchange Act, can be accessed
free of charge on our web site at
www.daybreakoilandgas.com
on the “Shareholder Information” section of our web site under the “SEC Filings”
button as soon as reasonably practicable after we electronically file such
material with, or otherwise furnish it to, the Securities and Exchange
Commission (the “SEC”).
We have
adopted an Ethical Business Conduct Policy Statement to provide guidance to our
directors, officers and employees on matters of business conduct and ethics,
including compliance standards and procedures. We also have adopted a
Code of Ethics for Senior Financial Officers that applies to our principal
executive officer, principal financial officer, principal accounting officer and
controller. Our Ethical Business Conduct Policy Statement and Code of
Ethics for Senior Financial Officers are available on the “Shareholder
Information” section of our web site at
www.daybreakoilandgas.com
under the heading “Corporate Governance.” We intend to promptly
disclose via a Current Report on Form 8-K or via an update to our web site
information any amendment to or waiver of these codes with respect to our
executive officers and directors. Waiver information disclosed via
the web site will remain on the web site for at least 12 months after the
initial disclosure of a waiver. Our Corporate Governance Guidelines
and the charters of our Audit Committee, Nominating and Corporate Governance
Committee, and Compensation Committee are also available on the “Shareholder
Information” section of our web site at
www.daybreakoilandgas.com
under the heading “Corporate Governance.” In addition, copies of our
Ethical Business Conduct Policy Statement, Code of Ethics for Senior Financial
Officers, Corporate Governance Guidelines and the charters of the Committees
referenced above are available at no cost to any shareholder who requests them
by writing or telephoning us at the following address or telephone
number:
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Daybreak
Oil and Gas, Inc.
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601
W. Main Ave., Suite 1012
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Spokane,
WA 99201-0613
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Attention:
Corporate Secretary
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Telephone:
(509) 232-7674
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Information
contained on or connected to our web site is not incorporated by reference into
this Annual Report and should not be considered part of this report or any other
filing that we make with the SEC.
ITEM 2.
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DESCRIPTION
OF PROPERTIES
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We have
onshore oil and gas projects underway throughout the United States. We have not
filed any estimates of total, proved net oil or gas reserves with any Federal
agency for the fiscal year ended February 29, 2008. Throughout this
10-KSB annual report oil is shown in barrels (“Bbl”), and of natural gas is
shown in thousands of cubic feet (“Mcf”). The project areas that we
are involved in are as follows:
Alabama
(East Gilbertown Field)
Choctaw County.
In
December 2006, we acquired a working interest in an existing oil field project,
the East Gilbertown Field (“Gilbertown”) that produces relatively heavy oil
(approximately 18º API). This field has nineteen wellbores most of which are
capable of production.
From
December 2006 through March 2007, we incrementally increased our working
interest in this project from 2.5% to 12.5%. On June 1, 2007, we
became the operator of the Gilbertown. Future plans are to continue to increase
production in the field by bringing more non-producing wellbores back into
production. As of February 29, 2008, we had spent $397,229 in
leasehold, production and workover costs associated with this
field. We plan to spend approximately $200,000 in capital repairs and
new investments within the field in the upcoming fiscal year.
Reserves
At March
1, 2008 we had net proved reserves of 2,391 Bbls. (“Barrels”) of oil in
Gilbertown according to SEC guidelines as determined by the certified
independent engineering firm Huddleston & Co., Inc.
California
East Slopes Project in Kern
and Tulare Counties
. In May 2005, we agreed to jointly explore
an Area of Mutual Interest (“AMI”) in the southeastern part of the San Joaquin
Basin. For our 50% interest we initially paid a $12,500 fee to secure the
project and the geological concepts. Our agreement calls for us to
also pay another $5,000 fee upon the completion of each sub-regional lead that
is developed from a 3-D seismic survey. Additionally, we agreed to
pay another $5,000 fee upon the spud of the first well in each prospect
area.
Four
prospect areas have been identified and we are actively leasing lands in the
East Slopes project area. Additionally, we have identified two
prospect areas to the north of the East Slopes AMI. This second AMI is referred
to as the “Expanded AMI” project area. We have now jointly leased about 25,633
undeveloped acres in the two AMI’s. Drilling targets are porous and permeable
sandstone reservoirs at depths of 1,200 feet to 4,000 feet. Daybreak has a 50%
of the working interest in the area that is not in the Chevron partnered East
Slopes AMI project area covered by the recently completed high definition 3-D
seismic survey.
As of
February 29, 2008 we have spent $778,806 in leasehold and geologic and
geophysical costs associated with this project.
In June
2007, Daybreak and its partners (“Daybreak et al”), entered into a Seismic
Option Farmout Agreement with Chevron U.S.A. Inc. (“Chevron”), for a seismic and
drilling program in the East Slopes (Kern County) project
area.
By paying
the full cost of the seismic program Chevron has earned a 50% interest in the
Daybreak et al lands and a 50% working interest for the drilling of future wells
in the project area after the drilling of the first four wells. Daybreak et al
will earn a 50% (Daybreak 25%) interest in the Chevron lands located in the same
project area, by paying 100% of the cost of the first four initial test wells to
be drilled on the jointly held lands. The four initial test wells must be
drilled within nine months of the seismic data interpretation being
completed. In January 2008, we announced that data processing is
underway following the recently completed field acquisition of the 35
square-mile high resolution 3-D seismic survey. As of the date of
this report, we have currently identified 12 potential drilling locations from
ongoing interpretation of the seismic data. Drilling is expected to
commence in the second fiscal quarter of 2008. We plan to spend
approximately $2,000,000 in new capital investments within the AMI covering the
Seismic Option area in the upcoming fiscal year.
Louisiana
Tuscaloosa
Project in Tensas and
Franklin
Parishes
. On January 18, 2008 we signed a purchase and sale
agreement (“PSA”) for the sale of our project interests for $8 million in
cash. The transaction closed in three tranches; the first closing for
$2 million occurred on January 18, 2008; the second closing for $500,000
occurred on April 30, 2008; and the final closing for $5.5 million occurred on
June 12, 2008 and was subject to customary closing adjustments. The sale
includes Daybreak's interests in the Tensas Farms et al F-1, F-3, B-1, A-1 and
F-2 wells; and all of its acreage and infrastructure in the project
area. Under terms of the PSA, the effective date for each closing was
January 1, 2008.
Reserves
At March
1, 2008 we had net proved reserves of 31.8 MMcf of gas and 10,567 Bbls. of oil
in the Tuscaloosa Project according to SEC guidelines as determined by the
certified independent engineering firm Huddleston & Co., Inc.
The Krotz Springs Project
in
St. Landry Parish
is
a deep gas play with current net production from a Cockfield Sands reservoir.
Daybreak was the operator for this project during the drilling and completion
phases of this single well. When production commenced in May of 2007,
the unitized field operator of the Krotz Springs Field became the operator for
this well. Total project drilling and completion costs were approximately $9.2
million. We have a 12.5% working interest in this project, with a net
revenue interest (“NRI”) of 9.125%. As of February 29, 2008, we had
spent $1.16 million in leasehold, drilling, completion and production costs
associated with this project. Current production is being evaluated prior to
recompleting another prospective producing zone in the well in which Daybreak
will spend approximately $25,000 in the upcoming fiscal year.
Reserves
At March
1, 2008 we had net proved reserves of 4.6 MMcf (million cubic feet) of gas and
46 Bbls. of oil in the Krotz Springs Project according to SEC guidelines as
determined by the certified independent engineering firm Huddleston & Co.,
Inc.
The North Shuteston
Prospect
, also in St. Landry Parish is a three dimensional (“3-D”)
seismic objective supported by a shallow amplitude anomaly at a depth of 2,300
feet. This anomaly is related to a Miocene Age Sand. On
April 23, 2008, we conveyed our interest in this project to another party in
exchange for a two percent (2.0%) overriding royalty interest (“ORRI”) in the
production revenue from the start of production.
Drilling
will begin on this project during the summer of 2008; however, Daybreak no
longer has a working interest in this project, and therefore will not have any
more capital investment. As of February 29, 2008, we had spent about
$130,000 in leasehold, geologic and geophysical (“G&G”) and project
management costs associated with this project.
Avoyelles
Parish.
This Prospect is a Cretaceous target positioned
beneath an existing oilfield that has produced over 28 million barrels of
oil. The project is focused on the broad northeast flank of the
Cretaceous structure, targeting the Massive Sand of the Lower Tuscaloosa
Formation; and, the Fractured Lower (Austin) Chalk. Plans call for a
3-D seismic survey covering about 36 square miles. This is primarily
a deep gas play. Gross project costs are estimated to be $1,000,000 for land,
$3,000,000 for 3-D Seismic and $6,000,000 for drilling the first well. We have
jointly acquired leases or permits on approximately 2,002 gross undeveloped
acres within the AMI. Daybreak has a 35% working interest in this
project. As of February 29, 2008, we had spent $431,484 in leasehold,
seismic and project management costs associated with this exploration
project. We and our existing working interest partners endeavor to
secure other industry partners to participate in additional land acquisition and
seismic costs before proceeding with drilling. We are not planning on
spending any funds in capital new investments within the field in the upcoming
fiscal year.
Texas
Nueces
County
. In November 2005, we agreed to jointly participate in
a five well re-entry project in the Saxet Deep Field (“Saxet”) a previously
produced oilfield, on a developed 320 acre lease. The project is
located within the city limits of Corpus Christi, Texas, near the
airport. We have a variable working interest in the project, with an
average well working interest of 25.24% and an NRI of 14.25% on all production
from these wells.
In May
2006, we started the re-work of the first well, the Weil 8-C
well. This well was successfully reworked and placed into production
in August 2006. In August and September 2006, we re-entered and started to
produce from both the Weil 3-C and Weil 7-C wells. Two other wells
the Weil 2-C and Weil 6-C were re-entered in September and October of 2006, and
are now being used as salt water disposal wells.
As of
February 29, 2008, we had spent $702,569 in leasehold, workover, production,
pipeline and production facility costs associated with this
project.
We have
continued to face increased production costs in the Saxet with a workover
required on an existing salt water disposal well. The workover was completed in
late September 2007. We anticipate being able to continue production
of the field; however, there is no assurance that commercial returns will
continue. We plan on spending approximately $50,000 in capital new
investments within the field in the upcoming fiscal year.
Reserves
At March
1, 2008 we had net proved reserves of 29.2 MMcf of gas and 109 Bbls. of oil in
the Saxet according to SEC guidelines as determined by the certified independent
engineering firm Huddleston & Co., Inc.
Total
Reserves
At March
1, 2008 we had net proved reserves of 65.5 MMcf of gas and 13,113 Bbls. of oil
from all of our projects in total according to SEC guidelines as determined by
the certified independent engineering firm Huddleston & Co.,
Inc.
Summary
Operating Data
The
production and revenue shown in the following table is Daybreak’s net share of
annual production and revenue based on the Net Revenue Interest (“NRI”) in each
project as of February 29, 2008. Oil is shown in barrels (“Bbl”), and
natural gas is shown in thousands of cubic feet (“Mcf”).
|
|
|
|
Oil
|
|
|
Gas
|
|
State
|
|
Field
|
|
Net
Barrels
|
|
|
Net
Revenue
|
|
|
Net
Mcf
|
|
|
Net
Revenue
|
|
Louisiana
|
|
Tuscaloosa
|
|
|
4,231
|
|
|
$
|
359,012
|
|
|
|
37,641
|
|
|
$
|
291,742
|
|
|
|
Krotz
Springs
|
|
|
89
|
|
|
|
7,141
|
|
|
|
7,777
|
|
|
|
67,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas
|
|
Saxet
|
|
|
236
|
|
|
|
17,679
|
|
|
|
22,063
|
|
|
|
155,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alabama
|
|
Gilbertown
|
|
|
2,235
|
|
|
|
119,209
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
|
|
6,791
|
|
|
$
|
503,041
|
|
|
|
67,481
|
|
|
$
|
514,563
|
|
The
following table shows the average sales price per unit of oil and natural gas as
well as the average cost of production in barrels of oil equivalent (“BOE”)
conversion, for the past three fiscal years. One barrel of oil is
roughly equivalent to 6,000 cubic feet of natural gas. Oil is shown
in barrels (“Bbl”), and natural gas is shown in thousands of cubic feet
(“Mcf”).
|
|
Years
Ended,
|
|
|
|
February
29,
|
|
|
February
28,
|
|
|
|
2008
|
|
|
2007
|
|
Average
Sales Price:
|
|
|
|
|
|
|
Gas
(per Mcf)
|
|
$
|
7.63
|
|
|
$
|
6.62
|
|
Oil (per
Bbl)
|
|
$
|
74.84
|
|
|
$
|
65.10
|
|
|
|
|
|
|
|
|
|
|
Average
Cost of Production:
|
|
|
|
|
|
|
|
|
Oil (per
Bbl)
|
|
$
|
25.12
|
|
|
$
|
24.81
|
|
The
following table shows the developed and undeveloped oil and gas lease acreage
held by us as of February 29, 2008. Undeveloped acres are acres on
which wells have not been drilled or completed to a point that would permit the
production of commercial quantities of oil and gas. Gross acres are
the total number of acres in which we have an interest. Net acres are the sum of
our fractional interests owned in the gross acres.
|
|
Developed
Acres
|
|
|
Undeveloped
Acres
|
|
Location
|
|
Gross
|
|
|
Net
|
|
|
Gross
|
|
|
Net
|
|
Alabama
|
|
|
2,025
|
|
|
|
253
|
|
|
|
-
|
|
|
|
-
|
|
Texas
|
|
|
320
|
|
|
|
81
|
|
|
|
-
|
|
|
|
-
|
|
Louisiana
|
|
|
6,762
|
|
|
|
2,803
|
|
|
|
13,524
|
|
|
|
5,606
|
|
California
|
|
|
|
|
|
|
|
|
|
|
25,633
|
|
|
|
12,817
|
|
Total
|
|
|
9,107
|
|
|
|
3,137
|
|
|
|
39,157
|
|
|
|
18,423
|
|
The
following table summarizes our productive oil and gas wells as of February 29,
2008. Productive wells are producing wells and wells capable of
production. Gross wells are the total number of wells in which we
have an interest. Net wells are the sum of our fractional interests
owned in the gross wells.
State
|
Field
|
|
Gross
|
|
|
Net
|
|
Louisiana
|
Tuscaloosa
|
|
|
3
|
|
|
|
1.25
|
|
|
Krotz
Springs
|
|
|
1
|
|
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
Texas
|
Saxet
|
|
|
3
|
|
|
|
0.76
|
|
|
|
|
|
|
|
|
|
|
|
Alabama
|
Gilbertown
|
|
|
19
|
|
|
|
2.38
|
|
Total
|
|
|
|
26
|
|
|
|
4.5
|
|
The
following table shows our exploratory well drilling activity for fiscal years
ended February 28, 2007 and February 29, 2008.
|
|
Fiscal
Year 2008
|
|
|
Fiscal
Year 2007
|
|
State
|
|
Productive
|
|
|
Dry
|
|
|
Productive
|
|
|
Dry
|
|
Louisiana
|
|
|
2
|
|
|
|
1
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
In a
lawsuit filed on January 12, 2008, in East Baton Rouge Parish, State of
Louisiana, entitled, “Daybreak Oil and Gas, Inc. versus California Oil & Gas
Corporation, Suit No. 562933, Section 24, 19
th
Judicial District Court,” Daybreak seeks judgment in the amount of $587,465,
together with legal interest thereon from the date of judicial demand until
paid, for reasonable attorney fees on both principal and interest, and all costs
of the proceedings.
Under the
Joint Operating Agreement for the Krotz Springs Project, California Oil &
Gas Corporation (“COGC”) was responsible for its twenty-five percent (25%) share
of the working interest costs related to drilling and completing the Haas-Hirsch
#1 well in the Krotz Springs Project. As part of the drilling and
completion of the Haas-Hirsch #1 well, Daybreak incurred certain costs and
expenses on behalf of the various working interests associated with the
well. COGC was periodically sent invoices for its 25% share of these
costs. COGC has made partial payments pursuant to these periodic
invoices. COGC, however, has not made full payment.
As a
result, Daybreak has instituted this lawsuit. Service of this lawsuit
has been perfected on COGC in Calgary, Alberta, Canada. A hearing
date in court has been set for the end of May, 2008.
On May 1,
2008, Daybreak received $108,428 from the unitized field operator of the Krotz
Spings Project, who had been holding the production revenue of COGC in suspense
under instructions from Daybreak. This amount, representing net
production revenue from May 2007 through February 2008, will be applied to the
original claim.
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
During
the fourth quarter of the fiscal year ended February 29, 2008, we did not have
any matters submitted to a vote of our security holders of the
Company.
PART
II
ITEM 5.
|
MARKET
FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER
PURCHASE OF EQUITY SECURITIES
|
Our
Common Stock is quoted in the over the counter market on the OTC Bulletin Board
under the symbol “DBRM.OB”. From July 2007 to December 13, 2007, our
stock was quoted in the OTC pink sheet market, due to SEC filing
delinquencies. We returned to being quoted on the OTC Bulletin Board
market after the filing of our second fiscal quarter 2008 10-QSB
report. The following table shows the high and low closing sales
prices for the Common Stock for the two most recent fiscal years. The
quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission and may not represent actual transactions. The information
is derived from information received from online stock quotation
services.
|
|
|
|
|
|
|
Fiscal Year Ending
February
28, 2007
|
|
High
Closing
|
|
|
Low
Closing
|
|
First
Quarter
|
|
$
|
2.95
|
|
|
$
|
1.66
|
|
Second
Quarter
|
|
$
|
2.77
|
|
|
$
|
1.85
|
|
Third
Quarter
|
|
$
|
1.92
|
|
|
$
|
1.02
|
|
Fourth
Quarter
|
|
$
|
1.30
|
|
|
$
|
0.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ending
February
29, 2008
|
|
High
Closing
|
|
|
Low
Closing
|
|
First
Quarter
|
|
$
|
0.95
|
|
|
$
|
0.48
|
|
Second
Quarter
|
|
$
|
0.70
|
|
|
$
|
0.39
|
|
Third
Quarter
|
|
$
|
0.62
|
|
|
$
|
0.35
|
|
Fourth
Quarter
|
|
$
|
0.45
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
Dividend
Policy
The
Company has not declared or paid cash dividends or made distributions in the
past, and the Company does not anticipate that it will pay cash dividends or
make distributions in the foreseeable future.
As of
February 29, 2008, the Company had 2,333 shareholders of record. This number
does not include an indeterminate number of shareholders whose shares are held
by brokers in street name.
Recent
Sales of Unregistered Securities
Convertible
Debentures
-
From
March 19, 2005 through August 31, 2005, we borrowed $168,821 from six
shareholders, officers or directors through a series of twenty-seven
convertible debentures to finance our operating activities. These
convertible debentures had the following features: one year term, six percent
interest rate and the notes were convertible after six months to unregistered
common stock.
A
conversion rate of $0.25 per share was selected because a private placement
offering of our common stock was being planned at the same time for that
price. Both the principal and the accrued interest were eligible for
conversion to unregistered common stock.
During
the fiscal year ended February 28, 2006, twenty-four of the convertible
debentures representing $136,821 in principal were converted resulting in
566,135 shares of unregistered common stock being issued to satisfy the
principal and interest obligations. By February 28, 2007, all
twenty-seven of the debentures were converted resulting in a total of 703,675
shares of unregistered common stock being issued to satisfy principal and
interest obligations. The convertible debenture, shares issued upon
conversion of the debenture and shares issued for interest were issued pursuant
to a Section 4(2) exemption from registration under the Securities Act of 1933,
as amended.
In
accordance with EITF 00-27 and 98-5, the Company determined that the debentures
issued integrated a beneficial conversion feature (BCF). The Company
recorded a discount of $73,511 to reflect the BCF feature on the debentures at
the date of issuance. Utilizing the effective interest method, these discounts
have been amortized over the period commencing from the issuance date to the
date of stated redemption (i.e. maturity) of the debt in accordance with EITF
00-27. The discount of $73,511 was fully amortized at February 28,
2007.
The
Company has evaluated the application of SFAS No. 133 and EITF 00-19 for the
consideration of embedded derivatives with respect to the conversion feature of
the convertible debentures relative to the guidance of these pronouncements, the
Company has concluded that these debentures did not contain embedded
derivatives.
The
following is a listing of the twenty-seven convertible debentures that
occurred:
1) On
March 19, 2005, Terrence Dunne (former Chief Financial Officer and director), a
shareholder and 10% control person (at the time), loaned the Company $623 to
finance ongoing operating expenses. On the day of the loan, the
closing price of our stock was $0.47. On November 28, 2005, Mr. Dunne
converted the note plus interest into unregistered common stock. He
was issued 2,593 shares of stock from this conversion. On the day of
the conversion, the closing price of our stock was $0.52. Based on
the closing price, the value of the principal in the conversion was
$1,296.
2) On
March 22, 2005, Terrence Dunne (former Chief Financial Officer and director), a
shareholder and 10% control person (at the time), loaned the Company $10,216 to
finance ongoing operating expenses. On the day of the loan, the closing price of
our stock was $0.50. On November 28, 2005, Mr. Dunne converted the
note plus interest into unregistered common stock. He was issued
42,503 shares of stock from this conversion. On the day of the
conversion, the closing price of our stock was $0.52. Based on the
closing price, the value of the principal in the conversion was
$21,249.
3) On
March 23, 2005, Dale Lavigne, a director and shareholder, loaned the Company
$15,000 to finance ongoing operating expenses. On the day of the loan, the
closing price of our stock was $0.48. On November 28, 2005, Mr.
Lavigne converted the note plus interest into unregistered common
stock. He was issued 62,397 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $0.52. Based on the closing price, the value of the
principal in the conversion was $31,200.
4) On
March 23, 2005, Ronald Lavigne, a director and shareholder, loaned the Company
$3,000 to finance ongoing operating expenses. On the day of the loan, the
closing price of our stock was $0.48. On November 28, 2005, Mr.
Lavigne converted the note plus interest into unregistered common
stock. He was issued 12,479 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $0.52. Based on the closing price, the value of the
principal in the conversion was $6,240.
5) On
March 25, 2005, Thomas Kilbourne (former Treasurer and director) a shareholder
loaned the Company $3,000 to finance ongoing operating expenses. On
the day of the loan, the closing price of our stock was $0.37. On
November 28, 2005, Mr. Kilbourne converted the note plus interest into
unregistered common stock. He was issued 12,475 shares of stock from
this conversion. On the day of the conversion, the closing price of
our stock was $0.52. Based on the closing price, the value of the
principal in the conversion was $6,240.
6) On
March 25, 2005, Robert O’Brien, a shareholder and ten percent (10%) control
person (at the time), loaned the Company $15,000 to finance ongoing operating
expenses. On the day of the loan, the closing price of our stock was
$0.37. On August 31, 2006, Mr. O’Brien converted the note plus
interest into unregistered common stock. He was issued 65,168 shares
of stock from this conversion. On the day of the conversion, the
closing price of our stock was $1.92. Based on the closing price, the
value of the principal in the conversion was $125,123.
7) On
April 25, 2005, Terrence Dunne (former Chief Financial Officer and director), a
shareholder and 10% control person (at the time), loaned the Company $8,000 to
finance ongoing operating expenses. On the day of the loan, the closing price of
our stock was $0.35. On November 28, 2005, Mr. Dunne converted the
note plus interest into unregistered common stock. He was issued
33,105 shares of stock from this conversion. On the day of the
conversion, the closing price of our stock was $0.52. Based on the
closing price, the value of the principal in the conversion was
$16,640.
8) On
April 25, 2005, Dale Lavigne, a director and shareholder, loaned the Company
$8,000 to finance ongoing operating expenses. On the day of the loan, the
closing price of our stock was $0.35. On November 28, 2005, Mr.
Lavigne converted the note plus interest into unregistered common
stock. He was issued 33,105 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $0.52. Based on the closing price, the value of the
principal in the conversion was $16,640.
9) On
April 26, 2005, Ronald Lavigne, a director and shareholder, loaned the Company
$3,000 to finance ongoing operating expenses. On the day of the loan, the
closing price of our stock was $0.35. On November 28, 2005, Mr.
Lavigne converted the note plus interest into unregistered common
stock. He was issued 12,412 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $0.52. Based on the closing price, the value of the
principal in the conversion was $6,240.
10) On
April 26, 2005, Thomas Kilbourne (former Treasurer and director) a shareholder,
loaned the Company $3,000 to finance ongoing operating expenses. On the day of
the loan, the closing price of our stock was $0.35. On November 28,
2005, Mr. Kilbourne converted the note plus interest into unregistered common
stock. He was issued 12,412 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $0.52. Based on the closing price, the value of the
principal in the conversion was $6,240.
11) On
May 26, 2005, Terrence Dunne (former Chief Financial Officer and director), a
shareholder and 10% control person (at the time), loaned the Company $3,982 to
finance ongoing operating expenses. On the day of the loan, the closing price of
our stock was $0.33. On November 30, 2005, Mr. Dunne converted the
note plus interest into unregistered common stock. He was issued
16,418 shares of stock from this conversion. On the day of the
conversion, the closing price of our stock was $0.52. Based on the
closing price, the value of the principal in the conversion was
$8,283.
12) On
May 31, 2005, Thomas Kilbourne (former Treasurer and director) a shareholder,
loaned the Company $3,000 to finance ongoing operating expenses. On the day of
the loan, the closing price of our stock was $0.32. On November 30,
2005, Mr. Kilbourne converted the note plus interest into unregistered common
stock. He was issued 12,361 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $0.52. Based on the closing price, the value of the
principal in the conversion was $6,240.
13) On
June 16, 2005, Terrence Dunne (former Chief Financial Officer and director), a
shareholder and 10% control person (at the time), loaned the Company $10,000 to
finance ongoing operating expenses. On the day of the loan, the closing price of
our stock was $0.33. On February 10, 2006, Mr. Dunne converted the
note plus interest into unregistered common stock. He was issued
41,558 shares of stock from this conversion. On the day of the
conversion, the closing price of our stock was $1.70. Based on the
closing price, the value of the principal in the conversion was
$68,000.
14) On
July 8, 2005, Golconda Mining Company, a shareholder, loaned the Company $10,000
to finance ongoing operating expenses. On the day of the loan, the closing price
of our stock was $0.32. On January 25, 2006, Golconda Mining Company
converted the note plus interest into unregistered common stock. They
were issued 41,315 shares of stock from this conversion. On the day
of the conversion, the closing price of our stock was $1.54. Based on
the closing price, the value of the principal in the conversion was
$61,600.
15) On
July 27, 2005, Terrence Dunne (former Chief Financial Officer and director), a
shareholder and 10% control person (at the time), loaned the Company $13,000 to
finance ongoing operating expenses. On the day of the loan, the closing price of
our stock was $0.25. On February 10, 2006, Mr. Dunne converted the
note plus interest into unregistered common stock. He was issued
53,675 shares of stock from this conversion. On the day of the
conversion, the closing price of our stock was $1.70. Based on the
closing price, the value of the principal in the conversion was
$88,400.
16) On
July 27, 2005, Thomas Kilbourne (former Treasurer and director) a shareholder,
loaned the Company $6,500 to finance ongoing operating expenses. On the day of
the loan, the closing price of our stock was $0.25. On February 10,
2006, Mr. Kilbourne converted the note plus interest into unregistered common
stock. He was issued 26,838 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $1.70. Based on the closing price, the value of the
principal in the conversion was $44,200.
17) On
July 27, 2005, Robert O’Brien, a shareholder and ten percent (10%) control
person (at the time), loaned the Company $12,000 to finance ongoing operating
expenses. On the day of the loan, the closing price of our stock was
$0.25. On August 31, 2006, Mr. O’Brien converted the note plus
interest into unregistered common stock. He was issued 51,156 shares
of stock from this conversion. On the day of the conversion, the
closing price of our stock was $1.92. Based on the closing price, the
value of the principal in the conversion was $98,220.
18) On
August 1, 2005, Dale Lavigne, a director and shareholder, loaned the Company
$5,000 to finance ongoing operating expenses. On the day of the loan, the
closing price of our stock was $0.30. On February 10, 2006, Mr.
Lavigne converted the note plus interest into unregistered common
stock. He was issued 20,628 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $1.70. Based on the closing price, the value of the
principal in the conversion was $34,000.
19) On
August 1, 2005, Thomas Kilbourne (former Treasurer and director) a shareholder,
loaned the Company $500 to finance ongoing operating expenses. On the day of the
loan, the closing price of our stock was $0.30. On February 10,
2006, Mr. Kilbourne converted the note plus interest into unregistered common
stock. He was issued 2,063 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $1.70. Based on the closing price, the value of the
principal in the conversion was $3,400.
20) On
August 2, 2005, Ronald Lavigne, a director and shareholder, loaned the Company
$5,000 to finance ongoing operating expenses. On the day of the loan, the
closing price of our stock was $0.28. On February 10, 2006, Mr.
Lavigne converted the note plus interest into unregistered common
stock. He was issued 20,625 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $1.70. Based on the closing price, the value of the
principal in the conversion was $34,000.
21) On
August 22, 2005, Thomas Kilbourne (former Treasurer and director) a shareholder,
loaned the Company $5,000 to finance ongoing operating expenses. On the day of
the loan, the closing price of our stock was $0.44. On February
28, 2006, Mr. Kilbourne converted the note plus interest into unregistered
common stock. He was issued 20,625 shares of stock from this
conversion. On the day of the conversion the closing price of our
stock was $2.25. Based on the closing price, the value of the
principal in the conversion was $45,000.
22) On
August 24, 2005, Terrence Dunne (former Chief Financial Officer and director), a
shareholder and 10% control person (at the time), loaned the Company $6,000 to
finance ongoing operating expenses. On the day of the loan, the closing price of
our stock was $0.42. On February 28, 2006, Mr. Dunne converted the note plus
interest into unregistered common stock. He was issued 24,742 shares
of stock from this conversion. On the day of the conversion, the
closing price of our stock was $2.25. Based on the closing price, the
value of the principal in the conversion was $54,000.
23) On
August 26, 2005, Terrence Dunne (former Chief Financial Officer and director), a
shareholder and 10% control person (at the time), loaned the Company $6,000 to
finance ongoing operating expenses. On the day of the loan, the closing price of
our stock was $0.40. On February 28, 2006, Mr. Dunne converted the note plus
interest into unregistered common stock. He was issued 24,734 shares
of stock from this conversion. On the day of the conversion, the
closing price of our stock was $2.25. Based on the closing price, the value of
the principal in the conversion was $54,000.
24) On
August 26, 2005, Robert O’Brien, a shareholder and ten percent (10%) control
person (at the time), loaned the Company $5,000 to finance ongoing operating
expenses. On the day of the loan, the closing price of our stock was
$0.40. On August 31, 2006, Mr. O’Brien converted the note plus interest into
unregistered common stock. He was issued 21,216 shares of stock from
this conversion. On the day of the conversion, the closing price of
our stock was $1.92. Based on the closing price, the value of the
principal in the conversion was $40,735.
25) On
August 31, 2005, Ronald Lavigne, a director and shareholder, loaned the Company
$2,500 to finance ongoing operating expenses. On the day of the loan, the
closing price of our stock was $0.37. On February 28, 2006, Mr. Lavigne
converted the note plus interest into unregistered common stock. He was issued
10,298 shares of stock from this conversion. On the day of the conversion, the
closing price of our stock was $2.25. Based on the closing price, the
value of the principal in the conversion was $22,500.
26) On
August 31, 2005, Thomas Kilbourne (former Treasurer and director) a shareholder,
loaned the Company $2,500 to finance ongoing operating expenses. On
the day of the loan, the closing price of our stock was $0.37. On February 28,
2006, Mr. Kilbourne converted the note plus interest into unregistered common
stock. He was issued 10,298 shares of stock from this conversion. On
the day of the conversion, the closing price of our stock was
$2.25. Based on the closing price, the value of the principal in the
conversion was $22,500.
27) On
August 31, 2005, Terrence Dunne (former Chief Financial Officer and director), a
shareholder and 10% control person (at the time), loaned the Company $4,000 to
finance ongoing operating expenses. On the day of the loan, the closing price of
our stock was $0.37. On February 28, 2006, Mr. Dunne converted the
note plus interest into unregistered common stock. He was issued
16,476 shares of stock from this conversion. On the day of the
conversion, the closing price of our stock was $2.25. Based on the closing
price, the value of the principal in the conversion was $36,000.
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Between
January 25, 2006 and February 8, 2006, the Company borrowed a total of
$806,700 from seven shareholders in eight loans to finance exploration
activities as well as increase operating capital. The term of these
convertible debentures was for one year at a 10% interest rate. The
debentures were convertible to unregistered common stock after 61 days from
the date of issuance. The conversion rate was $0.50 per
share.
As of
February 28, 2007, all of these debentures had been converted to unregistered
common stock. The convertible debenture, shares issued upon conversion of the
debenture and shares issued for interest were issued pursuant to a Section 4(2)
exemption from registration under the Securities Act of 1933, as
amended.
In
accordance with EITF 00-27 and 98-5, the Company determined that the debentures
issued integrated a beneficial conversion feature (BCF). The Company recorded a
discount of $806,700 to reflect the BCF feature at the date of issuance.
Utilizing the effective interest method, these discounts have been amortized
over the period commencing on the issuance date to the date of stated redemption
(i.e. maturity) of the debt in accordance with EITF 00-27. The
discount of $806,700 was fully amortized at February 28, 2007.
The
Company has evaluated the application of SFAS No. 133 and EITF 00-19 for the
consideration of embedded derivatives with respect to the conversion feature of
the convertible debentures relative to the guidance of these pronouncements, the
Company has concluded that these debentures did not contain embedded
derivatives
The
following is a list of the eight convertible debentures that
occurred:
1) On
January 25, 2006, Michael Schneider, a shareholder loaned the Company $50,000 to
finance ongoing operating expenses. The loan agreement term was for one year at
a 10% interest rate. The loan could be converted to unregistered common stock at
the end of the term. The conversion rate was $0.50 per share. On
January 25, 2007, Mr. Schneider converted the debenture plus interest into
unregistered common stock. He was issued 102,055 shares of stock from
this conversion. On the day of the conversion the closing price of our stock was
$1.14. Based on the closing price, the value of the principal in the conversion
was $114,000.
2) On
January 27, 2006, Thomas Hallett, a shareholder loaned the Company $175,000 to
finance ongoing operating expenses. On the day of the loan, the closing price of
our stock was $1.60. On February 27, 2007, Mr. Schneider converted
the debenture plus interest into unregistered common stock. He was
issued 385,000 shares of stock from this conversion. On the day of
the conversion, the closing price of our stock was $.95. Based on the
closing price, the value of the principal in the conversion was
$332,500.
3) On
January 27, 2006, the Hooper Group, a shareholder and company controlled by
Keith Hooper a greater than 5% shareholder (at the time), loaned the Company
$200,000 to finance ongoing operating expenses. On the day of the loan, the
closing price of our stock was $1.60. On February 27, 2007, the
Hooper Group converted the debenture plus interest into unregistered common
stock. They were issued 440,000 shares of stock from this
conversion. On the day of the conversion, the closing price of our
stock was $.95. Based on the closing price, the value of the
principal in the conversion was $380,000.
4) On
January 30, 2006, W. Stanley Hooper, a shareholder loaned the Company $100,000
to finance ongoing operating expenses. On the day of the loan, the closing price
of our stock was $1.63. On February 27, 2007, Mr. Hooper converted
the debenture plus interest into unregistered common stock. He was
issued 220,000 shares of stock from this conversion. On the day of
the conversion, the closing price of our stock was $.95. Based on the
closing price, the value of the principal in the conversion was
$190,000.
5) On
February 1, 2006, Daniel McKinney, a shareholder loaned the Company $101,700 to
finance ongoing operating expenses. On the day of the loan, the closing price of
our stock was $1.59. On February 27, 2007, Mr. Schneider converted the debenture
plus interest into unregistered common stock. He was issued 223,740 shares of
stock from this conversion. On the day of the conversion, the closing
price of our stock was $.95. Based on the closing price, the value of
the principal in the conversion was $193,230.
6) On
February 1, 2006, Moreland Properties, a shareholder and company controlled by
W. Douglas Moreland loaned the Company $50,000 to finance ongoing operating
expenses. On the day of the loan, the closing price of our stock was
$1.59. On February 27, 2007, Moreland Properties converted the
debenture plus interest into unregistered common stock. They were
issued 110,000 shares of stock from this conversion. On the day of the
conversion, the closing price of our stock was $.95. Based on the
closing price, the value of the principal in the conversion was
$95,000.
7) On
February 2, 2006, James McQuade, a shareholder loaned the Company $100,000 to
finance ongoing operating expenses. On the day of the loan, the closing price of
our stock was $1.55. On February 27, 2007, James McQuade converted the debenture
plus interest into unregistered common stock.
He was
issued 220,000 shares of stock from this conversion. On the day of the
conversion, the closing price of our stock was $.95. Based on the closing price,
the value of the principal in the conversion was $190,000.
8)
On February 8, 2006, Michael Schneider, a shareholder loaned the Company $30,000
to finance ongoing operating expenses. On the day of the loan, the closing price
of our stock was $1.52. On February 27, 2007, Mr. Schneider converted the
debenture plus interest into unregistered common stock. He was issued 66,000
shares of stock from this conversion. On the day of the conversion, the closing
price of our stock was $.95. Based on the closing price, the value of the
principal in the conversion was $57,000.
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In
February and March 2006, we borrowed $325,001 from four shareholders to
finance operating capital needs. Three of the loans were in the form of
convertible debentures. The fourth loan was in the form of a loan
agreement. The term of all four loans, was for one year at a 10%
interest rate. They were convertible to unregistered common stock after 61
days from the date of issuance. The conversion rate is $0.75 per
share.
As of
February 28, 2007, the loan agreement had been converted to unregistered common
stock. The loan agreement shares issued upon conversion of the loan and shares
issued for interest were issued pursuant to a Section 4(2) exemption from
registration under the Securities Act of 1933, as amended.
In
December 2006, the three convertible debenture holders agreed to extend the term
of the debentures to August 31, 2007. In consideration of the term extension,
they were issued 150,001 warrants exercisable at $2.00 for a period of five
years. The warrants were valued at $119,283 using the Black-Scholes option
pricing model. The assumptions used in the Black-Scholes valuation model were: a
risk free interest rate of 4.7%; the current stock price at date of issuance of
$1.04 per share; the exercise price of the warrants of $2.00; the term of five
years; volatility of 117%; and dividend yield of 0.0%. The value of the warrants
was recognized at the time of issuance as a discount against the existing
convertible debentures and was amortized using the effective interest method
until maturity.
On April
30, 2007, one of the convertible debenture holders converted to Daybreak
unregistered common stock. A total of 37,169 shares were issued to satisfy the
principal and interest obligation.
On August
31, 2007, the remaining two convertible debenture holders agreed to extend the
term of the debentures to October 31, 2007. In consideration of the term
extension they received 112,000 warrants. The warrants were valued at $35,386
using the Black-Scholes option pricing model. The assumptions used in the
Black-Scholes valuation model were: a risk free interest rate of 4.1 %; the
current stock price at date of issuance of $0.53 per share; the exercise price
of the warrants of $0.53; the term of two years; volatility of 114%; and
dividend yield of 0.0%. The value of the warrants was recognized at
the time of issuance as a discount against the existing convertible debentures
and was amortized using the effective interest method until
maturity.
On
October 31, 2007, one of the two remaining convertible debenture holders chose
to receive a payoff of $76,756.87 representing the principal plus accumulated
interest of the convertible debenture. The other convertible
debenture holder agreed to extend the term of his debenture until January 31,
2008.
In
consideration of the term extension he received 90,000 warrants. The warrants
were valued at $25,587 using the Black-Scholes option pricing
model. The assumptions used in the Black-Scholes valuation model
were: a risk free interest rate of 3.9 %; the current stock price at date of
issuance of $0.40 per share; the exercise price of the warrants of $0.25; the
term of two years; volatility of 121.64%; and dividend yield of
0.0%. The value of the warrants was recognized at the time of
issuance as a discount against the existing convertible debentures and was
amortized using the effective interest method until maturity.
On
January 31, 2008, the remaining convertible debenture holder received a payoff
of $128,151.71 representing the principal plus accumulated interest of the
convertible debenture.
In
accordance with EITF 00-27 and 98-5, the Company determined that the debentures
issued integrated a beneficial conversion feature (BCF). The Company
has recorded a discount of $325,001 to reflect the BCF feature over this
period. The beneficial conversion features were recognized as
discounts on the debentures at the date of issuance. Utilizing the effective
interest method, these discounts have been amortized over the period commencing
on the issuance date to the date of stated redemption (i.e. maturity) of the
debt in accordance with EITF 00-27 rather than EITF 98-5. The discount of
$325,001 was fully amortized at February 28, 2007.
The
Company has evaluated the application of SFAS No. 133 and EITF 00-19 for the
consideration of embedded derivatives with respect to the conversion feature of
the convertible debentures relative to the guidance of these pronouncements, the
Company has concluded that these debentures did not contain embedded
derivatives
The
following is a list of the loan agreement and the three convertible debentures
that occurred:
1) On
February 24, 2006, Genesis Financial, Inc., a shareholder loaned the Company
$100,000 in a Loan Agreement to finance ongoing operating expenses. On the day
of the loan, the closing price of our stock was $2.50. On June 6, 2006, Genesis
Financial converted the note plus interest into unregistered common stock. They
were issued 137,023 shares of stock from this conversion. On the day of the
conversion, the closing price of our stock was $2.30. Based on the
closing price, the value of the principal in the conversion was $306,666. The
convertible note, shares issued upon conversion of the loan agreement and shares
issued for interest were issued pursuant to a Section 4(2) exemption from
registration under the Securities Act of 1933, as amended.
2) On
February 27, 2006, Daniel McKinney, a shareholder loaned the Company $125,001 in
a Convertible Debenture to finance ongoing operating expenses. On the day of the
loan, the closing price of our stock was $2.21. On December 28, 2006,
Mr. McKinney agreed to extend the term of the debenture to August 31, 2007. In
consideration of this extension, he was issued 83,333 warrants. On August 31,
2007, Mr. KcKinney agreed to extend the term of the debenture to October 31,
2007. In consideration of this extension, he was issued 70,000 warrants. On
October 31, 2007, Mr. McKinney again agreed to extend the term of the debenture
to January 31, 2008. At the end of the term Mr. McKinney was paid in full and
the debenture was cancelled. The convertible note and warrants issued upon
extension of the term of the note were issued pursuant to a Section 4(2)
exemption from registration under the Securities Act of 1933, as
amended.
3) On
February 28, 2006, James McQuade, a shareholder loaned the Company $75,000 in a
Convertible Debenture to finance ongoing operating expenses. On the day of the
loan, the closing price of our stock was $2.25. On December 29, 2006, Mr.
McQuade agreed to extend the term of the debenture to August 31, 2007. In
consideration of this extension, he was issued 50,000 warrants. On August 31,
2007, Mr. McQuade agreed to extend the term of the debenture to October 31,
2007. In consideration of this extension, he was issued 42,000 warrants. On
October 31, 2007, Mr. McQuade was paid in full and the debenture was cancelled.
The convertible note and warrants issued upon extension of the term of the note
were issued pursuant to a Section 4(2) exemption from registration under the
Securities Act of 1933, as amended.
4) On
March 6, 2006, Michael Schneider, a shareholder loaned the Company $25,000 in a
Convertible Debenture to finance ongoing operating expenses. On the day of the
loan, the closing price of our stock was $2.65. On January 16, 2007, Mr.
Schneider agreed to extend the term of the debenture to August 31, 2007. In
consideration of this extension, he was issued 16,668 warrants. On
April 30, 2007, Mr. Schneider converted the note plus interest into unregistered
common stock. He was issued 37,169 shares of stock from this
conversion. On the day of the conversion, the closing price of our stock was
$0.56. Based on the closing price, the value of the principal in the conversion
was $18,667. The convertible debenture, warrants, shares issued upon conversion
of the debenture and shares issued for interest were issued pursuant to a
Section 4(2) exemption from registration under the Securities Act of 1933, as
amended.
Warehousing Line of Credit
and Convertible Promissory Note
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On
December 19, 2005, we received an advance of $60,000 on a warehousing line of
credit from Genesis Financial Inc., to finance operating activities. This
warehousing line of credit for $180,000 was set up to fund the completion
costs of the Ginny South Prospect in Texas. When the exploratory
well was plugged and abandoned, the remaining balance of this line of credit
was not utilized and was therefore cancelled.
The
$60,000 advance, in the form of a Convertible Promissory Note, had no stated
interest and had the option to convert the note into Daybreak’s common stock at
any time until the June 30, 2006 maturity date of the note. In February 2006,
the $60,000 advance on the line of credit, as secured by the Convertible
Promissory Note, was converted into unregistered common stock of Daybreak which
resulted in 240,000 shares of stock being issued. The shares issued upon
conversion of the line of credit were issued pursuant to a Section 4(2)
exemption from registration under the Securities Act of 1933, as
amended.
No
discount was recorded for the imputed interest rate on the Convertible
Promissory Note as a beneficial conversion feature of $60,000 was recognized
upon issuance in accordance with EITF 00-27 and 98-5. The beneficial conversion
feature was recognized as a discount on the Convertible Promissory Note and
amortized utilizing the effective interest method, over the period commencing on
the issuance date to the date of stated redemption (i.e. maturity) of the debt
in accordance with EITF 00-27.
Upon
conversion, the remaining discount was recognized as interest and the
Convertible Promissory Note was cancelled. Financing costs for the Convertible
Promissory Note were paid by issuing 66,000 shares of unregistered common stock
to Genesis Financial and the director who guaranteed Convertible Promissory Note
as explained below. The common stock fair value of $38,380 was recognized as
interest expense on the date of grant and the fair value was determined using
Daybreak’s trading price on the date of grant.
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On
December 19, 2005, we issued 30,000 shares of unregistered common stock to
Terrence Dunne (former Chief Financial Officer and director) for his personal
guarantee on the Genesis Financial Convertible Promissory Note. The
fair value of the common stock shares was determined using our trading price
on the date of grant and were recorded as interest expense. The shares issued
for services were issued pursuant to a Section 4(2) exemption from
registration under the Securities Act of 1933, as
amended.
Private
Placements
-
Commencing
on June 7, 2005 and closing on December 19, 2005, we conducted an unregistered
offering through a private placement offering of our common stock for $0.25
per share. Gross proceeds of $1,100,000 were raised from the sale and
generated net proceeds of $1,087,500. A total of forty-three (43) investors
participated in this private placement. From this offering, 4,400,000 shares
of unregistered common stock were issued. We did not engage a placement agent
for this offering, instead all the shares were sold directly by the Company.
The trading prices of the common stock during the private placement period
ranged from a low of $ 0.23 per share to a high of $ 0.65 per share. The
proceeds from this offering were allocated to the following
expenditures:
Mineral
rights acquisition;
Drilling
wells;
Seismic
exploration;
General
and administrative expenses;
Legal and
accounting expenses.
The
shares were offered and sold pursuant to a Regulation D exemption from the
registration requirements of the Securities Act of 1933, as
amended. The shares were offered and sold only to accredited
investors.
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Commencing
on March 3, 2006 and closing on May 19, 2006, we conducted a private placement
offering of our common stock. Bathgate Capital Partners LLC, of
Denver, Colorado was the placement agent. We offered “units” for
sale, which were comprised of two shares of common stock and one common stock
purchase warrant (warrant). The units sold for $1.50 per unit, gross proceeds
from the sale were $6,020,404, which equated to 4,013,602 units. Our net
proceeds were $5,188,257 and the placement agent’s commission and other
expenses equaled $832,147.
A total
of 118 investors participated in this private placement. From the
offering, 8,027,206 shares of unregistered common stock and 4,013,602 warrants
were issued. The warrants were valued at $1,779,172 using the Black-Scholes
option pricing model. The assumptions used in the Black-Scholes
valuation model were: a risk free interest rate of 4.99%; the current stock
price at date of issuance of $2.70 per share; the exercise price of $2.00; an
expected term of five (5) years; volatility of 112%; and dividend yield of
0.0%.
The
Warrants are exercisable for a period of five (5) years after the closing date
at an exercise price of $2.00 per share. Daybreak may call the
warrants for redemption if (a) the average of the closing sale price of the
common stock is at or above $3.00 for twenty (20) out of thirty (30) trading
days prior to the date the warrants are called, and (b) the warrant shares are
registered under the Securities Act.
The
Warrants were valued using the Black-Scholes option pricing
model. The assumptions used in the Black-Scholes valuation model
were: a risk free interest rate of 4.99%; the current stock price at date of
issuance of $2.70 per share; the exercise price of the warrants; an expected
term of five (5) years; volatility of 112%; and dividend yield of 0.0%. As of
February 28, 2007, no subscriber warrants had been exercised.
Bathgate
Capital Partners, of Denver, Colorado was the placement agent. Joseph Lavigne,
son of Dale Lavigne (the Chairman and a director of Daybreak) is an employee of
Bathgate Capital Partners. The Placement Agent was paid a sales
commission of 10% of the gross proceeds of the private placement and a
non-accountable expense allowance of 3% of the gross proceeds totaling
$790,402. Additionally, the Placement Agent was paid a due diligence
fee of $15,000. For every ten (10) units sold, the Placement Agent earned three
(3) common stock warrants, two of which are exercisable at $0.75 per share and
one of which is exercisable at $2.00 per share. The Placement Agent warrants are
exercisable for a period of seven (7) years. The placement agent
earned 1,204,082 warrants, of which 802,721 are exercisable at $0.75 per share
and were determined to have a fair value of $2,043,752. The remaining 401,361
warrant shares are exercisable at $2.00 per share and were determined to have a
fair value of $973,970. The placement agent warrants were valued
using the Black-Scholes option pricing model. The assumptions used in
the Black-Scholes valuation model were: a risk free interest rate of 4.99%; the
current stock price at date of issuance of $2.70 per share; the exercise price
of the warrants; an expected term of seven years; volatility of 112%; and
dividend yield of 0.0%. As of February 28, 2007, no placement agent
warrants had been exercised.
Both the
subscriber warrants and the placement agent warrants have a cashless exercise
provision and contain customary anti-dilution provisions. The cashless exercise
provision allows for the holder of the warrants to receive a number shares equal
to the quotient of a) the product of the number warrants held and the amount by
which Daybreaks market traded stock price exceeds the exercise price of the
warrants on the date of exercise, divided by b) the market traded stock
price. The anti-dilution provisions permit the adjustment of the
number of shares issuable upon exercise of the warrants in the event of stock
splits, stock dividends, stock reversals and sales of substantially all of the
Company’s assets.
Daybreak
agreed to register the shares on a “best efforts” basis. If Daybreak
was unable to file the registration statement within the filing timeline,
Daybreak would have had to issue 4,013,602 additional warrants at an exercise
price of the lower of (a) the average closing sale price of its common stock for
twenty of the thirty trading days immediately preceding the date the
registration statement should have been filed, or (b) $1.50 per common share.
Daybreak did file the registration statement within the filing
timeline. No additional warrants were required to be
issued.
In
February 2008, Daybreak issued “goodwill” common stock warrants to the
participants of the Spring 2006 private placement. The warrants were
issued as a goodwill gesture to investors in the two 2006 private placements due
to the inability to complete the respective registration statements;
recognizing, this was a result of regulatory process delays rather than any
fault of the Company. Each participant was offered one “goodwill” warrant for
every unit that had been purchased in exchange waiving their rights under the
Registration Rights Agreement. On November 6, 2007, the date our
Board approved issuing these “goodwill” warrants, the closing price of our stock
was $0.40.
As of
February 29, 2008, we had received Registration Rights waiver letters from
approximately 76% of the participants in this private placement. The
warrants will expire on February 14, 2010, have an exercise price of $0.65 and
contain a cashless exercise provision. We have issued 2,998,934
goodwill warrants valued at $680,238 to these investors. A total of
4,013,602 warrants could be issued. The issued warrants were valued using
the Black-Scholes option pricing model. The assumptions used in the
Black-Scholes valuation model were: a risk free interest rate of 3.7 %; a term
of two years; volatility of 121.67%; and dividend yield of 0.0%.
Daybreak
evaluated the application of SFAS No. 133 and EITF 00-19 with respect to the
conversion feature and the registration rights for consideration of embedded
derivatives and concluded that the preferred stock and registration rights
instruments did not have embedded derivatives.
The
relative fair value of the Common Stock and the Common Stock Purchase Warrants
was as follows:
Description
|
|
Shares
|
|
|
Relative
Fair
Value
Amount
|
|
Common
Stock
|
|
|
8,027,206
|
|
|
$
|
4,241,232
|
|
Common
Stock Purchase Warrants
|
|
|
4,013,602
|
|
|
|
1,779,172
|
|
Total
Proceeds
|
|
|
|
|
|
|
6,020,404
|
|
Placement
fees
|
|
|
|
|
|
|
(832,147
|
)
|
Net
Proceeds
|
|
|
|
|
|
$
|
5,188,257
|
|
The
trading prices of our common stock during the private placement period ranged
from a low of $ 1.66 per share to a high of $ 2.80 per share. The
proceeds from this offering were allocated to the following
expenditures:
Land
acquisition;
Drilling
additional wells;
Connecting
well to pipeline;
Seismic
exploration;
General
and administrative expenses;
Legal and
accounting expenses.
This
private placement offering was made pursuant to a Rule 506 exemption from
registration promulgated under Regulation D of the Securities Act of 1933, as
amended. All offerees and purchasers in this private placement were accredited
investors.
-
Commencing
on July 7, 2006 and closing on July 18, 2006, we conducted a private placement
of our Series A Convertible Preferred Stock. Bathgate Capital Partners LLC, of
Denver, Colorado was the placement agent. We offered “units” for sale which
were comprised of one share of our Series A Convertible Preferred stock and
two common stock purchase warrants for $3.00 per unit. Gross proceeds from the
sale were $4,199,291 which equated to 1,399,765 units. Our net proceeds were
$3,626,204 and the placement agent’s commission and other expenses equaled
$573,091.
A total
of 100 investors participated in this private placement. From the offering,
1,399,765 shares of Series A Convertible Preferred stock and 2,799,527 common
stock warrant shares were issued. Holders of Series A Convertible Preferred
stock earn a dividend, in the amount of 6% of the original purchase price per
year. Accumulated dividends do not bear interest. Dividends are
payable upon declaration by the Board of Directors and none have been declared.
The Series A Preferred can be converted by the shareholder at any time into
three shares of Daybreak’s common stock. If Daybreak’s common stock is
registered under the Securities Act of 1933, the Series A Preferred shall be
automatically converted into common stock at any time after the effective date
of the registration statement if Daybreak’s common stock closes at or above
$3.00 per share for twenty (20) out of thirty trading days (30)
days.
The
Warrants included in the private placement, are exercisable for a period of five
(5) years after the closing date at an exercise price of $2.00 per share. In
accordance with EITF 98-5, Daybreak valued the warrants and the beneficial
conversion feature of the preferred stock. Accordingly, Daybreak
recorded a discount for the warrants and beneficial conversion feature (BCF), of
$4,199,295. The discount is attributable to the fair value of the Warrants and
the intrinsic value of the conversion feature of the preferred stock. The
value of the BCF was recognized and measured separately by allocating to
additional paid-in capital the proceeds equal to the $1,489,222 relative fair
value of the Warrants and the $2,710,073 intrinsic value of the conversion
feature. Daybreak also recorded a deemed dividend to reflect the full
amortization of the discount of the value of the Warrants and conversion
features of $4,199,295. The fair value of each Warrant granted was estimated
using the Black-Scholes pricing model. The assumptions used in the Black-Scholes
valuation model were: a risk free interest rate of 4.99%; the current stock
price at date of issuance of $2.20 per share; the exercise price of the warrants
at $1.00; an expected term of five years; volatility of 113%; and dividend yield
of 0.0%. As of February 28, 2007, no warrants had been exercised.
Bathgate
Capital Partners, of Denver, Colorado (Bathgate) was the placement
agent. Joseph Lavigne, son of Dale Lavigne (the Chairman and a
director of Daybreak) is an employee of Bathgate. Bathgate was paid a sales
commission of 10% of the gross proceeds of the private placement and a
non-accountable expense allowance of 3% of the gross proceeds totaling $547,589.
For every $30.00 invested, Bathgate earned three (3) common stock purchase
warrants exercisable at $1.00 per share. The warrants are exercisable for a
period of five (5) years. A total of 419,930 warrants were issued to Bathgate
from this private placement and were valued at $816,374. The placement agent
warrants were valued using the Black-Scholes option pricing model. The
assumptions used in the Black-Scholes valuation model were: a risk free interest
rate of 4.99%; the current stock price at date of issuance of $2.20 per share;
the exercise price of the warrants at $1.00; an expected term of five years;
volatility of 113%; and dividend yield of 0.0%. As of February 28,
2007, no placement agent warrants had been exercised.
Both the
subscriber warrants and the placement agent warrants contain anti-dilution
provisions. The anti-dilution provisions permit the adjustment of the number of
shares issuable upon exercise of the warrants in the event of stock splits,
stock dividends, stock reversals and sales of substantially all of the Company’s
assets. The placement agent warrants contain a cashless exercise
provision.
The
cashless exercise provision allows for the holder of the warrants to receive a
number shares equal to the quotient of a) the product of the number warrants
held and the amount by which Daybreaks market traded stock price exceeds the
exercise price of the warrants on the date of exercise, divided by b) the market
traded stock price.
Daybreak
agreed to register the Series A Preferred shares on a “best efforts”
basis. If Daybreak was unable to file the registration statement
within the filing timeline, Daybreak would have to issue 1,399,765 additional
warrants at an exercise price of $2.00 per share. Daybreak was required to file
the registration statement within sixty (60) days after the registration
statement for the common stock private placement from the May of 2006 became
effective. Daybreak did file the registration statement on time and no
additional warrant issuances were required.
In
February 2008, Daybreak issued “goodwill” common stock warrants to the
participants of the July 2006 private placement. The warrants were issued as a
goodwill gesture to investors in the two 2006 private placements due to the
inability to complete the respective registration statement; recognizing, this
was a result of regulatory process delays rather than any fault of the Company.
Each participant was offered one “goodwill” warrant for every unit that had been
purchased in exchange waiving their rights under the Registration Rights
Agreement. On November 6, 2007, the date our Board approved issuing
these “goodwill” warrants, the closing price of our stock was $0.40 As of
February 29, 2008, we had received Registration Rights waiver letters from
approximately 79% of the participants in this private placement. The warrants
will expire on February 14, 2010, have an exercise price of $0.65 and contain a
cashless exercise provision. We have issued 1,121,267 goodwill
warrants valued at $254,283 to these investors. A total of 1,399,765
warrants could be issued. The issued warrants were valued using the
Black-Scholes option pricing model. The assumptions used in the
Black-Scholes valuation model were: a risk free interest rate of 3.7 %; a term
of two years; volatility of 121.67%; and dividend yield of 0.0%.
Daybreak
evaluated the application of SFAS No. 133 and EITF 00-19 with respect to the
conversion feature and the registration rights for consideration of embedded
derivatives and concluded that the preferred stock and registration rights
instruments did not have embedded derivatives.
The
relative fair values of the Series A Convertible Preferred Shares and the Common
Stock Purchase Warrants were as follows:
Description
|
|
Shares
|
|
|
Relative
Fair
Value
Amount
|
|
Series
A Convertible Preferred
|
|
|
1,399,765
|
|
|
$
|
2,710,073
|
|
Common
Stock Purchase Warrants
|
|
|
2,799,530
|
|
|
|
1,489,222
|
|
Total
Proceeds
|
|
|
|
|
|
|
4,199,295
|
|
Offering
Costs
|
|
|
|
|
|
|
(573,091
|
)
|
Net
Proceeds
|
|
|
|
|
|
$
|
3,626,204
|
|
The
trading prices of the common stock during the private placement period ranged
from a low of $2.20 per share to a high of $2.35 per share. The
proceeds from this offering were allocated to the following
expenditures:
Completions
of wells;
Connecting
wells to pipelines;
Drilling
additional wells;
Working
capital.
This
offering was made pursuant to a Rule 506 exemption from registration promulgated
under Regulation D of the Securities Act of 1933, as amended. All offerees and
purchasers in this private placement were accredited investors.
From
March 26, 2007 through February 29, 2008, ten (10) Series A Convertible
Preferred shareholders, owning a total of 102,300 shares of our Series A
Convertible Preferred Stock, from our July 2006 private placement, chose to
convert their preferred shares to common stock. In accordance with the terms of
the private placement agreement under which the preferred stock was purchased,
each preferred share was converted to three shares of common stock resulting in
306,900 shares of common stock being issued.
-
Commencing
on October 19, 2007 and closing on December 28, 2007, we conducted an
unregistered offering through a private placement of our common stock under
the securities transaction exemption Regulation D Rule 506 of the Securities
Act of 1933. Shares were offered at $0.25 per share to “accredited investors”
only as defined in Regulation D under the Securities Act of
1933. The shares were sold directly by Daybreak and no placement
agent was involved in the offering. A total of 2,497,000 shares of
unregistered common stock were sold to thirteen (13) investors resulting in
$624,250 in gross proceeds. Offering expenses were approximately $6,500. Net
proceeds were used to meet our drilling commitments in the Tuscaloosa project
and general and administrative expenses.
-
Commencing
on January 2, 2008 we began conducting an unregistered offering through a
private placement of our common stock under the securities transaction
exemption Regulation D Rule 506 of the Securities Act of 1933. Shares are
offered at $0.25 per share to “accredited investors” only as defined in
Regulation D under the Securities Act of 1933. The shares are being sold
directly by Daybreak and also through a placement agent. As of February 29,
2008, a total of 605,000 shares of unregistered common stock have been sold to
seven (7) investors resulting in $151,250 in gross proceeds. The
Placement Agent was paid a sales commission of 10% of the gross proceeds of
their firm’s sales of the private placement and a non-accountable expense
allowance of 3% of the gross proceeds of their firm’s sales totaling
$23,112.50. Net proceeds have been used to meet our drilling commitments in
the Tuscaloosa project and general and administrative
expenses.
Stock for
Services
In
accordance with the current interpretation of FAS 123(R) the value of the below
listed transaction has been expensed as of the grant date of each transaction as
reflected in our restated financial statements. The shares issued for services
were issued pursuant to a Section 4(2) exemption from registration under the
Securities Act of 1933, as amended.
On April
27, 2005, we issued 350,000 shares of unregistered common stock to AnMac
Enterprises (a company owned by Michael McIntyre) for Investor Relations (“IR”)
consulting services from March 1, 2005 through February 28, 2006. On the grant
date of March 1, 2005, the closing price of our stock was $0.79. Based on the
closing price the value of this stock issuance was $276,500.
On April
27, 2005, we issued 500,000 shares of unregistered common stock to Eric L. Moe
(appointed Chief Executive Officer in March 2006; resigned as Chief Executive
Officer and director in December 2007) for Investor Relations (“IR”) consulting
services from March 1, 2005 through February 28, 2006. On the grant date of
March 1, 2005, the closing price of our stock was $0.79. Based on the closing
price the value of this stock issuance was $395,000.
On May
11, 2005, we issued 1,100,000 shares of unregistered common stock to 413294
Alberta, Ltd., of Calgary, Alberta to supply the services of Robert N. Martin,
as our Company President (resigned as President and director December 2007). On
the grant date of March 1, 2005, the closing price of our stock was $0.79. Based
on the price the value of this stock issuance was
$869,000.
On May
25, 2005, we issued 300,000 shares of unregistered common stock to Irwin
Renneisen for IR consulting services. On the grant date of May 18, 2005, the
closing price of our stock was $0.38. Based on the closing price the value of
this stock issuance was $114,000. In August 2005, the 300,000 shares
were voided and returned on August 25, 2005, and we then issued Irwin Renneisen
30,000 shares of restricted common stock. On the revised grant date
of August 25, 2005, the closing price of our stock was $0.44. Based on the
closing price the value of this stock issuance was $13,200.
On
October 5, 2005, we issued 1,000,000 shares of unregistered common stock to Eric
L. Moe (appointed Chief Executive Officer in March 2006; resigned as Chief
Executive Officer and director in December 2007) for IR consulting services. On
the grant date of September 27, 2005, the closing price of our stock was $0.56.
Based on the closing price the value of this stock issuance was
$560,000.
On
October 27, 2005, we issued 1,667 shares of unregistered common stock to Laura
Crist as partial payment for marketing services for our web site.
On
October 27, 2005, we issued 10,000 shares of unregistered common stock to
Gregory Lipsker as payment for legal services.
On
November 30, 2005, we issued 400,000 shares of unregistered common stock to
Terrence J. Dunne, (appointed a director in January 2006 and Chief Financial
Officer in April 2006; resigned as Chief Financial Officer and director in
December 2007), a shareholder and 10% control person (at the time), for
management services. On the grant date of September 27, 2005, the
closing price of our stock was $0.56. Based on the closing price the value of
this stock issuance was $224,000.
On
January 17, 2006, we issued 300,000 shares of unregistered common stock to Dale
B. Lavigne (Chairman), for management services. On the grant date of September
27, 2005, the closing price of our stock was $0.56. Based on the closing price
the value of this stock issuance was $168,000.
On
January 17, 2006, we issued 300,000 shares of unregistered common stock to
Ronald D. Lavigne (director) for management services. On the grant date of
September 27, 2005, the closing price of our stock was $0.56. Based on the
closing price the value of this stock issuance was $168,000.
On
January 17, 2006, we issued 400,000 shares of unregistered common stock to
Thomas C. Kilbourne (Treasurer and director; resigned in December 2007) for
management services. On the grant date of September 27, 2005, the
closing price of our stock was $0.56. Based on the closing price the
value of this stock issuance was $224,000.
On
January 17, 2006, we issued 600,000 shares of unregistered common stock to Kirby
Cochran, a shareholder for IR consulting services. On the grant date
of January 13, 2006, the closing price of our stock was $0.55. Based on the
closing price the value of this stock issuance was $330,000.
On
February 17, 2006, we issued 100,000 shares of unregistered common stock to
Bennett W. Anderson, a shareholder for consulting services. On the
grant date of February 17, 2006, the closing price of our stock was
$2.23. Based on the closing price the value of this stock issuance
was $223,000.
On May 3,
2006, we issued 70,000 shares of unregistered common stock to Gregory Donelson
for consulting services. On the grant date of December 14, 2005, the
closing price of our stock was $0.61. Based on the closing price the value of
this stock issuance was $42,700.
On May
10, 2006, we issued 150,000 shares of unregistered common stock to AnMac
Enterprises (a company owned by Michael McIntyre) for Investor Relations (“IR”)
consulting work from March 1, 2006 through February 28, 2007. On the grant date
of March 1, 2006, the closing price of our stock was $2.39. Based on
the closing price the value of this stock issuance was $358,500.
On May
26, 2006, we issued 250,000 shares of unregistered common stock to 413294
Alberta, Ltd., of Calgary, Alberta to supply the services of Robert N. Martin,
as our Company President (resigned as President and director December 2007). On
the grant date of March 1, 2006, the closing price of our stock was $2.39. Based
on the closing price the value of this stock issuance was $597,500.
On May
26, 2006, we issued 250,000 shares of unregistered common stock to Eric L. Moe,
Chief Executive Officer (resigned as Chief Executive Officer and director in
December 2007), for management services from March 1, 2006 through February 28,
2007. On the grant date of March 1, 2006, the closing price of our stock was
$2.39. Based on the closing price the value of this stock issuance was
$597,500.
On May
26, 2006, we issued 100,000 shares of unregistered common stock to Thomas C.
Kilbourne, (Treasurer and a director; resigned in December 2007) for management
services from March 1, 2006 through February 28, 2007. On the grant date of
March 1, 2006, the closing price of our stock was $2.39. Based on the closing
price the value of this stock issuance was $239,000.
On August
31, 2006, we issued another 250,000 shares of unregistered common stock to Eric
L. Moe, (Chief Executive Officer and a director; resigned as Chief Executive
Officer and director in December 2007). The shares were issued as
additional compensation. On the grant date of August 3, 2006, the closing price
of our stock was $2.05. Based on the closing price the value of this
stock issuance was $512,500.
On
February 23, 2007, we issued 200,000 shares of unregistered common stock to
Timothy R. Lindsey, (a director; appointed interim President and Chief Executive
Officer in December 2007) for consulting services from January 2, 2007, through
February 28, 2008. On the grant date of January 2, 2007, the closing price of
our stock was $1.30. Based on the closing price the value of this
stock issuance was $260,000.
On August
17, 2007, we issued 10,000 shares of unregistered common stock to Frank Duval, a
shareholder for consulting services. On the grant date of August 17,
2007, the closing price of our stock was $0.45. Based on the closing price the
value of this stock issuance was $4,500.
Stock for Directors
Services
In
accordance with the current interpretation of FAS 123(R) the value of the below
listed transaction has been expensed as of the grant date of each transaction as
reflected in our restated financial statements. The shares issued for services
were issued pursuant to a Section 4(2) exemption from registration under the
Securities Act of 1933, as amended.
On
November 30, 2005, we issued 18,000 shares of unregistered common stock to each
of the six members of the Board of Directors. These directors were
413295 Alberta Ltd. (Robert N. Martin), Michael Curtis, Dale B. Lavigne, Jeffrey
R. Dworkin, Ronald D. Lavigne and Thomas C. Kilbourne. On the grant
date of October 25, 2005, the closing price of our stock was $0.55. Based on the
closing price the value of each stock issuance was $9,900.
On
November 30, 2005, we issued 9,000 shares of unregistered common stock worth to
each of the six members of the Board of Directors for director’s fees for the
third quarter of the current fiscal year. These directors were 413295
Alberta Ltd. (Robert N. Martin), Michael Curtis, Dale B. Lavigne, Jeffrey R.
Dworkin, Ronald D. Lavigne and Thomas C. Kilbourne. On the grant date
of November 30, 2005, the closing price of our stock was $0.52. Based on the
closing price the value of each stock issuance was $4,680.
On
February 28, 2006, we issued 3,000 shares of unregistered common stock worth to
each of the seven members of the Board of Directors for director’s fees for the
fourth quarter of the current fiscal year. These directors were
413295 Alberta Ltd. (Robert N. Martin), Michael Curtis, Dale B. Lavigne, Jeffrey
R. Dworkin, Ronald D. Lavigne, Terrence J. Dunne and Thomas C.
Kilbourne. On the grant date of February 28, 2006, the closing price
of our stock was $2.25. Based on the closing price the value of each stock
issuance was $6,750.
Stock for Oil and Gas
Properties
In
accordance with the current interpretation of FAS 123(R) the value of the below
listed transaction has been expensed as of the grant date of each transaction as
reflected in our restated financial statements. The shares issued for services
were issued pursuant to a Section 4(2) exemption from registration under the
Securities Act of 1933, as amended.
On August
31, 2005, we issued 100,000 shares of unregistered common stock to Margaret
Perales of MPG Petroleum as consideration for participation in the Pearl
Prospect located in Texas. On the grant date of August 31, 2005, the closing
price of our stock was $0.37. Based on the closing price the value of
this stock issuance was $37,000.
On
October 27, 2005, we issued 600,000 shares of unregistered common stock to Sam
Pfiester, Trustee for the Chicago Mill Joint Venture (“CMJV”) in the Tuscaloosa
project in Louisiana. On the grant date of September 29, 2005, the closing price
of our stock was $0.63. Based on the closing price the value of this stock
issuance was $378,000.
On May
31, 2006, we issued 150,000 shares of unregistered common stock to Big Sky
Western Canada of Calgary, Alberta, Canada as consideration for our
participation in the 40 Mile Coulee project in Alberta, Canada. On the grant
date of May 30, 2006, the closing price of our stock was $2.80. Based on the
closing price the value of this stock issuance was $420,000. On
December 8, 2006, we repurchased the original 150,000 shares from Big Sky
Western Canada for the original book value of $1.00 per share as part of the
settlement of the plug and abandonment negotiations on the 40 Mile Coulee
project. The shares were consequently cancelled.
On
September 22, 2006, we issued 72,500 shares of unregistered common stock to
Strike Oil & Minerals, Corp., as part of our purchase of an additional eight
percent (8%) working interest in the Tuscaloosa project in
Louisiana. On the grant date of September 22, 2006, the closing price
of our stock was $1.50. Based on the closing price the value of this stock
issuance was $108,750.
Common Stock
Warrants
In
February 2008, Daybreak issued “goodwill” common stock warrants to the
participants of the two private placement offerings that were held during
2006. These warrants have been previously described in the preceding
private placement information of this 10-KSB annual report. The warrants were
issued as a goodwill gesture to investors in the private placements due to the
inability to complete the respective registration statements; recognizing, this
was a result of regulatory process delays rather than any fault of the
Company. Each participant from both private placements was offered
one “goodwill” warrant for every unit that had been purchased in exchange
waiving their rights under the Registration Rights Agreement. On
November 6, 2007, the date our Board approved issuing these “goodwill” warrants,
the closing price of our stock was $0.40 As of February 29, 2008, we had
received acceptance letters from approximately 77% of the participants in these
two private placements. The warrants will expire on February 14,
2010, have an exercise price of $0.65 and contain a cashless exercise
provision. We have issued 4,120,201 goodwill warrants
valued at $934,521 to these investors. A total of 5,413,367 warrants
could be issued. The issued warrants were valued using the Black-Scholes option
pricing model. The assumptions used in the Black-Scholes valuation
model were: a risk free interest rate of 3.7 %; a term of two years; volatility
of 121.67%; and dividend yield of 0.0%.
Securities
Authorized for Issuance under Equity Compensation Plan
We have
no agreements with any employees or consultants for issuing options, warrants or
rights on our stock. We have however, issued unregistered restricted common
stock in the past as a part of our employment and consulting
contracts. These instances are explained in the detail immediately
above.
Common
Stock
The
Company is authorized to issue 200,000,000 shares of Common Stock with a par
value of $0.001 of which 40,877,230 were issued as of February 28,
2007. At February 29, 2008, a total of 44,293,299 shares were issued
and outstanding. 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 fifty
percent (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 fifty percent (50%) would not be able
to elect any directors.
Preferred
Stock
The
Company is authorized to issue 10,000,000 shares of Preferred Stock with a par
value of $0.001 of which none had been issued as of February 28,
2006. Our 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.
On June
30, 2006, in action by the Board of Directors, 2,400,000 of these preferred
shares were designated as Series A Convertible Preferred. In July
2006, we completed a private placement of the Series A Convertible Preferred
that resulted in the issuance of 1,399,765 shares. At February 29,
2008, there were 1,297,465 shares issued and outstanding. There were
a total of 102,300 shares that were converted to our common stock during the
fiscal year.
Series
A Convertible Preferred Stock
The
following is a summary of the rights and preferences of the Series A Convertible
Preferred Stock
Conversion:
The
preferred shareholder shall have the right to convert the Series A Convertible
Preferred Stock into the Company’s Common Stock at any time. Each
share of Preferred Stock is convertible into three (3) shares of Common
Stock.
The
Series A Convertible Preferred Stock shall be automatically converted into
Common Stock if the Common Stock into which the Series A Convertible Preferred
Stock are convertible are registered with the Securities and Exchange Commission
and at any time after the effective date of the registration statement the
Company’s Common Stock closes at or above $3.00 per share for twenty (20) out of
thirty trading days (30) days.
Dividend:
Holders
of Series A Convertible Preferred Stock 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, 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
Convertible Preferred Stock do not bear interest. Dividends are
payable upon declaration by the Board of Directors.
The
holders of the Series A Convertible Preferred Stock will vote together with the
common stock and not as a separate class except as specifically provided herein
or as otherwise required by law. Each share of the Series A
Convertible Preferred Stock 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
Convertible Preferred Stock.
Debt
Securities
From
March 23, 2005 through August 31, 2005, in a series of twenty-seven loans, we
borrowed from six officers, directors or shareholders, a total of $168,821 to
finance ongoing operations. These convertible debentures were for a
term of one year; had a 6% interest rate and both the principal and interest
could be converted to unregistered common stock after a minimum period of six
months. The conversion rate was $0.25 per share. During the fiscal
year ended February 28, 2006, twenty-four of the twenty-seven loans were
converted to unregistered common stock resulting in 566,134 unregistered shares
being issued. During the fiscal year ended February 28, 2007, the
remaining three convertible debentures were converted to unregistered common
stock resulting in 137,541 unregistered shares being issued.
From
January 25, 2006 through February 8, 2006, in a series of eight loans, we
borrowed from seven shareholders a total of $806,700 to finance ongoing
operations. These convertible debentures were for a term of one year;
had a 10% interest rate and both the principal and interest could be converted
to unregistered common stock after a minimum period of sixty-one
days. The conversion rate was $0.50 per share. During the fiscal year
ended February 28, 2007, all eight loans were converted to unregistered common
stock resulting in 468,592 unregistered shares being issued.
From
February 24, 2006 through March 6, 2006, in a series of four loans, we borrowed
from four existing shareholders a total of $325,001 to finance ongoing
operations. These loans were in the form of convertible debentures
(3) and a loan agreement with the following features. The term was
for a period of one year; the interest rate was 10%; the notes could be
converted to our common stock after a holding period of 61 days; and the
conversion rate is $0.75 per share. The loan agreement balance of $100,000 plus
interest was converted to unregistered common stock on June 6,
2006. In December 2006, all three convertible debenture holders
agreed to extend the term of the notes to August 31, 2007. This
agreement for the term extension did not affect the debenture holders rights to
convert to common stock at any time. We issued 150,001 warrants to these
debenture holders as consideration for extending the term of the notes. The fair
market value of these warrants was $119,283. On April 30, 2007, one
debenture holder chose to convert his note to unregistered common
stock. He was issued 37,169 shares of stock from this
conversion. On August 31, 2007, the remaining two convertible
debenture holders agreed to extend the term of the debentures to October 31,
2007. We issued 112,000 warrants to these debenture holders as
consideration for extending the term of the notes. The warrants were
valued at $35,386 using the Black-Scholes option pricing
model.
The
assumptions used in the Black-Scholes valuation model were: a risk free interest
rate of 4.1 %; the current stock price at date of issuance of $0.53 per share;
the exercise price of the warrants of $0.53; the term of two years; volatility
of 114%; and dividend yield of 0.0%.
On
October 31, 2007, one of the two remaining convertible debenture holders chose
to receive a payoff of $76,756.87 representing the principal plus accumulated
interest of the convertible debenture. The other convertible
debenture holder agreed to extend the term of his debenture until January 31,
2008. In consideration of the term extension he received 90,000
warrants. The warrants were valued at $25,587 using the Black-Scholes
option pricing model. The assumptions used in the Black-Scholes valuation model
were: a risk free interest rate of 3.9 %; the current stock price at date of
issuance of $0.40 per share; the exercise price of the warrants of $0.25; the
term of two years; volatility of 121.64%; and dividend yield of
0.0%. The value of the warrants was recognized at the time of
issuance as a discount against the existing convertible debentures and was
amortized using the effective interest method until maturity.
On
January 31, 2008, the remaining convertible debenture holder received a payoff
of $128,151.71 representing the principal plus accumulated interest of the
convertible debenture.
ITEM 6.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
|
The
following management’s discussion and analysis (“MD&A”) is management’s
assessment of the historical financial and operating results of Daybreak Oil and
Gas, Inc. (“Daybreak”, the “Company”, “we”, “us” or “our”) during the period
covered by the financial statements. This MD&A should be read in conjunction
with the audited financial statements and the related notes and other
information included elsewhere in this 10-KSB report.
Additional
information relating to Daybreak is available on EDGAR at www.edgar-online.com
or our web site at www.daybreakoilandgas.com. Our stock is quoted on
the NASDAQ over the counter (OTC.BB) market under the symbol
DBRM.OB.
Safe Harbor
Provision
Certain
statements contained in our Management’s Discussion and Analysis of Financial
Condition or Plan of Operation 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 Securities Exchange Act of 1934, as amended. All statements
other than statements of historical facts contained in this report, including
statements regarding our current expectations and projections about future
results, business strategy, performance, prospects and opportunities, are
forward-looking statements. To understand about forward looking statements,
please refer the section labeled forward looking statements at the beginning of
this 10-KSB report.
Plan
of Operation
As an
early stage oil and gas exploration and development company our expenditures
consist primarily of geological and engineering services, acquiring mineral
leases, exploration and drilling costs and travel. Our expenses also consist of
consulting and professional services, employee compensation, legal and
accounting and general and administrative expenses which we have incurred in
order to address necessary organizational activities.
Our
longer-term success depends on, among many other factors, the acquisition and
drilling of commercial grade oil and gas properties and on the prevailing sales
prices for oil and natural gas along with associated operating expenses. Oil and
natural gas prices have been extremely volatile in recent years and are affected
by many factors outside our control. This volatile nature of the energy markets
makes it difficult to estimate future prices of oil and natural gas; however,
any prolonged period of depressed prices would have a material adverse effect on
our results of operations and financial condition.
Our
operations are focused on identifying and evaluating prospective oil and gas
properties and funding projects that we believe have the potential to produce
oil or gas in commercial quantities. We are currently developing projects in
Alabama, California, Louisiana and Texas. In November 2006, we became
the operator of the Tuscaloosa project in Tensas and Franklin Parishes in
Louisiana. In January 2007, drilling began in Louisiana on the Krotz
Springs project. We were the operator of record during the drilling
and completion phases of this project. In Alabama, we have been operator of the
East Gilbertown Field since June 2007. During the past three fiscal years, we
have been involved in the drilling of ten wells in Louisiana, Texas and Alberta,
Canada. We have achieved commercial production in four of these
projects. Additionally, we have participated in eighteen workover projects in
Alabama and Texas and have achieved or increased commercial production in
fifteen of the wellbores.
Selected Financial
Information
Since our
inception, we have incurred recurring losses from operations with negative cash
flow and have depended on external financing to sustain our
operations. During the fiscal year ended February 29, 2008, we
reported losses of $5,200,694. There is no assurance that we will be
able to achieve profitability.
Our
balance sheet on February 29, 2008, shows total assets of $3,661,037 comprised
primarily of oil and gas properties (net of Depreciation, Depletion,
Amortization and Impairment) of $169,521, accounts receivable (including trade,
related parties and joint interest participants) of $813,697, assets held for
sale of $1,634,471 and cash and marketable securities for
$214,578. This compares with the February 28, 2007 balances for oil
and gas properties of $1,054,029; cash and marketable securities for $2,734,170
and notes receivable and accounts receivable of $1,726,569.
At
February 29, 2008, we had total liabilities of $435,460, comprised of $316,253
in accounts payable and $119,207 in asset retirement obligation (ARO) as
compared with the February 28, 2007 balances for accounts payable of $2,110,458,
notes payable (net of discount) of $334,999 and ARO of $99,427.
Our
common stock issued and outstanding has increased by 3,416,069 shares during the
last fiscal year primarily as a result of private placement sales and
conversions from our Series A Convertible Preferred stock. Preferred stock
decreased by 102,299 shares to 1,297,465 at February 29, 2008, compared to
1,399,765 at February 28, 2007, as a result of conversions to our common
stock.
Accumulated
Deficit
The
increase in the accumulated deficit during the exploration stage from
$12,864,071 at February 28, 2007, to $18,064,765 was due to the $5,200,694
operating loss from the fiscal year ended February 29, 2008. This was
the smallest net loss we have experienced since becoming an oil and gas
exploration and development company.
Cash
Flows
Cash flow from operating
activities
for the fiscal year ended February 29, 2008, was $(1,302,213)
compared to ($3,427,627) for the period ending February 28, 2007. This negative
flow was primarily caused by the net loss ($5,200,694 in comparison to
$8,392,030 from the prior year); larger amount of accounts receivable from oil
and gas sales ($311,277 in comparison to $56,906) being offset by less common
stock being issued for services ($4,500 in comparison to $2,607,700 in the prior
year); less exploration expense from dry holes (33,233 in comparison to
$563,020); lower non-cash interest expense and accretion ($164,873 in comparison
to $1,209,529) as well as marketable securities $2,200,768 in comparison to
($2,356,213)). Cash flows from accounts receivable – joint interest participants
declined ($702,450 in comparison to $799,970) as well as accounts payable and
accrued liabilities ($(1,385,367) in comparison to $1,604,626).
Cash flow from investing
activities
for the fiscal year ended February 29, 2008, was a positive
$576,574 compared to ($6,039,904) for the same period ending February 28,
2007.
This
difference was due to a smaller decrease oil and gas properties ($(2,036,888) in
comparison to $5,441,993 from the prior year) and the receipt of $2 million for
the sale of 25% of the working interest in the Tuscaloosa Project as well as the
payoff of the note receivable from the refurbishment of the drilling
rig.
Cash flow from financing
activities
for the fiscal year ended February 29, 2008, was $406,815
compared to $9,039,461 for the same period ending February 28,
2007. This difference was due to less common stock and no preferred
stock being sold compared to the prior year ($731,816 in comparison to
$8,814,461). This difference was offset by the repayment of
convertible debentures ($325,001 in comparison to $25,000).
Liquidity
and Capital Resources
Liquidity and Working
Capital
Liquidity
is defined as the ability to convert assets into cash or to obtain cash.
Short-term liquidity refers to the ability to meet short-term obligations of 12
months or less. Liquidity is a matter of degree and is expressed in terms of a
ratio. Two common liquidity ratios in financial statement analysis
are: Working Capital and Current Ratio.
Our
working capital (current assets minus current liabilities) and current ratio
(current assets divided by current liabilities) are as follows:
|
|
February
29,
|
|
|
February
28,
|
|
|
2008
|
|
|
2007
|
Current
Assets
|
|
$
|
1,049,217
|
|
|
$
|
4,537,634
|
|
Current
Liabilities
|
|
$
|
316,253
|
|
|
$
|
2,445,457
|
|
Working
Capital
|
|
$
|
732,964
|
|
|
$
|
2,092,177
|
|
|
|
|
|
|
|
|
|
|
Current
Ratio
|
|
|
3.32
|
|
|
|
1.86
|
|
While
these two ratios are important, numerous other factors may also affect the
liquidity and capital resources of a company. Our working capital
decreased from $2,092,177 as of February 28, 2007, to $732,964 as of February
29, 2008. This decrease was principally due to the aggressive stance
we took to pay off payables and debt as shown in a decrease of $2,129,204 in
accounts payable, notes payable and convertible debentures that we had issued
during the last two fiscal years to meet operating expenses as well as having
used cash on hand to meet operating expenses and the payoff of the note
receivable on the refurbishment of the drilling rig.
Our
business is capital intensive. Our ability to grow is dependent upon
our ability to obtain outside capital and generate cash flows from operating
activities to necessary to fund our investment activities. As of
February 29, 2008, we have not yet demonstrated the ability to generate
significant and sustainable cash flow from producing wells developed as a result
of our prior exploration and development activities. This is
especially true of our Tuscaloosa project and was a major reason we decided to
accept an offer to sell our working interest in the Tuscaloosa project for $8
million.
Our
sources of funds in the past have included the debt or equity markets and while
we have had cash flow from operations, we have not yet established sustainable
positive cash flow from those operations. We may again have to rely on the debt
or equity markets to fund future operations. Our business model is
focused on acquiring exploration or development properties and also acquiring
existing producing properties. Our ability to generate future
revenues and operating cash flow will depend on successful exploration, and/or
acquisition of oil and gas producing properties, which may very likely require
us to continue to raise equity or debt capital from outside
sources. We have ongoing capital commitments to develop certain
leases pursuant to their underlying terms. Failure to meet such
ongoing commitments may result in the loss of certain leases. These
ongoing capital commitments may also cause us to seek additional capital from
outside sources.
Since our
inception, we have incurred recurring start-up losses from operations with
negative cash flow and we have depended on external financing to sustain our
operations. During the fiscal year ended February 29, 2008, we
reported losses of $4.27 million. 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 exterior sources, should we be unable to
achieve sustainable profitability this could cause any equity investment in the
Company to become worthless. The final closing of $5.5 million on the
sale of our Tuscaloosa project will allow us to move forward with our
exploration and drilling projects in California.
Critical
Accounting Policies
Management’s
discussion and analysis of our financial condition and results of operations are
based on our financial statements, which have been prepared in conformity with
accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires
management to make estimates, judgments and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period.
On an
ongoing basis, we evaluate our estimates, including those related to revenue
recognition, bad debts, cancellation costs associated with long term
commitments, investments, intangible assets, assets subject to disposal, income
taxes, service contracts, contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making estimates and judgments about the carrying value of assets and
liabilities that are not readily apparent from other
sources. Estimates, by their nature, are based on judgment and
available information. Therefore, actual results could differ from those
estimates and could have a material impact on our financial statements, and it
is possible that such changes could occur in the near term.
Oil
and Gas Properties
We use
the successful efforts method of accounting for oil and gas property
acquisition, exploration, development, and production
activities. Costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that find proved reserves, and
to drill and equip developmental 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 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 proved developed reserves. Support equipment and other property
and equipment are depreciated over their estimated useful lives.
Pursuant
to SFAS No. 144, “Impairment or Disposal of Long-Lived Assets”, we review proved
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. We estimate the future cash flows expected in connection
with the properties and compare 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. The charge is included in
depreciation, depletion and amortization.
Unproved
oil and gas properties that are individually significant are also periodically
assessed for impairment of value. An impairment loss for unproved oil
and gas properties is recognized at the time of impairment by providing an
impairment allowance.
On the
retirement or sale of a partial unit of proved property, the cost is charged to
accumulated depreciation, depletion, and amortization with a resulting gain or
loss recognized in income.
Deposits
and advances for services expected to be provided for exploration and
development or for the acquisition of oil and gas properties are classified as
long term other assets.
Revenue
Recognition
We use
the sales method to account for sales of crude oil and natural
gas. Under this method, revenues are recognized based on actual
volumes of oil and gas sold to purchasers. The volumes sold may
differ from the volumes to which we are entitled based on its interests in the
properties. These differences create imbalances, which are recognized as a
liability only when the imbalance exceeds the estimate of remaining
reserves. We had no significant imbalances as of February 29, 2008
and February 28, 2007.
Suspended
Well Costs
On April
4, 2005, the Financial Accounting Standards Board, (FASB) issued FASB Staff
Position No. 19-1,"Accounting for Suspended Well Costs" (FSP No. 19-1). This
staff position amends SFAS No. 19, "Financial Accounting and Reporting by Oil
and Gas Producing Companies" and provides guidance concerning exploratory well
costs for companies that use the successful efforts method of
accounting. Daybreak adopted FSP No. 19-1 for the fiscal years ended
February 29, 2008 and February 28, 2007.
The FSP
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 management's
evaluation of capitalized exploratory well costs.
In
addition, the FSP 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.
Share
Based Payments
Prior to
February 28, 2005, we accounted for our stock based compensation plans under the
recognition and measurement provisions of APB Opinion No. 25, “Accounting for
Stock Issued to Employees” and related Interpretations, (“APB 25”) as permitted
by SFAS No. 123, “Accounting for Stock Based Compensation” (“SFAS
123”).
Effective
March 1, 2005, we adopted the fair value recognition provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation” (“SFAS 123”) for our stock based
compensation plans under the recognition and measurement provisions of SFAS
123. No awards granted prior to March 1, 2005 were modified or
settled in cash during fiscal year ended February 28, 2006.
Effective
March 1, 2006, we adopted the fair value recognition provisions of SFAS No.
123R, “Share Based Payment” and related Interpretations (“SFAS
123R”).
Under
both SFAS 123 and SFAS 123R, compensation cost for all share based payments
granted on or subsequent to March 1, 2005 are based on the grant date fair value
estimated in accordance with the provisions of SFAS 123 and SFAS 123R, for the
respective fiscal years. Compensation cost is recognized on a
straight line basis over the requisite service period for the entire award in
accordance with the provisions of SFAS 123R. If at any date the portion of the
grant-date fair value of the award that is vested is greater than that amount
recognized on a straight line basis, the amount of the vested grant date fair
value is recognized.
We
account for transactions in which we issue equity instruments to acquire goods
or services from non-employees in accordance with the provisions of SFAS No.
123R (as amended). These transactions are accounted for based on the
fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
Fiscal
Year 2008 compared to Fiscal Year 2007 – Continuing Operations
This
discussion comparing fiscal year 2008 results with fiscal year 2007 results
covers our continuing operations in Gilbertown Field in Alabama, Krotz Springs
in Louisiana and Saxet Field in Texas.
Revenues.
Our
revenues are derived entirely from the sale of our share of oil and gas
production from our producing wells. We realized our first revenues
from producing wells in August 2006. Prior to that date, we had no
revenues from continuing operations.
A table
of our revenues for the fiscal year 2008 compared to the fiscal year 2007
follows:
|
|
Fiscal
Year
|
|
|
Fiscal
Year
|
|
|
|
2008
|
|
|
2007
|
|
Alabama
- Gilbertown
|
|
$
|
119,209
|
|
|
$
|
2,110
|
|
Louisiana
– Krotz Springs
|
|
|
74,740
|
|
|
|
-
|
|
Texas
- Saxet Field
|
|
|
172,901
|
|
|
|
152,678
|
|
Total
Revenues
|
|
$
|
366,850
|
|
|
$
|
154,788
|
|
The
Gilbertown Field in Alabama revenues represented 32.5% of total
revenues. The Krotz Springs project in Louisiana began commercial
production in May 2007. The Krotz Springs revenues represented 20.4%
of total revenues. The Saxet Field in Texas revenues represented
47.1% of total revenues. For the fiscal year ended February 29, 2008, total
revenues increased 237% from the prior fiscal year.
We
recorded revenues from our interests in twenty (20) producing
wells.
Costs and Expenses:
Total
operating expenses declined by 21.7% or $1,660,625 for the fiscal year ended
February 29, 2008 as compared to the prior fiscal year. The largest
decreases of 32.3% or $1,273,191 and 45.3% or $541,875 were in our general and
administrative (“G&A”) and exploration and drilling costs
respectively.
A table
of our costs and expenses for the fiscal year 2008 compared to the fiscal year
2007 follows:
|
|
Fiscal
Year
|
|
|
Fiscal
Year
|
|
|
|
2008
|
|
|
2007
|
|
Production
Costs
|
|
$
|
326,849
|
|
|
$
|
107,931
|
|
Exploration
Costs
|
|
|
654,765
|
|
|
|
1,196,640
|
|
Depreciation,
Depletion,
|
|
|
|
|
|
|
|
|
Amortization
& Impairment
|
|
|
2,333,571
|
|
|
|
2,398,048
|
|
General
& Administrative
|
|
|
2,663,677
|
|
|
|
3,936,868
|
|
Total
Operating Expenses
|
|
$
|
5,978,862
|
|
|
$
|
7,639,487
|
|
Expenses
incurred by the Company include production costs associated directly with the
generation of oil and gas revenues and well workover projects, general and
administrative expenses, including legal and accounting expenses, director and
management fees, investor relations expenses, and other general and
administrative costs, and unsuccessful exploration costs.
Production
costs increased $218,918 or 302% from the prior fiscal year and relate directly
to the existence of new production revenues from the Gilbertown Field and the
Krotz Springs well and the increased production costs in the Saxet Field in
fiscal year ended February 29, 2008.
Exploration
expenses decreased $541,875 or 45.3% from the prior fiscal year. The
majority of this change was from decreased dry hole expenses in comparison to
the prior fiscal year. For the fiscal year ended February 29, 2008 we
participated in the drilling of one dry hole.
Depreciation,
depletion, amortization and impairment expenses had decreased $64,477 or 2.7%
from the prior fiscal year.
General
and administrative costs decreased $1,273,191 or 32.3% from the prior fiscal
year. Management fees and Investor Relations fees accounted for the two largest
decreases in the expenses declining by $1,538,594 or 47.4% from the prior fiscal
year.
Legal and
accounting fees, another part of general and administrative costs, increased
$151,287 or 54.3% from the prior fiscal year. This was a direct
result of our having to restate our financial statements for the fiscal year
ended February 28, 2006 and the first three quarters of the fiscal year ended
February 28, 2007.
Interest
and dividend income decreased $60,003 or 56% from the prior fiscal year due
primarily to lower average cash and investment balances.
Interest
expense decreased by $1,014,407 or 83% from the prior fiscal
year. This was a result of an aggressive program to pay off existing
debt.
Due to
the nature of its business, as well as the relative immaturity of the business,
we expect that revenues, as well as all categories of expenses, will continue to
fluctuate substantially quarter to quarter and year to
year. Production costs will fluctuate according to the number and
percentage ownership of producing wells, as well as the amount of revenues being
contributed by such wells. Exploration and drilling expenses will be dependant
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 depreciation, depletion, amortization expense and impairment costs will
depend upon the factors cited in the prior sentence, as well as numerous other
factors including general market conditions.
Fiscal
Year 2008 compared to Fiscal Year 2007 – Discontinued Operations
On
January 18, 2008 we signed a purchase and sale agreement (“PSA”) for the sale of
our Tuscaloosa project interests for $8 million dollars. The transaction closed
in three tranches; the first closing of $2 million occurred on January 18, 2008;
the second closing for $500,000 occurred on April 30, 2008; and the final
closing for $5.5 million occurred on June 12, 2008 and was subject to customary
closing adjustments. The sale includes Daybreak's interests in the Tensas Farms
et al F-1, F-3, B-1, A-1 and F-2 wells; and all of its acreage and
infrastructure in the project area. Under terms of the PSA, the
effective dates for each closing was January 1, 2008.
Revenues. The
revenues shown are from oil and gas production of the Tensas Farms et al F-1,
F-3 and A-1 wells. We realized our first revenues from the F-1 in
June 2006; the F-3 in February 2007; and the A-1 in December 2007.
A table
of our revenues for the fiscal year 2008 compared to the fiscal year 2007
follows:
|
|
Fiscal
Year
|
|
|
Fiscal
Year
|
|
|
|
2008
|
|
|
2007
|
|
Tensas
Farms F-1
|
|
$
|
59,333
|
|
|
$
|
472,526
|
|
Tensas
Farms F-3
|
|
|
383,211
|
|
|
|
2,032
|
|
Tensas
Farms A-1
|
|
|
208,210
|
|
|
|
-
|
|
Total
Revenues
|
|
$
|
650,754
|
|
|
$
|
474,558
|
|
Income
from discontinued operations, representing our Tuscaloosa Project interest
increased by $176,196 or 37.1%. This increase was primarily due to
the Tensas Farms A-1 well coming into production in December 2007.
The F-1
returned to production in January 2008 after being shut-in since November 2006,
and represents 9.1% of Tuscaloosa revenues. The F-3 commenced production in
February 2007, and represents 58.9% of Tuscaloosa revenues. The A-1 well
commenced production in December 2007, and represents 32% of Tuscaloosa
revenues. We continued throughout the second half of the fiscal year to
experience mechanical and technical production problems with both the F-1 and
F-3 wells. The F-1 and A-1 wells contributed approximately 26.35% of
total revenues in the fiscal year ended February 29, 2008. It is anticipated
that the F-3 well will return to production in the second quarter of calendar
year 2008.
Costs and Expenses:
Total
operating expenses increased by 28.6% or $76,056 for the fiscal year ended
February 29, 2008 as compared to the prior fiscal year. This was caused by the
installation of mechanical lifting equipment on the F-1 and F-3
wells.
A table
of our costs and expenses for the fiscal year 2008 compared to the fiscal year
2007 follows:
|
|
|
|
|
|
|
|
|
Fiscal
Year
|
|
|
Fiscal
Year
|
|
|
|
2008
|
|
|
2007
|
|
Production
Costs
|
|
$
|
279,391
|
|
|
$
|
265,835
|
|
Exploration
Costs
|
|
|
62,500
|
|
|
|
-
|
|
Total
Operating Expenses
|
|
$
|
341,891
|
|
|
$
|
265,835
|
|
Oil
and Gas Projects Update
Alabama
(East Gilbertown Field)
Choctaw County.
In
December 2006, we acquired a working interest an existing oil field project, the
East Gilbertown Field (“Gilbertown”) that produces heavy oil (approximately 18º
API). This field has nineteen wellbores most of which are capable of
production.
From
December 2006 through March 2007, we incrementally increased our working
interest in this project from 2.5% to 12.5%. On June 1, 2007, we
became the operator of the East Gilbertown Field. Future plans are to continue
to increase production in the field by bringing more non-producing wellbores
back into production. As of February 29, 2008, we had spent $397,229
in leasehold, production and workover costs associated with this field. We plan
to spend approximately $100,000 in capital repairs and new investments within
the field in the upcoming fiscal year.
California
East Slopes Project in Kern
and Tulare Counties
. In May 2005, we agreed to jointly explore
an Area of Mutual Interest (“AMI”) in the southeastern part of the San Joaquin
Basin. We initially paid a $12,500 fee to secure the project and the geological
concepts. Our agreement calls for us to also pay another $5,000 fee
upon the completion of each sub-regional lead that is developed for 3-D seismic
survey. Additionally, we will pay another $5,000 fee upon the spud of
the first well in each prospect area.
Four
prospect areas have been identified and we are actively leasing lands in the
East Slopes project area. Additionally, we have identified two
prospect areas to the north of the East Slopes AMI. This second AMI is referred
to as the “Expanded AMI” project area. We have now jointly leased about 25,633
undeveloped acres in the two AMI’s. Drilling targets are porous and permeable
sandstone reservoirs at depths of 1,200 feet to 4,000 feet. Daybreak has a 50%
of the working interest in the area that is not in the Chevron partnered East
Slopes AMI project area covered by the recently completed high definition 3-D
seismic survey. As of February 29, 2008 we have spent $778,806 in leasehold and
geologic and geophysical costs associated with this project.
I
n June 2007, Daybreak and its partners
(“Daybreak et al”), entered into a Seismic Option Farmout Agreement with Chevron
U.S.A. Inc. (“Chevron”), for a seismic and drilling program in the East Slopes
(
Kern
County
) project area in
California
. By paying the full cost of the
seismic program Chevron will earn a 50% interest in the Daybreak et al lands and
a 50% (Daybreak 25%) working interest for the drilling of future wells in the
project area. Daybreak et al will earn a 50% (Daybreak 25%) interest
in the Chevron lands located in the same project area, by paying 100% of the
cost of the first four initial test wells to be drilled on the jointly held
lands. The four initial test wells must be drilled within nine months of the
seismic data interpretation being completed.
In January 2008 we announced
that data processing is underway following the recently completed field
acquisition of the 35 square-mile 3-D seismic survey. Drilling is
expected to commence in the second fiscal quarter of 2008.
We plan to spend approximately
$2,000,000 in new capital investments within the field in the upcoming fiscal
year.
Louisiana
On
January 18, 2008 we signed a purchase and sale agreement (“PSA”) for the sale of
our Tuscaloosa project interests for $8 million in cash. The
transaction closed in three tranches; the first closing for $2 million occurred
on January 18, 2008; the second closing for $500,000 occurred on April 30, 2008;
and the final closing for $5.5 million occurred on June 12, 2008 and was subject
to customary closing adjustments. The sale includes Daybreak's interests in the
Tensas Farms et al F-1, F-3, B-1, A-1 and F-2 wells; and all of its acreage and
infrastructure in the project area. Under terms of the PSA, the
effective dates for each closing was January 1, 2008.
Additionally,
in January 2008, we finalized the acquisition of a 2% working interest in the
Tuscaloosa project that had been jointly owned by three parties, two of whom we
former officers and directors of the Company. The interest that we purchased
represented a 1.5% working interest in the Tensas Farms et al B-1 well and a
0.5% working interest in the F-3 well. The NRI (net revenue interest) of these
three parties was 0.38% in the F-3 well. The purchase included the rights to
revenue from first production. We paid an aggregate $27,808 for this interest.
The sale was subject to the customary closing adjustments.
St. Landry
Parish.
The Krotz Springs Project is a deep gas play with
current production coming from a Cockfield Sands reservoir. We were the operator
for this project during the drilling and completion phases. When
production commenced in May of 2007, the unitized field operator of the Krotz
Springs Field became the operator for this well. Total project
drilling and completion costs were approximately $9.2 million. We have a 12.5%
working interest in this project, with a net revenue interest (“NRI”) of
9.125%. As of February 29, 2008, we had spent $1.16 million in
leasehold, drilling, completion and production costs associated with this
project. Current production is being evaluated prior to recompleting another
prospective producing zone in the well in which Daybreak will spend
approximately $15,000 in the upcoming fiscal year.
In the
North Shuteston prospect, the target is a three dimensional (“3-D”) seismic
supported shallow amplitude anomaly at a depth of 2,300 feet. This
anomaly is related to a Miocene Age Sand. On April 23, 2008, we
conveyed our interest in this project to another party in exchange for a two
percent (2.0%) overriding royalty interest (ORRI) in the production revenue from
the start of production. Drilling will begin on this project during the summer
of 2008, however Daybreak no longer has a working interest in this project, and
therefore will not have a capital investment. As of February 29, 2008, we had
spent about $130,000 in leasehold, geologic and geophysical (“G&G”) and
project management costs associated with this project.
Avoyelles
Parish.
This Prospect is a Cretaceous target positioned
beneath an existing oilfield that has produced over 28 million barrels of
oil. The project will initially focus on the broad northeast flank of
the Cretaceous structure, targeting the Massive Sand of the Lower Tuscaloosa and
the Fractured Lower (Austin) Chalk. Plans call for a 3-D seismic
survey covering about 36 square miles. This is primarily a deep gas
play. Gross project costs are estimated to be $1,000,000 for land, $3,000,000
for 3-D Seismic and $6,000,000 for drilling the first well. We have jointly
acquired leases or permits on approximately 2,002 gross undeveloped acres within
the AMI. Daybreak has a 35% working interest in this project. As of
February 29, 2008, we had spent $431,484 in leasehold, seismic and project
management costs associated with this project. We and our existing
working interest partners are looking for other industry partners to participate
in additional land acquisition and seismic costs before proceeding with
drilling. We are not planning on spending any funds in capital new
investments within the field in the upcoming fiscal year.
Texas
Nueces
County
. In November 2005, we agreed to jointly participate in
a five well re-entry project in the Saxet Deep Field (“Saxet”) a previously
produced oilfield, on a developed 320 acre lease. The project is
located within the city limits of Corpus Christi, Texas, near the
airport. We have a variable working interest in the project, with an
average well working interest of 25.24% and an NRI of 14.25% on all production
from these wells.
In May
2006, we started the re-work of the first well, the Weil 8-C
well. This well was successfully reworked and placed into production
in August 2006. In August and September 2006, we re-entered and
started to produce from both the Weil 3-C and Weil 7-C wells. Two other wells
the Weil 2-C and Weil 6-C were re-entered in September and October of 2006, and
are now being used as salt water disposal wells.
As of
February 29, 2008, we had spent $702,569 in leasehold, workover, production,
pipeline and production facility costs associated with this
project.
We have
continued to face increased production costs in the Saxet with a workover
required on an existing salt water disposal well. The workover was completed in
late September 2007. We anticipate being able to continue production
of the field; however, there is no assurance that commercial returns will
continue. We plan on spending approximately $50,000 in capital new investments
within the field in the upcoming fiscal year.
Other
Liquidity Factors
At August
31, 2007, we had outstanding, two convertible debentures for an aggregate of
$200,001 that, along within accrued interest, were originally due on August 31,
2007. On August 31, 2007, the maturity on these convertible debentures was
extended to October 31, 2007. On October 31, 2007, the $75,000
convertible debenture plus accrued interest was paid off. The
maturity of the other convertible debenture with a principal balance of $125,001
was extended to January 31, 2008. On January 31, 2008, the $125,001 debenture
plus accrued interest was paid off.
In
addition, at May 31, 2007, we had a note payable to a related party in the
amount of $200,000 for financing of the pipeline used on the F-1 and F-3 wells.
In the 2
nd
quarter, principal payments of $185,000 were made on this financing obligation.
During the 3
rd
quarter
of the current fiscal year, we paid in full the financed amount plus accrued
interest that was due on this note payable.
In
December 2007, we closed an unregistered offering through a private placement of
our common stock under the securities transaction exemption Regulation D Rule
506 of the Securities Act of 1933. Shares were offered at $0.25 per share to
“accredited investors” only as defined in Regulation D under the Securities Act
of 1933. The offering was closed on December 27, 2007. The
shares were sold directly by Daybreak and no placement agent was involved in the
offering. A total of 2,497,000 shares of unregistered common stock were sold to
thirteen investors resulting in $624,250 in gross proceeds. Offering expenses
were approximately $6,500. Net proceeds were used to meet our drilling
commitments in the Tuscaloosa project and general and administrative
expenses.
In
January 2008, we commenced an unregistered offering through a private placement
of our common stock under the securities transaction exemption Regulation D Rule
506 of the Securities Act of 1933. We propose to offer and sell 10,000,000
shares for gross proceeds of $2,500,000. Shares will be offered and sold at
$0.25 per share to “accredited investors” only as defined in Regulation D under
the Securities Act of 1933. An additional 1,000,000 common stock shares may be
sold at our sole discretion. The shares will be sold directly by Daybreak or by
commissioned placement agents. A 10% commission plus 3%
non-accountable expense allowance will be paid to the placement agents.
Additionally, the placement agents will earn warrants in the amount of 7% of
their sales. The warrants will be exercisable for a period of three
years at an exercise price of $0.25. As of February 29, 2008, a total of 565,000
shares of unregistered common stock were sold to six investors resulting in
$141,250 in gross proceeds. Offering expenses were approximately
$23,112. Net proceeds of $118,138 were used to meet our drilling
commitments in the Tuscaloosa project and general and administrative
expenses.
Management
and Board of Directors Restructuring
On
December 14, 2007, we underwent a change in the management of Daybreak. Robert
N. Martin, President resigned from that position and was appointed Senior
Vice-President, Exploration; Chief Executive Officer Eric L. Moe resigned from
the Company; Timothy R. Lindsey formerly an outside director was appointed
interim President and Chief Executive Officer; Chief Financial Officer Terrence
J. Dunne resigned from the Company; and Controller Thomas C. Kilbourne resigned
from that position but continued as an employee of Daybreak. James F.
Westmoreland, formerly a finance and accounting consultant to Daybreak, was
appointed interim Chief Financial Officer.
On
December 18, 2007, the Board of Directors voted to reduce the number of Board
positions to three. Subsequently, the following individuals resigned their
positions and offices with the Board of Directors of Daybreak; Robert N. Martin,
Eric L. Moe, Terrence J. Dunne, Jeffrey R. Dworkin, Thomas C. Kilbourne and
Michael Curtis. Karol L. Adams, formerly a consultant to Daybreak,
was appointed Corporate Secretary.
On March
24, 2008 James F. Meara was appointed to our Board of Directors, thereby
expanding the Company's Board to four members.
On April
3, 2008, James F. Westmoreland, formerly interim Chief Financial Officer, was
appointed Executive Vice President and Chief Financial Officer; Karol L. Adams
was appointed Chief Compliance Officer in addition to the Corporate Secretary
duties; Thomas C. Kilbourne was appointed Controller and Assistant Secretary;
and Daybreak adopted a series of corporate responsibility statements and
employee guidelines.
Off-Balance
Sheet Arrangements
As of
February 29, 2008, we did not have any relationships with unconsolidated
entities or financial partners, such as entities often referred to as structured
finance or special purpose entities, which have been established for the purpose
of facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. As such, we are not materially exposed to any
financing, liquidity, market or credit risk that could arise if we had engaged
in such relationships.
Summary
Daybreak
Oil and Gas has repositioned itself during its fiscal 2008 year agreeing to sell
its Tuscaloosa Project property for $8 million subject to customary closing
adjustments. The first tranche of proceeds from this sale were used
to pay off existing indebtedness, and the final two tranches will fund our
upcoming drilling program at our East Slopes Project in
California. We expect to begin drilling in the second quarter of
2008. The 3-D seismic acquisition phase over the entire are of mutual interest
(“AMI”) has been completed; the data has been processed and a portfolio of
future drilling prospects is currently being identified. The wells at
East Slopes will be relatively inexpensive to drill and complete compared to the
Tuscaloosa project wells. A multi-well drilling program targeting
moderately risked potential oil resources in California affords Daybreak
exposure to attractive economic upside. Available capital resulting
from the Tuscaloosa sale transaction also provides us with the financial
flexibility to pursue other possible projects on a select basis as they become
available.
ITEM 7.
|
FINANCIAL
INFORMATION
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Stockholders
of Daybreak Oil and Gas, Inc.
(An
Exploration Stage Company)
We have
audited the accompanying balance sheets of Daybreak Oil and Gas, Inc. (an
exploration stage company) as of February 29, 2008 and February 28, 2007 and the
related statements of operations, stockholders’ equity, and cash flows for the
years then ended and for the period from March 1, 2005 (inception) to February
29, 2008. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform an audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Daybreak Oil and Gas, Inc. as of
February 29, 2008 and February 28, 2007 and the results of operations and cash
flows for the periods described above, in conformity with accounting principles
generally accepted in the United States of America.
As
discussed in Note 14 to the financial statements, the Company has restated its
2008 financial statements.
Malone
& Bailey PC
www.malone-bailey.com
Houston,
Texas
May 27,
2008 except for Note 7 and 13, which are as of July 11, 2008 and Notes 2 and 14
which are as of January 13, 2009.
Daybreak
Oil and Gas, Inc.
(An
Exploration Stage Company, Date of Inception March 1, 2005)
Balance
Sheets
As
of February 29, 2008 and February 28, 2007
|
|
As
Restated
2008
|
|
|
2007
|
|
ASSETS
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
|
|
$
|
59,133
|
|
|
$
|
377,957
|
|
Investment
in marketable securities, at market, cost of $155,445 and
$2,356,213
|
|
|
|
|
|
|
|
|
respectively
|
|
|
155,445
|
|
|
|
2,356,213
|
|
Accounts
receivable:
|
|
|
|
|
|
|
|
|
Oil
and gas sales
|
|
|
311,277
|
|
|
|
56,906
|
|
Joint
interest participants
|
|
|
502,420
|
|
|
|
799,970
|
|
Related
party participants
|
|
|
-
|
|
|
|
41,357
|
|
Notes
receivable (including accrued interest of $28,336)
|
|
|
-
|
|
|
|
828,336
|
|
Prepaid
expenses and other current assets
|
|
|
20,942
|
|
|
|
76,895
|
|
Total
current assets
|
|
|
1,049,217
|
|
|
|
4,537,634
|
|
OIL
AND GAS PROPERTIES, net of accumulated depletion, depreciation,
amortization
|
|
|
|
|
|
and
impairment, successful efforts method
|
|
|
169,521
|
|
|
|
1,054,029
|
|
VEHICLES
AND EQUIPMENT, net of accumulated depreciation of $13,310
and
|
|
|
|
|
|
|
|
|
$4,355
respectively
|
|
|
18,019
|
|
|
|
18,556
|
|
Assets
held for sale
|
|
|
1,634,471
|
|
|
|
3,498,821
|
|
Joint
interest receivable – long term
|
|
|
500,000
|
|
|
|
-
|
|
OTHER
ASSETS
|
|
|
289,809
|
|
|
|
102,426
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
3,661,037
|
|
|
$
|
9,211,466
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable and other accrued liabilities
|
|
$
|
316,253
|
|
|
$
|
2,110,458
|
|
Note
payable - related party
|
|
|
-
|
|
|
|
200,000
|
|
Convertible
debentures, net of discount of $ 90,002
|
|
|
-
|
|
|
|
134,999
|
|
Total
current liabilities
|
|
|
316,253
|
|
|
|
2,445,457
|
|
OTHER
LIABILITIES
|
|
|
|
|
|
|
|
|
Asset
retirement obligation
|
|
|
119,207
|
|
|
|
99,427
|
|
Total
liabilities
|
|
|
435,460
|
|
|
|
2,544,884
|
|
COMMITMENTS
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
|
Preferred
stock - 10,000,000 shares authorized, $0.001 par value;
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred stock - 2,400,000 shares
authorized,
|
|
|
|
|
|
|
|
|
$0.001
par value, 6% cumulative dividends; 1,297,465 and 1,399,764
shares
issued and outstanding respectively
|
|
|
1,298
|
|
|
|
1,400
|
|
Common
stock - 200,000,000 shares authorized; $0.001 par value,
44,293,299
and
40,877,230 shares issued and outstanding respectively
|
|
|
44,294
|
|
|
|
40,877
|
|
Additional
Paid-In Capital
|
|
|
21,980,785
|
|
|
|
20,224,411
|
|
Accumulated
deficit
|
|
|
(736,035
|
)
|
|
|
(736,035
|
)
|
Deficit
accumulated during the exploration stage
|
|
|
(18,064,765
|
)
|
|
|
(12,864,071
|
)
|
Total
stockholders’ equity
|
|
|
3,225,577
|
|
|
|
6,666,582
|
|
Total
liabilities and stockholders' equity
|
|
$
|
3,661,037
|
|
|
$
|
9,211,466
|
|
The
accompanying notes are an integral part of these financial
statements.
DAYBREAK
OIL AND GAS, INC.
(An
Exploration Stage Company)
Statements
of Operations
For
the Years ended February 29, 2008 and February 28, 2007 and for the
Period
from
Inception (March 1, 2005) to February 29, 2008
|
|
|
|
|
From
Inception
|
|
|
|
Years
Ended
|
|
|
Through
|
|
|
|
(As
Restated)
|
|
|
|
|
|
(As
Restated)
|
|
|
|
February
29,
|
|
|
February
28,
|
|
|
February
29,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
Oil
and gas sales
|
|
$
|
366,850
|
|
|
$
|
154,788
|
|
|
$
|
521,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
costs
|
|
|
326,849
|
|
|
|
107,931
|
|
|
|
434,780
|
|
Exploration
and drilling
|
|
|
654,765
|
|
|
|
1,196,640
|
|
|
|
2,241,374
|
|
Depreciation,
depletion, amortization, and
|
|
|
|
|
|
|
|
|
|
|
|
|
impairment
|
|
|
2,333,571
|
|
|
|
2,398,048
|
|
|
|
4,731,619
|
|
General
and administrative
|
|
|
2,663,677
|
|
|
|
3,936,868
|
|
|
|
10,699,619
|
|
Total
operating expenses
|
|
|
5,978,862
|
|
|
|
7,639,487
|
|
|
|
18,107,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
LOSS
|
|
|
(5,612,012
|
)
|
|
|
(7,484,699
|
)
|
|
|
(17,585,754
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative
income
|
|
|
139,131
|
|
|
|
-
|
|
|
|
139,131
|
|
Interest
income
|
|
|
43,550
|
|
|
|
101,697
|
|
|
|
145,607
|
|
Dividend
income
|
|
|
3,691
|
|
|
|
5,547
|
|
|
|
9,238
|
|
Interest
expense
|
|
|
(208,893
|
)
|
|
|
(1,223,298
|
)
|
|
|
(1,478,049
|
)
|
Total
other income (expense)
|
|
|
(22,521
|
)
|
|
|
(1,116,054
|
)
|
|
|
(1,184,073
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM CONTINUING OPERATIONS
|
|
|
(5,634,533
|
)
|
|
|
(8,600,753
|
)
|
|
|
(18,769,827
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations
|
|
|
433,839
|
|
|
|
208,723
|
|
|
|
705,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(5,200,694
|
)
|
|
|
(8,392,030
|
)
|
|
|
(18,064,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
convertible preferred stock dividend requirement
|
|
|
(395,923
|
)
|
|
|
(155,316
|
)
|
|
|
(551,239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed
dividend - Beneficial conversion feature
|
|
|
-
|
|
|
|
(4,199,295
|
)
|
|
|
(4,199,295
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS AVAILABLE TO COMMON SHAREHOLDERS
|
|
$
|
(5,596,617
|
)
|
|
$
|
(12,746,641
|
)
|
|
$
|
(22,815,299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(0.14
|
)
|
|
$
|
(0.23
|
)
|
|
|
|
|
Income
from discontinued operations
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
|
|
NET
LOSS PER COMMON SHARE - Basic and diluted
|
|
$
|
(0.14
|
)
|
|
$
|
(0.34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON
SHARES OUTSTANDING - Basic and diluted
|
|
|
41,292,659
|
|
|
|
37,045,509
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
DAYBREAK
OIL AND GAS, INC.
(An
Exploration Stage Company)
Statement
of Changes in Stockholders' Equity
For
the Period from Inception (March 1, 2005) through February 28, 2007
|
|
Series
A Convertible
Preferred Stock
|
|
|
Common
Stock
|
|
|
Additional
Paid-In Capital
|
|
|
Accumulated
|
|
|
Deficit
Accumulated During the Exploration Stage
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
(Restated)
|
|
|
Deficit
|
|
|
(Restated)
|
|
|
(Restated)
|
|
BALANCE,
March 1, 2005 (Exploration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stage
date of inception)
|
|
|
-
|
|
|
$
|
-
|
|
|
|
18,199,419
|
|
|
$
|
18,199
|
|
|
$
|
709,997
|
|
|
$
|
(736,035
|
)
|
|
$
|
-
|
|
|
$
|
(7,839
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Cash
|
|
|
-
|
|
|
|
-
|
|
|
|
4,400,000
|
|
|
|
4,400
|
|
|
|
1,083,100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,087,500
|
|
Services
|
|
|
-
|
|
|
|
-
|
|
|
|
5,352,667
|
|
|
|
5,353
|
|
|
|
3,622,176
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,627,529
|
|
Oil
and gas properties
|
|
|
-
|
|
|
|
-
|
|
|
|
700,000
|
|
|
|
700
|
|
|
|
411,300
|
|
|
|
-
|
|
|
|
-
|
|
|
|
412,000
|
|
Conversion
of convertible debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
and
interest payable
|
|
|
-
|
|
|
|
-
|
|
|
|
806,135
|
|
|
|
806
|
|
|
|
200,728
|
|
|
|
-
|
|
|
|
-
|
|
|
|
201,534
|
|
Discount
on convertible notes payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,240,213
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,240,213
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,472,041
|
)
|
|
|
(4,472,041
|
)
|
BALANCE,
FEBRUARY 28, 2006
|
|
|
-
|
|
|
|
-
|
|
|
|
29,458,221
|
|
|
|
29,458
|
|
|
|
7,267,514
|
|
|
|
(736,035
|
)
|
|
|
(4,472,041
|
)
|
|
|
2,088,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Cash
|
|
|
-
|
|
|
|
-
|
|
|
|
8,027,206
|
|
|
|
8,027
|
|
|
|
5,180,230
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,188,257
|
|
Services
|
|
|
-
|
|
|
|
-
|
|
|
|
1,270,000
|
|
|
|
1,270
|
|
|
|
2,606,430
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,607,700
|
|
Oil
and gas properties
|
|
|
-
|
|
|
|
-
|
|
|
|
222,500
|
|
|
|
223
|
|
|
|
528,527
|
|
|
|
-
|
|
|
|
-
|
|
|
|
528,750
|
|
Conversion
of convertible debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
2,049,303
|
|
|
|
2,049
|
|
|
|
1,022,473
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,024,522
|
|
Purchase
and cancellation of common stock:
|
|
|
-
|
|
|
|
-
|
|
|
|
(150,000
|
)
|
|
|
(150
|
)
|
|
|
(149,850
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(150,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of preferred stock for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
1,399,765
|
|
|
|
1,400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,624,804
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,626,204
|
|
Discount
on convertible notes payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,000
|
|
Extension
warrants on convertible notes payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
119,283
|
|
|
|
-
|
|
|
|
-
|
|
|
|
119,283
|
|
Discount
on preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,199,295
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,199,295
|
|
Deemed
dividend on preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,199,295
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,199,295
|
)
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,392,030
|
)
|
|
|
(8,392,030
|
)
|
BALANCE,
FEBRUARY 28, 2007
|
|
|
1,399,765
|
|
|
$
|
1,400
|
|
|
|
40,877,230
|
|
|
$
|
40,877
|
|
|
$
|
20,224,411
|
|
|
$
|
(736,035
|
)
|
|
$
|
(12,864,071
|
)
|
|
$
|
6,666,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Cash
|
|
|
-
|
|
|
|
-
|
|
|
|
3,062,000
|
|
|
|
3,062
|
|
|
|
728,754
|
|
|
|
-
|
|
|
|
-
|
|
|
|
731,816
|
|
Services
|
|
|
-
|
|
|
|
-
|
|
|
|
10,000
|
|
|
|
10
|
|
|
|
4,491
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,501
|
|
Conversion
of convertible debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
37,169
|
|
|
|
38
|
|
|
|
27,840
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,878
|
|
Extension
warrants on convertible notes payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60,973
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60,973
|
|
Conversion
of preferred stock
|
|
|
(102,300
|
)
|
|
|
(102
|
)
|
|
|
306,900
|
|
|
|
307
|
|
|
|
(205
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance
of goodwill warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
934,521
|
|
|
|
|
|
|
|
|
|
|
|
934,521
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,200,694
|
)
|
|
|
(5,200,694
|
)
|
BALANCE,
FEBRUARY 29, 2008, as restated
|
|
|
1,297,465
|
|
|
$
|
1,298
|
|
|
|
44,293,299
|
|
|
$
|
44,294
|
|
|
$
|
21,980,785
|
|
|
$
|
(736,035
|
)
|
|
$
|
(18,064,765
|
)
|
|
$
|
3,225,577
|
|
The
accompanying notes are an integral part of these financial
statements.
DAYBREAK
OIL AND GAS, INC.
(An
Exploration Stage Company)
For
the Years ended February 29, 2008 and February 28, 2007 and for the
Period
from
Inception (March 1, 2005) through February 29, 2008
|
|
|
|
|
|
|
|
From
Inception
|
|
|
|
Years
Ended
|
|
|
March
1, 2005
|
|
|
|
February
29,
|
|
|
February
28,
|
|
|
Through
February 29,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
|
(As
Restated)
|
|
|
|
|
|
(As
Restated)
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(5,200,694
|
)
|
|
$
|
(8,392,030
|
)
|
|
$
|
(18,064,765
|
)
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
used
in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for services
|
|
|
4,500
|
|
|
|
2,607,700
|
|
|
|
6,239,729
|
|
Depreciation,
depletion, amortization and impairment expense
|
|
|
2,333,571
|
|
|
|
2,398,048
|
|
|
|
4,731,619
|
|
Exploration
expense - dry wells
|
|
|
33,233
|
|
|
|
563,020
|
|
|
|
849,753
|
|
Non
cash interest expense and accretion
|
|
|
164,873
|
|
|
|
1,209,529
|
|
|
|
1,470,051
|
|
Non
cash interest and dividend income
|
|
|
(28,108
|
)
|
|
|
(28,585
|
)
|
|
|
(56,693
|
)
|
Non cash
general and administrative expense
|
|
|
934,521
|
|
|
|
-
|
|
|
|
934,521
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
-
|
|
|
|
8,333
|
|
|
|
-
|
|
Investment
in marketable securities
|
|
|
2,200,768
|
|
|
|
(2,356,213
|
)
|
|
|
(155,445
|
)
|
Accounts
receivable - oil and gas sales
|
|
|
(254,371
|
)
|
|
|
(56,906
|
)
|
|
|
(311,277
|
)
|
Accounts
receivable - related party participants
|
|
|
41,357
|
|
|
|
(41,357
|
)
|
|
|
-
|
|
Accounts
receivable - joint interest participants
|
|
|
(702,450
|
)
|
|
|
(799,970
|
)
|
|
|
(1,502,420
|
)
|
Prepaid
expenses and other current assets
|
|
|
55,954
|
|
|
|
(76,645
|
)
|
|
|
(20,500
|
)
|
Deferred
financing costs
|
|
|
-
|
|
|
|
10,000
|
|
|
|
-
|
|
Accounts
payable and other accrued liabilities
|
|
|
(1,385,367
|
)
|
|
|
1,604,626
|
|
|
|
802,542
|
|
Joint
interest receivable – long term
|
|
|
500,000
|
|
|
|
-
|
|
|
|
500,000
|
|
Other
assets
|
|
|
-
|
|
|
|
(77,177
|
)
|
|
|
(77,177
|
)
|
Net cash (used) in operating
activities
|
|
|
(1,302,213
|
)
|
|
|
(3,427,627
|
)
|
|
|
(4,660,062
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of reclamation bond
|
|
|
(250,000
|
)
|
|
|
(25,000
|
)
|
|
|
(275,000
|
)
|
Refund
on equipment
|
|
|
-
|
|
|
|
250,000
|
|
|
|
-
|
|
Additions
to note receivable
|
|
|
-
|
|
|
|
(800,000
|
)
|
|
|
(800,000
|
)
|
Purchases
of oil and gas properties
|
|
|
(2,036,888
|
)
|
|
|
(5,441,993
|
)
|
|
|
(8,915,744
|
)
|
Purchase
of fixed assets
|
|
|
(8,930
|
)
|
|
|
(22,911
|
)
|
|
|
(31,841
|
)
|
Proceeds
from sale of oil and gas properties
|
|
|
2,000,000
|
|
|
|
-
|
|
|
|
2,000,000
|
|
Proceeds
from note receivable
|
|
|
800,000
|
|
|
|
-
|
|
|
|
800,000
|
|
Additions
to oil and gas prepayments
|
|
|
72,392
|
|
|
|
-
|
|
|
|
72,392
|
|
Net cash provided by (used) in
investing activities
|
|
|
576,574
|
|
|
|
(6,039,904
|
)
|
|
|
(7,150,193
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sales of preferred stock, net
|
|
|
-
|
|
|
|
3,626,204
|
|
|
|
3,626,204
|
|
Proceeds
from sales of common stock, net
|
|
|
731,816
|
|
|
|
5,188,257
|
|
|
|
7,007,573
|
|
Proceeds
from related party notes payable
|
|
|
-
|
|
|
|
200,000
|
|
|
|
200,000
|
|
Proceeds
(repayments) from borrowings
|
|
|
(325,001
|
)
|
|
|
25,000
|
|
|
|
1,035,520
|
|
Net cash provided by financing
activities
|
|
|
406,815
|
|
|
|
9,039,461
|
|
|
|
11,869,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
|
|
|
(318,824
|
)
|
|
|
(428,070
|
)
|
|
|
59,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND EQUIVALENTS AT BEGINNING OF PERIOD
|
|
|
377,957
|
|
|
|
806,027
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AT END OF PERIOD
|
|
$
|
59,133
|
|
|
$
|
377,957
|
|
|
$
|
59,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
PAID FOR:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
41,327
|
|
|
$
|
13,769
|
|
|
$
|
55,096
|
|
Income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for services
|
|
$
|
4,500
|
|
|
$
|
2,607,700
|
|
|
$
|
6,239,729
|
|
Common
stock issued for oil and gas properties
|
|
|
-
|
|
|
|
528,750
|
|
|
|
940,750
|
|
Common
stock repurchased and cancelled
|
|
|
-
|
|
|
|
(150,000
|
)
|
|
|
(150,000
|
)
|
Common
stock issued on conversion of convertible debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
and
interest
|
|
|
27,878
|
|
|
|
1,024,522
|
|
|
|
1,253,934
|
|
Discount
on convertible notes payable
|
|
|
60,973
|
|
|
|
25,000
|
|
|
|
1,326,186
|
|
Extension
warrants on convertible notes payable
|
|
|
-
|
|
|
|
119,283
|
|
|
|
119,283
|
|
Conversion
of preferred stock to common stock
|
|
$
|
185
|
|
|
$
|
-
|
|
|
$
|
185
|
|
The
accompanying notes are an integral part of these financial
statements.
Daybreak
Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
NOTE
1 — ORGANIZATION AND BASIS OF PRESENTATION:
Organization
Originally
incorporated as Daybreak Uranium, Inc., (the “Company”), under the laws of the
State of Washington on March 11, 1955, the Company 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
oil and gas exploration industry. On October 25, 2005, the shareholders approved
a name change to Daybreak Oil and Gas, Inc. (“Daybreak”), to better reflect the
business of the Company.
Basis
of Presentation
The
accompanying audited financial statements of Daybreak have been prepared in
accordance with accounting principles generally accepted in the United States of
America and the rules of the Securities and Exchange Commission.
Exploration
Stage Company
On March
1, 2005 (the inception date), Daybreak commenced oil and gas exploration
activities. As of February 29, 2008, Daybreak has not produced a sustainable
positive cash flow from its oil and gas operations. Accordingly, Daybreak’s
activities have been accounted for as those of an “Exploration Stage Enterprise”
as set forth in SFAS No. 7, “Accounting for Development Stage Entities.” Among
the disclosures required by SFAS No. 7 are that Daybreak’s financial statements
be identified as those of an exploration stage company. In addition, the
statements of operations, stockholders equity (deficit) and cash flows are
required to disclose all activity since Daybreak’s date of
inception.
Daybreak
will continue to prepare its financial statements and related disclosures in
accordance with SFAS No. 7 until such time that Daybreak’s oil and gas
properties have generated significant revenues.
Use
of Estimates
In
preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions. These estimates and assumptions may
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, and
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
NOTE
2 — 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.
Daybreak
Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
Restricted
Cash
Daybreak
classifies cash balances as “restricted cash” when cash is restricted as to
withdrawal or usage. Daybreak did not have any cash balances designated as
restricted at February 29, 2008.
Investment
in Marketable Securities
Daybreak
determines the appropriate classification of its investments in debt securities
at the time of purchase and reevaluates such determinations at each
balance-sheet date. Daybreak classifies all investments in marketable debt
securities as trading securities as they are bought and held principally for the
purpose of selling them in the near term. These securities are
reported at fair value, with realized and unrealized gains and losses recognized
in earnings. The fair value of all securities is determined by quoted market
prices. These investments are not insured by the Federal Deposit
Insurance Corporation.
Accounts
and Notes Receivable
Daybreak
routinely assesses the recoverability of all material trade and other
receivables. Daybreak 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. No allowance for
doubtful accounts was considered necessary at February 29, 2008 and February 28,
2007.
Oil
and Gas Properties
Daybreak
uses the successful efforts method of accounting for oil and gas property
acquisition, exploration, development, and production
activities. Costs to acquire mineral interests in oil and 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 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 proved developed reserves. Support equipment and other property
and equipment are depreciated over their estimated useful lives.
Pursuant
to SFAS No. 144, “Impairment or Disposal of Long-Lived Assets”, Daybreak reviews
proved 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. Daybreak
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.
Daybreak
Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
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. Asset impairments
of $684,505 and $1,606,292 were recorded for the years ended February 29, 2008
and February 28, 2007, respectively. The charge is included in depreciation,
depletion and amortization.
As of
February 29, 2008, Oil and Gas Properties net of accumulated depletion,
depreciation, amortization and impairment were at $169,521.
Unproved
oil and gas properties that are individually significant are also periodically
assessed for impairment of value. An impairment loss for unproved oil and gas
properties is recognized at the time of impairment by providing an impairment
allowance.
On the
retirement or sale of a partial unit of proved property, the cost is charged to
accumulated depreciation, depletion, and amortization with a resulting gain or
loss recognized in income.
Deposits
and advances for services expected to be provided for exploration and
development or for the acquisition of oil and gas properties are classified as
long term other assets.
As of
February 29, 2008, $12,617 had been advanced from Joint Interest
Owners.
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 lives of three years.
Long
Lived Assets
Daybreak
reviews long-lived assets and identifiable intangibles whenever events or
circumstances indicate that the carrying amounts of such assets may not be fully
recoverable. Daybreak 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).
Debt
Daybreak
recognizes interest expense for accrued interest payable under the terms of the
debt. Principal and interest payments due within one year are
classified as current, whereas principal and interest payments for periods
beyond one year are classified as long term. Beneficial conversion
features of debt are valued and the related amounts recorded as discounts on the
debt. Discounts are amortized to interest expense using the effective
interest method to the earliest date of conversion of the debt.
Daybreak
Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
Fair
Value of Financial Instruments
The
amounts of financial instruments including cash, deposits, deferred financing
costs, prepaid expenses, accounts payable, convertible debentures, notes payable
and interest payable approximated their fair values as of February 29, 2008 and
February 28, 2007.
Share
Based Payments
Prior to
February 28, 2005, Daybreak accounted for its stock based compensation plans
under the recognition and measurement provisions of APB Opinion No. 25,
“Accounting for Stock Issued to Employees” and related Interpretations, (“APB
25”) as permitted by SFAS No. 123, “Accounting for Stock Based Compensation”
(“SFAS 123”).
Effective
March 1, 2005, Daybreak adopted the fair value recognition provisions of SFAS
No. 123, “Accounting for Stock Based Compensation” (“SFAS 123”) for its stock
based compensation plans under the recognition and measurement provisions of
SFAS 123. No awards granted prior to March 1, 2005 were modified or
settled in cash during fiscal 2006.
Effective
March 1, 2006, Daybreak adopted the fair value recognition provisions of SFAS
No. 123R, “Share Based Payment” and related Interpretations (“SFAS
123R”).
Under
both SFAS 123 and SFAS 123R, compensation cost for all share based payments
granted on or subsequent to March 1, 2005 are based on the grant date fair value
estimated in accordance with the provisions of SFAS 123 and SFAS 123R, for the
respective fiscal years. Compensation cost is recognized on a straight line
basis over the requisite service period for the entire award in accordance with
the provisions of SFAS 123R. If at any date the portion of the grant
date fair value of the award that is vested is greater than that amount
recognized on a straight line basis, the amount of the vested grant-date fair
value is recognized.
Daybreak
accounts for transactions in which it issues equity instruments to acquire goods
or services from non employees in accordance with the provisions of SFAS No.
123R (as amended). These transactions are accounted for based on the
fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
Loss
per Share of Common Stock
Basic
loss per share of common stock is calculated by dividing net loss available to
common stockholders by the weighted average number of common shares issued and
outstanding during the year. Common stock equivalents, including common stock
issuable upon the conversion of loans and interest payable, are excluded from
the calculations when their effect is anti-dilutive. At February 29, 2008 and
February 28, 2007, the potential dilutive effect of converting notes payable and
related interest to shares was determined to be anti-dilutive, and therefore
their effect is excluded from the calculation of diluted weighted average
shares.
Concentration
of Credit Risk
Substantially
all of Daybreak’s accounts receivable result from natural gas and crude oil
sales or joint interest billings to third parties in the oil and gas industry,
operating in the United States. This concentration of customers and joint
interest owners may impact Daybreak’s overall credit risk as these entities
could be affected by similar changes in economic conditions as well as other
related factors.
Daybreak
Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
Accounts
receivable are generally not collateralized. Historically, Daybreak
has not experienced credit losses on its accounts receivable. At each of
Daybreak’s four producing projects, there is only one buyer for the purchase of
oil or gas production. At the Tuscaloosa project in Louisiana, the
F-1, F-3 and A-1 wells are supplying gas to a single customer pursuant to a gas
supply agreement. As a result of the loss of customers by the gas
purchaser, the F-1 and F-3 wells were, starting in July 2007 and continuing
through November 2007, temporarily shut-in pending the securing of an
alternative market for the natural gas produced by these two
wells. The A-1 well did not start to produce until December 2007 when
there were no production restrictions in place. In combination, the F-1 and F-3
wells contributed approximately 43% of total revenues during the fiscal year
ended February 29, 2008. At February 29, 2008, five customers represented 100%
of crude oil and natural gas sales receivable from all projects in
aggregate.
In
accordance with Statement of Financial Accounting Standards No. 131 (“SFAS
131”), a table disclosing the total amount of revenues from each major customer
by product type follows:
|
|
|
|
|
For
the Year Ended February 29, 2008
|
|
|
For
the Year Ended February 28, 2007
|
|
Project
|
Location
|
Product
|
Customer
|
|
Revenue
|
|
|
Percentage
|
|
|
Revenue
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tuscaloosa
|
Louisiana
|
Gas
|
Locust
Ridge
|
|
$
|
267,022
|
|
|
|
33%
|
|
|
$
|
237,159
|
|
|
|
38%
|
|
|
|
Oil
|
Plains
Marketing
|
|
|
183,791
|
|
|
|
22%
|
|
|
|
237,434
|
|
|
|
38%
|
|
Saxet
|
Texas
|
Gas
|
Gulf
Coast Gas Gathering
|
|
|
155,222
|
|
|
|
19%
|
|
|
|
139,491
|
|
|
|
22%
|
|
Gilbertown
|
Alabama
|
Oil
|
Hunt
Crude Oil Supply
|
|
|
119,409
|
|
|
|
15%
|
|
|
|
N/A
|
|
|
|
N/A
|
|
In the
Krotz Springs project in St. Landry Parish, Louisiana one of the working
interest partners, California Oil & Gas, Inc. (“COGC”) has defaulted on its
twenty-five percent (25%) working interest obligation for the drilling and
completion of the KSU #59 well. The balance of the default was $587,464 as of
February 29, 2008. As a partial payment of the outstanding balance, COGC has
assigned their Net Revenue Interest (“NRI”) of 18.25% in the production proceeds
from the start of production to Daybreak. Additionally, Daybreak has filed a
lawsuit in East Baton Rouge Parish, State of Louisiana seeking judgment in its
favor in the amount of $587,464 together with legal interest, attorney fees and
all costs of the proceedings. Service of this lawsuit has been perfected on COGC
and a hearing date in court has been set for the end of May, 2008. On
May 1, 2008, Daybreak received from the unitized field operator $108,428 that
represented the production revenue net of severance tax that had been held in
suspense under direction from Daybreak. This revenue was from the months of May
2007 through February 2008. These funds are being applied against the
outstanding balance.
Daybreak
Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
Revenue
Recognition
Daybreak
uses the sales method to account for sales of crude oil and natural
gas. Under this method, revenues are recognized based on actual
volumes of oil and gas sold to purchasers. The volumes sold may
differ from the volumes to which Daybreak is entitled based on its interests in
the properties. These differences create imbalances which are
recognized as a liability only when the imbalance exceeds the estimate of
remaining reserves. Daybreak had no significant imbalances as of
February 29, 2008 and February 28, 2007.
Reclamation
Bonds
Included
in other assets at February 29, 2008, is a $25,000 certificate of deposit which
has been pledged to the State of Louisiana. Also, included in other
assets is a $250,000 cash deposit as collateral for a $250,000 surety bond with
the State of Alabama. Both of these are in connection with asset
retirement obligations for future plugging, abandonment and site remediation in
Louisiana and Alabama. The pledging of these bonds was necessitated
by Daybreak’s emerging status as an oil and gas property operator in the States
of Louisiana and Alabama.
Environmental
Matters and Asset Retirement Obligation
Daybreak
owns and has previously owned mineral property interests (which it has explored
for commercial mineral deposits) on public and private lands in various states
in the western United States. Daybreak and its properties are subject to a
variety of federal and state regulations governing land use and environmental
matters. Management believes it has been in substantial compliance
with all such regulations. Management is also unaware of any pending
action or proceeding relating to regulatory matters that would effect the
financial position of Daybreak.
SFAS No.
143, “Accounting for Asset Retirement Obligations,” addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement
costs. This statement requires that Daybreak recognizes 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. An 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 asset.
Suspended
Well Costs
On April
4, 2005, the Financial Accounting Standards Board, (FASB) issued FASB Staff
Position No. 19-1,"Accounting for Suspended Well Costs" (FSP No. 19-1). This
staff position amends SFAS No. 19, "Financial Accounting and Reporting by Oil
and Gas Producing Companies" and provides guidance concerning exploratory well
costs for companies that use the successful efforts method of accounting.
Daybreak adopted FSP No. 19-1 for the fiscal years ended February 29, 2008 and
February 28, 2007.
Daybreak
Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
The
position 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 management's evaluation of capitalized
exploratory well costs.
In
addition, the FSP 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.
Provisions
for Taxes
Daybreak
has adopted SFAS No. 109 “Accounting for Income Taxes”. Pursuant to this
pronouncement, income taxes are accounted for using an asset and liability
approach. SFAS No. 109 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.
Recent
Accounting Pronouncements
Daybreak
does not expect the adoption of any recently issued accounting pronouncements to
have a significant effect on its material position or results of
operation.
Reclassifications
Certain
reclassifications have been made to conform to prior period’s financial
information to the current period’s presentation. These
reclassifications had no effect on previously reported net loss or accumulated
deficit.
NOTE
3 – INVESTMENTS IN MARKETABLE SECURITIES:
Daybreak
periodically invests excess cash on hand in marketable securities with the
intent to sell the securities in the near term as cash requirements
determine. At February 29, 2008, Daybreak held $155,445 in a
brokerage account which was invested in mutual funds that invested in fixed
income securities with relatively low market risk. These securities
are classified as trading securities under the provisions of SFAS No. 115 “
Accounting for Certain Investments
in Debt and Equity Securities”.
During the year ended February
29, 2008, Daybreak earned $47,241 in interest and dividend income from these
investments. The market value of the securities as at February 29,
2008 was equal to their book value and no trading gains or losses occurred
during the year.
Daybreak
Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
NOTE
4 – ACCOUNTS RECEIVABLE – JOINT INTEREST PARTICIPANTS:
In June
2007, Daybreak as Operator for the drilling and completion phases of the KSU #59
(formerly Haas-Hirsch No. 1) well, located in the Krotz Springs Field in St.
Landry Parish, Louisiana, sent a notice of default to California Oil & Gas,
Inc., (“COGC”) a 25% working interest participant for their delinquency in
meeting the financial commitments in the drilling and completion of the KSU #59
well. Additionally, the Unitized Field Operator, was notified to place all
revenue payments to COGC in suspense until the delinquency had been
cured. Between August and October 2007, the Company received an
aggregate of $199,970 in payments on this delinquency. In January 2008, Daybreak
instituted legal action against COGC for their default. As of
February 29, 2008 the outstanding balance on this account was $608,489. On May
1, 2008, Daybreak as part of a revenue assignment agreement with COGC received a
payment of $108,427, representing the net revenue proceeds that had been held in
suspense by the Unit Operator since production began in May
2007. Daybreak intends to vigorously pursue all legal remedies
available to settle this outstanding debt.
NOTE
5 - NOTES RECEIVABLE - DRILLING RIG AGREEMENT:
Daybreak
advanced a total of $800,000 to Green River Drilling, LLC through November 30,
2006, under promissory note agreements for the refurbishment of a drilling
rig. In May 2007, Daybreak was informed by Green River that they
intended to sell the drilling rig to a third party. The sale was
completed and in June 2007, Daybreak received a total of $846,668 which
represented the proceeds and interest from the $800,000 note
receivable.
NOTE
6 — OIL AND GAS PROPERTIES:
Oil and
gas properties, at cost:
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
February
29, 2008
|
|
|
February
28, 2007
|
|
Proved
leasehold costs
|
|
$
|
299,571
|
|
|
$
|
125,000
|
|
Unproved
leasehold costs
|
|
|
104,700
|
|
|
|
165,261
|
|
Costs
of wells and development
|
|
|
1,732,958
|
|
|
|
574,933
|
|
Unevaluated
capitalized exploratory well costs
|
|
|
-
|
|
|
|
599,442
|
|
Capitalized
asset retirement costs
|
|
|
22,740
|
|
|
|
25,711
|
|
Total
cost of oil and gas properties
|
|
|
2,159,969
|
|
|
|
1,490,347
|
|
Accumulated
depletion, depreciation,
|
|
|
|
|
|
|
|
|
amortization
and impairment
|
|
|
(1,990,448
|
)
|
|
|
(436,318
|
)
|
Oil
and gas properties, net
|
|
$
|
169,521
|
|
|
$
|
1,054,029
|
|
Suspended
Well Costs
As of
March 1, 2005, the Company adopted FASB Staff Position FAS 19-1, "Accounting for
Suspended Well Costs." Upon adoption of the FSP, the Company evaluated all
existing capitalized exploratory well costs under the provisions of the FSP.
Daybreak
Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
The
Company had no capitalized exploratory wells costs at the time of adoption of
FAS 19-1 or as of February 28, 2006. The following table reflects the
net changes in capitalized exploratory well costs during the fiscal year ended
February 29, 2008, and does not include amounts that were capitalized and
subsequently expensed in the same period.
|
|
2008
|
|
|
2007
|
|
Beginning
balance at March 1 of fiscal year
|
|
$
|
599,442
|
|
|
$
|
-
|
|
Total
Exploration Well Additions
|
|
|
33,233
|
|
|
|
2,385,120
|
|
Reclassifications
to wells, facilities, and equipment based on the determination of proved
reserves
|
|
|
(599,442
|
)
|
|
|
(1,222,658
|
)
|
Capitalized
exploratory well costs charged to expense
|
|
|
|
|
|
|
(563,020
|
)
|
Ending
Balance at February 29 of fiscal year
|
|
$
|
33,233
|
|
|
$
|
599,442
|
|
The
following table provides an aging of capitalized exploratory well costs based on
the date the drilling was completed and the number of projects for which
exploratory well costs have been capitalized for a period greater than one year
since the completion of drilling:
Fiscal
year
|
|
2008
|
|
Capitalized
exploratory well costs that have been capitalized for a period of one year
or less
|
|
$
|
33,233
|
|
Balance
at February 29 of fiscal year
|
|
$
|
33,233
|
|
Impairment
of oil and gas properties
In
accordance with Statement of Financial Accounting Standards No. 144, “Accounting
for Impairment or Disposal of Long-Lived Assets”
,
if impairment is necessary,
the asset carrying value is written down to fair value. Cash flow
pricing estimates are based on existing proved reserve and production
information and pricing assumptions that management believes are
reasonable. Unproved oil and gas properties that are individually
significant are periodically assessed for impairment by providing an impairment
allowance. As of February 29, 2008, Daybreak expensed $684,505 as
impairment on proved properties.
Asset
Retirement Obligation
Daybreak’s
financial statements reflect the provisions of Statement of Financial Accounting
Standards No. 143, “Accounting for Asset Retirement Obligations”. Our
asset retirement obligation (“ARO”) primarily represents the estimated present
value of the amount Daybreak will incur to plug, abandon and remediate its
producing properties at the end of their productive lives, in accordance with
applicable state laws. Daybreak determines the ARO on its oil and gas properties
by calculating the present value of estimated cash flows related to the
liability. At February 29, 2008, the liability for ARO was $119,207,
all of which is considered long term. The asset retirement
obligations are recorded as current or non-current liabilities based on the
estimated timing of the anticipated cash flows. For the year ended
February 29, 2008 and February 28, 2007, Daybreak has recognized accretion
expense of $9,943 and $5,970, respectively.
Daybreak
Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
The
following table describes the changes in the asset retirement obligations for
the year ended February 29, 2008.
Asset
retirement obligations, beginning of period
|
|
$
|
99,427
|
|
Accretion
expense
|
|
|
9,943
|
|
Asset
retirement addition
|
|
|
9,837
|
|
Asset
retirement obligations, end of period
|
|
$
|
119,207
|
|
NOTE
7 — DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE:
On
January 18, 2008 Daybreak signed a purchase and sale agreement (“PSA”) for the
sale of its Tuscaloosa project interests for $8 million in cash. The
transaction closed in three tranches; the first closing for $2 million closed on
January 18, 2008; the second closing for $500,000 occurred on April 30, 2008;
and the final closing for $5.5 million occurred on June 12, 2008 and was subject
to customary closing adjustments. The sale includes Daybreak's interests in the
Tensas Farms et al F-1, F-3, B-1, A-1 and F-2 wells; and all of its acreage and
infrastructure in the project area. Under terms of the PSA, the
effective dates for each closing was January 1, 2008.
|
|
2008
|
|
|
2007
|
|
Oil
and gas sales revenues – Tuscaloosa project
|
|
$
|
650,754
|
|
|
$
|
474,558
|
|
Cost
and Expenses
|
|
|
(216,915
|
)
|
|
|
(265,835
|
)
|
Income
from discontinued operations
|
|
$
|
433,839
|
|
|
$
|
208,723
|
|
Oil and
gas properties, at cost for discontinued operations:
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
February
29, 2008
|
|
|
February
28, 2007
|
|
Proved
leasehold costs
|
|
$
|
1,556,423
|
|
|
$
|
1,967,107
|
|
Unproved
leasehold costs
|
|
|
310,657
|
|
|
|
737,156
|
|
Costs
of wells and development
|
|
|
1,393,790
|
|
|
|
1,461,010
|
|
Unevaluated
capitalized exploratory well costs
|
|
|
896,067
|
|
|
|
1,223,177
|
|
Capitalized
asset retirement costs
|
|
|
57,567
|
|
|
|
67,746
|
|
Total
cost of oil and gas properties
|
|
|
4,214,504
|
|
|
|
5,456,196
|
|
Accumulated
depletion, depreciation,
|
|
|
|
|
|
|
|
|
amortization
and impairment
|
|
|
(2,580,033
|
)
|
|
|
(1,957,375
|
)
|
Oil
and gas properties, net
|
|
$
|
1,634,471
|
|
|
$
|
3,498,821
|
|
Daybreak
Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
The
following table reflects the net changes in capitalized exploratory well costs
for discontinued operations during the fiscal year ended February 29, 2008, and
does not include amounts that were capitalized and subsequently expensed in the
same period.
|
|
2008
|
|
|
2007
|
|
Beginning
balance at March 1 of fiscal year
|
|
$
|
1,223,177
|
|
|
$
|
-
|
|
Total
Exploration Well Additions
|
|
|
517,316
|
|
|
|
1,223,177
|
|
Sales
of exploratory wells
|
|
|
(844,426
|
)
|
|
|
-
|
|
Ending
Balance at February 29 of fiscal year
|
|
$
|
896,067
|
|
|
$
|
1,223,177
|
|
NOTE
8 — CONVERTIBLE DEBENTURES:
During
the fiscal years ended February 28, 2006 and February 28, 2007, there were three
issuances of Convertible Debentures to various accredited individual investors
by Daybreak. The convertible debentures had a one year maturity date
and were convertible into shares of Daybreak’s unregistered common stock at
conversion prices of $0.25, $0.50 and $0.75, respectively. In
December of 2005, Daybreak issued a convertible promissory note (“Convertible
Promissory Note”) to an accredited investor pursuant to a warehousing line of
credit arrangement with a related party. The Convertible Promissory
Note was convertible into unregistered common stock at a conversion price of
$0.25.
The
following table summarizes the issuances of Convertible Debentures and the
Convertible Promissory Note:
Description
|
|
Interest
Rate
|
|
Dates
of Maturity
|
|
2008
|
|
|
2007
|
|
Principal
balance, beginning of year
|
|
|
|
|
|
$
|
134,999
|
|
|
$
|
1,138,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
issuances
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.25
Convertible Debentures
|
|
|
6%
|
|
03/22/06
to 08/31/06
|
|
|
-
|
|
|
|
-
|
|
$0.50
Convertible Debentures
|
|
|
10%
|
|
01/26/07
to 02/26/07
|
|
|
-
|
|
|
|
-
|
|
$0.75
Convertible Debentures
|
|
|
10%
|
|
02/26/07
to 10/31/07
|
|
|
-
|
|
|
|
25,000
|
|
$0.25
Convertible Promissory Note
|
|
|
0%
|
|
06/30/06
|
|
|
-
|
|
|
|
-
|
|
Total
issuances during the year ended
|
|
|
|
|
|
|
|
-
|
|
|
|
1,163,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
converted during the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.25
Convertible Debentures
|
|
|
6%
|
|
|
|
|
-
|
|
|
|
(32,000
|
)
|
$0.50
Convertible Debentures
|
|
|
10%
|
|
|
|
|
-
|
|
|
|
(806,700
|
)
|
$0.75
Convertible Debentures
|
|
|
10%
|
|
|
|
|
-
|
|
|
|
(100,000
|
)
|
$0.25
Convertible Promissory Note
|
|
|
0%
|
|
|
|
|
-
|
|
|
|
|
|
Total
conversions during the year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
paid in cash
|
|
|
|
|
|
|
|
(134,999
|
)
|
|
|
|
|
Principal
balance, end of year
|
|
|
|
|
|
|
|
-
|
|
|
|
225,001
|
|
Unamortized
discount, end of year
|
|
|
|
|
|
|
|
-
|
|
|
|
(90,002
|
)
|
Total
debt, net of discount
|
|
|
|
|
|
|
$
|
0
|
|
|
$
|
134,999
|
|
Daybreak
Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
Twenty-Six
(26) of the 6% interest $0.25 convertible debentures for a total of $158,821
were with related parties that included officers, directors and greater than 10%
shareholders.
One of
the 10% interest $0.50 convertible debentures for a total of $200,000 was with
Hooper Group, LLC, an entity controlled Keith Hooper a Daybreak shareholder
(greater than 5%).
Under the
warehousing line of credit Convertible Promissory Note, Daybreak was advanced
$60,000 and had the option to request an additional $120,000 upon completion of
the Ginny South prospect in Texas. The Convertible Promissory Note
was guaranteed by a director of the company. The Convertible
Promissory Note had no stated interest and contained the option to convert the
note into Daybreak common stock. All advances under the Convertible
Promissory Note could also be converted into common stock of the Company at or
prior to the maturity date.
No
discount was recorded for the imputed interest rate on the Convertible
Promissory Note as a beneficial conversion feature of $60,000 was recognized
upon issuance in accordance with EITF 00-27 and 98-5. The beneficial
conversion feature was recognized as a discount on the Convertible Promissory
Note and amortized utilizing the effective interest method, over the period
commencing on the issuance date to the date of stated redemption of the debt in
accordance with EITF 00-27.
In
February 2006, the $60,000 advance on the line of credit, as secured by the
Convertible Promissory Note, was converted into Daybreak common
stock. Upon conversion, the remaining discount was recognized as
interest and the Convertible Promissory Note was cancelled. Financing
costs for the Convertible Promissory Note were paid by issuing 66,000 shares of
unregistered common stock to the issuer and another related
party. The common stock fair value of $38,380 was recognized as
interest expense on the date of grant and the fair value was determined using
Daybreak’s trading price on the date of grant.
The
holders of the $0.25 Convertible Debentures had the option to convert their
debentures (including accrued interest of 6%) into Daybreak’s common stock at
any time after six months had elapsed from the date of issuance. In accordance
with EITF 00-27 and 98-5, beneficial conversion features of $73,511 were
recognized upon issuance of the debentures. The beneficial conversion features
were recognized as discounts on the debentures at the date of issuance and
amortized using the effective interest method to the earliest of the maturity
date or the date conversion. As of February 28, 2007, the entire
issuance of the $0.25 convertible debentures had been converted into
unregistered common stock and the $73,511 discount had been
recognized.
The
holders of the $0.50 Convertible Debentures had the option to convert their
debentures (including accrued interest of 10%) into Daybreak’s common stock at
any time after sixty-one (61) days had elapsed from the date of issuance. In
accordance with EITF 00-27 and 98-5, beneficial conversion features of $806,700
were recognized upon issuance of the debentures. The beneficial
conversion features were recognized as discounts on the debentures at the date
of issuance and amortized using the effective interest method to the earliest of
the maturity date or the date of conversion. As of February 28, 2007,
the entire issuance of the $0.50 convertible debentures had been converted into
unregistered common stock and the $806,700 discount had been
recognized.
The
holders of the $0.75 Convertible Debentures had the option to convert their
debentures (including accrued interest of 10%) into Daybreak’s common stock at
any time after sixty-one (61) days had elapsed from the date of
issuance. In accordance with EITF 00-27 and 98-5, beneficial
conversion features of $325,001 were recognized upon issuance of the
debentures.
Daybreak
Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
The
beneficial conversion features were recognized as discounts on the debentures at
the date of issuance and amortized using the effective interest method to the
earliest of the maturity date or the date conversion. As of February
28, 2007, $100,000 of the $0.75 convertible debentures, including accrued
interest of 10%, had been converted into unregistered common stock and the
$325,001 discount had been recognized. As of February 29, 2008, the
balance of the convertible debentures had been redeemed for their principal
amounts plus accrued interest.
In
December 2006, the three holders of the $0.75 convertible debentures, agreed to
extend the due date of the debentures to August 31, 2007. In
consideration of the term extension the debenture holders were issued a total of
150,001 warrants. The warrants were valued at $119,283 using the
Black-Scholes option pricing model. The assumptions used in the
Black-Scholes valuation model were: a risk free interest rate of 4.7%; the
current stock price at date of issuance of $1.04 per share; the exercise price
of the warrants of $2.00; the term of five years; volatility of 117%; and
dividend yield of 0.0%. The value of the warrants was recognized at
the time of issuance as a discount against the existing convertible debentures
and is being amortized using the effective interest method until
maturity.
On April
30, 2007, one of the convertible debenture holders converted to Daybreak
unregistered common stock. A total of 37,169 shares were issued to
satisfy the debt. On August 31, 2007, the remaining two debenture
holders agreed to extend the term of the debentures to October 31, 2007. In
consideration of this extension they received 112,000 warrants. The
warrants were valued at $35,386 using the Black-Scholes option pricing
model. The assumptions used in the Black-Scholes valuation model
were: a risk free interest rate of 4.1 %; the current stock price at date of
issuance of $0.53 per share; the exercise price of the warrants of $0.53; the
term of two years; volatility of 114%; and dividend yield of
0.0%. The value of the warrants was recognized at the time of
issuance as a discount against the existing convertible debentures and is being
amortized using the effective interest method until maturity.
On
October 31, 2007, one of the two remaining convertible debenture holders
received proceeds of $76,756.87, representing the principal plus accumulated
interest of the convertible debenture. The other convertible
debenture holder agreed to extend the term of his debenture until January 31,
2008. In consideration of the term extension he received 90,000
warrants. The warrants were valued at $25,587 using the Black-Scholes
option pricing model. The assumptions used in the Black-Scholes
valuation model were: a risk free interest rate of 3.9 %; the current stock
price at date of issuance of $0.40 per share; the exercise price of the warrants
of $0.25; the term of two years; volatility of 121.64%; and dividend yield of
0.0%. The value of the warrants was recognized at the time of
issuance as a discount against the existing convertible debentures and was
amortized using the effective interest method until maturity.
On
January 31, 2008, the remaining convertible debenture holder received proceeds
of $128,151.71 representing the principal plus accumulated interest of the
convertible debenture.
Daybreak
has evaluated the application of SFAS No. 133 and EITF 00-19 for the
consideration of embedded derivatives with respect to the conversion features
for each of the Convertible Debentures and the Convertible Promissory
Note. Daybreak has concluded that the instruments did not contain
embedded derivatives.
Daybreak
Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
NOTE
9 — RELATED PARTY TRANSACTIONS:
Office
Lease
Daybreak
leases offices from Terrence J. Dunne & Associates, a company owned by
Terrence J. Dunne (former Chief Financial Officer, director and current 8.8%
shareholder). In May 2007, Daybreak increased their office size from
850 to approximately 1,000 square feet and monthly lease payments increased from
$1,000 to $1,250 per month. This office lease is currently on a
month-to-month basis. On January 1, 2008, the monthly rent was reduced to $1,000
per month because of a reduction in the square footage being
leased.
Financing
of Gas Pipeline
On May
24, 2006, Daybreak financed its forty percent (40%) working interest in the
Tuscaloosa project gas pipeline through a financing arrangement with Hooper Oil
& Gas Partners, LLC (“Hooper O&G”). This pipeline services the Tensas
Farms et al F-1 well in Tensas Parish, Louisiana. Hooper O&G is a company
controlled by Keith A. Hooper (a greater than 5% shareholder).
Daybreak
has accounted for this agreement as a financing arrangement in the form of a
note payable with a principal balance of $200,000. Daybreak was
obligated to pay $5,000 per quarter in interest until the principal was paid in
full. Daybreak was also required to pay an additional 1% interest fee
based on Daybreak’s original net revenue interest (“NRI”) on the gas production
revenue of the F-1 well for the life of the well. Daybreak was obligated to
repay the note between the sixth and the thirtieth (30th) month after the
operation of the pipeline had commenced. Under the agreement, title
transferred to Hooper O&G, however Hooper O&G was obligated to sell the
interest and title back to Daybreak and couldn’t sell the interest to any other
party.
Daybreak
was required to commence repayment of the loan if production from the F-1 well
should cease for any cause for a period exceeding sixty
days. Daybreak made payments of $100,000 on June 14, 2007 and $58,245
on August 28, 2007. Due to the shut-in status of the F-1 well the
accelerated repayment schedule was triggered. The loan was repaid in
full on November 29, 2007.
Common
Stock and Cash for Services
Under
SFAS No. 123R the guidelines for recording stock issued for goods or services
require the fair value of the shares granted be based on the fair value of the
goods or services received or the publicly traded share price of Daybreak’s
registered shares on the date the shares were granted (irrespective of the fact
that the shares granted were unregistered), whichever is more readily
determinable. This position has been further clarified by the issuance of SFAS
No. 157. Accordingly, Daybreak elected an early application of these
guidelines. Daybreak has determined that the fair value of all common
stock issued for goods or services is more readily determinable based on the
publicly traded share price on the date of grant.
From
March 1, 2005 through February 29, 2008, Daybreak had contracts with 413294
Alberta, Ltd. to provide the services of Robert N. Martin as President (resigned
as President and director December 14, 2007, and appointed Senior
Vice-President, Exploration). For the fiscal year ended February 28, 2007,
413294 Alberta, Ltd. was paid a total of $161,500 and 250,000 shares of
unregistered common stock valued at $597,500.
Daybreak
Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
The
shares of common stock were expensed at the grant date. For the
fiscal year ended February 29, 2008, 413294 Alberta Ltd. was paid a total of
$186,000 for services rendered.
From
March 1, 2005 through February 29, 2008, Daybreak had contracts with Jeffrey R.
Dworkin (resigned as Secretary and director December 14, 2007) for services in
regards to public company corporate governance and oil and gas mineral rights
and leases. For the fiscal ended February 28, 2007, Mr. Dworkin was paid a total
of $36,191. For the fiscal year ended February 29, 2008, Mr. Dworkin was paid
$31,550 for services rendered.
For the
fiscal year ended February 28, 2007, Mr. Anderson was employed as Chief
Operating Officer and paid $98,500 in cash for services. For the
Fiscal year ended February 29, 2008, Mr. Anderson was compensated $126,000 in
cash for services rendered.
From
January 2, 2007 through February 29, 2008, Daybreak had a contract with Timothy
R. Lindsey (director; appointed Interim Chief Executive Officer and President
December 14, 2007) to facilitate long range strategic planning and advise
Daybreak in business and exploration matters in the oil and gas
industry. Under the terms of his contract, Mr. Lindsey was granted
200,000 shares of unregistered common stock valued at $260,000. The
contract provides compensation for services on a daily rate and no payments were
made under the contract as of February 28, 2007. For the fiscal year
ended February 29, 2008, Mr. Lindsey was paid $21,000 for services
rendered.
During
the fiscal year ended February 28, 2007, Eric L. Moe (resigned as Chief
Executive Officer and director December 14, 2007) was compensated $103,500 in
cash and granted 500,000 shares of unregistered common stock valued at
$1,100,000. For the fiscal year ended February 29, 2008, Mr. Moe
received compensation of $105,000 for services rendered.
During
the fiscal year ended February 28, 2007, Thomas C. Kilbourne (resigned as
Treasurer and director December 14, 2007) was compensated $84,500 in cash and
granted 100,000 shares of unregistered common stock valued at $239,000. For the
fiscal year ended February 29, 2008, Mr. Kilbourne received compensation of
$102,000 for services rendered.
During
the fiscal year ending February 28, 2007, Daybreak paid nine directors a total
of $69,750 cash for directors’ fees. For the fiscal year ended
February 29, 2008, fees paid to the nine directors total $81,000.
Convertible
Debentures
Of the
$168,821 Convertible Debentures $0.25 series issued in the fiscal year ended
February 28, 2006, $158,821 were issued to five individuals who were considered
to be related parties at the time. In the fiscal year ended February 28,
2006, twenty-three of the related party convertible debentures representing
$126,821 in principal were converted, resulting in 524,820 shares of
unregistered common stock being issued to satisfy the principal and interest
obligations. By February 28, 2007, all twenty-six of related party
convertible debentures were converted resulting in a total of 662,360 shares of
unregistered common stock being issued to satisfy principal and interest
obligations.
Daybreak
Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
Of the
$806,700 in convertible debenture of the 10% interest $0.75 series, $200,000 was
from Hooper Group, LLC, an entity controlled by Keith Hooper a Daybreak
shareholder (greater than 5%). In the fiscal year ended February 28,
2007, these notes were converted for 440,000 shares of unregistered common stock
to satisfy the principal and interest obligations.
Purchase
of Additional Working Interest in Tuscaloosa Project
During
the fourth quarter of the fiscal year ended February 28, 2008. the Company
finalized the acquisition of an additional 2% working interest in the Tuscaloosa
project in Louisiana that had been jointly owned by three parties, two of whom
were 413294 Alberta Ltd. and Tempest Energy, Inc. Robert N. Martin (former
President and director; currently Senior Vice-President, Exploration) and Eric
L. Moe (former Chief Executive Officer and director) are each the President of
their respective companies. The interest purchased represented a 1.5%
working interest in the Tensas Farms et al B-1 well and a 0.5% working interest
in the F-3 well. The NRI (net revenue interest) of these three parties was 0.38%
in the F-3 well. The purchase included the rights to revenue from first
production. Daybreak paid an aggregate $27,808 for this
interest. The sale was subject to the customary closing
adjustments.
NOTE
10 — STOCKHOLDERS’ EQUITY:
Series
A Convertible Preferred Stock
Daybreak
is authorized to issue up to 10,000,000 shares of $0.001 par value preferred
stock. Daybreak has designated 2,400,000 shares of the 10,000,000
total preferred shares as “Series A Convertible Preferred Stock” (“Series A
Preferred”), with a $0.001 par value. During the year ended February 28, 2007,
Daybreak conducted a private placement sale of Series A Preferred (the “July
2006 Preferred Stock Private Placement”). Each sale unit consisted of
one share of Series A Preferred and two common stock purchase
warrants. The units were sold for $3.00 per unit, with a total of
1,399,765 units sold; resulting in gross proceeds of
$4,199,295. Daybreak received net proceeds of $3,626,204 after
placement agent fees, commissions and other offering costs of
$573,091.
The
Series A Preferred can be converted by the shareholder at any time into three
shares of Daybreak’s common stock. If Daybreak’s common stock is
registered under the Securities Act of 1933, the Series A Preferred shall be
automatically converted into common stock at any time after the effective date
of the registration statement if Daybreak’s common stock closes at or above
$3.00 per share for twenty (20) out of thirty trading days (30)
days. Holders of Series A Convertible Preferred stock earn a
dividend, in the amount of 6% of the original purchase price per year.
Accumulated dividends do not bear interest. Dividends can be paid in
cash or stock, are payable upon declaration by the Board of Directors and none
have been declared.
The
Warrants included in the private placement, are exercisable for a period of five
years after the closing date at an exercise price of $2.00 per share. In
accordance with EITF 98-5, Daybreak valued the warrants and the beneficial
conversion feature of the preferred stock. Accordingly, Daybreak
recorded a discount for the warrants and beneficial conversion feature (BCF), of
$4,199,295. The discount is attributable to the fair value of the Warrants and
the intrinsic value of the conversion feature of the preferred stock. The
value of the BCF was recognized and measured separately by allocating to
additional paid-in capital the proceeds equal to the $1,489,222 relative fair
value of the Warrants and the $2,710,073 intrinsic value of the conversion
feature.
Daybreak
Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
Daybreak
also recorded a deemed dividend to reflect the full amortization of the discount
of the value of the Warrants and conversion features of
$4,199,295. The fair value of each Warrant granted was
estimated using the Black-Scholes pricing model. The assumptions used in the
Black-Scholes valuation model were: a risk free interest rate of 4.99%; the
current stock price at date of issuance of $2.20 per share; the exercise price
of the warrants at $1.00; an expected term of five years; volatility of 113%;
and dividend yield of 0.0%. As of February 29, 2008, no subscriber
warrants had been exercised.
Bathgate
Capital Partners, of Denver, Colorado (Bathgate) was the placement
agent. Joseph Lavigne, son of Dale B. Lavigne (the Chairman and a
director of Daybreak) is an employee of Bathgate. Bathgate was paid a sales
commission of 10% of the gross proceeds of the private placement and a
non-accountable expense allowance of 3% of the gross proceeds totaling $547,589.
For every $30.00 invested, Bathgate earned three common stock purchase warrants
exercisable at $1.00 per share. The warrants are exercisable for a period of
five years. A total of 419,930 warrants were issued to Bathgate from this
private placement and were valued at $816,374. The placement agent
warrants were valued using the Black-Scholes option pricing
model. The assumptions used in the Black-Scholes valuation model
were: a risk free interest rate of 4.99%; the current stock price at date of
issuance of $2.20 per share; the exercise price of the warrants at $1.00; an
expected term of five years; volatility of 113%; and dividend yield of 0.0%. As
of February 29, 2008, no placement agent warrants had been
exercised.
Both the
subscriber warrants and the placement agent warrants contain customary
anti-dilution provisions. The anti-dilution provisions permit the
adjustment of the number of shares issuable upon exercise of the warrants in the
event of stock splits, stock dividends, stock reversals and sales of
substantially all of the Company’s assets. The placement agent
warrants also contain a cashless exercise provision. The cashless
exercise provision allows for the holder of the warrants to receive a number
shares equal to the quotient of a) the product of the number of warrants held
and the amount by which Daybreaks market traded stock price exceeds the exercise
price of the warrants on the date of exercise, divided by b) the market traded
stock price.
Daybreak
agreed to register the Series A Preferred shares on a “best efforts”
basis. If Daybreak was unable to file the registration statement
within the filing timeline, Daybreak would have to issue 1,399,765 additional
warrants at an exercise price of $2.00 per share. Daybreak was
required to file the registration statement within sixty (60) days after the
registration statement for the common stock private placement from the May of
2006 became effective. Daybreak did file the registration statement
on time and no additional warrant issuances were required.
In
February 2008, Daybreak issued “goodwill” common stock warrants to the
participants of the July 2006 private placement. The warrants were
issued as a goodwill gesture to investors in the two 2006 private placements due
to the inability to complete the respective registration statement; recognizing,
this was a result of regulatory process delays rather than any fault of the
Company. Each participant was offered one “goodwill” warrant for every unit that
had been purchased in exchange waiving their rights under the Registration
Rights Agreement. On November 6, 2007, the date our Board approved
issuing these “goodwill” warrants, the closing price of our stock was $0.40 As
of February 29, 2008, we had received Registration Rights waiver letters from
approximately 77% of the participants in this private placement. The
warrants will expire on February 14, 2010, have an exercise price of $0.65 and
contain a cashless exercise provision. We have issued 1,121,267
goodwill warrants valued at $254,283 to these investors. A total of 1,399,765
warrants could be issued.
Daybreak
Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
The
warrants were valued using the Black-Scholes option pricing
model. The assumptions used in the Black-Scholes valuation model
were: a risk free interest rate of 3.7 %; a term of two years; volatility of
121.67%; and dividend yield of 0.0%.
Daybreak
evaluated the application of SFAS No. 133 and EITF 00-19 with respect to the
conversion feature and the registration rights for consideration of embedded
derivatives and concluded that the preferred stock and registration rights
instruments did not have embedded derivatives.
The
relative fair values of the Series A Convertible Preferred Shares and the Common
Stock Purchase Warrants were as follows:
Description
|
|
Shares
|
|
|
Relative
Fair Value Amount
|
|
Series
A Convertible Preferred
|
|
|
1,399,765
|
|
|
$
|
2,710,073
|
|
Common
Stock Purchase Warrants
|
|
|
2,799,530
|
|
|
|
1,489,222
|
|
Total
Proceeds
|
|
|
|
|
|
|
4,199,295
|
|
Offering
Costs
|
|
|
|
|
|
|
(573,091
|
)
|
Net
Proceeds
|
|
|
|
|
|
$
|
3,626,204
|
|
Common
Stock
Daybreak
is authorized to issue up to 200,000,000 shares of $0.001 par value common
stock. Commencing on January 2, 2008, Daybreak began conducting an unregistered
offering of common stock through a private placement under the securities
transaction exemption Regulation D Rule 506 of the Securities Act of 1933.
Shares are offered at $0.25 per share to “accredited investors” only as defined
in Regulation D under the Securities Act of 1933. The shares are being sold
directly by Daybreak and also by an unnamed placement agent. As of February 29,
2008, a total of 605,000 shares of unregistered common stock have been sold to
seven investors resulting in $151,250 in gross proceeds. The
Placement Agent was paid a sales commission of 10% of the gross proceeds of
their firm’s sales of the private placement and a non-accountable expense
allowance of 3% of the gross proceeds of their firm’s sales totaling
$23,112.50. Net proceeds were used to meet drilling commitments in
the Tuscaloosa project and general and administrative expenses
Commencing
on October 19, 2007 and closing on December 28, 2007, Daybreak conducted an
unregistered offering of common stock through a private placement under the
securities transaction exemption Regulation D Rule 506 of the Securities Act of
1933. Shares were offered at $0.25 per share to “accredited
investors” only as defined in Regulation D under the Securities Act of 1933. The
shares were sold directly by Daybreak and no placement agent was involved in the
offering. A total of 2,497,000 shares of unregistered common stock were sold to
thirteen investors resulting in $624,250 in gross proceeds. Offering
expenses were approximately $6,500. Net proceeds were used to meet drilling
commitments in the Tuscaloosa project and general and administrative
expenses.
Daybreak
Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
During
the year ended February 28, 2007, Daybreak conducted a private placement sale of
common stock from March 3, 2006 to May 19, 2006 (the “May 2006 Common Stock
Private Placement”). Each sale unit consisted of two shares of common stock and
one common stock purchase warrant (warrant). The units sold for $1.50
per unit, with a total of 4,013,602 units sold; resulting in gross proceeds of
$6,020,404 (net proceeds of $5,188,257 after placement costs).
The
Warrants are exercisable for a period of five years after the closing date at an
exercise price of $2.00 per share. Daybreak may call the warrants for
redemption if (a) the average of the closing sale price of the common stock is
at or above $3.00 for twenty (20) out of thirty (30) trading days prior to the
date the warrants are called, and (b) the warrant shares are registered under
the Securities Act. The Warrants were valued using the Black-Scholes
option pricing model. The assumptions used in the Black-Scholes
valuation model were: a risk free interest rate of 4.99%; the current stock
price at date of issuance of $2.70 per share; the exercise price of the
warrants; an expected term of five years; volatility of 112%; and dividend yield
of 0.0%. As of February 29, 2008, no subscriber warrants had been
exercised.
Bathgate
Capital Partners, of Denver, Colorado was the placement agent. Joseph
Lavigne, son of Dale B. Lavigne (the Chairman and a director of
Daybreak) is an employee of Bathgate Capital Partners. The Placement
Agent was paid a sales commission of 10% of the gross proceeds of the private
placement and a non-accountable expense allowance of 3% of the gross proceeds
totaling $790,402. Additionally, the Placement Agent was paid a due
diligence fee of $15,000. For every ten units sold, the Placement
Agent earned three common stock warrants, two of which are exercisable at $0.75
per share and one of which is exercisable at $2.00 per share. The
Placement Agent warrants are exercisable for a period of seven
years. The placement agent earned 1,204,082 warrants, of which
802,721 are exercisable at $0.75 per share and were determined to have a fair
value of $2,043,752. The remaining 401,361 warrant shares are
exercisable at $2.00 per share and were determined to have a fair value of
$973,970. The placement agent warrants were valued using the
Black-Scholes option pricing model. The assumptions used in the Black-Scholes
valuation model were: a risk free interest rate of 4.99%; the current stock
price at date of issuance of $2.70 per share; the exercise price of the
warrants; an expected term of seven years; volatility of 112%; and dividend
yield of 0.0%. As of February 29, 2008, no placement agent warrants
had been exercised.
The
placement agent warrants have a cashless exercise provision and contain
customary anti-dilution provisions. The cashless exercise provision
allows for the holder of the warrants to receive a number shares equal to the
quotient of a) the product of the number of warrants held and the amount by
which Daybreaks market traded stock price exceeds the exercise price of the
warrants on the date of exercise, divided by b) the market traded stock price.
The anti-dilution provisions permit the adjustment of the number of shares
issuable upon exercise of the warrants in the event of stock splits, stock
dividends, stock reversals and sales of substantially all of the Company’s
assets.
Daybreak
agreed to register the shares on a “best efforts” basis. If Daybreak
was unable to file the registration statement within the filing timeline,
Daybreak would have had to issue 4,013,602 additional warrants at an exercise
price of the lower of (a) the average closing sale price of its common stock for
twenty of the thirty trading days immediately preceding the date the
registration statement should have been filed, or (b) $1.50 per common
share. Daybreak did file the registration statement within the filing
timeline. No additional warrants were required to be issued.
Daybreak
Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
In
February 2008, Daybreak issued “goodwill” common stock warrants to the
participants of the Spring 2006 private placement. The warrants were
issued as a goodwill gesture to investors in the two 2006 private placements due
to the inability to complete the respective registration statements;
recognizing, this was a result of regulatory process delays rather than any
fault of the Company. Each participant was offered one “goodwill” warrant for
every unit that had been purchased in exchange waiving their rights under the
Registration Rights Agreement. On November 6, 2007, the date our
Board approved issuing these “goodwill” warrants, the closing price of our stock
was $0.40 As of February 29, 2008, we had received Registration Rights waiver
letters from approximately 73% of the participants in this private
placement. The warrants will expire on February 14, 2010, have an
exercise price of $0.65 and contain a cashless exercise provision. We
have issued 2,998,934 goodwill warrants valued at $680,238 to these
investors. A total of 4,013,602 warrants could be issued. The issued
warrants were valued using the Black-Scholes option pricing
model. The assumptions used in the Black-Scholes valuation model
were: a risk free interest rate of 3.7 %; a term of two years; volatility of
121.67%; and dividend yield of 0.0%.
Daybreak
evaluated the application of SFAS No. 133 and EITF 00-19 with respect to the
conversion feature and the registration rights for consideration of embedded
derivatives and concluded that the preferred stock and registration rights
instruments did not have embedded derivatives.
The
relative fair value of the Common Stock and the Common Stock Purchase Warrants
was as follows:
Description
|
|
Shares
|
|
|
Relative
Fair Value Amount
|
|
Common
Stock
|
|
|
8,027,206
|
|
|
$
|
4,241,232
|
|
Common
Stock Purchase Warrants
|
|
|
4,013,602
|
|
|
|
1,779,172
|
|
Total
Proceeds
|
|
|
|
|
|
|
6,020,404
|
|
Placement
fees
|
|
|
|
|
|
|
(832,147
|
)
|
Net
Proceeds
|
|
|
|
|
|
$
|
5,188,257
|
|
During
the fiscal year ended February 28, 2005, Daybreak conducted a private placement
sale of common stock from June 7, 2005 through December 19, 2005 (the “December
2005 Common Stock Private Placement”). The shares were sold directly
by Daybreak and were offered at $0.25 per share to accredited investors only.
Gross proceeds were $1,100,000, with net proceeds of $1,087,500. A
total of forty-three investors participated in this private
placement. From this offering, 4,400,000 shares of unregistered
common stock were issued.
Common
Stock for Services
Under
SFAS No. 123R the guidelines for recording stock issued for goods or services
require the fair value of the shares granted be based on the fair value of the
goods or services received or the publicly traded share price of Daybreak’s
registered shares on the date the shares were granted (irrespective of the fact
that the shares granted were unregistered), whichever is more readily
determinable. This position has been further clarified by the recent
issuance of SFAS No. 157. Accordingly, Daybreak has elected an early application
of these newly enacted guidelines.
Daybreak
Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
Daybreak
has determined that the fair value of all common stock issued for goods or
services is more readily determinable based on the publicly traded share price
on the date of grant.
During
the fiscal year ended February 29, 2008, Daybreak paid for services with 10,000
shares of unregistered common stock valued at $4,500.
During
the fiscal year ended February 28, 2007, Daybreak paid for investor relations
and consulting services with 220,000 shares of unregistered common stock valued
at $401,200.
Common
Stock Issued for Convertible Debentures and Interest Payable
During
the fiscal year ended February 29, 2008, non-related parties converted
debentures representing $25,000 in principal, resulting in 37,169 shares of
unregistered common stock being issued to satisfy the principal and interest
obligations.
During
the fiscal year ended February 28, 2007, non-related parties converted
debentures representing $770,139 in principal, resulting in 1,471,763 shares of
unregistered common stock being issued to satisfy the principal and interest
obligations.
Common
Stock Issued for Oil and Gas Property Interests
Under
SFAS No. 123R the guidelines for recording stock issued for goods or services
require the fair value of the shares granted be based on the fair value of the
goods or services received or the publicly traded share price of Daybreak’s
registered shares on the date the shares were granted (irrespective of the fact
that the shares granted were unregistered), whichever is more readily
determinable. This position has been further clarified by the recent
issuance of SFAS No. 157. Accordingly, Daybreak has elected an early application
of these newly enacted guidelines. Daybreak has determined that the fair value
of all common stock issued for goods or services is more readily determinable
based on the publicly traded share price on the date of grant.
During
the fiscal year ended February 28, 2007, Daybreak purchased oil and gas
properties valued at $420,000 by issuing 150,000 shares of its unregistered
common for the 40 Mile Coulee project in Alberta, Canada. On December
8, 2006, Daybreak repurchased these same 150,000 shares for an agreed amount of
$150,000 as part of an agreement to release Daybreak from any further plugging
and abandonment liabilities related to this project.
During
the fiscal year ended February 28, 2007, Daybreak purchased an additional eight
percent (8%) working interest in the Tuscaloosa project in Louisiana from Strike
Oil & Minerals, Corp. for $205,883 in cash and 72,500 shares of unregistered
common stock valued at $108,750.
Daybreak
Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
NOTE
11 – WARRANTS:
Warrants
outstanding and exercisable as of February 28, 2007 are:
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Exercisable
Warrants
|
|
Description
|
|
Warrants
|
|
|
Price
|
|
|
Life
(Years)
|
|
|
Remaining
|
|
Spring
2006 Common Stock Private Placement
|
|
|
4,013,602
|
|
|
$
|
2.00
|
|
|
|
4.25
|
|
|
|
4,013,602
|
|
Placement
Agent Warrants Spring 2006 PP
|
|
|
802,721
|
|
|
$
|
0.75
|
|
|
|
6.25
|
|
|
|
802,721
|
|
Placement
Agent Warrants Spring 2006 PP
|
|
|
401,361
|
|
|
$
|
2.00
|
|
|
|
6.25
|
|
|
|
401,361
|
|
July
2006 Preferred Stock Private Placement
|
|
|
2,799,530
|
|
|
$
|
2.00
|
|
|
|
4.50
|
|
|
|
2,799,530
|
|
Placement
Agent Warrants July 2006 Preferred Stock Private Placement
|
|
|
419,930
|
|
|
$
|
1.00
|
|
|
|
4.50
|
|
|
|
419,930
|
|
Convertible
Debenture Term Extension
|
|
|
150,001
|
|
|
$
|
2.00
|
|
|
|
4.75
|
|
|
|
150,001
|
|
|
|
|
8,587,145
|
|
|
|
|
|
|
|
|
|
|
|
8,587,145
|
|
Warrants
outstanding and exercisable as of February 29, 2008 are:
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Exercisable
Warrants
|
|
Description
|
|
Warrants
|
|
|
Price
|
|
|
Life
(Years)
|
|
|
Remaining
|
|
Spring
2006 Common Stock Private Placement
|
|
|
4,013,602
|
|
|
$
|
2.00
|
|
|
|
3.25
|
|
|
|
4,013,602
|
|
Placement
Agent Warrants Spring 2006 PP
|
|
|
802,721
|
|
|
$
|
0.75
|
|
|
|
5.25
|
|
|
|
802,721
|
|
Placement
Agent Warrants Spring 2006 PP
|
|
|
401,361
|
|
|
$
|
2.00
|
|
|
|
5.25
|
|
|
|
401,361
|
|
July
2006 Preferred Stock Private Placement
|
|
|
2,799,530
|
|
|
$
|
2.00
|
|
|
|
3.50
|
|
|
|
2,799,530
|
|
Placement
Agent Warrants July 2006 Preferred Stock Private Placement
|
|
|
419,930
|
|
|
$
|
1.00
|
|
|
|
3.50
|
|
|
|
419,930
|
|
Convertible
Debenture Term Extension
|
|
|
150,001
|
|
|
$
|
2.00
|
|
|
|
3.75
|
|
|
|
150,001
|
|
Convertible
Debenture 2
nd
Term Extension
|
|
|
112,000
|
|
|
$
|
0.53
|
|
|
|
1.50
|
|
|
|
112,000
|
|
Convertible
Debenture 3
rd
Term Extension
|
|
|
90,000
|
|
|
$
|
0.25
|
|
|
|
1.75
|
|
|
|
90,000
|
|
Spring
2006 PP Goodwill Warrants
|
|
|
2,998,934
|
|
|
$
|
0.65
|
|
|
|
2.00
|
|
|
|
2,998,934
|
|
July
2006 PP Goodwill Warrants
|
|
|
1,121,267
|
|
|
$
|
0.65
|
|
|
|
2.00
|
|
|
|
1,121,267
|
|
|
|
|
12,909,346
|
|
|
|
|
|
|
|
|
|
|
|
12,909,346
|
|
During
the year ended February 29, 2008, no warrants were exercised. For the fiscal
years ended February 29, 2008 and February 28, 2007 there were 12,909,346 and
8,587,145 warrants issued or outstanding respectfully. The intrinsic value of
all warrants at February 29, 2008 was $5,400.
During
the year ended February 28, 2007, no warrants were exercised. For the year ended
February 28, 2006 there were no warrants issued or outstanding. The
intrinsic value of all warrants at February 28, 2007 was
$152,517.
Daybreak
Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
NOTE
12 - INCOME TAXES:
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:
|
|
2008
|
|
Computed
at U.S. and State statutory rates (40%)
|
|
$
|
(2,080,244
|
)
|
Permanent
differences
|
|
|
68,415
|
|
Changes
in valuation allowance
|
|
|
2,011,829
|
|
Total
|
|
$
|
-
|
|
Tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred liabilities are presented below:
Deferred
tax assets:
|
|
2008
|
|
|
2007
|
|
Net
operating loss carryforwards
|
|
$
|
2,574,000
|
|
|
$
|
1,734,000
|
|
Oil
and gas properties
|
|
|
1,745,820
|
|
|
|
947,800
|
|
Warrant
expense
|
|
|
373,808
|
|
|
|
|
|
Less
valuation allowance
|
|
|
(4,693,628
|
)
|
|
|
(2,681,800
|
)
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
At
February 29, 2008, Daybreak had a net operating loss carryforwards for federal
and state income tax purposes of approximately $6,435,000, which will begin to
expire, if unused, beginning in 2024. Section 382 Rule will place
annual limitations on Daybreak’s net operating loss (NOL)
carryforward.
The above
estimates are based upon management’s decisions concerning certain elections
which could change the relationship between net income and taxable income.
Management decisions are made annually and could cause the estimates to vary
significantly.
NOTE
13 – FINAL CLOSING OF SALE OF TUSCALOOSA PROPERTIES SUBSEQUENT TO INITIAL FILING
OF FORM 10-KSB:
On
January 18, 2008, Daybreak signed a purchase and sale agreement (“PSA”) for the
sale of its Tuscaloosa project interests for $8 million in cash. The
transaction closed in three tranches; the first closing for $2 million closed on
January 18, 2008; the second closing for $500,000 occurred on April 30, 2008;
and the final closing for $5.5 million occurred on June 12, 2008 and was subject
to customary closing adjustments. The sale includes Daybreak's interests in the
Tensas Farms F-1, F-3, B-1, A-1 and F-2 wells; and all of its acreage and
infrastructure in the project area. Under terms of the PSA, the
effective dates for each closing was January 1, 2008.
As a
result of the final closing and the $5.5 million cash receipts, the conditions
that gave rise to the Company’s going concern uncertainty have subsequently been
resolved.
Daybreak
Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
NOTE
14 – RESTATEMENT:
On
December 19, 2008, the audit committee of the board of directors of Daybreak Oil
and Gas, Inc. (the “Company”) determined that it will be necessary to restate
its financial statements for the fiscal year ended February 29, 2008, as filed
on Form 10-KSB on May 27, 2008 (the “Restated Period”) to correct for an error
in the accounting of the goodwill common stock warrants issued in February 2008
(see also Note 10).
This
determination was made after consideration was given to a series of comments
made by the Staff of the Securities and Exchange Commission (the “SEC”)
regarding certain financial valuation and disclosure items in the Company’s Form
10-KSB/A for the fiscal year ended February 29, 2008. In response to
comments and a review by the SEC, the Company determined that it should follow
the guidance of Statement of Financial Accounting Standards No. 123R (“FAS
123R”) Share-Based Payment and FSP EITF 00-19-2 Accounting for Registration
Payment Arrangements in its accounting treatment of warrants offered by the
Company in February 2008 to participants of the two private placement offerings
that occurred in 2006.
The
restated financial statements reflect the values of the goodwill common stock
warrants issued to participants in the July 2006 and Spring 2006 private
placements of $254,283 and $680,238, respectively as general and administrative
expense in the income statement on the basis that these common stock warrants
were issued in exchange for the waiver of the investors’ registration rights.
Previously, Daybreak had recognized these goodwill common stock warrants as
incremental costs related to the above private placements offerings and were
debited to additional paid in capital.
The
correction of this error affected certain accounts in the balance sheet as of
February 29, 2008 and certain line items in the statement of operations,
statement of changes in stockholders equity and the statement of cash flows for
the year ended February 29, 2008 and from inception through February 29,
2008.
The
effects of the correction of the accounting error are summarized as
follows:
Daybreak
Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
As
of February 29, 2008:
|
|
As
Previously
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
$
|
1,049,217
|
|
|
$
|
-
|
|
|
$
|
1,049,217
|
|
Oil
and gas properties, net of accumulated depletion, successful efforts
method
|
|
|
169,521
|
|
|
|
-
|
|
|
|
169,521
|
|
Assets
held for sale
|
|
|
1,634,471
|
|
|
|
-
|
|
|
|
1,634,471
|
|
Other
assets
|
|
|
807,828
|
|
|
|
-
|
|
|
|
807,828
|
|
Total assets
|
|
$
|
3,661,037
|
|
|
$
|
-
|
|
|
$
|
3,661,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
$
|
316,253
|
|
|
$
|
-
|
|
|
$
|
316,253
|
|
Other
liabilities
|
|
|
119,207
|
|
|
|
-
|
|
|
|
119,207
|
|
Total
liabilities
|
|
|
435,460
|
|
|
|
-
|
|
|
|
435,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
1,298
|
|
|
|
-
|
|
|
|
1,298
|
|
Common
stock
|
|
|
44,294
|
|
|
|
-
|
|
|
|
44,294
|
|
Additional
paid-in capital
|
|
|
21,046,264
|
|
|
|
934,521
|
|
|
|
21,980,785
|
|
Accumulated
deficit
|
|
|
(736,035
|
)
|
|
|
-
|
|
|
|
(736,035
|
)
|
Deficit
accumulated during the exploration stage
|
|
|
(17,130,244
|
)
|
|
|
(934,521
|
)
|
|
|
(18,064,765
|
)
|
Total stockholders’
equity
|
|
|
3,225,577
|
|
|
|
-
|
|
|
|
3,225,577
|
|
Total liabilities and
stockholders’ equity
|
|
$
|
3,661,037
|
|
|
$
|
-
|
|
|
$
|
3,661,037
|
|
Daybreak
Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
For
the twelve months ended
February
29, 2008:
|
|
As
Previously
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
REVENUE
|
|
$
|
366,850
|
|
|
$
|
-
|
|
|
$
|
366,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
costs
|
|
|
326,849
|
|
|
|
-
|
|
|
|
326,849
|
|
Exploration and
drilling
|
|
|
654,765
|
|
|
|
-
|
|
|
|
654,765
|
|
Depreciation and depletion
expense
|
|
|
2.333.571
|
|
|
|
-
|
|
|
|
2,333,571
|
|
General and
administrative
|
|
|
1,729,156
|
|
|
|
934,521
|
|
|
|
2,663,677
|
|
Total operating
expenses
|
|
|
5,044,341
|
|
|
|
934,521
|
|
|
|
5,978,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
LOSS
|
|
|
(4,677,491
|
)
|
|
|
(934,521
|
)
|
|
|
(5,612,012
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME AND (EXPENSE)
|
|
|
(22,521
|
)
|
|
|
-
|
|
|
|
(22,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM CONTINUING OPERATIONS
|
|
|
(4,700,012
|
)
|
|
|
(934,521
|
)
|
|
|
(5,634,533
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued
operations
|
|
|
433,839
|
|
|
|
-
|
|
|
|
433,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(4,266,173
|
)
|
|
|
(934,521
|
)
|
|
|
(5,200,694
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
convertible preferred
stock dividend
requirement
|
|
|
(395,923
|
)
|
|
|
-
|
|
|
|
(395,923
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS AVAILABLE TO COMMON SHAREHOLDERS
|
|
$
|
(4,662,096
|
)
|
|
$
|
(934,521
|
)
|
|
$
|
(5,596,617
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations
|
|
$
|
(0.11
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED-AVERAGE
COMMON SHARESOUTSTANDING
|
|
|
41,292,659
|
|
|
|
-
|
|
|
|
41,292,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daybreak
Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1,
2005)
Notes
to Financial Statements
SUPPLEMENTARY
INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
All of
the Company’s operations are directly related to oil and natural gas producing
activities located in Alabama, Louisiana, and Texas.
Capitalized
Costs Relating to Oil and Gas Producing Activities
|
|
As
of February 29 / 28,
|
|
|
|
2008
|
|
|
2007
|
|
Proved
properties
|
|
|
|
|
|
|
Mineral
interests
|
|
$
|
1,855,994
|
|
|
$
|
2,092,107
|
|
Wells,
equipment and facilities
|
|
|
3,207,055
|
|
|
|
2,129,400
|
|
Total
proved properties
|
|
|
5,063,049
|
|
|
|
4,221,507
|
|
|
|
|
|
|
|
|
|
|
Unproved
properties
|
|
|
|
|
|
|
|
|
Mineral
interests
|
|
|
415,357
|
|
|
|
902,420
|
|
Uncompleted
wells, equipment and facilities
|
|
|
896,067
|
|
|
|
1,822,619
|
|
Total
unproved properties
|
|
|
1,311,424
|
|
|
|
2,725,039
|
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation, depletion, amortization and
impairment
|
|
|
(4,570,481
|
)
|
|
|
(2,393,693
|
)
|
Net
Capitalized Costs
|
|
$
|
1,803,992
|
|
|
$
|
4,552,853
|
|
Costs
Incurred in Oil and Gas Producing Activities
|
|
Twelve
Months Ended
February
29 / 28,
|
|
|
|
2008
|
|
|
2007
|
|
Acquisition
of proved properties
|
|
$
|
119,235
|
|
|
$
|
428,669
|
|
Acquisition
of unproved properties
|
|
|
7,043
|
|
|
|
1,486,901
|
|
Development
costs
|
|
|
921,334
|
|
|
|
859,688
|
|
Exploration
costs
|
|
|
1,264,784
|
|
|
|
4,241,917
|
|
Total
Costs Incurred
|
|
$
|
2,312,396
|
|
|
$
|
7,017,175
|
|
Results
of Operations from Oil and Gas Producing Activities
|
|
Twelve
Months Ended
February
29 / 28,
|
|
|
|
2008
|
|
|
2007
|
|
Oil
and gas revenues
|
|
$
|
1,017,604
|
|
|
$
|
629,346
|
|
Production
costs
|
|
|
(606,240
|
)
|
|
|
(373,766
|
)
|
Exploration
expenses
|
|
|
(717,265
|
)
|
|
|
(1,196,640
|
)
|
Depletion,
depreciation, and impairment
|
|
|
(2,314,160
|
)
|
|
|
(2,393,693
|
)
|
Result
of oil and gas producing operations before income taxes
|
|
|
(2,620,061
|
)
|
|
|
(3,334,753
|
)
|
Provision
for income taxes
|
|
|
-
|
|
|
|
-
|
|
Results
of Oil and Gas Producing Operations
|
|
$
|
(2,620,061
|
)
|
|
$
|
(3,334,753
|
)
|
Proved
Reserves
The
Company’s proved oil and natural gas reserves have been estimated by the
certified independent engineering firm, Huddleston & Co.,
Inc. 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. Due to the inherent uncertainties and the limited nature of
reservoir data, such estimates are subject to change as addition 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. The Company had no
proved reserves in fiscal 2006. The fiscal 2008 proved reserves are
summarized in the table below:
|
|
Crude
Oil and Natural Gas Liquid
Bbls
|
|
|
Natural
Gas
Mcf
|
|
Proved
Reserves as of February 29, 2008:
|
|
|
|
|
|
|
Beginning
of the period
|
|
|
29,425
|
|
|
|
211,800
|
|
Revisions
of previous estimates
(1)
|
|
|
(15,775
|
)
|
|
|
(104,264
|
)
|
Extensions
and discoveries
|
|
|
9,776
|
|
|
|
18,148
|
|
Production
|
|
|
(6,792
|
)
|
|
|
(49,584
|
)
|
Sale
of minerals in place
|
|
|
(3,522
|
)
|
|
|
(10,600
|
)
|
End
of the period
|
|
|
13,112
|
|
|
|
65,500
|
|
(1) The
revisions of previous estimates resulted from two sources. As discussed
previously in this 10-KSB/A Amendment No. 2, the F-1 and F-3 wells in the
Tuscaloosa project in Louisiana were shut in for the majority of the 2007 – 2008
fiscal year resulting in a marked decline in field performance. This decline
then resulted in the previous estimates of proved reserves being decreased.
Additionally,
in the Gilbertown Field in Alabama, production costs increased dramatically in
comparison to the prior year thereby creating a necessary downward revision of
proved reserves because of a higher economic limit. These increased costs were
due to recurring workover programs that occurred on existing
wellbores.
Standardized
Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas
Reserves
The
following information is based on the Company’s best estimate of the required
data for the Standardized Measure of Discounted Future Net Cash Flows as of
February 29, 2008 and February 28, 2007 in accordance with SFAS No. 69,
“Disclosures About Oil and Gas Producing Activities” 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 Company’s
proved oil and gas reserves.
|
|
February
29 / 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Future
cash inflows
|
|
$
|
1,876,287
|
|
|
$
|
3,270,219
|
|
Future
production costs
(1)
|
|
|
(632,786
|
)
|
|
|
(889,817
|
)
|
Future
development costs
|
|
|
-
|
|
|
|
(170,762
|
)
|
Future
income tax expenses
(2)
|
|
|
-
|
|
|
|
-
|
|
Future
net cash flows
|
|
|
1,243,501
|
|
|
|
2,209,640
|
|
10%
annual discount for estimated timing of cash flows
|
|
|
(113,236
|
)
|
|
|
(269,273
|
)
|
Standardized
measure of discounted future net cash flows at the end of the
year
|
|
$
|
1,130,265
|
|
|
$
|
1,940,367
|
|
(1)
Production
costs include oil and gas operations expense, production ad valorem taxes,
transportation costs and general and administrative expense supporting the
Company’s oil and gas operations.
(2)
The
Company has sufficient tax deductions and allowances related to proved oil and
gas reserves to offset future net revenues.
Future
cash inflows are computed by applying year-end prices, adjusted for location and
quality differentials on a property-by-property basis, to year-end quantities of
proved reserves, except in those instances where fixed and determinable price
changes are provided by contractual arrangements at year-end. The
discounted future cash flow estimates do not include the effects of the
Company’s derivative instruments, if any. See the following table for average
prices.
|
|
February
29 / 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Average
crude oil price per Bbl
|
|
|
74.89
|
|
|
$
|
65.10
|
|
Average
natural gas price per Mcf
|
|
|
7.63
|
|
|
$
|
6.62
|
|
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 Company’s 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.
Future
income tax expenses are computed by applying the appropriate year-end statutory
tax rates to the estimated future pretax net cash flows relating to the
Company’s proved crude oil and natural gas reserves, less the tax bases of the
properties involved. The future income tax expenses give effect to tax credits
and allowances, but do not reflect the impact of general and administrative
costs and exploration expenses of ongoing operations relating to the Company’s
proved crude oil and natural gas reserves.
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 Company’s proved crude oil and natural gas reserves,
as required by SFAS No. 69, at year end are set forth in the table
below.
|
|
Twelve
Months Ended
February
29 / 28,
|
|
|
|
2008
|
|
|
2007
|
|
Standardized
measure of discounted future net cash flows at the beginning of the
year
|
|
$
|
1,940,367
|
|
|
$
|
-
|
|
Extensions,
discoveries and improved recovery, less related costs
|
|
|
644,889
|
|
|
|
1,806,060
|
|
Revisions
of previous quantity estimates
|
|
|
(1,559,345
|
)
|
|
|
-
|
|
Changes
in estimated future development costs
|
|
|
(185,701
|
)
|
|
|
-
|
|
Purchases
(sales) of minerals in place
|
|
|
(330,401
|
)
|
|
|
389,887
|
|
Net
changes in prices and production costs
|
|
|
283,362
|
|
|
|
-
|
|
Accretion
of discount
|
|
|
194,037
|
|
|
|
-
|
|
Sales
of oil and gas produced, net of production costs
|
|
|
(411,365
|
)
|
|
|
(255,580
|
)
|
Development
costs incurred during the period
|
|
|
356,463
|
|
|
|
-
|
|
Change
in timing of estimated future production and other
|
|
|
197,959
|
|
|
|
-
|
|
Net
change in income taxes
|
|
|
-
|
|
|
|
-
|
|
Standardized
measure of discounted future net cash flows at the end of the
year
|
|
$
|
1,130,265
|
|
|
$
|
1,940,367
|
|
ITEM 8.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
ITEM 8A.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures.
As of the
end of the reporting period, February 29, 2008, an evaluation was conducted by
Daybreak management as to the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-15(e) of the
Securities Exchange Act of 1934 (the "Exchange Act"). Such disclosure
controls and procedures are designed to insure that information required to be
disclosed by a company in the reports that it files under the Exchange Act is
recorded, processed, summarized and reported within required time periods
specified by the Securities & Exchange Commission rules and forms.
Additionally, it is vital that such information is accumulated and communicated
to our management in a manner to allow timely decisions regarding required
disclosures.
Based
upon that evaluation, our management concluded that our financial and disclosure
controls needed improvement and were not effective as of February 29,
2008.
Management’s
Report on Internal Control Over Financial Reporting.
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting as such term is defined in Exchange Act Rule 13a -15(f). The
Company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.
Because
of the inherent limitations due to, for example, the potential for human error
or circumvention of controls, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with policies or procedures may deteriorate.
Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in
Internal Control – Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
Based on
this evaluation, management concluded that the Company’s internal control over
financial reporting was not effective as of February 29,
2008. Material weakness identified included:
-
Our
10-KSB report for the fiscal year ended February 28, 2007, should have been
filed on May 29, 2007. We were unable to complete the 10-KSB in the
time allotted because the restatement of our previously filed financial
statements was not completed. Consequently we filed a 12b-25 “Notification of
Late Filing” report, believing that we would complete the restatement and
audit process within the filing extension period. We were not successful in
meeting that goal. On July 2, 2007, our stock was dropped from
being quoted on the OTC Bulletin Board market to the OTC pink sheet
market.
-
Our
first quarter 10-QSB report for the fiscal year ended February 29, 2008 should
have been filed on July 16, 2007. We were not successful in making this
filing deadline because the audit of our prior fiscal year ended
February 28, 2006 was not completed.
-
Subsequent
to these filing delays and completion of the audit of our prior year financial
statements, we were able to complete our late filings and fulfill all other
requirements allowing Daybreak to return to the OTC Bulletin
Board.
-
Due to
the level of administrative staff at the Company during the past fiscal year,
certain beneficial control methods were not available for implementation. This
was especially true when evaluating an effective separation of duties and
responsibilities in the corporate office as it relates to financial reporting,
general accounting processes, and information technology security and
controls.
Pursuant
to Regulation S-B filers:
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management’s report
in this annual report.
Changes
in Internal Control.
As a
result of our evaluations described above, the Company has initiated the changes
described below in our internal control over financial reporting during the
quarter ended February 29, 2008, which have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
-
We have
changed our Corporate Governance structure via the introduction of several new
corporate charters and company wide procedures along with a change in the
composition of the Board of Directors to be more independent.
-
We have
revised our operating procedures relating to preparation and issuance of
financial reports and the timely disclosure of all required SEC filings. The
changes include a defined quarter end closing schedule and more timely and
detailed review by management and the Board of Directors.
-
We have
added changes to our management team to increase our industry expertise and
increased the administrative staff available to assist in the more timely
preparation of all required reporting documents.
-
We have
made operating and financial changes to our day to day activities to improve
the segregation of duties at the Company with the intent to add more control
around the authorization of expenditures and payments on behalf of the
company.
Limitations.
Our
management does not expect that our disclosure controls or internal controls
over financial reporting will prevent all errors or all instances of fraud. A
control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system’s objectives will be
met.
Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs.
Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within our company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. The design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and any design may not succeed in achieving its stated goals
under all potential future conditions.
Over
time, controls may become inadequate because of changes in conditions or
deterioration in the degree of compliance with policies or procedures. Because
of the inherent limitation of a cost-effective control system, misstatements due
to error or fraud may occur and not be detected.
ITEM 8B.
|
OTHER
INFORMATION
|
None
PART III
ITEM 9.
|
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
16(A) OF THE EXCHANGE ACT
|
Information
regarding the Ethical Business Conduct Policy Statement and the Code of Ethics
for Senior Financial Officers is described in the introductory pages of this
Annual Report under the caption “Website / Available
Information.” The information required by Item 9 that relates to our
directors and executive officers is incorporated by reference from the
information appearing under the captions “Election of Directors,” “Executive
Management,” “Corporate Governance,” “Section 16(a) Beneficial Ownership
Reporting and Compliance” and “Other Information” in our definitive proxy
statement or in an amendment to this Annual Report on Form 10-KSB/A that is to
be filed with the SEC pursuant to the Exchange Act within 120 days of the end of
our fiscal year on February 29, 2008.
ITEM 10.
|
EXECUTIVE
COMPENSATION
|
The
information required by Item 10 that relates to compensation of our principal
executive officers and our directors is incorporated by reference from the
information appearing under the captions “Compensation Discussion and Analysis”
and “Director Compensation” in our definitive proxy statement or in an amendment
to this Annual Report on Form 10-KSB/A that is to be filed with the SEC within
120 days of the end of our fiscal year on February 29, 2008. In
addition and in accordance with Item 402(a)(8) of Regulation S-K, the
information contained in our definitive proxy statement or a Form 10-KSB/A under
the subheading “Report of the Compensation Committee of the Board of Directors”
shall not be deemed to be filed as part of, or incorporated by reference into,
this Annual Report.
ITEM 11.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The
information required by Item 11 that relates to the ownership of securities by
management and others is incorporated by reference from the information
appearing under the caption “Security Ownership” in our definitive proxy
statement or in an amendment to this Annual Report on Form 10-KSB/A that is to
be filed with the SEC within 120 days of the end of our fiscal year on February
29. 2008.
ITEM 12.
|
CERTAIN
RELATIONSHIPS AND RELATED
TRANSACTIONS
|
The
information required by Item 12 that relates to business relationships and
transactions with our management and other related parties is incorporated by
reference from the information appearing under the captions “Related Party
Transactions,” and “Transactions Between the Company and Managements” in our
definitive proxy statement or in an amendment to this Annual Report on Form
10-KSB/A that is to be filed with the SEC within 120 days of the end of our
fiscal year on February 29, 2008.
The
following Exhibits are filed as part of the report:
3.01
|
Articles
of Incorporation, as amended
(18)
|
3.02
|
Amended
and Restated Bylaws
(16)
|
4.01
|
Registration
statement of securities
(4)
|
4.02
|
Designations
of Series A Convertible Preferred Stock (filed as Articles of Amendment to
theArticles of Incorporation of Daybreak Oil & Gas, Inc. dated June
30, 2006 and filed as part of Exhibit 3.01
herewith.)
|
10.01
|
Quitclaim
mining deed with Silver Crown Mining of mineral rights in
Idaho
(12)
|
10.02
|
Agreement
with Crosspoint Holdings, Inc. for the purchase of Series A Preferred
Stock
(1)
|
10.03
|
Consulting
Agreement with 413294 Alberta Ltd. effective March 1, 2005
(15)
|
10.04
|
Consulting
Agreement with AnMac Enterprises effective March 1, 2005
(15)
|
10.05
|
Consulting
Agreement with Eric Moe effective March 1, 2005
(15)
|
10.06
|
Expiration
of Series A Stock Purchase Agreement with Crosspoint Holdings,
Inc.,
(2)
|
10.07
|
Drilling
agreement with MPG Petroleum for Ginny South project.
(3)
|
10.08
|
Agreement
with MPG Petroleum to join land bank for Pearl Prospect
(3)
|
10.09
|
Consulting
agreement with Summitt Ventures for management services
(3)
|
10.10
|
Development
agreement with Chicago Mill Joint Venture for Louisiana
project
(12)
|
10.11
|
Prospect
review and non-competition agreement for California project
(12)
|
10.12
|
Joint
Venture Agreement with Nomad Hydrocarbons, Ltd. for California
project
(12)
|
10.13
|
Development
agreement with Oracle Operating Co. for Texas project
(12)
|
10.14
|
Prospect
review agreement for California project
(12)
|
10.15
|
Development
agreement with Vision Exploration for Krotz Springs 3D
Prospect
(12)
|
10.16
|
Farmout
agreement with Big Sky Western Canada for well in Alberta,
Canada
(12)
|
10.17
|
Development
agreement with Vision Exploration for prospect in Louisiana
(12)
|
10.18
|
Subscription
agreement and letter of investment intent, March 2006 private
placement
(5)
|
10.19
|
Warrant
for the purchase shares of common stock, March 2006 private
placement
(5)
|
10.20
|
Registration
rights agreement, March 2006 private placement
(5)
|
10.21
|
Pipeline
license agreement for Tuscaloosa project in Louisiana
(12)
|
10.22
|
Subscription
agreement and letter of investment intent, July 2006 private
placement
(15)
|
10.23
|
Warrant
for the purchase shares of common stock, July 2006 private
placement
(15)
|
10.24
|
Registration
rights agreement, July 2006 private placement
(15)
|
10.25
|
Development
agreement with Frank Davis Exploration for prospect in
Louisiana
(12)
|
10.26
|
Agreement
for refurbishing and operating of drilling rig
(6)
|
10.27
|
Consulting
Agreement with Jeffrey Dworkin dated August 1, 2006
(15)
|
10.28
|
Office
Rent Agreement with Terrence Dunne & Associates dated August 1,
2006
(15)
|
10.29
|
Consulting
Agreement with Michael Hooper dated August 3, 2006
(15)
|
10.30
|
Purchase
of additional mineral interest in Tuscaloosa project in
Louisiana
(7)
|
10.31
|
Farmout
agreement with Monarch Gulf Exploration, Inc.
(8)
|
10.32
|
Oil
and gas lease with Anadarko E&P Company, L.P.
(9)
|
10.33
|
Drilling
contract with Energy Drilling for two wells in Louisiana
(11)
|
10.34
|
Consulting
Agreement with Tim Lindsey effective January 2, 2007
(15)
|
10.35
|
Consulting
Agreement with 413294 Alberta Ltd. effective March 1, 2007
(15)
|
10.36
|
Consulting
Agreement with Jeffrey Dworkin effective March 1, 2007
(15)
|
10.37
|
Consulting
Agreement with Michael Hooper effective March 1, 2007
(15)
|
10.38
|
Employment
Agreement with Eric Moe, CEO effective March 1, 2007
(15)
|
10.39
|
Employment
Agreement with Bennett Anderson effective March 1, 2007
(15)
|
10.40
|
Employment
Agreement Thomas Kilbourne effective March 1, 2007
(15)
|
10.41
|
Office
Rent Agreement with Terrence Dunne & Associates effective May 1,
2007
(15)
|
10.42
|
Seismic
Option Farmin Agreement with Chevron U.S.A.
(13)
|
10.43
|
Joint
Development Participation Agreement for Tuscaloosa project in
Louisiana
(14)
|
10.44
|
Definitive
Purchase and Sale Agreement with Lasso Partners, LLC
(18)
|
10.45
|
Letter
of Agreement to Amendment of Purchase and Sale Agreement with Lasso
Partners,LLC
(17)
|
10.46
|
Warehousing
Line of Credit Promissory Note and Personal Guaranty
(18)
|
10.47
|
Purchase
of Tuscaloosa interest from Kirby Cochran
(18)
|
10.48
|
Purchase
of Tuscaloosa interest from 413294 Alberta Ltd. (Robert N.
Martin)
(18)
|
10.49
|
Purchase
of Tuscaloosa interest from Tempest Energy, Inc (Eric L. Moe)
(18)
|
10.50
|
Letter
of Agreement on North Shuteston Assignment of Interest
(18)
|
14.01
|
Ethical
Business Conduct Policy Statement
(16)
|
14.02
|
Code
of Ethics for Senior Financial Officers
(16)
|
16.01
|
Change
in Certifying Accountant
(10)
|
99.1
|
Audit
Fee Pre-Approval Policy (April 2008)
(18)
|
(1)
|
Previously
filed as exhibit to Form 8-K on November 5, 2004, and incorporated by
reference herein.
|
(2)
|
Previously
filed as exhibit to Form 8-K on April 7, 2005, and incorporated by
reference herein.
|
(3)
|
Previously
filed as exhibit to Form 10-KSB on June 15, 2005, and incorporated by
reference herein.
|
(4)
|
Previously
filed as exhibit to Form S-8 on August 19, 2005, and incorporated by
reference herein.
|
(5)
|
Previously
filed as exhibit to Form SB-2 on July 18, 2006, and incorporated by
reference herein.
|
(6)
|
Previously
filed as exhibit to Form 8-K on September 6, 2006, and incorporated by
reference herein.
|
(7)
|
Previously
filed as exhibit to Form 8-K on September 28, 2006, and incorporated by
reference herein.
|
(8)
|
Previously
filed as exhibit to Form 8-K on October 26, 2006, and incorporated by
referenceherein.
|
(9)
|
Previously
filed as exhibit to Form 8-K on November 7, 2006, and incorporated by
reference herein.
|
(10)
|
Previously
filed as exhibit to Form 8-K on November 15, 2006, and incorporated by
reference herein.
|
(11)
|
Previously
filed as exhibit to Form 8-K on November 17, 2006, and incorporated by
reference herein.
|
(12)
|
Previously
filed as exhibit to Form SB-2/A on December 28, 2006, and incorporated by
reference herein.
|
(13)
|
Previously
filed as exhibit to Form 8-K on July 16, 2007, and incorporated by
reference herein.
|
(14)
|
Previously
filed as exhibit to Form 8-K on July 20, 2007, and incorporated by
reference herein.
|
(15)
|
Previously
filed as exhibit to Form 10-KSB on September 21, 2007, and incorporated by
reference herein.
|
(16)
|
Previously
filed as exhibit to Form 8-K on April 9, 2008, and incorporated by
reference herein.
|
(17)
|
Previously
filed as exhibit to Form 8-K on May 2, 2008, and incorporated by reference
herein.
|
(18)
|
Filed
with Original Form 10-KSB filed on May 27,
2008.
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The
information required by Item 14 that relates to services provided by our
registered public accounting firm and the fees incurred for services provided
during fiscal years 2008 and 2007 is incorporated by reference from the
information appearing under the captions “Fees Billed by Independent Public
Accountants” in our definitive proxy statement or in an amendment to this Annual
Report on Form 10-KSB/A that is to be filed with the SEC within 120 days of the
end of our fiscal year on February 29, 2008.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
DAYBREAK
OIL AND GAS, INC.
|
|
|
|
|
|
|
By:
|
/s/ JAMES
F. WESTMORELAND
|
|
|
|
James
F. Westmoreland, its
|
|
|
|
President,
Chief Executive Officer
and
interim
principal finance and
accounting
officer
|
|
|
|
Date: January
14, 2009
|
|
110
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