NOTES TO AUDITED FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION AND BASIS OF PRESENTATION:
Originally incorporated as Daybreak Uranium, Inc., (Daybreak Uranium) under the laws of the State of Washington on March 11, 1955, Daybreak Uranium was organized to explore for, acquire, and develop mineral properties in the Western United States. During 2005, management of the Company decided to enter the crude oil and natural gas exploration and production industry. On October 25, 2005, the Companys shareholders approved a name change from Daybreak Mines, Inc. to Daybreak Oil and Gas, Inc. (referred to herein as Daybreak or the Company) to better reflect the business of the Company.
All of the Companys crude oil and natural gas production is sold under contracts that are market-sensitive. Accordingly, the Companys financial condition, results of operations, and capital resources are highly dependent upon prevailing market prices of, and demand for, crude oil and natural gas. These commodity prices are subject to wide fluctuations and market uncertainties due to a variety of factors that are beyond the control of the Company. These factors include the level of global demand for petroleum products, foreign supply of crude oil and natural gas, the establishment of and compliance with production quotas by crude oil-exporting countries, the relative strength of the U.S. dollar, weather conditions, the price and availability of alternative fuels, and overall economic conditions, both foreign and domestic.
NOTE 2 GOING CONCERN:
Financial Condition
Daybreaks financial statements for the twelve months ended February 28, 2018 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. Daybreak has incurred net losses since inception and has accumulated a deficit of $38,334,383 and a working capital deficit of $16,009,456, which raises substantial doubt about the Companys ability to continue as a going concern.
Management Plans to Continue as a Going Concern
The Company continues to implement plans to enhance its ability to continue as a going concern. Daybreak currently has a net revenue interest in 20 producing crude oil wells in its East Slopes Project located in Kern County, California (the East Slopes Project). The revenue from these wells has created a steady and reliable source of revenue. The Companys average working interest in these wells is 36.6% and the average net revenue interest is 28.4% for these same wells.
The Company anticipates revenue will continue to increase as the Company participates in the drilling of more wells in the East Slopes Project in California and our project in Michigan. However given the current decline and instability in hydrocarbon prices, the timing of any drilling activity in California will be dependent on a sustained improvement in hydrocarbon prices and a successful refinancing or restructuring of our credit facility.
The Company believes that our liquidity will improve when there is a sustained improvement in hydrocarbon prices. Daybreaks sources of funds in the past have included the debt or equity markets and the sale of assets. While the Company has experienced revenue growth, which has resulted in positive cash flow from its crude oil and natural gas properties, it has not yet established a positive cash flow on a company-wide basis. It will be necessary for the Company to obtain additional funding from the private or public debt or equity markets in the future. However, the Company cannot offer any assurance that it will be successful in executing the aforementioned plans to continue as a going concern.
Daybreaks financial statements as of February 28, 2018 do not include any adjustments that might result from the inability to implement or execute Daybreaks plans to improve our ability to continue as a going concern.
58
NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
Cash equivalents include demand deposits with banks and all highly liquid investments with original maturities of three months or less. The Company has in the past maintained balances in financial institutions where deposits may exceed the federally insured deposit limit of $250,000. The Company has not experienced any losses from such accounts and does not believe it is exposed to any significant credit risk on cash.
Accounts Receivable
The Company routinely assesses the recoverability of all material trade and other receivables. The Company accrues a reserve on a receivable when, based on the judgment of management, it is probable that a receivable will not be collected and the amount of any reserve may be reasonably estimated. Actual write-offs may exceed the recorded allowance. Substantially all of the Companys trade accounts receivable result from crude oil in California or joint interest billings to its working interest partners in California. This concentration of customers and joint interest owners may impact the Companys overall credit risk as these entities could be affected by similar changes in economic conditions as well as other related factors. Trade accounts receivable are generally not collateralized. There were no allowances for doubtful accounts for the Companys trade accounts receivable at February 28, 2018 and 2017.
Crude Oil and Natural Gas Properties
The Company uses the successful efforts method of accounting for crude oil and natural gas property acquisition, exploration, development, and production activities. Costs to acquire mineral interests in crude oil and natural gas properties, to drill and equip exploratory wells that find proved reserves, and to drill and equip development wells are capitalized as incurred. Costs to drill exploratory wells that are unsuccessful in finding proved reserves are expensed as incurred. In addition, the geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed as incurred. Costs to operate and maintain wells and field equipment are expensed as incurred.
Capitalized proved property acquisition costs are amortized by field using the unit-of-production method based on estimated proved reserves. Capitalized exploration well costs and development costs (plus estimated future dismantlement, surface restoration, and property abandonment costs, net of equipment salvage values) are amortized in a similar fashion (by field) based on their estimated proved developed reserves. Support equipment and other property and equipment are depreciated over their estimated useful lives.
Pursuant to the provisions of Financial Accounting Standards Codification (ASC) Topic 360,
Property, Plant and Equipment
the Company reviews proved crude oil and natural gas properties and other long-lived assets for impairment. These reviews are predicated by events and circumstances, such as downward revision of the reserve estimates or commodity prices that indicate a decline in the recoverability of the carrying value of such properties. The Company estimates the future cash flows expected in connection with the properties and compares such future cash flows to the carrying amount of the properties to determine if the carrying amount is recoverable. When the carrying amounts of the properties exceed their estimated undiscounted future cash flows, the carrying amounts of the properties are reduced to their estimated fair value. The factors used to determine fair value include, but are not limited to, estimates of proved reserves, future commodity prices, the timing of future production, future capital expenditures and a risk-adjusted discount rate. These estimates of future product prices may differ from current market prices of crude oil and natural gas. Any downward revisions to managements estimates of future production or product prices could result in an impairment of the Companys crude oil and natural gas properties in subsequent periods. Unproved crude oil and natural gas properties that are individually significant are also periodically assessed for impairment of value. An impairment loss for unproved crude oil and natural gas properties is recognized at the time of impairment by providing an impairment allowance.
The Company did not recognize any asset impairment for the twelve months ended February 28, 2018 and 2017, respectively.
On the retirement or sale of a partial unit of proved property, the cost is charged to accumulated DD&A with a resulting gain or loss recognized in income.
59
Property and Equipment
Fixed assets are stated at cost. Depreciation on vehicles is provided using the straight-line method over expected useful lives of three years. Depreciation on machinery and equipment is provided using the straight-line method over expected useful life of three years. Depreciation of production facilities and natural gas pipelines are recorded using the unit-of-production method based on estimated reserves.
Long Lived Assets
The Company reviews long-lived assets and identifiable intangibles whenever events or circumstances indicate that the carrying amounts of such assets may not be fully recoverable. The Company evaluates the recoverability of long-lived assets by measuring the carrying amounts of the assets against the estimated undiscounted cash flows associated with these assets. If this evaluation indicates that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the assets' carrying value, the assets are adjusted to their fair values (based upon discounted cash flows).
Fair Value of Financial Instruments
The carrying value of short-term financial instruments including cash, receivables, prepaid expenses, accounts payable, and other accrued liabilities, short-term liabilities and the line of credit approximated their fair values due to the relatively short period to maturity for these instruments. The long-term notes payable approximates fair value since the related rates of interest approximate current market rates.
Share Based Payments
Stock awards are accounted for under FASB ASC Topic 718,
Compensation-Stock Compensation
(ASC 718)
.
Under ASC 718, compensation for all share-based payment awards is based on estimated fair value at the grant date. The value of the portion of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service periods, if any.
The Company estimates the fair value of stock purchase warrants on the grant date using the Black-Scholes option pricing model (Black-Scholes Model) as its method of valuation for warrant awards granted during the year. The Companys determination of fair value of warrant awards on the date of grant using an option-pricing model is affected by the Companys stock price, as well as assumptions regarding a number of subjective variables. These variables include, but are not limited to, the Companys expected price volatility over the term of the awards and discount rates assumed.
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. Diluted net loss per share is computed based on the weighted average number of common shares outstanding, increased by dilutive Common Stock equivalents. Common Stock equivalents are excluded from the calculations when their effect is anti-dilutive.
Concentration of Credit Risk
Substantially all of the Companys accounts receivable result from crude oil California or joint interest billings to its working interest partners in California. This concentration of customers and joint interest owners may impact the Companys overall credit risk as these entities could be affected by similar changes in economic conditions as well as other related factors.
At the Companys East Slopes project in California we deal with only one buyer for the purchase of all crude oil production. The Company has no natural gas production in California. At February 28, 2018 and 2017, this one individual customer represented 100.0% of crude oil sales receivable from continuing operations. If this buyer is unable to resell its products or if they lose a significant sales contract then the Company may incur difficulties in selling its crude oil production.
60
The Companys accounts receivable from continuing operations in California for crude oil sales at February 28, 2018 and 2017, respectively are set forth in the table below.
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
February 28, 2018
|
|
February 28, 2017
|
Project
|
|
Customer
|
|
Accounts
Receivable
Crude Oil
Sales
|
|
Percentage
|
|
Accounts
Receivable
Crude Oil
Sales
|
|
Percentage
|
California East Slopes Project (Crude oil)
|
|
Plains Marketing
|
|
$
|
104,840
|
|
100.0%
|
|
$
|
83,405
|
|
100.0%
|
Revenue Recognition
Revenues from the sale of crude oil and natural gas are recognized when the products are sold to a purchaser at a fixed or determinable price, delivery has occurred and title has transferred, and collectability of the revenue is reasonably assured. The Company follows the sales method of accounting for recording crude oil and natural gas revenues. Under this method, the Company records revenue based on actual sales volumes to purchasers.
Reclamation Bonds
Included in current assets as of February 28, 2018 and 2017, are funds that have been pledged as collateral in connection with any future obligations for plugging, abandonment and site remediation. The amount pledged for an operator bond in California is approximately $100,000 plus accrued interest. The pledging of these funds is required by any state in which the Company operates as the project Operator. On March 29, 2018, the restriction on these funds was released by the State of California.
Asset Retirement Obligation (ARO)
The Company follows the provisions of FASB ASC Topic 410,
Asset Retirement and Environmental Obligations
(ASC 410)
,
which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This standard requires that the Company recognize the fair value of a liability for an asset retirement obligation (ARO) in the period in which it is incurred. The ARO is capitalized as part of the carrying value of the assets to which it is associated, and depreciated over the useful life of the asset. The ARO and the related asset retirement cost are recorded when an asset is first drilled, constructed or purchased. The asset retirement cost is determined and discounted to present value using a credit-adjusted risk-free rate. After initial recording, the liability is increased for the passage of time, with the increase being reflected as accretion expense in the statements of operations. Subsequent adjustments in the cost estimate are reflected in the ARO liability and the amounts continue to be amortized over the useful life of the related long-lived assets.
Suspended Well Costs
The Company accounts for any suspended well costs in accordance with FASB ASC Topic 932,
Extractive Activities Oil and Gas
(ASC 932). ASC 932 states that exploratory well costs should continue to be capitalized if: (1) a sufficient quantity of reserves are discovered in the well to justify its completion as a producing well and (2) sufficient progress is made in assessing the reserves and the economic and operating feasibility of the well. If the exploratory well costs do not meet both of these criteria, these costs should be expensed, net of any salvage value. Additional annual disclosures are required to provide information about managements evaluation of capitalized exploratory well costs.
In addition, ASC 932 requires annual disclosure of: (1) net changes from period to period of capitalized exploratory well costs for wells that are pending the determination of proved reserves, (2) the amount of exploratory well costs that have been capitalized for a period greater than one year after the completion of drilling and (3) an aging of exploratory well costs suspended for greater than one year, designating the number of wells the aging is related to. Further, the disclosures should describe the activities undertaken to evaluate the reserves and the projects, the information still required to classify the associated reserves as proved and the estimated timing for completing the evaluation.
61
Income Taxes
The Company follows the provisions of FASB ASC Topic 740,
Income Taxes
(ASC 740). As required under ASC 740, the Company accounts for income taxes using an asset and liability approach, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statements and tax bases of assets and liabilities at the applicable tax rates. A valuation allowance is utilized when it is more likely than not, that some portion of, or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under ASC 740, the Company recognizes tax benefits only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% (percent) likely to be realized upon settlement. A liability for unrecognized tax benefits is recorded for any tax benefits claimed in our tax returns that do not meet these recognition and measurement standards.
Use of Estimates and Assumptions
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions. These estimates and assumptions may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates. The accounting policies most affected by managements estimates and assumptions are as follows:
·
The reliance on estimates of proved reserves to compute the provision for depreciation, depletion and amortization and to determine the amount of any impairment of proved properties;
·
The valuation of unproved acreage and proved crude oil and natural gas properties to determine the amount of any impairment of crude oil and natural gas properties;
·
Judgment regarding the productive status of in-progress exploratory wells to determine the amount of any provision for abandonment; and
·
Estimates regarding the timing and cost of future abandonment obligations.
Recent Accounting Pronouncements
Accounting Standards Issued and Adopted
In May 2014, the FASB issued ASC updated No. 2014-09,
Revenue from Contracts with Customers (Topic 606
(ASU 2014-09)
. Under the amendments in this update, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in this update are effective for fiscal years and interim periods within those years beginning after December 15, 2017. The new standard is required to be applied either retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of applying the update recognized at the date of initial application. The Company has determined that implementation of this amendment will not result in any change to its financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18). The update is effective for years beginning December 15, 2017, including interim reporting periods within those fiscal years. Early adoption is permitted. The purpose of Update 216-18 is to clarify guidance and presentation related to restricted cash in the Statements of Cash Flows. The amendment requires beginning-of-period and end-of-period total amounts shown on the Statements of Cash Flows to include cash and cash equivalents as well as restricted cash and restricted cash equivalents. The Company has evaluated the impact and timing of the adoption of ASU 2016-18 and has concluded it will not have a material impact on its financial statements.
Reclassifications
Certain reclassifications have been made to conform the prior periods financial information to the current periods presentation. These reclassifications had no effect on previously reported net loss or accumulated deficit.
62
NOTE 4 ACCOUNTS RECEIVABLE:
Accounts receivable consists primarily of receivables from the sale of crude oil production from continuing operations by the Company and receivables from the Companys working interest partners in crude oil projects in which the Company acts as Operator of the project.
Crude oil sales receivables balances from continuing operations of $104,840 and $83,405 at February 28, 2018 and 2017, represent crude oil sales that occurred in February 2018 and 2017, respectively.
Joint interest participant receivables balances of $58,452 and $55,154 at February 28, 2018 and 2017, respectively, represent amounts due from working interest partners in California, where the Company is the Operator. There were no allowances for doubtful accounts for the Companys trade accounts receivable at February 28, 2018 and 2017.
NOTE 5 CRUDE OIL PROPERTIES:
Crude oil property balances from continuing operations at February 28, 2018 and 2017 are set forth in the table below:
|
|
|
|
| |
|
February 28, 2018
(1)
|
|
February 28,
2017
|
Proved leasehold costs
|
$
|
115,119
|
|
$
|
115,119
|
Unproved leasehold costs
|
|
31,187
|
|
|
59,375
|
Costs of wells and development
|
|
2,293,668
|
|
|
2,293,668
|
Capitalized exploratory well costs
|
|
1,333,785
|
|
|
1,341,494
|
Capitalized asset retirement costs
|
|
-
|
|
|
56,497
|
Total cost of oil and gas properties
|
|
3,773,759
|
|
|
3,866,153
|
Accumulated depletion, depreciation amortization and impairment
|
|
(3,027,963)
|
|
|
(2,953,226)
|
Oil and gas properties, net
|
$
|
745,796
|
|
$
|
912,927
|
(1)
During the twelve months ended February 28, 2018, a $51,486 reduction in unproved crude oil and natural gas properties was recorded to properly recognize geologic and geophysical lease expenses associated with our Michigan exploratory joint drilling project development.
NOTE 6 Asset Retirement Obligation (ARO)
The Companys financial statements reflect the provisions of ASC 410. The ARO primarily represents the estimated present value of the amount the Company will incur to plug, abandon and remediate its producing properties at the end of their productive lives, in accordance with applicable state laws. The Company determines the ARO on its crude oil and natural gas properties by calculating the present value of estimated cash flows related to the liability. As of February 28, 2018 and 2017, ARO obligations were considered to be long-term based on the estimated timing of the anticipated cash flows. For the twelve months ended February 28, 2018 and 2017, the Company recognized accretion expense of $7,971 and $8,390, respectively which is included in DD&A in the statement of operations.
Changes in the asset retirement obligations for the twelve months ended February 28, 2018 and 2017 are set forth in the table below.
|
|
|
|
| |
|
February 28, 2018
|
|
February 28, 2017
|
Asset retirement obligation, beginning of period
|
$
|
93,409
|
|
$
|
73,213
|
Accretion expense
|
|
7,971
|
|
|
8,390
|
Revisions to asset retirement obligation
|
|
(64,206)
|
|
|
11,806
|
Asset retirement obligation, end of period
|
$
|
37,174
|
|
$
|
93,409
|
NOTE 7 DISCONTINUED OPERATIONS:
Effective October 31, 2016, the Company finalized the sale of its interest in the Twin Bottoms Field in Kentucky. The sale included Daybreaks working interest in 14 producing horizontal crude oil wells, its mineral rights, its lease acreage and infrastructure. In accordance with the guidance provided in ASC 205-20, the Company concluded that this sale qualified for presentation as discontinued operations. The Company has no ongoing or future plans to be involved in this segment of its crude oil and natural gas projects. Prior period income statement balances applicable to the Twin Bottoms Field in Kentucky have been reclassified and are included under the Discontinued Operations caption in the statements of operations for February 28, 2017.
63
Operating income, interest income, operating expenses and interest expense related to Kentucky for the twelve months ended February 28, 2018 and 2017 are set forth in the tables below.
|
|
|
|
| |
|
For the Twelve Months Ended
|
|
February 28, 2018
|
|
February 28, 2017
|
Crude oil and natural gas sales revenue
|
$
|
-
|
|
$
|
280,030
|
Interest income
|
|
-
|
|
|
760,704
|
Production, exploration and drilling expenses
|
|
-
|
|
|
(65,157)
|
Depreciation, Depletion and Amortization (DD&A) expenses
|
|
-
|
|
|
(124,169)
|
General and Administrative (G&A)
|
|
-
|
|
|
(204,056)
|
Interest expense
|
|
-
|
|
|
(723,206)
|
Loss on note receivable settlement
|
|
-
|
|
|
(1,500,676)
|
Loss on sale of O&G properties
|
|
-
|
|
|
(1,955,315)
|
Gain on debt settlement
|
|
-
|
|
|
3,926,468
|
Loss from discontinued operations
|
$
|
-
|
|
$
|
(394,623)
|
The statements of cash flows include certain significant non-cash operating items for discontinued operations in Kentucky during the twelve months ended February 28, 2017, comprised of loss on sale of crude oil and natural gas properties of $1.96 million; loss on note receivable settlement of $1.5 million; gain on debt settlement of $3.9 million; satisfaction of note receivable through debt reduction of $3.9 million; proceeds from sale of crude oil and natural gas properties paid directly to reduce debt of $600 thousand; addition to debt for expenses directly by lender of $215 thousand; increase in note receivable for interest added to principal of $745 thousand; DD&A expense of $124 thousand; and additions to crude oil and natural gas properties of $13 thousand.
NOTE 8
ACCOUNTS PAYABLE:
On March 1, 2009, the Company became the operator for the East Slopes Project located in Kern County, California. Additionally, the Company then assumed certain original defaulting partners approximate $1.5 million liability representing a 25% working interest in the drilling and completion costs associated with the East Slopes Project four earning wells program. The Company subsequently sold the 25% working interest on June 11, 2009. Approximately $244,849 of the $1.5 million default remains unpaid and is included in the February 28, 2018 accounts payable balance.
NOTE 9
ACCOUNTS PAYABLE- RELATED PARTIES:
The February 28, 2018 and 2017 accounts payable related parties balances of $1,664,845 and $1,414,481, respectively, were comprised primarily of deferred salaries of the Companys Executive Officers and certain employees; deferred directors fees; expense reimbursements; related party consulting fees; and deferred interest payments on the 12% Subordinated Note to the Companys Chairman, President and Chief Executive Officer. Payment of these deferred items has been delayed until the Companys cash flow situation improves.
NOTE 10 SHORT-TERM AND LONG-TERM BORROWINGS:
Note Payable Related Party
The Company has a note payable-related party loan balance of $250,100 as of February 28, 2018 and 2017. The Companys Chairman, President and Chief Executive Officer has loaned the Company an aggregate $250,100 that was used for a variety of corporate purposes including an escrow requirement on a loan commitment; maturity extension fees on third party loans; and a reduction of principal on the Companys credit line with UBS Bank. These loans are non-interest bearing loans and repayment will be made upon a mutually agreeable date in the future.
64
12% Subordinated Notes
The Companys 12% Subordinated Notes (the Notes) issued pursuant to a January 2010 private placement offering to accredited investors, resulted in $595,000 in gross proceeds (of which $250,000 was from a related party) to the Company and accrue interest at 12% per annum, payable semi-annually on January 29th and July 29th. On January 29, 2015, the Company and 12 of the 13 holders of the Notes agreed to extend the maturity date of the Notes for an additional two years to January 29, 2017. Effective January 29, 2017, the maturity date of the Notes and the expiration date of the warrants that were issued in conjunction with the Notes were extended for an additional two years to January 29, 2019. There are ten noteholders, holding 980,000 warrants, who have not yet exercised their warrants. The exercise price of the associated warrants was lowered from $0.14 to $0.07 as a part of the Note maturity extension. The fair value of the warrant modification, as determined by the Black-Scholes option pricing model, was $29,075 and was recognized as a discount to debt and is being amortized over the extended maturity date of the Notes. The Black-Scholes valuation encompassed the following weighted average assumptions: a risk free interest rate of 1.22%; volatility of 378.73%; and dividend yield of 0.0%.
The Notes principal of $565,000 is payable in full at the amended maturity date of the Notes. Should the Board of Directors, on the maturity date, decide that the payment of the principal and any unpaid interest would impair the financial condition or operations of the Company, the Company may then elect a mandatory conversion of the unpaid principal and interest into the Companys common stock at a conversion rate equal to 75% of the average closing price of the Companys common stock over the 20 consecutive trading days preceding December 31, 2018. Amortization expense was $14,538 and $1,211 at February 28, 2018 and 2017, respectively. The unamortized debt discount at February 28, 2018 and 2017 was $13,326 and $27,864, respectively.
12% Note balances at February 28, 2018 and 2017 are set forth in the table below:
|
|
|
|
| |
|
February 28, 2018
|
|
February 28, 2017
|
12% Subordinated Notes
|
$
|
315,000
|
|
$
|
315,000
|
Debt discount
|
|
(7,429)
|
|
|
(15,535)
|
Net 12% Subordinated Note balance
|
$
|
307,571
|
|
$
|
299,465
|
12% Note balances related parties at February 28, 2018 and 2017 are set forth in the table below:
|
|
|
|
| |
|
February 28, 2018
|
|
February 28, 2017
|
12% Subordinated Notes related party
|
$
|
250,000
|
|
$
|
250,000
|
Debt discount
|
|
(5,897)
|
|
|
(12,329)
|
Net 12% Subordinated Note related party balance
|
$
|
244,103
|
|
$
|
237,671
|
In conjunction with the Notes private placement, a total of 1,190,000 common stock purchase warrants were issued at a rate of two warrants for every dollar raised through the private placement. The warrants have an exercise price of $0.07 and an amended expiration date of January 29, 2019. The 12% Note warrants that have been exercised are set forth in the table below. At February 28, 2018, there were 980,000 warrants that were not exercised and had not expired.
|
|
|
|
|
| |
Fiscal Period
|
|
Warrants
Exercised
|
|
Shares of
Common Stock
Issued
|
|
Number of
Accredited
Investors
|
Year Ended February 28, 2014
|
|
100,000
|
|
100,000
|
|
1
|
Year Ended February 28, 2015
|
|
50,000
|
|
50,000
|
|
1
|
Year Ended February 29, 2016
|
|
-
|
|
-
|
|
-
|
Year Ended February 28, 2017
|
|
-
|
|
-
|
|
-
|
Year Ended February 28, 2018
|
|
-
|
|
-
|
|
-
|
Totals
|
|
150,000
|
|
150,000
|
|
2
|
Maximilian Credit Facility and Loan Agreement
On October 31, 2012, the Company entered into a loan agreement with Maximilian Resources LLC, a Delaware limited liability company and successor by assignment to Maximilian Investors LLC (either party, as appropriate, is referred to in these notes to the financial statements as Maximilian), which provided for a revolving credit facility of up to $20 million, that matured on October 31, 2016, with a minimum commitment of $2.5 million. On October 31, 2016 through the Fourth Amendment to the Amended and Restated Loan and Security Agreement, the maturity date of the loan was changed to February 28, 2020.
65
In connection with the Companys acquisition of a working interest from App Energy, LLC, a Kentucky limited liability company (App Energy) in the Twin Bottoms Field in Lawrence County, Kentucky, the Company amended its loan agreement with Maximilian on August 28, 2013. The amendment increased the amount of the credit facility to $90 million and reduced the annual interest rate to 12%. The Company evaluated the amendment of the revolving credit facility under ASC 470-50-40 and determined that the Companys borrowing capacity under the amended loan agreement exceeded its borrowing capacity under the old loan agreement. Consequently, the unamortized discount and the deferred financing costs as of the date of amendment were amortized over the term of the loan agreement. Due to the Companys default on the Maximilian loan, all unamortized discount and deferred financing costs were fully amortized during the twelve months ended February 28, 2018.
On October 31, 2016, the Company entered into a Fourth Amendment to the Amended and Restated Loan and Security Agreement with Maximilian, which amended the Companys loan agreement with Maximilian (the Restructuring Agreement). Pursuant to the Restructuring Agreement, in exchange for the proceeds it received from the Kentucky Sale, Maximilian and the Company had agreed to a commitment by Maximilian to advance up to $250,000 in financing to the Company over the following six month period and the pursuit of the Michigan exploratory joint drilling project using the $250,000 set aside from the Kentucky Sale.
During the twelve months ended February 28, 2017, approximately $1.5 million of interest was converted to principal. Additionally, as a consequence of the Company selling its Kentucky project and the settlement of the account receivable owed by App Energy to the Company $745,163 of interest was added to the note receivable principal; $600,000 of the sale proceeds were paid directly to Maximilian; and, a $3.9 million in reduction in debt owed to Maximilian occurred.
As a result of the decline in hydrocarbon prices that started in June of 2014, the Company has been unable to make any type of interest or principal payments required under the amended terms of its credit facility with Maximilian since December of 2015. Under the terms of the Restructuring Amendment all unpaid interest is currently being accrued. Accrued interest on the credit facility loan at February 28, 2018 and 2017 was $1,812,128 and $440,389, respectively The Company is currently considered to be in default under the terms of its credit facility loan. Maximilian is currently in receivership. The United States District Court for the Eastern District of New York, Southern Division has hired consultants to assist in finding a new lender to assume the Maximilian credit facility. No assurances can be made as to who the new lender will be or how the structure of the loan will affect the Company.
During the twelve months ended February 28, 2018 and 2017, the Company received advances of $102,700 and $25,000, respectively, under the terms of the credit facility.
Maximilian Promissory Note Michigan Exploratory Joint Drilling Project
As of February 28, 2018, the Company had received $94,650 in aggregate from multiple advances starting in the year ended February 28, 2017 from Maximilian under a separate promissory note agreement dated January 17, 2017 and amended on February 10, 2017 regarding the development of an exploratory joint drilling project in Michigan. In the event of a default of any of the Companys obligations under the promissory note, the amounts due may be called immediately due and payable at Maximilians option. Advances under this agreement are subject to a 5% (five percent) per annum interest rate and may be prepaid at any time without penalty. Pursuant to the agreement, if a well that the Company elects to participate in is scheduled to be spudded at the Michigan exploratory joint drilling project on or before December 31, 2017, then the advances under the promissory note must be repaid in full upon the earlier of (a) the time that is ten days prior to the first well being spudded on the Michigan exploratory joint drilling project or (b) December 31, 2017. The agreement also provided that, if there was not a well scheduled to be spudded at the Michigan exploratory joint drilling project on or before December 31, 2017 that the Company elected to participate in, then the Company would assign to Maximilian its working interest in the Michigan exploratory joint drilling project, in full payment and satisfaction of the advances under the promissory note. Due to a lack of available funding from Maximilian, we were unable to spud a well on the Michigan project by December 31, 2017. The Company is currently considered to be in default under the terms of its loan agreement. Maximilian is currently in receivership. The United States District Court for the Eastern District of New York, Southern Division has hired consultants to assist in finding a new lender. No assurances can be made as to who the new lender will be or how the structure of the loan will affect the Company. Accrued interest on the Michigan promissory note at February 28, 2018 and 2017 was $5,158 and $456, respectively. During the twelve months ended February 28, 2018, an aggregate amount of $10,650 was paid directly to the Operator of the Michigan project by Maximilian on the Companys behalf.
66
In accordance with the guidance found in ASC-470-10-45, the entire balance of the Maximilian loan is presented under the current liabilities section of the balance sheets. In accordance with the guidance found in ASC 835-30 the net amount of the deferred finance costs associated with the credit facility are included with the debt discount as a reduction of the loan balance shown on the Balance Sheet as of February 28, 2018 and 2017. Due to the Companys default on the Maximilian loan, all unamortized discount and deferred financing costs were fully amortized during the twelve months ended February 28, 2018.
Current debt balances at February 28, 2018 and 2017 are set forth in the table below:
|
|
|
|
| |
|
February 28, 2018
|
|
February 28, 2017
|
Credit facility balance
|
$
|
9,063,144
|
|
$
|
8,960,444
|
Less unamortized discount and debt issuance costs
|
|
-
|
|
|
(238,598)
|
Subtotal O&G operating debt
|
|
9,063,144
|
|
|
8,721,846
|
Michigan exploratory joint drilling debt
|
|
94,650
|
|
|
84,000
|
Net debt
|
$
|
9,157,794
|
|
$
|
8,805,846
|
Deferred financing costs at February 28, 2018 and 2017 relating to the original and the amended credit facility with Maximilian, are set forth in the table below:
|
|
|
|
| |
|
February 28, 2018
|
|
February 28, 2017
|
Deferred financing costs loan fees
|
$
|
181,648
|
|
$
|
181,648
|
Deferred financing costs loan commissions
|
|
630,662
|
|
|
630,662
|
Deferred financing costs fair value of warrants
|
|
530,488
|
|
|
530,488
|
Deferred financing costs fair value of common stock
|
|
419,832
|
|
|
419,832
|
Subtotal deferred financing costs
|
|
1,762,630
|
|
|
1,762,630
|
Accumulated amortization
|
|
(1,762,630)
|
|
|
(1,524,032)
|
Remaining balance deferred financing costs
|
$
|
-
|
|
$
|
238,598
|
Deferred financing cost balances of $-0- and $238,598 at February 28, 2018 and 2017, respectively includes the fair value of common shares and warrants issued to Maximilian and to a third party that assisted in both the original and the amended financing transactions. The unamortized deferred financing costs are netted against debt in the balance sheets. Amortization expense of deferred financing costs was $238,598 and $423,331 for the twelve months ended February 28, 2018 and 2017, respectively. Accrued interest on both the Maximilian credit facility loan and the Michigan loan at February 28, 2018 and 2017 was $1,817,286 and $$440,845, respectively.
Encumbrances
The Companys debt obligations, pursuant to the above mentioned credit facility loan agreement and promissory notes entered into by and between Maximilian and the Company are secured by a perfected first priority security interest in substantially all of the personal property of the Company, and two mortgages; one covering its leases in California and the other covering its leases in Michigan. On July 13, 2017, in connection with receiving a payment waiver from Maximilian, the California and Michigan properties were cross-collateralized for the credit facility loan and the promissory note.
Line of Credit
The Company has an existing $890,000 line of credit for working capital purposes with UBS Bank USA (UBS), established pursuant to a Line of Credit Agreement dated October 24, 2011 that is secured by the personal guarantee of the Companys Chairman, President and Chief Executive Officer. On July 10, 2017 a $700,000 portion of the outstanding line of credit balance was converted to a 24 month fixed term annual interest rate of 3.244% with interest payable monthly. The remaining principal balance of the line of credit has a stated reference rate of 0.249% + 337.5 basis points with interest payable monthly. The reference rate is based on the 30 day LIBOR (London Interbank Offered Rate) and is subject to change from UBS. During the twelve months ended February 28, 2018 and 2017, we received advances on the line of credit of $84,000 and $-0-, respectively. During the twelve months ended February 28, 2018 and 2017 the Company made payments to the line of credit of $60,000 and $60,000, respectively. Interest paid for the twelve months ended February 28, 2018 and 2017 was $31,727 and $33,815, respectively. At February 28, 2018 and 2017, the line of credit had an outstanding balance of $873,350 and $817,622, respectively.
67
NOTE 11 STOCKHOLDERS DEFICIT:
Preferred Stock
The Company is authorized to issue up to 10,000,000 shares of preferred stock with a par value of $0.001. The Companys preferred stock may be entitled to preference over the common stock with respect to the distribution of assets of the Company in the event of liquidation, dissolution, or winding-up of the Company, whether voluntarily or involuntarily, or in the event of any other distribution of assets of the Company among its shareholders for the purpose of winding-up its affairs. The authorized but unissued shares of preferred stock may be divided into and issued in designated series from time to time by one or more resolutions adopted by the Board of Directors. The directors in their sole discretion shall have the power to determine the relative powers, preferences, and rights of each series of preferred stock.
Series A Convertible Preferred Stock
The Company has designated 2,400,000 shares of the 10,000,000 preferred shares as Series A Convertible Preferred Stock (Series A Preferred), with a $0.001 par value. In July 2006, we completed a private placement of the Series A Preferred that resulted in the issuance of 1,399,765 shares to 100 accredited investors. For the year ended February 28, 2018, there was one conversion of Series A Preferred stock to Common Stock. In this conversion, 14,997 shares of Series A Preferred were converted to 44,991 shares of the Companys Common Stock.
The following is a summary of the rights and preferences of the Series A Preferred.
Voluntary Conversion:
The Series A Preferred that is currently issued and outstanding is eligible to be converted by the shareholder at any time into three shares of the Companys common stock. During the twelve months ended February 28, 2018, there was one conversion of 14,997 shares of Series A Preferred to 44,991 shares of the Companys Common Stock. For the twelve months ended February 28, 2017, there were no conversions of Series A Preferred.
At February 28, 2018 there were 709,568 shares issued and outstanding that had not been converted into our common stock. As of February 28, 2018, 44 accredited investors have converted 690,197 Series A Preferred shares into 2,070,591 shares of Daybreak Common Stock. The conversions of Series A Preferred that have occurred since the Series A Preferred was first issued in July 2006 is set forth in the table below.
|
|
|
|
|
| |
Fiscal Period
|
|
Shares of Series A
Preferred Converted
to Common Stock
|
|
Shares of
Common Stock
Issued from
Conversion
|
|
Number of
Accredited
Investors
|
Year Ended February 29, 2008
|
|
102,300
|
|
306,900
|
|
10
|
Year Ended February 28, 2009
|
|
237,000
|
|
711,000
|
|
12
|
Year Ended February 28, 2010
|
|
51,900
|
|
155,700
|
|
4
|
Year Ended February 28, 2011
|
|
102,000
|
|
306,000
|
|
4
|
Year Ended February 29, 2012
|
|
-
|
|
-
|
|
-
|
Year Ended February 28, 2013
|
|
18,000
|
|
54,000
|
|
2
|
Year Ended February 28, 2014
|
|
151,000
|
|
453,000
|
|
9
|
Year Ended February 28, 2015
|
|
3,000
|
|
9,000
|
|
1
|
Year Ended February 29, 2016
|
|
10,000
|
|
30,000
|
|
1
|
Year Ended February 28, 2017
|
|
-
|
|
-
|
|
-
|
Year Ended February 28, 2018
|
|
14,997
|
|
44,991
|
|
1
|
Totals
|
|
690,197
|
|
2,070,591
|
|
44
|
Automatic Conversion:
The Series A Preferred shall be automatically converted into the Companys common stock if the common stock into which the Series A Preferred are convertible the Companys common stock closes at or above $3.00 per share for 20 out of 30 trading days.
68
Dividend:
Holders of Series A Preferred shall be paid dividends, in the amount of 6% of the original purchase price per annum. Dividends may be paid in cash or common stock at the discretion of the Company. Dividends are cumulative from the date of the final closing of the private placement, whether or not in any dividend period or periods we have assets legally available for the payment of such dividends. Accumulations of dividends on shares of Series A Preferred do not bear interest. Dividends are payable upon declaration by the Board of Directors.
Cumulative dividends earned for each twelve month period since issuance are set forth in the table below:
|
|
|
|
| |
Fiscal Year Ended
|
|
Shareholders at
Period End
|
|
Accumulated
Dividends
|
February 28, 2007
|
|
100
|
|
$
|
155,311
|
February 29, 2008
|
|
90
|
|
|
242,126
|
February 28, 2009
|
|
78
|
|
|
209,973
|
February 28, 2010
|
|
74
|
|
|
189,973
|
February 28, 2011
|
|
70
|
|
|
173,707
|
February 29, 2012
|
|
70
|
|
|
163,624
|
February 28, 2013
|
|
68
|
|
|
161,906
|
February 28, 2014
|
|
59
|
|
|
151,323
|
February 28, 2015
|
|
58
|
|
|
132,634
|
February 29, 2016
|
|
57
|
|
|
130,925
|
February 28, 2017
|
|
57
|
|
|
130,415
|
February 28, 2018
|
|
56
|
|
|
128,231
|
|
|
|
|
$
|
1,970,148
|
Liquidation Preference:
In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holders of the Series A Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of common stock by reason of their ownership thereof, and subject to the rights of any series of preferred stock that may rank on liquidation prior to the Series A Preferred, an amount equal to all accrued or declared but unpaid dividends on such shares, for each share of Series A Preferred then held by them. The remaining assets shall be distributed ratably to the holders of common stock and Series A Preferred on a common equivalent basis. Certain other events, as described in our Amended and Restated Articles of Incorporation, including a consolidation or merger of the Company or the disposition of the Companys assets, may trigger the payment of the liquidation preference to the holders of Series A Preferred.
Voting Rights:
The holders of the Series A Preferred will vote together with the common stock and not as a separate class except as specifically provided or as otherwise required by law. Each share of the Series A Preferred shall have a number of votes equal to the number of shares of common stock then issuable upon conversion of such shares of Series A Preferred.
Common Stock
The Company is authorized to issue up to 200,000,000 shares of $0.001 par value Common Stock of which 51,532,364 and 51,487,373 shares were issued and outstanding as of February 28, 2018 and 2017, respectively.
|
|
|
| |
|
Common Stock
Balance
|
|
Par Value
|
Common stock, Issued and Outstanding, February 29, 2016
|
51,487,373
|
|
|
|
Conversion of Series A Convertible Preferred Stock to common stock
|
-
|
|
$
|
-
|
Common stock, Issued and Outstanding, February 28, 2017
|
51,487,373
|
|
|
|
Conversion of Series A Convertible Preferred Stock to common stock
|
44,991
|
|
$
|
45
|
Common stock, Issued and Outstanding, February 28, 2018
|
51,532,364
|
|
|
|
69
All shares of common stock are equal to each other with respect to voting, liquidation, dividend and other rights. Owners of shares of common stock are entitled to one vote for each share of common stock owned at any shareholders meeting. Holders of shares of common stock are entitled to receive such dividends as may be declared by the Board of Directors out of funds legally available therefore; and upon liquidation, are entitled to participate pro rata in a distribution of assets available for such a distribution to shareholders.
There are no conversion, preemptive, or other subscription rights or privileges with respect to any shares of our common stock. Our stock does not have cumulative voting rights, which means that the holders of more than 50% of the shares voting in an election of directors may elect all of the directors if they choose to do so. In such event, the holders of the remaining shares aggregating less than 50% would not be able to elect any directors.
NOTE 12 WARRANTS:
Warrants outstanding and exercisable as of February 28, 2018 are set forth in the table below:
|
|
|
|
|
|
|
| |
|
|
Warrants
|
|
Exercise
Price
|
|
Remaining
Life
(Years)
|
|
Exercisable
Warrants
Remaining
|
12% Subordinated Notes
|
|
980,000
|
|
$0.07
|
|
0.92
|
|
980,000
|
Warrants issued for Kentucky crude oil project
|
|
3,498,601
|
|
$0.04
|
|
0.50
|
|
3,498,601
|
Warrants issued for Kentucky debt financing
|
|
2,623,951
|
|
$0.04
|
|
0.50
|
|
2,623,951
|
Warrants issued for Kentucky debt financing
|
|
309,503
|
|
$0.214
|
|
0.50
|
|
309,503
|
Warrants issued in share-for-warrant exchange
|
|
427,729
|
|
$0.04
|
|
0.50
|
|
427,729
|
|
|
7,839,784
|
|
|
|
|
|
7,839,784
|
Warrant activity for the twelve months ended February 28, 2018 and 2017 is set forth in the table below:
|
|
|
| |
|
|
Warrants
|
|
Weighted Average
Exercise Price
|
Warrants outstanding, February 29, 2016
|
|
8,156,401
|
|
$0.06
|
|
|
|
|
|
Changes during the twelve months ended February 28, 2017:
|
|
|
|
|
Expired / Cancelled / Forfeited
|
|
-
|
|
|
Warrants outstanding, February 28, 2017
|
|
8,156,401
|
|
$0.05
|
|
|
|
|
|
Changes during the twelve months ended February 28, 2018:
|
|
|
|
|
Expired / Cancelled / Forfeited
|
|
(316,617)
|
|
|
Warrants outstanding, February 28, 2018
|
|
7,839,784
|
|
$0.05
|
|
|
|
|
|
Warrants exercisable, February 28, 2018
|
|
7,839,784
|
|
$0.05
|
On January 29, 2017, the 980,000 warrants associated with the 12% Subordinated Notes were modified to extend the expiration date of the warrants to January 29, 2019. As a part of this modification the exercise price of the 12% Note warrants was changed from $0.14 to $0.07. No other terms of the warrants were affected by the modification. The outstanding warrants as of February 28, 2018 and 2017 have a weighted average exercise price of $0.05; a weighted average remaining life of 0.55 and 1.52, respectively; and an intrinsic value of $-0-.
NOTE 13
INCOME TAXES:
On December 22, 2017, the federal government enacted a tax bill H.R.1, an act to provide for reconciliation pursuant to Titles II and V of the concurrent resolution on the budget for fiscal year 2018, commonly referred to as the Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act contains significant changes to corporate taxation, including, but not limited to, reducing the U.S. federal corporate income tax rate from 35% to 21% and modifying or limiting many business deductions. At Febraury 28, 2018, we had not completed our accounting for the tax effects resulting from the enactment of the Tax Cuts and Jobs Act; however we have made a reasonable estimate of the effects on our existing deferred tax balances. We remeasured deferred tax liabilities based on rates at which they are expected tobe utilized in the future, which is generally 21%. However, we are still analyzing certain aspecs of the Tax Cuts and Jobs Act and refining our calculations, which could potentially affect the measurement of those balances or give rise to new deferred tax amounts.
70
Reconciliation between actual tax expense (benefit) and income taxes computed by applying the U.S. federal income tax rate and state income tax rate to income from continuing operations before income taxes is as follows:
|
|
|
|
| |
|
February 28, 2018
|
|
February 28, 2017
|
Computed at U.S. and state statutory rates (40%)
|
$
|
(981,966)
|
|
$
|
(1,387,422)
|
Permanent differences
|
|
29,060
|
|
|
83,606
|
New tax law adjustment
|
|
2,912,689
|
|
|
-
|
Changes in valuation allowance
|
|
(1,959,783)
|
|
|
1,303,816
|
Total
|
$
|
-
|
|
$
|
-
|
Tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred liabilities are presented below:
|
|
|
|
| |
|
February 28, 2018
|
|
February 28, 2017
|
Deferred tax assets:
|
|
|
|
|
|
Net operating loss carryforwards
|
$
|
8,413,128
|
|
$
|
10,425,780
|
Oil and gas properties
|
|
47,434
|
|
|
32,488
|
Stock based compensation
|
|
66,187
|
|
|
88,723
|
Other
|
|
27,838
|
|
|
(32,618)
|
Less valuation allowance
|
|
(8,554,587)
|
|
|
(10,514,373)
|
Total
|
$
|
-
|
|
$
|
-
|
At February 28, 2018, the Company had a net operating loss (NOL) carryforwards for federal and state income tax purposes of approximately $27,853,381, which will begin to expire, if unused, beginning in 2024. Under the Tax Cuts and Jobs Act, the NOL portion of loss incurred in the 2018 period of $340,749 will not expire and will carry over indefinitely. The valuation allowances increased by $1,959,786 and $1,303,816 for the years ended February 28, 2018 and 2017, respectively. Section 382 Rule of the Internal Revenue Code will place annual limitations on the Companys NOL carryforward.
The above estimates are based upon managements decisions concerning certain elections that could change the relationship between net income and taxable income. Management decisions are made annually and could cause the estimates to vary significantly. The Companys files federal income tax returns with the United States Internal Revenue Service and state income tax returns in various state tax jurisdictions. As a general rule, the Companys tax returns for the fiscal years after 2012 currently remain subject to examinations by appropriate tax authorities. None of our tax returns are under examination at this time.
NOTE 14 COMMITMENTS AND CONTINGENCIES:
Various lawsuits, claims and other contingencies arise in the ordinary course of the Companys business activities. While the ultimate outcome of the aforementioned contingencies are not determinable at this time, management believes that any liability or loss resulting therefrom will not materially affect the financial position, results of operations or cash flows of the Company.
The Company, as an owner or lessee and operator of oil and gas properties, is subject to various federal, state and local laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability on the lessee under an oil and gas lease for the cost of pollution cleanup resulting from operations and subject the lessee to liability for pollution damages. In some instances, the Company may be directed to suspend or cease operations in the affected area. The Company maintains insurance coverage that is customary in the industry, although the Company is not fully insured against all environmental risks.
The Company is not aware of any environmental claims existing as of February 28, 2018. There can be no assurance, however, that current regulatory requirements will not change, or past non-compliance with environmental issues will not be discovered on the Companys oil and gas properties.
71
The Companys minimum annual office rental lease commitments by fiscal year as of February 28, 2018 for these offices are shown in the table below:
|
|
| |
Fiscal Year Ended
|
|
Annual Office Lease Obligation
|
February 28, 2019
|
|
$
|
12,849
|
February 29, 2020
|
|
|
-
|
February 28, 2021
|
|
|
-
|
February 28, 2022
|
|
|
-
|
February 28, 2023 and thereafter
|
|
|
-
|
Totals
|
|
$
|
12,849
|
NOTE 15 SUBSEQUENT EVENTS:
On March 29, 2018 the restrictions on the pledged certificate of deposit with the State of California as a reclamation bond were lifted. These funds then became available for the Company to use for regular business purposes. The February 28, 2018 balance of this restricted time deposit was $100,029.
NOTE 16
SUPPLEMENTARY INFORMATION FOR CRUDE OIL PRODUCING ACTIVITIES (UNAUDITED)
Discontinued operations information comprising the sale of the Companys Kentucky assets, effective October 31, 2016, has not been segregated from our continuing operations in California in the Supplemental Information for Crude Oil Producing Activities presented below for the twelve months ended February 28, 2017.
Capitalized Costs Relating to Crude Oil and Natural Gas Producing Activities
|
|
|
|
| |
|
As of
February 28, 2018
|
|
As of
February 28, 2017
|
Proved leasehold costs
|
|
|
|
|
|
Mineral Interests
|
$
|
115,119
|
|
$
|
115,119
|
Wells, equipment and facilities
|
|
3,627,453
|
|
|
3,691,659
|
Total Proved Properties
|
|
3,742,572
|
|
|
3,806,778
|
|
|
|
|
|
|
Unproved properties
|
|
|
|
|
|
Mineral Interests
|
|
31,187
|
|
|
59,375
|
Uncompleted wells, equipment and facilities
|
|
-
|
|
|
-
|
Total unproved properties
|
|
31,187
|
|
|
59,375
|
|
|
|
|
|
|
Less accumulated depreciation, depletion amortization and impairment
|
|
(3,027,963)
|
|
|
(2,953,226)
|
Net capitalized costs
|
$
|
745,796
|
|
$
|
912,927
|
Costs Incurred in Oil and Gas Producing Activities
|
|
|
|
| |
|
12 Months Ended
|
|
12 Months Ended
|
|
February 28, 2018
|
|
February 28, 2017
|
Acquisition of proved properties
|
$
|
-
|
|
$
|
-
|
Acquisition of unproved properties
|
|
31,187
|
|
|
59,375
|
Development costs
|
|
-
|
|
|
-
|
Exploration costs
|
|
-
|
|
|
-
|
Total costs incurred
|
$
|
31,187
|
|
$
|
59,375
|
72
Results of Operations from Oil and Gas Producing Activities
|
|
|
|
| |
|
12 Months Ended
|
|
12 Months Ended
|
|
February 28, 2018
|
|
February 28, 2017
|
Oil and gas revenues
|
$
|
628,652
|
|
$
|
762,686
|
Production costs
|
|
(170,966)
|
|
|
(221,579)
|
Exploration expenses
|
|
(107,884)
|
|
|
(16,529)
|
Depletion, depreciation and amortization
|
|
(82,707)
|
|
|
(234,454)
|
Impairment of oil properties
|
|
-
|
|
|
-
|
Result of oil and gas producing operations before income taxes
|
|
267,095
|
|
|
290,124
|
Provision for income taxes
|
|
-
|
|
|
-
|
Results of oil and gas producing activities
|
$
|
267,095
|
|
$
|
290,124
|
Proved Reserves
The Companys proved oil and natural gas reserves have been estimated by the certified independent engineering firm, PGH Petroleum and Environmental Engineers, LLC. Proved reserves are the estimated quantities that geologic and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are the quantities expected to be recovered through existing wells with existing equipment and operating methods when the estimates were made. Due to the inherent uncertainties and the limited nature of reservoir data, such estimates are subject to change as additional information becomes available. The reserves actually recovered and the timing of production of these reserves may be substantially different from the original estimate. Revisions result primarily from new information obtained from development drilling and production history; acquisitions of oil and natural gas properties; and changes in economic factors.
On October 31, 2016, we sold our non-operated working interest in crude oil and natural gas properties located in the Twin Bottoms Field in Lawrence County, Kentucky. As of February 28, 2018, our total reserves were comprised of our working interest in East Slopes Project located in Kern County, California.
Our proved reserves are summarized in the table below:
|
|
|
|
|
| |
|
|
Oil (Barrels)
|
|
Natural Gas (Mcf)
|
|
BOE (Barrels)
|
Proved reserves:
|
|
|
|
|
|
|
February 29, 2016
|
|
773,110
|
|
778,020
|
|
902,780
|
Revisions
(1)
|
|
(13,145)
|
|
-
|
|
(13,145)
|
Sales of minerals
|
|
(360,018)
|
|
(761,517)
|
|
(486,937)
|
Production
|
|
(18,877)
|
|
(16,503)
|
|
(21,628)
|
February 28, 2017
|
|
381,070
|
|
-
|
|
381,070
|
Revisions
(2)
|
|
35,099
|
|
-
|
|
35,099
|
Discoveries and extensions
|
|
24,639
|
|
-
|
|
24,639
|
Production
|
|
(12,741)
|
|
-
|
|
(12,741)
|
February 28, 2018
|
|
428,067
|
|
-
|
|
428,067
|
(1)
The revisions of previous estimates resulted from a decline in the estimated economic life of the reserves due to lower realized crude oil prices in the energy markets.
(2)
The revisions of previous estimates resulted from an increase in the estimated economic life of the reserves due to higher realized crude oil prices in the energy markets.
The Companys proved reserves are set forth in the table below.
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Developed
|
|
Undeveloped
|
|
Total Reserves
|
|
|
Oil (Bbls)
|
|
BOE (Bbls)
|
|
Oil (Bbls)
|
|
BOE (Bbls)
|
|
Oil (Bbls)
|
|
BOE (Bbls)
|
February 28, 2018
|
|
109,475
|
|
109,475
|
|
318,592
|
|
318,592
|
|
428,067
|
|
428,067
|
February 28, 2017
|
|
99,710
|
|
99,710
|
|
281,360
|
|
281,360
|
|
381,070
|
|
381,070
|
February 29, 2016
|
|
203,131
|
|
231,778
|
|
569,979
|
|
671,002
|
|
773,110
|
|
902,780
|
73
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves
The following information is based on the Companys best estimate of the required data for the Standardized Measure of Discounted Future Net Cash Flows as of February 28, 2018 and 2017 in accordance with ASC 932, Extractive Activities Oil and Gas which requires the use of a 10% discount rate. This information is not the fair market value, nor does it represent the expected present value of future cash flows of the Companys proved oil and gas reserves.
Future cash inflows for the years ended February 28, 2018 and 2017 were estimated as specified by the SEC through calculation of an average price based on the 12-month unweighted arithmetic average of the first-day-of-the-month price for the period from March through February during each respective fiscal year. The resulting net cash flows are reduced to present value by applying a 10% discount factor.
|
|
|
|
| |
|
12 Months Ended
|
|
February 28, 2018
|
|
February 28, 2017
|
Future cash inflows
|
$
|
21,526,541
|
|
$
|
13,684,350
|
Future production costs
(1)
|
|
(10,373,652)
|
|
|
(7,377,450)
|
Future development costs
|
|
(2,763,750)
|
|
|
(2,090,810)
|
Future income tax expenses
(2)
|
|
-
|
|
|
-
|
Future net cash flows
|
|
8,389,139
|
|
|
4,216,090
|
10% annual discount for estimated timing of cash flows
|
|
(5,140,986)
|
|
|
(2,493,750)
|
Standardized measure of discounted future net cash flows at the end of the fiscal year
|
$
|
3,248,153
|
|
$
|
1,722,340
|
(1)
Production costs include crude oil and natural gas operations expense, production ad valorem taxes, transportation costs and G&A expense supporting the Companys crude oil and natural gas operations.
(2)
The Company has sufficient tax deductions and allowances related to proved crude oil and natural gas reserves to offset future net revenues.
Average hydrocarbon prices are set forth in the table below.
|
|
|
|
| |
|
Average Price
|
|
Natural
|
|
Crude Oil (Bbl)
|
|
Gas (Mcf)
|
Year ended February 28, 2018
(1)
|
$
|
50.29
|
|
$
|
-
|
Year ended February 28, 2017
(1)
|
$
|
40.00
|
|
$
|
1.59
|
Year ended February 29, 2016
(1)
|
$
|
47.45
|
|
$
|
2.51
|
(1)
Average prices were based on 12-month unweighted arithmetic average of the first-day-of-the-month prices for the period from March through February during each respective fiscal year.
Future production and development costs, which include dismantlement and restoration expense, are computed by estimating the expenditures to be incurred in developing and producing the Companys proved crude oil and natural gas reserves at the end of the year, based on year-end costs, and assuming continuation of existing economic conditions.
Sources of Changes in Discounted Future Net Cash Flows
Principal changes in the aggregate standardized measure of discounted future net cash flows attributable to the Companys proved crude oil and natural gas reserves, as required by ASC 932, at fiscal year-end are set forth in the table below.
|
|
|
|
| |
|
12 Months Ended
|
|
February 28, 2018
|
|
February 28, 2017
|
Standardized measure of discounted future net cash flows at the beginning of the year
|
$
|
1,722,340
|
|
$
|
3,972,930
|
Extensions, discoveries and improved recovery, less related costs
|
|
47,100
|
|
|
-
|
Revisions of previous quantity estimates
|
|
267,955
|
|
|
(88,875)
|
Sales of minerals in place
|
|
-
|
|
|
(1,948,968)
|
Net changes in prices and production costs
|
|
1,355,682
|
|
|
(1,289,038)
|
Accretion of discount
|
|
258,351
|
|
|
397,293
|
Sales of oil produced, net of production costs
|
|
(457,686)
|
|
|
(541,107)
|
Development costs incurred during the period
|
|
-
|
|
|
4,654
|
Changes in future development costs
|
|
(265,044)
|
|
|
262,156
|
Changes in timing of future production
|
|
319,455
|
|
|
953,295
|
Net changes in income taxes
|
|
-
|
|
|
-
|
Standardized measure of discounted future net cash flows at the end of the year
|
$
|
3,248,153
|
|
$
|
1,722,340
|
74