UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~November 30, 2021~~May 31, 2022

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

For the transition period from ______________ to _______________

Commission File Number: 000-50107

DAYBREAK OIL AND GAS, INC.

(Exact name of registrant as specified in its charter)

Washington		91-0626366
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

~~1101 N. Argonne Road~~1414 S. Friendswood Dr., Suite ~~A 211~~212, ~~Spokane Valley~~Friendswood, WATX		~~99212~~77546
(Address of principal executive offices)		(Zip code)

~~(509)~~(281) ~~232-7674~~996-4176

(Registrant’s telephone number, including area code)

1101 N. Argonne Rd. Suite A 211, Spokane Valley, WA

99212

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:~~NONE~~

Title of each class

Trading Symbol(s)

Name of each exchange

on which registered

n/a

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated ~~filer”,~~filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated ~~Filer~~filer ¨		Accelerated ~~Filer~~filer ¨

Non-accelerated ~~Filer~~filer ☑ þ		Smaller reporting company ☑

		Emerging growth company ¨

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

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

At ~~January 14,~~July 25, 2022 the registrant had ~~60,491,122~~384,735,402 outstanding shares of $0.001 par value common stock.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

~~PART I - FINANCIAL INFORMATION~~

ITEM 1.	FINANCIAL STATEMENTS	3
	Consolidated Balance Sheets at ~~November 30, 2021~~May 31, 2022 and February 28, ~~2021~~2022 (Unaudited)	3
	Consolidated Statements of Operations for the Three ~~and Nine~~ Months Ended ~~November 30,~~May 31, 2022 and May 31, 2021 ~~and November 30, 2020~~ (Unaudited)	4
	Consolidated Statements of Changes in Stockholders’ Deficit for the Three ~~and Nine~~ Months Ended ~~November 30,~~May 31, 2022 and 2021 ~~and November 30, 2020~~ (Unaudited)	5
	Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~November 30,~~May 31, 2022 and May 31, 2021 ~~and November 30, 2020~~ (Unaudited)	6
	NOTES TO UNAUDITED FINANCIAL STATEMENTS	7

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	1816
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	3227
ITEM 4.	CONTROLS AND PROCEDURES	3227

~~PART II - OTHER INFORMATION~~

PART II - OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS	3328
ITEM 1A.	RISK FACTORS	3328
ITEM 6.	EXHIBITS	3429
Signatures		3530

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DAYBREAK OIL AND GAS, INC.

Consolidated Balance Sheets – Unaudited

	As of November 30, 2021			As of February 28, 2021			As of May 31, 2022			As of February 28, 2022
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	17,392		$	33,528		$	1,159,469		$	139,573
Accounts receivable:
Crude oil sales		111,782			108,993			88,551			117,727
Joint interest participants		77,245			79,411			80,223			85,339
Prepaid expenses and other current assets		96,493			61,307			52,328			74,012
Total current assets		302,912			283,239			1,380,571			416,651

LONG-TERM ASSETS:
Crude oil properties, successful efforts method, net
Proved properties		523,406			556,456			5,221,341			536,032
Unproved properties		55,978			55,978
Prepaid drilling costs		16,452			16,452			16,452			16,452
Vehicles and equipment, net		7,357			—
Property, plant and equipment, net								5,781			6,569
Goodwill crude oil and natural gas properties								2,168,600			—
Total long-term assets		603,193			628,886			7,412,174			559,053
Total assets	$	906,105		$	912,125		$	8,792,745		$	975,704

LIABILITIES AND STOCKHOLDERS’ DEFICIT
LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Accounts payable and other accrued liabilities	$	1,857,833		$	1,710,922		$	2,160,655		$	1,649,119
Accounts payable – related parties		981,634			988,966			49,680			49,228
Accrued interest		161,138			123,659			174,480			176,229
Note payable		120,000			120,000
Note payable – related party, current, net of unamortized discount of $730 and $728, respectively		8,042			7,870
Note Payable								120,000			120,000
Note payable - related party, current, net of unamortized discount of $729 and $729, respectively								8,159			8,100
Convertible Note payable, related party								—			200,000
12% Notes payable		315,000			315,000			290,000			315,000
12% Notes payable – related party		250,000			250,000
Production revenue payable - current, net of unamortized discount		85,759			111,753
Production revenue payable, current, net of unamortized discount								210,215			78,877
Line of credit		816,583			840,904			—			808,182
Total current liabilities		4,595,989			4,469,074			3,013,189			3,404,735

LONG-TERM LIABILITIES:
Note payable – related party, net of current portion and net of unamortized discount of $9,532 and $10,080, respectively		129,407			135,460
LONG TERM LIABILITIES:
Note payable - related party, net of current portion and net unamortized discount of $9,168 and $9,350, respectively								125,298			127,360
Production revenue payable, net of unamortized discount and current portion		1,504,671			1,391,669			621,461			738,248
Asset retirement obligation		36,700			33,062			54,299			52,565
Total long-term liabilities		1,670,778			1,560,191			801,058			918,173
Total liabilities		6,266,767			6,029,265			3,814,247			4,322,908

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ DEFICIT:
Preferred stock – 10,000,000 shares authorized, $0.001 par value;		—			—
Series A Convertible Preferred stock – 2,400,000 shares authorized, $0.001 par value, 6% cumulative dividends; 709,568 shares issued and outstanding, respectively		710			710
Common stock – 200,000,000 shares authorized; $0.001 par value, 60,491,122 shares issued and outstanding, respectively		60,491			60,491
Common stock – 500,000,000 shares authorized; $0.001 par value, 384,735,402 and 67,802,273 shares issued and outstanding, respectively								384,735			67,802
Additional paid-in capital		24,254,978			24,250,556			35,297,706			26,115,450
Accumulated deficit		(29,676,841	)		(29,428,897	)		(30,703,943	)		(29,530,456	)
Total stockholders’ deficit		(5,360,662	)		(5,117,140	)		4,978,498			(3,347,204	)
Total liabilities and stockholders’ deficit	$	906,105		$	912,125
Total liabilities and stockholders’ equity							$	8,792,745		$	975,704

~~Series A Convertible Preferred Stock~~

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

DAYBREAK OIL AND GAS, INC.

Consolidated Statements of Operations – Unaudited


	For the Three Months Ended November 30,						For the Nine Months Ended November 30,
	2021			2020			2021			2020			Three Months Ended May 31, 2022			Three Months Ended May 31, 2021
REVENUE:
Crude oil sales	$	188,792		$	96,322		$	505,410		$	274,085		$	247,615		$	147,300

OPERATING EXPENSES:
Production		65,788			53,581			165,357			136,218			60,717			46,726
Exploration and drilling (G&G)		34			73			235			73
Depreciation, depletion, and amortization (DD&A)		15,196			13,491			44,004			42,318
Depreciation, depletion and amortization														11,776			13,948
Transaction expenses														1,025,541			—
General and administrative		161,164			124,792			447,952			427,345			252,138			167,625
Total operating expenses		242,182			191,937			657,548			605,954			1,350,172			228,299
OPERATING LOSS		(53,390	)		(95,615	)		(152,138	)		(331,869	)		(1,102,557	)		(80,999	)

OTHER INCOME (EXPENSE):
OTHER EXPENSE:
Gain on asset disposal		—			—			9,614			—			—			9,614
Gain on SBA PPP loan forgiveness		72,800			—			72,800			—
Interest expense, net		(62,623	)		(56,302	)		(178,220	)		(182,246	)		(70,930	)		(61,266	)

NET LOSS		(43,213	)		(151,917	)		(247,944	)		(514,115	)		(1,173,487	)		(132,651	)

Cumulative convertible preferred stock dividend requirement		(31,841	)		(31,841	)		(96,223	)		(96,223	)		—			(32,191	)

NET LOSS AVAILABLE TO COMMON SHAREHOLDERS	$	(75,054	)	$	(183,758	)	$	(344,167	)	$	(610,338	)	$	(1,173,487	)	$	(164,842	)

NET LOSS PER COMMON SHARE, basic and diluted	$	(0.001	)	$	(0.003	)	$	(0.006	)	$	(0.011	)
NET LOSS PER COMMON SHARE – Basic and diluted													$	(0.01	)	$	(0.003	)

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic and diluted		60,491,122			60,491,122			60,491,122			57,081,331
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – Basic and diluted														94,229,815			60,491,122

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

DAYBREAK OIL AND GAS, INC.

Consolidated Statements of Changes in Stockholders' Deficit ~~- Unaudited~~

For the Three Months Ended May 31, 2022 and ~~Nine Months Ended November 30,~~ 2021 ~~and 2020~~

Series A Convertible Additional
Preferred Stock Common Stock Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
BALANCE, FEBRUARY 28, 2021 709,568 $ 710 60,491,122 $ 60,491 $ 24,250,556 $ (29,428,897 ) $ (5,117,140 )

Recognition of warrants issued for:
Investor relations services —   —   —   —   1,474 —   1,474

Net loss —   —   —   —   —   (132,651 ) (132,651 )

BALANCE, MAY 31, 2021 709,568 710 60,491,122 60,491 24,252,030 (29,561,548 ) (5,248,317 )

Recognition of warrants issued for:
Investor relations services —   —   —   —   1,474 —   1,474

Net loss —   —   —   —   —   (72,080 ) (72,080 )

BALANCE, AUGUST 31, 2021 709,568 $ 710 60,491,122 $ 60,491 $ 24,253,504 $ (29,633,628 ) $ (5,318,923 )

Recognition of warrants issued for:
Investor relations services —   —   —   —   1,474 —   1,474

Net loss —   —   —   —   —   (43,213 ) (43,213 )

BALANCE, NOVEMBER 30, 2021 709,568 $ 710 60,491,122 $ 60,491 $ 24,254,978 $ (29,676,841 ) $ (5,360,662 )

Series A Convertible Additional
Preferred Stock Common Stock Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total

BALANCE, FEBRUARY 28, 2022 —   $ —   67,802,273 $ 67,802 $ 26,115,450 $ (29,530,456 ) $ (3,347,204 )

Issuance of common stock for:
Conversion of 12% Note principal and interest —   —   78,934 79 35,441 —   35,520
Conversion of Convertible Note —   —   27,764,706 27,765 208,235 —   236,000
Acquisition of oil and gas property —   —   160,964,489 160,964 6,438,580 —   6,559,544
Sale of common stock —   —   128,125,000 128,125 2,500,000 —   2,628,125

Net loss —   —   —   —   —   (1,173,487 ) (1,173,487 )

BALANCE, MAY 31, 2022 —   $ —   384,735,402 $ 384,735 $ 35,297,706 $ (30,703,943 ) $ 4,978,498

Series A Convertible Additional
Preferred Stock Common Stock Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
BALANCE, FEBRUARY 29, 2020 709,568 $ 710 53,532,364 $ 53,532 $ 24,223,783 $ (28,916,632 ) $ (4,638,607 )

Recognition of warrants issued for:
Investor relations services —   —   —   —   1,474 —   1,474

Net loss —   —   —   —   —   (196,997 ) (196,997 )

BALANCE, MAY 31, 2020 709,568 710 53,532,364 53,532 24,225,257 (29,113,629 ) (4,834,130 )

Issuance of common stock for:
Conversion of related party note payable —   —   6,958,758 6,959 20,876 —   27,835

Recognition of warrants issued for:
Investor relations services —   —   —   —   1,474 —   1,474

Net loss —   —   —   —   —   (165,201 ) (165,201 )

BALANCE, AUGUST 31, 2020 709,568 $ 710 60,491,122 $ 60,491 $ 24,247,607 $ (29,278,830 ) $ (4,970,022 )

Recognition of warrants issued for:
Investor relations services —   —   —   —   1,474 —   1,474

Net loss —   —   —   —   —   (151,917 ) (151,917 )

BALANCE, NOVEMBER 30, 2020 709,568 $ 710 60,491,122 $ 60,491 $ 24,249,081 $ (29,430,747 ) $ (5,120,465 )
~~Common Stock~~
~~Additional Paid-In Capital~~
~~Accumulated Deficit~~

Series A Convertible Additional
Preferred Stock Common Stock Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total

BALANCE, FEBRUARY 28, 2021 709,568 $ 710 60,491,122 $ 60,491 $ 24,250,556 $ (29,428,897 ) $ (5,117,140 )

Issuance of warrants issued for:
Investor relations services —   —   —   —   1,474 —   1,474

Net loss —   —   —   —   —   (132,651 ) (132,651 )

BALANCE, MAY 31, 2021 709,568 $ 710 60,491,122 $ 60,491 $ 24,252,030 $ (29,561,548 ) $ (5,248,317 )

The accompanying notes are an integral part of these unaudited financial statements
Common Stock
Additional Paid-In Capital
Accumulated Deficit

5

DAYBREAK OIL AND GAS, INC.
Consolidated Statements of Cash Flows – Unaudited

Nine Months Ended Three Months Ended
November 30, 2021 November 30, 2020 May 31, 2022 May 31, 2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (247,944 ) $ (514,115 ) $ (1,173,487 ) $ (132,651 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation, depletion, amortization and impairment expense 44,004 42,318
Adjustments to reconcile net cash used in operating activities:
Depreciation, depletion and ARO expense 11,776 13,948
Amortization of debt discount 87,554 88,786 14,733 30,707
Operating lease expense in conjunction with right of use asset —   5,857
Financing fee expense 512,500 —
Warrant issued for investor relations services 4,422 4,422 —   1,474
Gain on forgiveness of PPP 2^nd Draw loan (72,800 ) —
Changes in assets and liabilities:
Accounts receivable – crude oil sales (2,789 ) (81 ) 29,176 14,303
Accounts receivable – joint interest participants 2,166 (10,817 )
Accounts receivable - joint interest participants 5,116 28,382
Prepaid expenses and other current assets 45,968 38,067 21,684 27,490
Accounts payable and other accrued liabilities 120,577 226,689 447,163 26,229
Accounts payable – related parties (7,332 ) 48,592
Operating lease liability in conjunction with right of use asset —   (5,857 )
Accounts payable - related parties 452 34,038
Accrued interest 58,158 59,120 (1,749 ) 19,419
Net cash provided by (used in) operating activities 31,984 (17,019 ) (132,636 ) 63,339

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to crude oil properties (5,213 ) —
Purchase of fixed assets (9,460 ) —
Purchase of fixed assets (truck) — (8,500 )
Additions to oil and gas properties — (2,084 )
Net cash used in investing activities (14,673 ) —   — (10,584 )

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from paycheck protection program (PPP) loan 72,800 74,355 — 72,800
Insurance financing repayments (24,601 ) (29,332 )
Proceeds from sale of common stock 1,987,500 —
Payments to note payable – related party (2,185 ) (2,128 )
Payments to line of credit (45,000 ) (45,000 ) (808,182 ) (15,000 )
Insurance financing repayments (54,820 ) (44,662 )
Payments on note payable – related party (6,427 ) —
Net cash used in financing activities (33,447 ) (15,307 )
Net cash provided by financing activities 1,152,532 26,440

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (16,136 ) (32,326 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 33,528 94,043
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,392 $ 61,717
NET INCREASE IN CASH 1,019,896 79,195
CASH AT BEGINNING OF PERIOD 139,573 33,528
CASH AT END OF PERIOD $ 1,159,469 $ 112,723

CASH PAID FOR:
Interest $ 10,145 $ 19,261 $ 61,956 $ 4,169
Income taxes $ —   $ —   $ —   $ —

SUPPLEMENTAL CASH FLOW INFORMATION:
Unpaid additions to crude oil properties $ —   $ 10,826
Non-cash increase to line of credit due to monthly interest $ 20,679 $ 21,744 $ —   $ 6,892
Financing of insurance premiums $ 81,154 $ 65,088
Common stock issued for settlement of related party note payable $ — $ 27,835
Common stock issued for conversion of 12% Subordinated Note $ 35,520 $ —
Common stock issued for conversion of convertible Note $ 236,000 $ —
Common stock issued for acquisition of crude oil and natural gas property $ 4,167,325 $ —
Common stock issued for financing fees $ 125,125 $ —
Unpaid additions to O&G properties $ 263,619 $ —
Goodwill from acquisition of O&G properties $ 2,432,219 $ —

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

6

DAYBREAK OIL AND GAS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS

NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION:

Organization

Originally incorporated as Daybreak Uranium, Inc., (“Daybreak Uranium”) on March 11, 1955, under the laws of the State of Washington, Daybreak Uranium was organized to explore for, acquire, and develop mineral properties in the Western United States. In August 1955, the assets of Morning Sun Uranium, Inc. were acquired by Daybreak Uranium. In May 1964, Daybreak Uranium changed its name to Daybreak Mines, Inc. During 2005, management of the Company decided to enter the crude oil and natural gas exploration, development and production industry. On October 25, 2005, the Company shareholders approved a name change from Daybreak Mines, Inc. to Daybreak Oil and Gas, Inc. (referred to herein as “Daybreak” or the “Company”) to better reflect the business of the Company.

All of the Company’s crude oil production is sold under contracts which are market-sensitive. Accordingly, the Company’s financial condition, results of operations, and capital resources are highly dependent upon prevailing market prices of, and demand for, crude oil. 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 may include the level of global demand for petroleum (hydrocarbon) 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; overall economic conditions, both foreign and domestic; crude oil price disputes between OPEC and non-OPEC members; and national and international pandemics like the coronavirus outbreak.

Basis of Presentation

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

In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements have been included and such adjustments are of a normal recurring nature. Operating results for the ~~nine~~three months ended ~~November 30, 2021~~May 31, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending February 28, ~~2022.~~2023.

These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, ~~2021.~~2022.

Use of Estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions. These estimates and assumptions may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results could differ materially from those estimates. The accounting policies most affected by management’s estimates and assumptions are as follows:
· The reliance on estimates of proved reserves to compute the provision for depreciation, depletion and amortization ~~(“DD&A”)~~ and to determine the amount of any impairment of proved properties;
· The valuation of unproved acreage and proved crude oil properties to determine the amount of any impairment of crude oil properties;
· Judgment regarding the productive status of in-progress exploratory wells to determine the amount of any provision for abandonment; ~~and~~
· Estimates regarding abandonment obligations; and
· Estimates regarding projected cash flows used in determining the production revenue payable discount.

7

Earnings per Share

The Company follows ASC Topic 260, Earnings per Share, to account for the earnings per share. Basic earnings per common share (“EPS”) calculations are determined by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share calculations are determined by dividing net income (loss) by the weighted average number of common shares and dilutive common share equivalents outstanding. During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation.
NOTE 2 — GOING CONCERN:

Financial Condition

The Company’s financial statements for the ~~nine~~three months ended ~~November 30, 2021~~May 31, 2022 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company has incurred net operating losses since entering the crude oil exploration industry and as of ~~November 30, 2021~~May 31, 2022 has an accumulated deficit of $~~29.7~~30.7 million and a working capital deficit of $~~4.29~~1.6 million, which raises substantial doubt about the Company’s ability to continue as a going concern.

Management Plans to Continue as a Going Concern
Revenue
The Company continues to implement plans to enhance its ability to continue as a going concern. Daybreak currently has a net revenue interest (“NRI”) in 20 producing crude oil wells in its East Slopes Project located in Kern County, California (the “East Slopes Project”). The revenue from these wells has created a steady and reliable source of income for the Company. The Company’s average working interest ~~(“WI”)~~ in these wells is 36.6% and the average net revenue interest (“NRI”) is 28.4% for these same wells.

In December 2019, the 2019 novel coronavirus (“COVID-19") surfaced in Wuhan, China. The World Health Organization declared a global emergency on January 30, 2020, with respect to the outbreak and most countries throughout the world initiated travel restrictions to and from other countries. With the appearance of the Omicron variant travel restrictions are also in place. This widespread health crisis and the governmental restrictions associated with it, have adversely affected demand for crude oil, depressed crude oil prices, and affected our ability to access capital. These factors, in turn, have had a negative impact on our operations, and financial condition as evidenced by the unprecedented decline in crude oil prices and our revenues during this same time period.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act commonly referred to as the CARES Act became law. One component of the CARES Act was the paycheck protection program (“PPP”) which provides small business with the resources needed to maintain their payroll and cover applicable overhead. The PPP is implemented by the Small Business Administration (“SBA”) with support from the Department of the Treasury. The Company applied for, and was accepted to participate in this program. On May ~~11, 2020,~~2022, the Company ~~received funding for approximately $74,355~~. In February 2021, the Company applied for full loan forgiveness and later that month was notified by our lender that the SBA had forgiven our original loan in full. On March 15, 2021, the Company received $~~72,800~~ ~~in funding through the SBA second draw paycheck protection program.~~ ~~Second Draw PPP loans can be used to help fund payroll costs, including benefits. Funds can also be used to pay for mortgage interest, rent and utilities over a 24 week period.~~ ~~The Company applied for full loan forgiveness on this PPP second draw loan and on October 6, 2021, and the SBA notified our lender that the loan was forgiven and repaid the loan in full.~~
~~On October 20, 2021,~~ ~~we entered into an Equity Exchange Agreement (the “Exchange Agreement”) by and between Daybreak,~~acquired Reabold California, LLC ~~a California limited liability company~~ (“Reabold”), from a third party. This property includes producing wells in both the Monterey and ~~Gaelic Resources Ltd.,~~Contra Costa counties of California. This project includes four producing wells. We have a ~~private company incorporated~~50% working interest with a 40% net revenue interest in ~~the Isle of Man and the 100% owner~~this project.
In conjunction with our acquisition of Reabold, ~~(“Gaelic”), pursuant~~the Company was able to ~~which~~secure a capital raise of $2,500,000 through the parties propose for (i) Daybreak to acquire 100% ownership of Reabold, in exchange for (ii) Daybreak issuing 160,964,489 shares of its common stock, par value $0.0001 (“Common Stock”) to Gaelic (the “Exchange Shares”), which will result in Reabold becoming a wholly-owned subsidiary of Daybreak named “Daybreak, LLC” and Gaelic becoming the ownerissuances of the ~~Exchange Shares and a major shareholder of Daybreak (the foregoing transaction and the transactions contemplated thereby, the “Equity Exchange”).~~
In connection with the Equity Exchange, and as conditions to closing the Equity Exchange, among other things we also propose to enter into agreements to sell a minimum of $2,500,000 of shares of Daybreak’s Common Stock, and a minimum of 125,000,000 shares of Common Stock, to one or more investors in a private placement expected to close promptly following the closing of the Equity Exchange (the “Capital Raise”), with the proceeds of the Capital Raise to be used to repay in full the Company’s ~~line of credit with UBS Bank and for drilling and exploration activities and other working capital purposes.~~
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As of November 30, 2021, all of the conditions for the closing of the Exchange Agreement have not yet been met. The Company is continuing to work towards satisfying all of the Exchange Agreement conditions including having certain conditions of the Exchange Agreement approved by the Company’s shareholders.common stock.

The Company anticipates its revenue will continue to increase as the Company participates in the drilling of more wells in the East Slopes ~~Project~~and Reabold projects in ~~California~~California. Daybreak’s sources of funds in the past have included the debt or equity markets and the sale of assets. 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 ~~our drilling project begins in Michigan.~~a going concern.

Daybreak’s financial statements as of ~~November 30, 2021~~May 31, 2022 do not include any adjustments that might result from the inability to implement or execute ~~the Company’s~~Daybreak’s plans to improve ~~its~~our ability to continue as a going concern.

NOTE 3 — CONCENTRATION OF CREDIT RISK:

Substantially all of the Company’s trade accounts receivable consists of receivables from the sale of crude oil and natural gas production from operations by the Company and receivables from the Company’s working interest partners in crude oil projects in ~~which~~ the ~~Company acts as~~East Slopes project where we are the Operator of the project. This concentration of customers and joint interest owners may impact the Company’s overall credit risk, as these entities could be affected by similar changes in economic conditions including lower crude oil prices as well as other related factors. Trade accounts receivable are generally not collateralized.
Customer Concentration
~~Accounts Receivable~~
At the Company’s East Slopes ~~project~~projects in California, there is only one buyer for the purchase of crude oil production. ~~The Company has no natural gas production in California.~~ At ~~November 30, 2021~~May 31, 2022 and February 28, ~~2021~~2022 this ~~one~~single customer represented 100.0% of crude oil and natural gas sales ~~receivable.~~receivable, respectively. If ~~this buyer is~~these buyers are unable to resell ~~its~~their products or if they lose a significant sales contract, the Company may incur difficulties in selling its crude oil and natural gas production.

Crude oil sales receivables balances of $~~111,782~~88,551 and $~~108,993~~117,727 at ~~November 30, 2021~~May 31, 2022 and February 28, ~~2021,~~2022, were from one customer, Plains Marketing; and represent crude oil sales that occurred in ~~November~~May and February 2021, respectively.

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Joint interest participant receivables balances of $~~77,245~~80,223 and $~~79,411~~85,339 at ~~November 30, 2021~~May 31, 2022 and February 28, ~~2021,~~2022, respectively, represent amounts due from working interest partners in ~~California, where~~ the ~~Company is the Operator.~~East Slopes project. There were no allowances for doubtful accounts for the Company’s trade accounts receivable at ~~November 30, 2021~~May 31, 2022 and February 28, ~~2021,~~2022, as the joint interest owners have a history of paying their obligations.

NOTE 4 — CRUDE OIL PROPERTIES:

Crude oil property balances of the East Slopes property at ~~November 30, 2021~~May 31, 2022 and February 28, ~~2021~~2022 are set forth in the table below.
Crude Oil Properties - ~~Capitalized Cost Relating to~~Schedule of Crude Oil Activities

November 30, 2021 February 28, 2021 May 31, 2022 February 28, 2022
Proved leasehold costs $ 115,119 $ 115,119 $ 115,119 $ 115,119
Costs of wells and development 2,297,137 2,291,924 2,309,628 2,309,628
Capitalized exploratory well costs 1,341,494 1,341,494 1,341,494 1,341,494
Cost of proved crude oil properties 3,753,750 3,748,537 3,766,241 3,766,241
Accumulated depletion, depreciation, amortization and impairment (3,230,344 ) (3,192,081 ) (3,239,463 ) (3,230,209 )
Proved crude oil properties, net $ 523,406 $ 556,456
Michigan unproved crude oil properties 55,978 55,978
Total proved crude oil properties, net $ 526,778 $ 536,032
Unproved leasehold costs 0   0
Total proved and unproved crude oil properties, net $ 579,384 $ 612,434 $ 0   $ 536,032
On May 25, 2022, the Company finalized the acquisition of Reabold California, LLC (“Reabold”). This property includes producing wells in both the Monterey and Contra Costa counties of California. This project includes four producing wells and four wells that have been temporarily shut-in. The Company has a 50% working interest with a 40% net revenue interest in this project. The estimated allocation of the purchase price for crude oil and natural gas properties from Reabold is shown below:
May 31, 2022 February 28, 2022
Proved leasehold costs $ 549,735 $ 0
Costs of wells and development 4,144,829 0
Cost of proved crude oil properties 4,694,563 0
Accumulated depletion, depreciation, amortization and impairment —   —
Total proved crude oil properties, net $ 4,694,563 $ 0
Unproved leasehold costs 0   0
Total proved and unproved crude oil properties, net $ 4,694,563 $ 0

NOTE 5 – ACQUISITION:
On May 25, 2022, the Company finalized the acquisition of Reabold from a third party for 160,964,489 shares of the Company’s common stock valued at $6,599,544. The transaction balance of $6,863,163 reflects the common stock valuation of the acquisition transaction and $263,619 in reimbursements to the seller as a purchase price adjustment.

Crude oil and natural gas property and equipment $ 4,694,563
Goodwill 2,168,600
Accounts payable (263,619 )
Purchase price, net of closing adjustments $ 6,599,544
NOTE 6 — ACCOUNTS PAYABLE:

On March 1, 2009, the Company became the operator for its 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 ~~well~~wells program. The Company subsequently sold the same 25% working interest on June 11, ~~2009.~~2009. Of the original $1.5 million liability, approximately $244,849 remains unpaid and is included in ~~both~~ the ~~November 30, 2021~~May 31, 2022 and February 28, ~~2021~~2022, accounts payable ~~balances.~~balance. Payment of this liability has been delayed until the Company’s cash flow situation improves. On October 17, 2018, a working interest partner in California filed a UCC financing statement in regards to payables owed to the partner by the Company. At ~~November 30, 2021~~May 31, 2022 and February 28, ~~2021,~~2022, the balance owed this working interest partner was $~~77,889~~73,661 and $~~88,905~~76,268, respectively, and is included in the approximate $~~1.86~~2.2 million and $~~1.71~~1.6 million accounts payable ~~balance~~balances at ~~November 30, 2021~~May 31, 2022 and February 28, ~~2021,~~2022, respectively.

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NOTE 67 — ACCOUNTS PAYABLE- RELATED PARTIES:

The ~~November 30, 2021~~May 31, 2022 and February 28, ~~2021~~2022 accounts payable – related ~~parties~~party balances of approximately $~~0.98~~49,680 ~~million~~ and $~~0.99~~49,228 ~~million~~ respectively, were comprised primarily of ~~deferred salaries of one of the Company’s Executive Officers and certain employees; directors’ fees;~~ expense ~~reimbursements; and deferred interest payments on a 12% Subordinated Notes owed~~reimbursements to ~~the Company’s Chairman, President and Chief Executive Officer. Payment of any other deferred items has been delayed until the Company’s cash flow situation improves.~~employees.

In California at the East Slopes Project, two of the vendors that the Company uses for services are partially owned by a related party, the Company’s Chief Operating Officer. The Company’s Chief Operating Officer is a 50% owner in both Great Earth Power and ABPlus Net Holdings. Great Earth Power began providing a portion of the solar power electrical service for production operations in July 2020. ABPlus Net Holdings began providing portable tank rentals to the Company as a part of its water treatment and disposal operations in September 2020. The services provided by Great Earth Power and ABPlus Net Holdings are competitive with other vendors and save the Company significant expense. For the ~~nine~~three months ended ~~November 30,~~May 31, 2022 and 2021, ~~and 2020,~~ Great Earth Power was paid $~~20,038~~4,813 and $~~1,925~~6,300, respectively. For the ~~nine~~three months ended ~~November 30,~~May 31, 2022 and 2021, ~~and 2020,~~ ABPlus Net holdings was paid $~~10,560~~2,880 and $-$03,840-, respectively.

NOTE 78 — SHORT-TERM AND LONG-TERM ~~BORROWINGS~~DEBT:

Note Payable

In December 2018, the Company was able to settle an outstanding balance owed to one of its third-party vendors. This settlement resulted in a $120,000 note payable being issued to the vendor. Additionally, the Company agreed to issue 2,000,000 shares of the Company’s common stock as a part of the settlement agreement. Based on the closing price of the Company’s common stock on the date of the settlement agreement, the value of the common stock transaction was determined to be $6,000. The common stock shares were issued during the twelve months ended February 29, 2020. The note has a maturity date of January 1, 2022 and bears an interest rate of 10% rate per annum. Monthly interest is accrued and payable on January 1^st of each anniversary date until maturity of the note. At ~~November 30, 2021,~~May 31, 2022, the principal and accrued interest had not been paid and was outstanding. The accrued interest on the Note was $~~35,000~~41,000 and $~~26,000~~38,000 at ~~November 30, 2021~~May 31, 2022 and February 28, ~~2021,~~2022, respectively.

Note Payable – Related Party
Secured Debt
Chief Executive Officer
On December 22, 2020, the Company entered into a Secured Promissory Note (the “Note”), as borrower, with James Forrest Westmoreland and Angela Marie Westmoreland, Co-Trustees of the James and Angela Westmoreland Revocable Trust, or its assigns (the “Noteholder”), as the lender. James F. Westmoreland is the Company’s Chairman, President and Chief Executive Officer. Pursuant to the Note, the Noteholder loaned the Company an aggregate principal amount of $155,548. After the deduction of loan fees of $10,929the net proceeds from the loan were $144,619. The loan fees are being amortized as original issue discount (OID) over the term of the loan. The interest rate of the loan is 2.25%. The Note requires monthly payments on the Note balance until repaid in full. The maturity date of the Note is December 21, 2035. For the ~~nine~~three months ended ~~November 30, 2021,~~May 31, 2022, the Company made principal payments of $~~6,427~~ 2,128and amortized debt discount of $~~546~~182. The obligations under the Note are secured by a lien on and security interest in the Company’s oil and gas assets located in Kern County, California, as described in a Deed of Trust entered into by the Company in favor of the Noteholder to secure the obligations under the Note. Such lien shall be a first priority lien, subject only to a pre-existing lien filed by a working interest partner of the Company.

The Company may prepay the Note at any time. Upon the occurrence of any Event of Default and expiration of any applicable cure period, and at any time thereafter during the continuance of such Event of Default, the Noteholder may at its option, by written notice to the Company: (a) declare the entire principal amount of the Note, together with all accrued interest thereon and all other amounts payable hereunder, immediately due and payable; (b) exercise any of its remedies with respect to the collateral set forth in the Deed of Trust; and/or (c) exercise any or all of its other rights, powers or remedies under applicable law.

Current portion of note payable – related party balances at ~~November 30, 2021~~May 31, 2022 and February 28, ~~2021~~2022 are set forth in the table below:
Short-Term and Long-Term Borrowings - Schedule of Related Party Notes Payable

November 30, 2021 February 28, 2021
Note payable – related party, current portion $ 8,772 $ 8,598
Unamortized debt issuance expenses (730 ) (728 )
Note payable – related party, current portion, net $ 8,042 $ 7,870
~~Note Payable - Related Party, Long-Term Balances~~
~~Note Payable - Related Party, Short-Term Balances~~
May 31, 2022 February 28, 2022
Note payable –related party, current portion $ 8,888 $ 8,829
Unamortized debt issuance expenses (729 ) (729 )
Note payable – related party, current portion, net $ 8,159 $ 8,100

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Note payable – related party long-term balances at ~~November 30, 2021~~May 31, 2022 and February 28, ~~2021~~2022 are set forth in the table below:

November 30, 2021 February 28, 2021 May 31, 2022 February 28, 2022
Note payable – related party, non-current $ 138,939 $ 145,540 $ 134,466 $ 136,710
Unamortized debt issuance expenses (9,532 ) (10,080 ) (9,168 ) (9,350 )
Note payable – related party, non-current, net $ 129,407 $ 135,460
Note payable– related party, non-current, net $ 125,298 $ 127,360

Future estimated payments on the outstanding note payable – related party are set forth in the table below:
Short-Term and Long-Term Borrowings - Schedule of Future Estimated Payments

Twelve month periods ending November 30,
2022 $ 8,771
Twelve month periods ending May 31
2023 9,006 $ 8,887
2024 9,247 9,126
2025 9,495 9,370
2026 9,750 9,622
2027 10,715
Thereafter 101,442 94,797
Total $ 147,711 $ 142,517

Short-term Convertible Note Payable
Convertible Debt
During the twelve months ended February 28, 2022, the Company executed a convertible promissory note with a third party for $200,000. The interest rate was 18% per annum and is payable in kind (PIK) solely by additional shares of the Company’s common stock. Regardless of when the conversion occurred, a full 12 months of interest would be payable upon conversion. On May 5, 2022, the Company received notice of conversion of the promissory note. The face amount of the note and $36,000 in interest were converted at a rate of $0.0085 per share into 27,764,706 share of the Company’s common stock during the three months ended May 31, 2022.
12% Subordinated Notes
Private Placement
~~12%~~ Subordinated ~~Notes~~Debt

The Company’s 12% Subordinated Notes (“the Notes”) issued pursuant to a January 2010 private placement offering to accredited investors, resulted in $595,000 in gross proceeds (of which $250,000 was from a related party) to the Company and accrue interest at 12% per annum, payable semi-annually on January 29th and July 29th. On January 29, 2015, the Company and 12 of the 13 holders of the Notes agreed to extend the maturity date of the Notes for an additional two years to January 29, 2017. Effective January 29, 2017, the maturity date of the Notes and the expiration date of the warrants that were issued in conjunction with the Notes were extended for an additional two years to January 29, 2019.

As a result of the Company restructuring its balance sheet through conversions of related party debt to common stock, the related party 12% Noteholder chose to convert the principal and accrued interest of their Notes to the Company’s common stock. The related party Note for $250,000 and accrued interest of $264,986 were converted to common stock at a rate of approximately $0.45 for every dollar of principal and interest resulting in 1,144,415 shares of common stock being issued.
During the three months ended May 31, 2022, one 12% Note holder chose to convert the principal balance and accrued interest in to the Company’s common stock. The $25,000 Note and accrued interest of $10,520 were converted at a rate of approximately $0.45 for every dollar of principal and interest resulting in 78,934 shares of common stock being issued.
The Company has informed the remaining Note holders that the payment of principal and final interest will be late and is subject to ~~future~~ financing being completed. The Notes principal of $~~565,000~~ 290,000~~was payable in full at the amended maturity date of the Notes, January 29, 2019, and~~ has not been paid. The terms of the Notes, state that should the Board of Directors decide that the payment of the principal and any unpaid interest would impair the financial condition or operations of the Company, the Company may then elect a mandatory conversion of the unpaid principal and interest into the Company’s common stock at a conversion rate equal to 75% of the average closing price of the Company’s common stock over the 20 consecutive trading days preceding December 31, 2018. ~~As of November 30, 2021, no conversion of the unpaid principal and interest into the Company’s common stock has occurred.~~ The accrued interest on the 12% Notes at ~~November 30, 2021~~May 31, 2022 and February 28, ~~2021~~2022 was $~~391,124~~ 133,480and $~~340,042~~135,229, respectively.

12% Note balances at ~~November 30, 2021~~May 31, 2022 and February 28, ~~2021~~2022 are set forth in the table below:
Short-Term and Long-Term Borrowings - Schedule of Subordinated Notes
12% Subordinated Notes
November 30, 2021 February 28, 2021
12% Subordinated Notes $ 315,000 $ 315,000
12% Subordinated Notes – related party 250,000 250,000
Total 12% Subordinated Note balance $ 565,000 $ 565,000
May 31, 2022 February 28, 2022
12% Subordinated notes – third party $ 290,000 $ 315,000
12% Subordinated notes – related party 0 0
12% Subordinated notes balance $ 290,000 $ 315,000

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Line of Credit
Line of Credit
The ~~accrued interest owed~~Company had an existing $890,000 line of credit for working capital purposes with UBS Bank USA (“UBS”), established pursuant to a Credit Line Agreement dated October 24, 2011 that was secured by the personal guarantee of its Chairman, President and Chief Executive Officer. On May 26, 2022, the Company paid off the outstanding balance of $809,930 on the ~~12% Subordinated Note to~~line of credit. The payoff of the ~~related party is presented on~~line of credit was previously approved under terms of the Equity Exchange Agreement in which the Company acquired the Reabold property in California. The payoff was a part of the use of proceeds from the Company’s ~~Balance Sheets at February 28, 2021 under the caption~~ ~~Accounts payable – related party~~ ~~rather than under the caption~~ ~~Accrued interest~~.sale of common stock to a third party.

Production Revenue Payable

Beginning in December 2018, the Company conducted a fundraising program to fund the drilling of future wells in California and Michigan and to settle some of its historical debt. The purchaser(s) of a production revenue payment interest received a production revenue payment on future wells to be drilled in California and Michigan in exchange for their purchase.
~~The production revenue payment program balance as of November 30, 2021 was $950,100~~ ~~of which $550,100~~ ~~was owed to a related party - the Company’s Chairman, President and Chief Executive Officer.~~
~~Chief Executive Officer~~
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The production payment interest entitles the purchasers to receive production payments equal to twice their original amount paid, payable from a percentage of the Company’s future net production payments from wells drilled after the date of the purchase and until the Production Payment Target (as described below) is met. The Company shall pay fifty percent of its net production payments from the relevant wells to the purchasers until each purchaser has received two times the purchase price (the “Production Payment Target”). Once the Company pays the purchasers amounts equal to the Production Payment Target, it shall thereafter pay a pro-rated eight percent (8%) of $1.3 million on its net production payments from the relevant wells to each of the purchasers. However, if the total raised is less than the target $1.3 million, then the payment will be a proportionate amount of the eight percent (8%). Additionally, if the Production Payment Target is not met within the first three years, the Company shall pay seventy-five percent of its production payments from the relevant wells to the purchasers until the Production Payment Target is met.

The Company accounted for the amounts received from these sales in accordance with ASC 470-10-25 and 470-10-35 which require amounts recorded as debt to be amortized under the interest method as described in ASC 835-30, Interest Method. Consequently, the program balance of $950,100 has been recognized as a production revenue payable. The Company determined an effective interest rate based on future expected cash flows to be paid to the holders of the production payment interests. This rate represents the discount rate that equates estimated cash flows with the initial proceeds received from the sales and is used to compute the amount of interest to be recognized each period. Estimating the future cash outflows under this agreement requires the Company to make certain estimates and assumptions about future revenues and payments and such estimates are subject to significant variability. Therefore, the estimates are likely to change which may result in future adjustments to the accretion of the interest expense and the amortized cost based carrying value of the related payables.

Accordingly, the Company has estimated the cash flows associated with the production revenue payments and determined a discount of $~~1,430,648~~1,077,642 as of ~~November 30, 2021,~~May 31, 2022, which is being accounted as interest expense over the estimated period over which payments will be made based on expected future revenue streams. For the ~~nine~~three months ended ~~November 30,~~May 31, 2022 and 2021, ~~and 2020,~~ amortization of the debt discount on these payables amounted to $~~87,008~~30,525 and $~~88,786~~31,970, respectively, which has been included in interest expense in the statements of operations.

Production revenue payable balances at ~~November 30, 2021~~May 31, 2022 and February 28, ~~2021~~2022 are set forth in the table below:
Short-Term and Long-Term Borrowings - Schedule of Production Revenue Payable Balances

November 30, 2021 February 28, 2021
Estimated payments of production revenue payable $ 2,380,748 $ 2,000,258
Less: unamortized discount (730,318 ) (496,836 )
1,590,430 1,503,422
Less: current portion (85,759 ) (111,753 )
Net production revenue payable – long-term $ 1,504,671 $ 1,391,669
~~Line of Credit~~
~~Line of Credit~~
~~The Company has an existing $890,000~~ ~~line of credit for working capital purposes with UBS Bank USA (“UBS”), established pursuant to a Credit Line Agreement dated October 24, 2011 that is~~ ~~secured by the personal guarantee of its Chairman, President and Chief Executive Officer. On July 10, 2017, a $700,000~~ ~~portion of the outstanding line of credit balance was~~ ~~converted to a 24 month fixed term annual interest rate of 3.244% with interest payable monthly. On July 10, 2021,~~ ~~the fixed term loan amount of $700,000 was renewed to an annual percentage interest rate of 3.20%~~. The Company has been notified that effective January 1, 2022 a new interest rate benchmark will be used for fixed rate interest calculations. The new rate will use the UBS Bank USA Fixed Funding Rate (UBSFFR), which is based on the Chicago Mercantile Exchange (CME) Term SOFR Rate or US Treasury Rate, plus a liquidity premium depending on the duration of the contract. ~~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. The Company has been notified that effective January 1, 2022 a new interest rate benchmark will be used for interest calculations. The new rate will be the UBS Variable Rate (UBSVR), which is comprised of the 30-day average of the Secured Overnight Financing Rate (SOFR) plus a fixed spread of 0.110%.
During the nine months ended November 30, 2021 and 2020, the Company did not receive any advances on the line of credit. During the nine months ended November 30, 2021 and 2020, the Company made payments to the line of credit of $~~45,000~~ ~~and $45,000, respectively. Interest converted to principal for the nine months ended November 30, 2021 and 2020 was $20,679~~ ~~and $21,744, respectively. At November 30, 2021 and February 28, 2021, the line of credit had an outstanding balance of $816,583~~ ~~and $840,904, respectively.~~
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~~Paycheck Protection Program (PPP) Loans~~
In March 2020, the Coronavirus Aid, Relief, and Economic Security Act commonly referred to as the CARES Act became law. One component of the CARES Act was the paycheck protection program (“PPP”) which provides small business with the resources needed to maintain their payroll and cover applicable overhead. The PPP is implemented by the Small Business Administration (“SBA”) with support from the Department of the Treasury. The Company applied for, and was accepted to participate in this program. On May 11, 2020, the Company received funding for approximately $~~74,355~~. On February 12, 2021, the Company applied for loan forgiveness under the provisions of Section 1106 of the CARES Act. Loan forgiveness was subject to the sole approval of the SBA. On February 23, 2021, the SBA notified our lender that the loan was forgiven and repaid the loan in full.
On March 4, 2021, the Company applied for, and was accepted to participate in the SBA PPP Second Draw program with funding pursuant to the Economic Aid Act that was passed in December, 2020. On March 15, 2021, Daybreak received funding for $~~72,800. The Company applied for full loan forgiveness for the PPP Second Draw PPP loan and on October 6, 2021, the SBA notified our lender that the loan was forgiven and repaid the loan in full.~~
May 31, 2022 February 28, 2022
Estimated payments of production revenue payable $ 991,638 $ 941,259
Less: unamortized discount (112,476 ) (124,134 )
879,162 817,125
Less: current portion (210,215 ) (78,877 )
Net production revenue payable – long term $ 621,461 $ 738,248

Encumbrances

On October 17, 2018, a working interest partner in California filed a UCC financing statement in regards to payable amounts owed to the partner by the Company. ~~As of November 30, 2021, we had no encumbrances on our crude oil project in Michigan.~~

~~NOTE 8 —~~ ~~GAIN ON ASSET DISPOSAL~~:12

~~During the nine months ended November 30, 2021, the Company recognized a gain on asset disposal of $9,614. The gain was the result of an insurance settlement on the theft of a company vehicle that was fully depreciated.~~

NOTE 9 — LEASES:

The Company leases approximately 988 rentable square feet of office space from an unaffiliated third party for our corporate office located in Spokane Valley, Washington. Additionally, we lease approximately 416 and 695 rentable square feet from unaffiliated third parties for our regional operations office in Friendswood, Texas and storage and auxiliary office space in Wallace, Idaho, respectively. The lease in Friendswood is a 12-month lease that expires onin October ~~31,~~ 2022 and as such is considered a short-term lease. The Company has elected to not apply the recognition requirements of ASC 842 to this short-term lease. The Spokane Valley and Wallace leases are currently on a month-to-month basis. The Company’s lease agreements do not contain any residual value guarantees, restrictive covenants or variable lease payments. The Company has not entered into any financing leases.

Rent expense for the ~~nine~~three months ended ~~November 30,~~May 31, 2022 and 2021 ~~and 2020~~ was $~~17,542~~5,947 and $~~17,642~~5,947, respectively.

NOTE 10 — STOCKHOLDERS’ DEFICIT:

Preferred Stock

~~The Company is authorized to issue up to~~ ~~10,000,000~~ ~~shares of preferred stock with a par value of $0.001. The Company’s preferred stock may be entitled to preference over~~With the ~~common stock with respect to the distribution of assets~~filing of the ~~Company~~Company’s Second Amended and Restated Articles of Incorporation with the Washington Secretary of State in ~~the event of liquidation, dissolution, or winding-up of~~May 2022, the Company ~~whether voluntarily or involuntarily, or in the event of~~no longer has 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.
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~~Series A Convertible Preferred Stock~~
shares. The Company has ~~designated~~ ~~2,400,000~~ ~~shares~~only class of ~~the~~ ~~10,000,000~~ ~~preferred shares as Series A Convertible Preferred Stock (“Series A Preferred”), with a $0.001~~ ~~par value. At November 30, 2021~~stock, and ~~February 28, 2021, there were~~ ~~709,568~~ ~~shares issued and outstanding, respectively,~~ that ~~had not been converted into our common stock. As of November 30, 2021, there are~~ 44 ~~accredited investors who have converted~~ ~~690,197~~ ~~Series A Preferred shares into~~ ~~2,070,591~~ ~~shares of Daybreak~~is common stock.

~~The conversions of Series A Preferred that have occurred since the Series A Preferred was first issued in July 2006 are set forth in the table below.~~
~~Stockholders’ Deficit - Schedule of Conversions of Series A Preferred Stock~~
Fiscal Period Ended
Shares of Series A Preferred
Converted to Common Stock

Shares of Common Stock
Issued from Conversion

Number of
Accredited Investors
Periods prior to February 29, 2014 662,200 1,986,600 41
February 28, 2015 3,000 9,000 1
February 29, 2016 10,000 30,000 1
February 28, 2017 0   0   0
February 28, 2018 14,997 44,991 1
February 28, 2019 0   0   0
February 29, 2020 0   0   0
February 28, 2021 0   0   0
November 30, 2021 0   0   0
Totals 690,197 2,070,591 44
~~Holders of Series A Preferred shall accrue dividends, in the amount of~~ 6% of the original purchase price per annum. Dividends may be paid in cash or common stock at the discretion of the Company. Dividends are cumulative whether or not in any dividend period or periods the Company has assets legally available for the payment of such dividends. Accumulations of dividends on Series A Preferred do not bear interest. Dividends are payable upon declaration by the Board of Directors.
~~As of November 30, 2021 no dividends have been declared or paid. Dividends earned since issuance for each fiscal year and the nine months ended November 30, 2021 are set forth in the table below:~~
~~Stockholders’ Deficit - Schedule of Preferred Stock Dividends Earned~~
Fiscal Period Ended
Shareholders at
Period End

Accumulated
Dividends
Periods prior to February 28, 2014 $ 1,447,943
February 28, 2015 58 132,634
February 29, 2016 57 130,925
February 28, 2017 57 130,415
February 28, 2018 56 128,231
February 28, 2019 56 127,714
February 29, 2020 56 128,063
February 28, 2021 56 127,714
November 30, 2021 56 96,223
$ 2,449,862
Common Stock

The Company is authorized to issue up to ~~200,000,000~~500,000,000 shares of $0.001 par value common stock of which 384,735,402 and ~~60,491,122~~67,802,273 shares were issued and outstanding as of ~~November 30, 2021~~May 31, 2022 and February 28, ~~2021,~~2022, respectively.

Common Stock
Balance
Par Value
Common stock, Issued and Outstanding, February 28, 2021 60,491,122
Shares issued for Series A Preferred conversion 2,128,704 $ 2,129
Shares issued for Series A accumulated dividend 1,100,000 $ 1,100
Shares issued for debt conversion of accrued salaries 1,397,880 $ 1,398
Shares issued for debt conversion of accrued directors fees 317,708 $ 318
Shares issued for conversion of 12% Note principal and interest – related party 1,144,415 $ 1,144
Shares issued for investment principal in production revenue program 1,222,444 $ 1,222
Common stock, Issued and Outstanding, February 28, 2022 67,802,273
Shares issued for conversion of 12% Note principal and interest 78,934 $ 79
Shares issued for conversion of convertible note 27,764,706 $ 27,765
Shares issued for acquisition of crude oil and natural gas properties 160,964,489 $ 160,964
Shares issued from sale of stock 128,125,000 $ 128,125
Common stock, Issued and Outstanding, May 31, 2022 384,735,402
During the three months ended May 31, 2022, there were 316,933,129 shares of common stock issued in aggregate. There were 78,934 shares issued to a third party on conversion of a $25,000 12% Subordinated Note and $10,520 in accumulated interest. There were 27,764,706 shares issued on conversion of a $200,000 convertible note and $36,000 in accumulated interest. There were 160,964,489 shares issued for the acquisition of the Reabold California, LLC crude oil and natural gas properties. There were 128,125,000 shares issued through the sale of common stock to a third party, which then became a related party through the sale.

NOTE 11 — WARRANTS:
~~Third Party~~Share Based Payment Arrangement - Non-Employee

During the twelve months ended February 29, 2020 there were 2.1 million warrants issued to a third party for investor relations services. The fair value of the warrants was determined by the Black-Scholes pricing model, was $17,689, and is being amortized over the 3three year vesting period of the warrants. The Black-Scholes valuation encompassed the following assumptions: a risk free interest rate of 1.68%; volatility rate of 260.23%; and a dividend yield of 0.0%.

1413

The ~~warrants contain~~warrant contains a vesting blocking provision that prevents the vesting of any warrants that such vesting would cause the warrant holder’s beneficial ownership (as such term is defined in Section 13d-3 of the Securities Exchange Act of 1934, as amended) to exceed more than four and ninety-nine one-hundredths percent (4.99%) of the Company’s outstanding Common Stock. The foregoing restriction may not be waived by either party.
The warrants ~~vest~~vested in equal parts over a 3three year period beginning on January 2, 2020 and ~~all~~were fully vested at January 2, 2022. The warrants expire on January 2, ~~2024~~2024.
As of May 31, 2022, there were 2,100,000. exercisable warrants. At ~~November 30, 2021,~~May 31, 2022, both the outstanding warrants and the exercisable warrants have a weighted average exercise price of $0.01, a weighted average remaining life of ~~2.08~~1.58 ~~years,~~years. Both the outstanding warrants and the exercisable warrants have an intrinsic value of $~~8,826~~77,280 ~~for the exercisable warrants and an intrinsic value of $35,070~~ ~~for the outstanding warrants.~~. For the ~~nine~~three months ended ~~November 30,~~May 31, 2022 and 2021, ~~and 2020,~~ the recorded amount of warrant expense was $$-~~4,422~~0- and $~~4,422~~1,474, respectively.

Warrant activity for the ~~nine~~three months ended ~~November 30, 2021~~May 31, 2022 is set forth in the table below:
Warrants - Schedule of ~~Warrants~~Warrant Activity

Warrants
Weighted Average
Exercise Price

Warrants outstanding, February 28, 2021 2,100,000 $ 0.01

Changes during the nine months ended November 30, 2021:
Issued 0   $ 0
Expired / cancelled / forfeited 0   $ 0
Warrants outstanding, November 30, 2021 2,100,000 $ 0.01
Warrants exercisable, November 30, 2021 528,507 $ 0.01
Warrants
Weighted Average
Exercise Price

Warrants outstanding, February 28, 2022 2,100,000 $ 0.01

Changes during the three months ended May 31, 2022:
Issued 0   $ —
Expired / cancelled / forfeited 0   $ —
Warrants outstanding, May 31, 2022 2,100,000 $ 0.01
Warrants exercisable, May 31, 2022 2,100,000 $ 0.01

NOTE 12 — INCOME TAXES:

On December 22, 2017, the federal government enacted a tax bill H.R.1, an act to provide for reconciliation pursuant to Titles II and V of the concurrent resolution on the budget for fiscal year 2018, commonly referred to as the Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act contains significant changes to corporate taxation, including, but not limited to, reducing the U.S. federal corporate income tax rate from 35% to 21% and modifying or limiting many business deductions. ~~The Company has~~We re-measured ~~its~~ deferred tax liabilities based on rates at which they are expected to be utilized in the future, which is generally 21%21%.

Reconciliation between actual tax expense (benefit) and income taxes computed by applying the U.S. federal income tax rate and state income tax rates to income from continuing operations before income taxes is set forth in the table below:
Income Taxes - Schedule of Reconciliation Between Actual Tax Expense Benefit and Income Taxes Computed by Applying Income Tax Rate

November 30, 2021 February 28, 2021 May 31, 2022 February 28, 2022
Computed at U.S. and state statutory rates $ (73,986 ) $ (152,860 )
Computed at U.S. and state statutory rates (40%) $ (350,168 ) $ (118,897 )
Permanent differences 7,142 15,342 4,914 11,157
Changes in valuation allowance 66,844 137,518 345,254 107,740
Total $ 0   $ 0   $ —   $ —

Tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred liabilities are set forth in the table below:
Income Taxes - Schedule of Deferred Tax Assets and Liabilities

November 30, 2021 February 28, 2021 May 31, 2022 February 28, 2022
Deferred tax assets:
Net operating loss carryforwards $ 5,644,405 $ 5,587,416 $ 6,015,569 $ 5,670,900
Crude oil properties 73,293 63,438 88,279 87,694
Stock based compensation 66,187 66,187 66,187 66,187
Other 27,838 27,838 27,838 27,838
Less valuation allowance (5,811,723 ) (5,744,879 ) (6,197,873 ) (5,852,619 )
Total $ 0   $ 0   $ —   $ —
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At ~~November 30, 2021, the Company~~May 31, 2022, Daybreak had estimated net operating loss (“NOL”) carryforwards for federal and state income tax purposes of approximately $~~18,915,568~~19,004,359 which will begin to expire, if unused, beginning in ~~2024~~.2024. Under the Tax Cuts and Jobs Act, the NOL portion of the loss incurred in the year ended February 28, 2018 ~~2020 and 2021 periods~~ of $340,749,; the loss incurred for the year ended February 29, 2020 of $339,299 ~~and~~; the loss incurred for the year ended February 28, 2021 of $416,898~~, r~~; the loss incurred for the year ended February 28, 2022 of $279,773~~espectively,~~; and the loss incurred for ~~the nine~~three months ended ~~November 30, 2021~~May 31, 2022 in the amount of approximately $~~190,982~~1,155,058 will not expire and will carry over indefinitely. The valuation allowance increased approximately $~~66,844~~345,254 for the ~~nine~~three months ended ~~November 30, 2021~~May 31, 2022 and increased approximately $~~137,518~~107,740 for the year ended February 28, ~~2021, respectively.~~2022, respectively. Section 382 of the Internal Revenue Code places annual limitations on the Company’s net operating loss (NOL) carryforward.

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The above estimates are based on management’s decisions concerning elections which could change the relationship between net income and taxable income. Management decisions are made annually and could cause estimates to vary significantly. The Company files federal income tax returns with the United States Internal Revenue Service and state income tax returns in various state tax jurisdictions. As a general rule the Company’s tax returns for the fiscal years after ~~2015~~2016 currently remain subject to examinations by appropriate tax authorities. None of our tax returns are under examination at this time.

NOTE 13 — COMMITMENTS AND CONTINGENCIES:

Various lawsuits, claims and other contingencies arise in the ordinary course of the Company’s business activities. While the ultimate outcome of any future contingency is not determinable at this time, management believes that any liability or loss resulting therefrom will not materially affect the financial position, results of operations or cash flows of the Company.

The Company, as an owner or lessee and operator of crude oil properties, is subject to various federal, state and local laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability on the lessee under a crude oil lease for the cost of pollution clean-up resulting from operations and subject the lessee to liability for pollution damages. In some instances, the Company may be directed to suspend or cease operations in the affected area. The Company maintains insurance coverage that is customary in the industry, although the Company is not fully insured against all environmental risks.

Sunflower Lawsuit
Sunflower Alliance v. California Department of Conservation, Geologic Energy Management Division. This case challenges the state agency’s compliance with the California Environmental Quality Act (CEQA) with respect to the PAL Reabold 072-00-0001 Project, for wastewater injection into an existing well. The Petition was filed on December 29, 2021 in the Alameda County Superior Court. The Petitioner seeks an order setting aside the state agency’s approval of a wastewater injection permit; damages are not sought in the lawsuit. On February 22, 2022, Real Party in Interest Reabold California, LLC filed a motion to transfer the case to the Contra Costa County Superior Court. On March 22, 2022, the Alameda County Superior Court ordered the case transferred to the Contra Costa County Superior Court. The parties are awaiting notification from the Contra Costa County Superior Court that the transfer has been completed. If successful, the lawsuit would prevent Reabold from injecting wastewater into an existing well until any CEQA deficiencies are addressed. The California Attorney General is defending the state agency, which disputes Petitioner’s claims. At this time, it is unclear when the litigation will be resolved.
The Company is not aware of any environmental claims existing as of ~~November 30,~~May 31, 2021. There can be no assurance, however, that current regulatory requirements will not change or that past non-compliance with environmental issues will not be discovered on the Company’s crude oil properties.
~~NOTE 14 —~~ ~~SUBSEQUENT EVENTS~~:
On December 15, 2021, Daybreak finalized agreements with its directors, executive officers, and other employees with respect to the forgiveness and conversion of related party debts into shares of the Company’s common stock at a conversion rate of $~~0.45~~ ~~per share of common stock.~~
The tables below detail the changes to certain Balance Sheet accounts either through debt forgiveness or conversion to the Company’s common stock. Since the common stock shares will be issued in the Company’s fourth quarter, this information is being presented as a subsequent event in a pro forma format.
~~Subsequent Events - Schedule of Pro Forma Debt Forgiveness or Conversions~~
Pro Forma November 30, 2021 (Unaudited) Adjustments
Pro Forma
November 30, 2021 (Unaudited)

CURRENT LIABILITIES:
Accounts payable and other accrued liabilities $ 1,857,833 $ (194,030 )⁽¹⁾ $ 1,663,803
Accounts payable related parties 981,634 (938,310 )⁽²⁾ 43,324
Accrued interest 161,138 —   161,138
Note payable 120,000 —   120,000
12% Notes payable 315,000 —   315,000
12% Notes payable, related party 250,000 (250,000 )⁽³⁾ —
Note payable, related party 8,042 —   8,042
Production revenue payable – current, net of discount 85,759 (49,654 )⁽⁴⁾ 36,105
Line of credit 816,583 —   816,583
Total current liabilities 4,595,989 (1,431,994 ) 3,163,995

LONG TERM LIABILITIES:
Note payable, related party 129,407 —   129,407
Production revenue payable – net of discount and current 1,504,671 (871,192 )⁽⁴⁾ 633,479
Asset retirement obligation 36,700 —   36,700
Total long-term liabilities 1,670,778 (871,192 ) 799,586
Total liabilities 6,266,767 (2,303,186 ) 3,963,581

STOCKHOLDERS’ DEFICIT:
Preferred stock —   —   —
Series A Convertible preferred stock 710 —   710
Common stock 60,491,122 and 64,573,570 shares 60,491 4,082 ⁽⁵⁾ 64,573
Additional paid-in capital 24,254,978 2,299,104 ⁽⁶⁾ 26,554,082
Accumulated deficit (29,676,841 ) —   (29,676,841 )
Total stockholders’ deficit (5,360,662 ) 2,303,186 (3,057,476 )
~~Subsequent Events~~
~~Adjustments~~
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⁽¹⁾ Adjustment of $194,030 consists of conversion of $141,501 estimated employee taxes previously recorded on accrued salaries into 314,447 shares of common stock; writing off of $52,529 estimated employer payroll taxes on previously recorded on accrued salaries that were converted
⁽²⁾ Adjustment of $938,310 consists of conversion of $487,545 employee net accrued salaries into 1,083,434 shares of common stock; conversion of $264,986 in 12% Note accrued interest into 588,859 shares of common stock; conversion of $142,969 accrued director fees into 317,708 shares of common stock; and forgiveness of $42,810 accounts payable related parties and employee net accrued salaries
⁽³~~) Adjustment of $250,000 consists of conversion of $250,000 related party 12% Note principal into 555,556 shares of common stock~~
⁽⁴⁾ ~~Adjustment represents the fair value of the current portion and long term portion of the $550,100 related party production revenue payable that was converted into 1,222,444 shares of common stock~~
⁽⁵⁾ ~~Adjustment of $4,082 reflecting 4,082,488 shares of common stock that will be issued for the conversion at par value $0.001~~
⁽⁶⁾ Adjustment of $2,299,104 consists of $105,528 fair value of the 4,082,448 shares to be issued for related party debt conversion, based on $0.0268 share closing price on November 30, 2021 net of the $4,082 par value; $2,193,776 forgiveness of liabilities to related parties for the difference of the fair value of the shares converted and the related party debt amount forgiven or converted.
~~An aggregate of~~ ~~4,082,448~~ ~~shares of common stock valued at $0.45~~ ~~per share will be issued to satisfy certain related party debt as detailed in the table below:~~
~~Common Stock Activity~~
~~Share issuances for accrued salaries to employees~~ ~~1,397,881~~
~~Share issuances for accrued director fees~~ ~~317,708~~
~~Share issuances for related party 12% Subordinated Note and interest~~ ~~1,144,415~~
~~Share issuances for related party production revenue payable program~~ ~~1,222,444~~
~~Common stock increase~~ ~~4,082,448~~

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

The following discussion is management’s assessment of the current and historical financial and operating results of the Company and of our financial condition. It is intended to provide information relevant to an understanding of our financial condition, changes in our financial condition and our results of operations and cash flows and should be read in conjunction with our unaudited financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q for the ~~nine~~three months ended ~~November 30, 2021~~May 31, 2022 and in our Annual Report on Form 10-K for the year ended February 28, ~~2021.~~2022. References to “Daybreak”, the “Company”, “we”, “us” or “our” mean Daybreak Oil and Gas, Inc.

Cautionary Statement Regarding Forward-Looking Statements

Certain statements contained in our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) are intended to be covered by the safe harbor provided for under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act.

All statements other than statements of historical fact contained in this MD&A report are inherently uncertain and are forward-looking statements. Statements that relate to results or developments that we anticipate will or may occur in the future are not statements of historical fact. Words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will” and similar expressions identify forward-looking statements. Examples of forward-looking statements include, without limitation, statements about the following:
· Our future operating results;
· Our future capital expenditures;
· Our future financing;
· Our expansion and growth of operations; and
· Our future investments in and acquisitions of crude oil properties.

We have based these forward-looking statements on assumptions and analyses made in light of our experience and our perception of historical trends, current conditions, and expected future developments. However, you should be aware that these forward-looking statements are only our predictions and we cannot guarantee any such outcomes. Future events and actual results may differ materially from the results set forth in or implied in the forward-looking statements. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, the following risks and uncertainties:
· General economic and business conditions;
· National and international pandemics such as the novel coronavirus COVID-19 outbreak;
· Exposure to market risks in our financial instruments;
· Fluctuations in worldwide prices and demand for crude oil;
· Our ability to find, acquire and develop crude oil properties;
· Fluctuations in the levels of our crude oil exploration and development activities;
· Risks associated with crude oil exploration and development activities;
· Competition for raw materials and customers in the crude oil industry;
· Technological changes and developments in the crude oil industry;
· Legislative and regulatory uncertainties, including proposed changes to federal tax law and climate change legislation, regulation of hydraulic fracturing and potential environmental liabilities;
· Our ability to continue as a going concern;
· Our ability to secure financing under any commitments as well as additional capital to fund operations; and
· Other factors discussed elsewhere in this Form ~~10-Q;~~10-Q and in our other public filings, ~~and~~ press ~~releases;~~releases, and discussions with Company management.

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

In December 2019, the 2019 novel coronavirus (“COVID-19") surfaced in Wuhan, China. The World Health Organization declared a global emergency on January 30, 2020, with respect to the outbreak and most countries throughout the world initiated severe travel restrictions to and from other countries. This widespread health crisis and the governmental restrictions associated with it, have adversely affected demand for crude oil and natural gas, depressed crude oil prices, and affected our ability to access capital. The resurgence of the Omicron variant has continued to have negative influence on our economy. These factors, in turn, have had a negative impact on our operations, and financial condition as evidenced by the unprecedented decline in crude oil prices and our revenues during this same time period.
18
Should one or more of the risks or uncertainties described above or elsewhere in our Form 10-K for the year ended February 28, ~~2021~~2022 and in this Form 10-Q for the ~~nine~~three months ended ~~November 30, 2021~~May 31, 2022 occur, or should any underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. We specifically undertake no obligation to publicly update or revise any information contained in any forward-looking statement or any forward-looking statement in its entirety, whether as a result of new information, future events, or otherwise, except as required by law.

All forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement.

16
Introduction and Overview

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

Our ~~longer-term~~long-term success depends on, among many other factors, the acquisition and drilling of commercial grade crude oil and natural gas properties and on the prevailing sales prices for crude oil and natural gas along with associated operating expenses. The volatile nature of the energy markets makes it difficult to estimate future prices of crude oil and natural gas; however, any prolonged period of depressed prices, ~~or market volatility, would~~such as we have experienced in the last 15 months, will have a material adverse effect on our results of operations and financial condition.

Our operations are focused on identifying and evaluating prospective crude oil and natural gas properties and funding projects that we believe have the potential to produce crude oil orand natural gas in commercial quantities. We conduct all of our drilling, exploration and production activities in the United States, and all of our revenues are derived from sales to customers within the United States. Currently, we are in the process of developing a multi-well oilfield project in Kern County, ~~California.~~California and an exploratory joint drilling project in Michigan.

Our management cannot provide any assurances that Daybreak will ever operate profitably. While, in the past, we have had positive cash flow from our crude oil operations in California, we have not yet generated sustainable positive cash flow or earnings on a company-wide basis. As a small company, we are more susceptible to the numerous business, investment and industry risks that have been described in Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended February 28, ~~2021~~2022 and in Part III, Item 1A. Risk Factors of this 10-Q Report. Throughout this Quarterly Report on Form 10-Q, crude oil is shown in barrels (“Bbls”); natural gas is shown in thousands of cubic feet (“Mcf”) unless otherwise specified, and hydrocarbon totals are expressed in barrels of crude oil equivalent (“BOE”).

Below is brief summary of our crude oil projects in ~~California and Michigan.~~California. Refer to our discussion in Item 2. Properties, in our Annual Report on Form 10-K for the year ended February 28, ~~2021~~2022 for more information on our multi-well oilfield project in California and our exploratory joint drilling project in Michigan.

Kern County, California (East Slopes Project)

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

The crude oil produced from our acreage in the Vedder Sand is considered heavy oil. The ~~gravity of the~~ crude oil ranges from 14° to 16° API (American Petroleum Institute) gravity and must be heated to separate and remove water prior to sale. Our crude oil wells in the East Slopes Project produce from five reservoirs at our Sunday, Bear, Black, Ball and Dyer Creek locations. The Sunday property has six producing wells, while the Bear property has nine producing wells. The Black property is the smallest of all currently producing reservoirs, and currently has two producing wells at this property. The Ball property also has two producing wells while the Dyer Creek property has one producing well. During the ~~nine~~three months ended ~~November 30, 2021~~May 31, 2022, we had production from 20 crude oil wells. Our average working interest ~~(“WI”)~~ and net revenue interest (“NRI”) in these 20 wells is 36.6% and 28.4%, respectively.

We plan on acquiring additional acreage exhibiting the same seismic characteristics and on trend with the Bear, Black and Dyer Creek reservoirs. Some of these prospects, if successful, would utilize the Company’s existing production facilities. In addition to the current field development, there are several other exploratory prospects that have been identified from the seismic data, which we plan to drill in the future.

East Slopes Drilling Plans
We plan to spend approximately $435,000 drilling three development wells in the current 2022-2023 fiscal year; however our actual expenditures may vary significantly from this estimate if our plans for exploration and development activities change during the year.
1917

Monterey and Contra Costa Counties, California ~~Drilling Plans~~
Planned drilling activity and implementation of our oilfield development plan will not begin until there is additional financing is put in place. We do not plan to make any capital investments within the East Slopes Project area for the remainder of the 2021-2022 fiscal year.
~~Michigan Acreage~~(Reabold California, LLC)

In ~~January 2017, Daybreak~~May 2022, we acquired ~~a 30% working interest~~Reabold California, LLC (“Reabold”) from its previous owner. This property includes producing wells in ~~1,400 acres in the Michigan Basin.~~ both Monterey and Contra Costa counties of California.
The leases have been secured and multiple targets were identified through a 2-D seismic interpretation. A 3-D seismic survey was obtained in January and February of 2017. An analysis of the 3-D seismic survey confirmed the first prospect originally identified on the 2-D seismic,Burnett Lease as well as ~~several~~the Doud Lease are located in close proximity to one another in Monterey County. They are part of a geological feature named the Monroe Swell. The Burnett Lease presently has two directional wells that are being produced from a depth of 2,900’ from the Beedy Sand zone. The oil being produced is 19° gravity. We have future plans of drilling one horizontal well on this lease and to convert and old well bore into a salt water disposal well (“SWDW”). The Doud Lease has four directional well bores with three of those being produced from a depth of 3,300’ from the Doud A Sand zone. The oil being produced is 22° gravity. We have future plans of drilling one additional ~~drilling locations.~~directional well on this lease. The SWDW for the Burnett Lease will be utilized for this lease as well.
The Brentwood Lease is located in Contra-Costa County. This lease is part of a geological feature named the Meganos Unconformity. There are presently producing two directional wells from this lease as well as one well bore that is shut- in waiting on a SWDW permit to be approved before putting it back in production. The wells are producing from the Second Massive Sand from a depth of between 4,000’-4,500’. The oil being produced is 32° gravity. We have plans to ~~obtain an additional 3-D survey~~do a work over on the ~~second prospect after drilling~~shut-in well to decrease water production and to increase oil production.
Sunflower Lawsuit
Sunflower Alliance v. California Department of Conservation, Geologic Energy Management Division. This case challenges the state agency’s compliance with the California Environmental Quality Act (CEQA) with respect to the PAL Reabold 072-00-0001 Project, for wastewater injection into an existing well. The Petition was filed on December 29, 2021 in the Alameda County Superior Court. The Petitioner seeks an order setting aside the state agency’s approval of a wastewater injection permit; damages are not sought in the lawsuit. On February 22, 2022, Real Party in Interest Reabold California, LLC filed a motion to transfer the case to the Contra Costa County Superior Court. On March 22, 2022, the Alameda County Superior Court ordered the case transferred to the Contra Costa County Superior Court. The parties are awaiting notification from the Contra Costa County Superior Court that the transfer has been completed. If successful, the lawsuit would prevent Reabold from injecting wastewater into an existing well onuntil any CEQA deficiencies are addressed. The California Attorney General is defending the ~~first prospect. The two prospects are independent of each other and~~state agency, which disputes Petitioner’s claims. At this time, it is unclear when the ~~success or lack of results of either prospect does not affect the potential of the other prospect. The wells~~litigation will be drilled vertically with conventional completions and no hydraulic fracturing is anticipated. With the settlement of our debt obligations to a former lender in December 2018, we acquired an additional 40% working interest, bringing our aggregate working interest to 70% in Michigan. The first well is expected to be drilled when additional financing is secured.resolved.

Encumbrances

On October 17, 2018, a working interest partner in the East Slopes Project in California filed a UCC financing statement in regards to payables owed to the partner by the Company. ~~As of November 30, 2021, we had no encumbrances on our crude oil project in Michigan.~~

Results of Operations – ~~Nine months ended November 30, 2021~~Three Months Ended May 31, 2022 compared to the ~~nine months ended November 30, 2020~~Three Months Ended May 31, 2021

California Crude Oil Prices

The ~~price~~prices we receive for crude oil sales in California isfrom the East Slopes project and from Reabold California, LLC (“Reabold”) are based on prices posted for Midway-Sunset and Buena Vista crude oil delivery contracts, ~~less deductions~~respectively. All posted pricing is subject to adjustments that vary by grade of crude oil, ~~sold~~transportation costs, market differentials and ~~transportation costs. The~~other local conditions. Both the posted Midway-Sunset ~~price~~and Buena Vista prices generally ~~moves~~move in correlation ~~to, and at a discount~~ to prices quoted on the New York Mercantile Exchange ~~(“NYMEX”~~(NYMEX”) for spot West Texas ~~Intermediate~~intermediate (“WTI”) crude oil, Cushing, Oklahoma delivery contracts. ~~We do not have any~~
California Natural Gas Prices
The price we receive for natural gas ~~revenues~~sales from Reabold is based on ninety-five (95%) of the price published in ~~California.~~Natural Gas Intelligence (“NGI”) Gas Price Index under the column “Bidweek Averages” for “California”, “PG&E Citygate” less an amount per MMBtu equal to the Silverado Path On System As-Available transport date, less the Silverado Path On System transmission shrinkage rate for Silverado. The price we receive generally moves in correlation to prices quoted on the New York Mercantile Exchange (NYMEX”) for spot Henry Hub natural gas prices.

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There continues to be a significant amount of volatility in ~~crude oil~~hydrocarbon prices and a ~~dramatic~~corresponding fluctuation in our realized sale price of crude oil ~~since~~does exist. An example of this volatility is that in June of 2014 ~~when~~ the monthly average price of WTI ~~crude~~ oil was $105.79 per barrel and our realized ~~sale~~ price per barrel of crude oil was ~~$98.78. As an example, for the month of~~$98.78 while in April 2020, the monthly average ~~closing~~ price of WTI crude oil was $16.55 and our monthly realized ~~oil~~ price was $16.96 per barrel. Finally, in May 2022, the monthly average price of WTI oil was $109.55 per barrel and our realized price per barrel of crude oil was $106.56. This volatility in crude oil prices has continued ~~through~~throughout most of ~~our 2020-2021~~the fiscal ~~year. The~~year ended February 28, 2022. Any downward volatility ~~and decline~~ in the price of crude oil ~~has had~~will have a prolonged and substantial negative impact on our profitability and cash flow from our producing California properties. ~~While there has been some improvement in crude oil prices for the nine months ended November 30, 2021, there is no guarantee that this trend will continue.~~ It is beyond our ability to accurately predict crude oil prices over any substantial length of time.

A comparison of the average WTI price and the average realized crude oil sales price for the ~~nine~~three months ended ~~November 30,~~May 31, 2022 and 2021 ~~and 2020~~ is shown in the table below:

Nine Months Ended
November 30, 2021 November 30, 2020 Percentage Change
Average nine month WTI crude oil price (Bbl) $ 70.34 $ 35.07 100.6 %
Average nine month realized crude oil sales price (Bbl) $ 67.97 $ 32.52 109.0 %
Three Months Ended
May 31, 2022 May 31, 2021 Percentage Change
Average three month WTI crude oil price (Bbl) $ 106.61 $ 63.07 69.0 %
Average three month realized crude oil sales price (Bbl) $ 106.12 $ 61.65 72.1 %

For the ~~nine~~three months ended ~~November 30, 2021,~~May 31, 2022, the average WTI price was ~~$70.34~~$106.61 and our average realized crude oil sale price was ~~$67.97,~~$106.12, representing a discount of ~~$2.37~~$0.49 per barrel or 3.4% lower than the average WTI price. In comparison, for the nine months ended November 30, 2020, the average WTI price was $35.07 and our average realized sale price was $32.52 representing a discount of $2.55 per barrel or 7.3% lower than the average WTI price. Historically, the sale price we receive for California heavy crude oil has been less than the quoted WTI price because of the lower API gravity of our California crude oil in comparison to the API gravity of quoted WTI crude oil.
20
~~California Crude Oil Revenue and Production~~
Crude oil revenue in California for the nine months ended November 30, 2021 increased $231,325 or 84.4% to $505,410 in comparison to revenue of $274,085 for the nine months ended November 30, 2020. The average sale price of a barrel of crude oil for the nine months ended November 30, 2021 was $67.97 in comparison to $32.52 for the nine months ended November 30, 2020. The 2019 novel coronavirus (“COVID-19") and the Omicron variant that has spread throughout the world including the United States had a substantial negative impact on the demand for crude oil and was largely responsible for the decline in crude oil prices for the nine months ended November 30, 2020. The increase of $35.45 or 109.0% per barrel in the average realized price of a barrel of crude oil accounted for 129.1% of the increase in crude oil revenue for the nine months ended November 30, 2021.
Our net sales volume for the nine months ended November 30, 2021 was 7,436 barrels of crude oil in comparison to 8,427 barrels sold for the nine months ended November 30, 2020. This decrease in crude oil sales volume of 991 barrels or 11.8% was primarily due to fewer days of production during the nine months ended November 30, 2021 and the timing of oil sales transportation.
The gravity of our produced crude oil in California ranges between 14° API and 16° API. Production for the nine months ended November 30, 2021 was from 20 wells resulting in 5,415 well days of production in comparison to 5,495 well days of production for the nine months ended November 30, 2020.
~~Our crude oil sales revenue for the nine months ended November 30, 2021 and 2020 is set forth in the following table:~~

Nine Months Ended
November 30, 2021

Nine Months Ended
November 30, 2020

Project Revenue Percentage Revenue Percentage
California – East Slopes Project $ 505,410 100.0 % $ 274,085 100.0 %
*Our average realized sale price on a BOE basis for the nine months ended November 30, 2021 was $67.97 in comparison to $32.52 for the nine months ended November 30, 2020, representing an increase of $35.45 or 109.0% per barrel.
~~Operating Expenses~~
Total operating expenses for the nine months ended November 30, 2021 were $657,548, an increase of $51,594 or 8.5% compared to $605,954 for the nine months ended November 30, 2020. Operating expenses for the nine months ended November 30, 2021 and 2020 are set forth in the table below:

Nine Months Ended
November 30, 2021

Nine Months Ended
November 30, 2020

Expenses Percentage
BOE
Basis
Expenses Percentage
BOE
Basis

Production expenses $ 165,357 25.1 % $ 136,218 22.5 %
Exploration and drilling expenses 235 0.0 % 73 0.0 %
Depreciation, depletion, amortization (“DD&A”) 44,004 6.7 % 42,318 7.0 %
General and administrative (“G&A”) expenses 447,952 68.2 % 427,345 70.5 %
Total operating expenses $ 657,548 100.0 % $ 88.43 $ 605,954 100.0 % $ 71.91
Production expenses include expenses associated with the production of crude oil. These expenses include contract pumpers, electricity, road maintenance, control of well insurance, property taxes and well workover expenses; and, relate directly to the number of wells that are in production. For the nine months ended November 30, 2021, these expenses increased by $29,139 or 21.4% to $165,357 in comparison to $136,218 for the nine months ended November 30, 2020. For the nine months ended November 30, 2021 and 2020, we had 20 wells on production in California. Production expense on a barrel of oil equivalent (“BOE”) basis for the nine months ended November 30, 2021 and 2020 was $22.24 and $16.16, respectively. Production expenses represented 25.1% and 22.5% of total operating expenses for the nine months ended November 30, 2021 and 2020, respectively.
Exploration and drilling expenses include geological and geophysical (“G&G”) expenses as well as leasehold maintenance, plugging and abandonment (“P&A”) expenses and dry hole expenses. For the nine months ended November 30, 2021, these expenses were $235 in comparison to $73 the nine months ended November 30, 2020. Exploration and drilling expenses represented 0.0% and 0.0% of total operating expenses for the nine months ended November 30, 2021 and 2020, respectively.
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Depreciation, depletion and amortization (“DD&A”) expenses relate to equipment, proven reserves and property costs, along with impairment, and is another component of operating expenses. For the nine months ended November 30, 2021, DD&A expenses increased $1,686 or 4.0% to $44,004 in comparison to $42,318 for the nine months ended November 30, 2020. On a BOE basis, DD&A expense was $5.92 and $5.02 for the nine months ended November 30, 2021 and 2020, respectively. DD&A expenses represented 6.7% and 7.0% of total operating expenses for the nine months ended November 30, 2021 and 2020, respectively.
General and administrative (“G&A”) expenses include the salaries of six employees, including management. Other items included in our G&A expenses are legal and accounting expenses, investor relations fees, travel expenses, insurance expenses and other administrative expenses necessary for an operator of crude oil properties as well as for running a public company. For the nine months ended November 30, 2021, G&A expenses increased $20,607 or 4.8% to $447,952 in comparison to $427,345 for the nine months ended November 30, 2020. We received, as Operator, administrative overhead reimbursement of $39,965 during the nine months ended November 30, 2021 for the East Slopes Project which was used to directly offset certain employee salaries. We are continuing a program of controlling our G&A costs wherever possible. G&A expenses represented 68.2% and 70.5% of total operating expenses for the nine months ended November 30, 2021 and 2020, respectively.
~~Interest expense, net for the nine months ended November 30, 2021 decreased $4,026 or 2.2% to $178,220 in comparison to $182,246 for the nine months ended November 30, 2020.~~
During the nine months ended November 30, 2021, the Company recognized a gain on asset disposal of $9,614. The gain was the result of an insurance settlement on the theft of a company vehicle that was fully depreciated.
During the nine months ended November 30, 2021, the Company recognized a gain on debt forgiveness in the amount of $72,800 due to notification that the SBA had approved the company’s application for loan forgiveness on the PPP 2^nd ~~Draw loan.~~
~~Results of Operations – Three months ended November 30, 2021 compared to the three months ended November 30, 2020~~
A comparison of the average WTI price and average realized crude oil sales price at our East Slopes Project in California for the three months ended November 30, 2021 and 2020 is shown in the table below:
Three Months Ended
November 30, 2021 November 30, 2020 Percentage Change
Average three month WTI crude oil price (Bbl) $ 77.43 $ 39.99 93.6 %
Average three month realized crude oil sales price (Bbl) $ 74.12 $ 36.58 102.6 %
~~For the three months ended November 30, 2021, the average WTI price was $77.43 and our average realized crude oil sale price was $74.12, representing a discount of $3.31 per barrel or 4.3%~~0.5% lower than the average WTI price. In comparison, for the three months ended ~~November 30, 2020,~~May 31, 2021, the average WTI price was ~~$39.99~~$63.07 and our average realized sale price was ~~$36.58~~$61.65 representing a discount of ~~$3.41~~$1.42 per barrel or ~~8.5%~~2.3% lower than the average WTI price. Historically, the sale price we receive for California heavy crude oil has been less than the quoted WTI price because of the lower API gravity of our California crude oil in comparison to the API gravity of quoted WTI crude oil.

California Crude Oil Revenue and Production

Crude oil revenue in California for the three months ended ~~November 30, 2021,~~May 31, 2022 increased ~~$92,470~~$100,315 or ~~96.0%~~68.1% to ~~$188,792~~$247,615 in comparison to revenue of ~~$96,322~~$147,300 for the three months ended ~~November 30, 2020.~~May 31, 2021. The average realized sale price of a barrel of crude oil for the three months ended ~~November 30,~~May 31, 2021 was ~~$74.12~~$106.12 in comparison to ~~$36.58~~$61.65 for the three months ended ~~November 30, 2020.~~May 31, 2021. The increase ~~of $37.54 or 102.6% per barrel~~ in the average realized sale price of a barrel of crude oil of $44.47 or 72.1% accounted for ~~106.9%~~105.9% of the increase in ~~crude oil~~ revenue for the three months ended ~~November 30, 2021.~~May 31, 2022, offset by a decline of 5.9% in revenue due to the 2.3% decline in production volume.

Our net sales volume for the three months ended ~~November 30, 2021~~May 31, 2022 was ~~2,547~~2,333 barrels of crude oil in comparison to ~~2,633~~2,389 barrels sold for the three months ended ~~November 30, 2020.~~May 31, 2021. This decrease in crude oil sales volume of 8656 barrels or ~~3.3%~~2.3% was primarily due to ~~fewer days of production during the three months ended November 30, 2021 and~~ the timing of oil sales ~~transportation.~~that occurred for the three months ended May 31, 2022.

The gravity of our produced crude oil in California ranges between 14° API and 16° API. Production for the three months ended ~~November 30, 2021~~May 31, 2022 was from 20 wells resulting in ~~1,784~~1,822 well days of production in comparison to ~~1,820~~1,809 well days of production for the three months ended ~~November 30, 2020.~~May 31, 2021.

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Our crude oil sales revenue for the three months ended ~~November 30,~~May 31, 2022 and 2021 ~~and 2020~~ is set forth in the following table:

Three Months Ended
November 30, 2021

Three Months Ended
November 30, 2020

Three Months Ended
May 31, 2022

Three Months Ended
May 31, 2021

Project Revenue Percentage Revenue Percentage Revenue Percentage Revenue Percentage
California – East Slopes Project $ 188,792 100.0 % $ 96,322 100.0 % $ 247,615 100.0 % $ 147,300 100.0 %

*Our average realized sale price on a BOE basis for the three months ended ~~November 30,~~May 31, 2021 was ~~$74.12~~$106.12 in comparison to ~~$36.58~~$61.65 for the three months ended ~~November 30, 2020,~~May 31, 2021, representing an increase of ~~$37.54~~$44.47 or ~~102.6%~~72.1% per barrel.

Operating Expenses

~~Total~~Our total operating expenses for the three months ended ~~November 30, 2021~~May 31, 2022 were ~~$242,182,~~$1,350,172, an increase of ~~$50,245~~$1,121,873 or ~~26.2%~~491.4% compared to ~~$191,937~~$228,299 for the three months ended ~~November 30, 2020.~~May 31, 2021. Operating expenses for the three months ended ~~November 30,~~May 31, 2022 and 2021 ~~and 2020~~ are set forth in the table below:

Three Months Ended
November 30, 2021

Three Months Ended
November 30, 2020

Expenses Percentage
BOE
Basis
Expenses Percentage
BOE
Basis

Production expenses $ 65,788 27.2 % $ 53,581 28.0 %
Exploration and drilling expenses 34 0.0 % 73 0.0 %
Depreciation, depletion, amortization (“DD&A”) 15,196 6.3 % 13,491 7.0 %
General and administrative (“G&A”) expenses 161,164 66.5 % 124,792 65.0 %
Total operating expenses $ 242,182 100.0 % $ 95.09 $ 191,937 100.0 % $ 72.90
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Three Months Ended
May 31, 2022

Three Months Ended
May 31, 2021
Expenses Percentage
BOE
Basis
Expenses Percentage
BOE
Basis
Production expenses $ 60,717 4.5 % $ 46,726 20.5 %
Depreciation, depletion, amortization (“DD&A”) 11,776 0.8 % 13,948 6.1 %
Transaction expenses 1,025,541 76.0 % —   —
General and administrative (“G&A”) expenses 252,138 18.7 % 167,625 73.4 %
Total operating expenses $ 1,350,172 100.0 % $ 578.73 $ 228,299 100.0 % $ 95.56

Production expenses include expenses associated with the production of crude oil. These expenses include pumpers, electricity, road maintenance, control of well insurance, property taxes and well workover costs; and, relate directly to the number of wells that are in production. For the three months ended May 31, 2022, these expenses increased by $13,991 or 29.9% to $60,717 in comparison to $46,726 for the three months ended ~~November 30, 2021, increased by $12,207 or 22.8% to $65,788 in comparison to $53,581 for the three months ended November 30, 2020.~~May 31, 2021. For the three months ended ~~November 30,~~May 31, 2022 and 2021, ~~and 2020,~~ we had 20 wells on production in California. Production expense on a barrel of oil equivalent (“BOE”) basis for the three months ended ~~November 30,~~May 31, 2022 and 2021 were $26.03 and ~~2020 were $25.83 and $20.35,~~$19.56, respectively. Production expenses represented ~~27.2%~~4.5% and ~~28.0%~~20.5% of total operating expenses for the three months ended ~~November 30,~~May 31, 2022 and 2021, ~~and 2020,~~ respectively.

Exploration and drilling expenses ~~for~~include geological and geophysical (“G&G”) expenses as well as leasehold maintenance, plugging and abandonment (“P&A”) expenses and dry hole expenses. For the three months ended ~~November 30,~~May 31, 2022 and 2021, these expenses were ~~$34 in comparison to $73 for the three months ended November 30, 2020.~~$-0-. Exploration and drilling expenses represented 0.0% of total operating expenses for the three months ended May 31, 2022 and 2021, respectively.
Depreciation, depletion and amortization (“DD&A”) expenses relate to equipment, proven reserves and property costs, along with impairment, and is another component of operating expenses. For the three months ended May 31, 2022, DD&A expenses decreased $2,172 or 15.6% to $11,776 in comparison to $13,948 for the three months ended May 31, 2021. On a BOE basis DD&A expense was $5.05 and $5.84 for the three months ended May 31, 2022 and 2021, respectively. DD&A and impairment expenses represented 0.8% and 6.1% of total operating expenses for the three months ended May 31, 2022 and 2021, respectively.
For the three months ended May 31, 2022, we incurred transaction expenses of $1,025,541 related to the acquisition of funding for future drilling and to eliminate our line of credit balance. For the three months ended May 31, 2021, we did not incur any related expenses. Transaction expenses represented 76.0% and 0.0% of total operating expenses for the three months ended ~~November 30,~~May 31, 2022 and 2021, ~~and 2020, respectively.~~
DD&A expenses for the three months ended November 30, 2021, increased $1,705 or 12.6% to $15,196 in comparison to $13,491 for the three months ended November 30, 2020. DD&A on a BOE basis was $5.97 and $5.12 for the three months ended November 30, 2021 and 2020, respectively. DD&A expenses represented 6.3% and 7.0% of total operating expenses for the three months ended November 30, 2021 and 2020, respectively.

General and administrative (“G&A”) expenses include the salaries of our six employees, including management. Other items included in our G&A expenses are legal and accounting expenses, ~~investor relations~~director fees, stock compensation, travel expenses, insurance, Sarbanes-Oxley (“SOX”) compliance expenses and other administrative expenses necessary for an operator of crude oil properties as well as for running a public company. ~~G&A~~For the three months ended May 31, 2022, these expenses increased $84,513 or 50.49% to $252,138 in comparison to $167,625 for the three months ended ~~November 30, 2021, increased $36,372~~May 31, 2021. Approximately $68,086 or ~~29.1%~~80.5% of the increase was directly related to ~~$161,164~~the expense of holding the special shareholders meeting to approve the acquisition of the Reabold property in comparison to $124,792 for the three months ended November 30, 2020. We received, as Operator in California, administrative overhead reimbursement of $13,321 during the three months ended November 30, 2021 for the East Slopes Project which was used to directly offset certain employee salaries.California. We are continuing a program of ~~controlling~~reducing all of our G&A costs wherever possible. G&A expenses represented ~~66.5%~~18.7% and ~~65.0%~~73.4% of total operating expenses for the three months ended ~~November 30,~~May 31, 2022 and 2021, ~~and 2020,~~ respectively.

Interest expense, net for the three months ended ~~November 30, 2021~~May 31, 2022 increased ~~$6,321~~$9,664 or ~~11.2%~~15.8% to ~~$62,623~~$70,930 in comparison to ~~$56,302~~$61,266 for the three months ended ~~November 30, 2020.~~May 31, 2021.

During the three months ended November 30, 2021, the Company recognized a gain on debt forgiveness in the amount of $72,800 due to notification that the SBA had approved the company’s application for loan forgiveness on the PPP 2^nd ~~Draw loan.~~
23
Due to the nature of our business, we expect that revenues, as well as all categories of expenses, will continue to fluctuate substantially on a quarter-to-quarter and year-to-year basis. Revenues are highly dependent on the volatility of hydrocarbon prices as seen during the last 18 months and production volumes. Production expenses will fluctuate according to the number and percentage ownership of producing wells as well as the amount of revenues we receive based on the price of crude oil. Exploration and drilling expenses will be dependent upon the amount of capital that we have to invest in future development projects, as well as the success or failure of such projects. Likewise, the amount of DD&A expense will depend upon the factors cited above including the size of our proven reserves base and the market price of energy products. G&A expenses will also fluctuate based on our current requirements, but will generally tend to increase as we expand the business operations of the Company. An ~~on-going~~ongoing goal of the Company is to improve cash flow to cover the current level of G&A expenses and to fund our drilling programs in California and Michigan.

20
Capital Resources and Liquidity

Our primary financial resource is our proven crude oil reserve base. Our ability to fund any future capital expenditure programs is dependent upon the prices we receive from crude oil sales, the success of our drilling programs in California and Michigan and the availability of capital resource financing. There continues to be a significant amount of volatility in ~~crude oil~~hydrocarbon prices and ~~dramatic~~a corresponding fluctuation in our realized sale price of crude oil ~~since~~does exist. An example of this volatility is that in June of 2014 ~~when~~ the monthly average price of WTI ~~crude~~ oil was $105.79 per barrel and our realized ~~sale~~ price per barrel of crude oil was ~~$98.78. As an example, for the month of~~$98.78 while in April 2020, the monthly average ~~closing~~ price of WTI crude oil was $16.55 and our monthly realized ~~oil~~ price was $16.96 per barrel. Finally, in May 2022, the monthly average price of WTI oil was $109.55 per barrel and our realized price per barrel of crude oil was $106.56. This volatility in crude oil prices has continued ~~through~~throughout most of ~~our 2020-2021~~the fiscal ~~year. The~~year ended February 28, 2022. Any downward volatility ~~and decline~~ in the price of crude oil ~~has had~~will have a prolonged and substantial negative impact on our profitability and cash flow from our producing California properties. ~~While there has been improvement in crude oil prices for the nine months ended November 30, 2021, there is no guarantee that this trend will continue.~~ It is beyond our ability to accurately predict crude oil prices over any substantial length of time.

We ~~do not~~ plan to ~~make any~~spend approximately $435,000 drilling three development wells in the current 2022-2023 fiscal year; however our actual expenditures may vary significantly from this estimate if our plans for exploration and development activities change during the year. Factors such as changes in operating margins and the availability of capital ~~investments within~~resources could increase or decrease our ultimate level of expenditures during the ~~East Slopes Project area for the remainder of the 2021-2022~~current fiscal year.

Changes in our capital resources at ~~November 30, 2021~~May 31, 2022 in comparison towith February 28, ~~2021~~2022 are set forth in the table below:

November 30, 2021 February 28, 2021
Increase
(Decrease)

Percentage
Change
May 31, 2022 February 28, 2022
Increase
(Decrease)

Percentage
Change

Cash $ 17,392 $ 33,528 $ (16,136 ) (48.1 %) $ 1,159,469 $ 139,573 $ 1,019,896 730.7 %
Current assets $ 302,912 $ 283,239 $ 19,673 6.9 % $ 1,380,571 $ 416,651 $ 963,920 231.3 %
Total assets $ 906,105 $ 912,125 $ (6,020 ) (0.7 %) $ 8,792,745 $ 975,704 $ 7,817,041 801.2 %
Current liabilities $ (4,595,989 ) $ (4,469,074 ) $ 126,915 2.8 % $ (3,013,189 ) $ (3,404,735 ) $ (391,546 ) (11.5 %)
Total liabilities $ (6,266,767 ) $ (6,029,265 ) $ 237,502 3.9 % $ (3,814,247 ) $ (4,322,908 ) $ (508,661 ) (11.8 %)
Working capital deficit $ (4,293,077 ) $ (4,185,835 ) $ 107,242 2.6 %
Working capital $ (1,632,618 ) $ (2,988,084 ) $ 1,355,466 45.4 %

Our working capital deficit ~~increased~~decreased approximately ~~$107,242~~$1.36 million or ~~2.6%~~45.4% to ~~approximately $4.293~~$1.63 million at ~~November 30, 2021~~May 31, 2022 in comparison to ~~approximately $4.186~~$2.99 million at February 28, ~~2021.~~2022. The ~~increase~~decrease in our working capital deficit was primarily due to ~~an increase~~the funding we received in ~~our accounts payable and accrued interest balances.~~conjunction with the Reabold property in California. We anticipate an increase in our cash flow will occur when we are able to return to our planned drilling program that will result in an increase in the number of wells on production.

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

Major sources of funds in the past for us have included the debt or equity markets and ~~the sale of assets. We~~we anticipate that we will have to rely on these capital markets to fund future operations and growth. Our business model is focused on acquiring exploration or development properties as well as existing production. Our ability to generate future revenues and operating cash flow will depend on successful exploration, and/or acquisition of crude oil producing properties, which may very likely require us to continue to raise equity or debt capital from outside sources.

24
Daybreak has ongoing capital commitments to develop certain leases pursuant to their underlying terms. Failure to meet such ongoing commitments may result in the loss of the right to participate in future drilling on certain leases or the loss of the lease itself. These ongoing capital commitments will cause us to seek additional forms of financing through various methods, including issuing debt securities, equity securities, bank debt, or combinations of these instruments which could result in dilution to existing security holders and increased debt and leverage. The current uncertainty in the credit and capital markets as well as the instability and volatility in crude oil prices since June of 2014, has restricted our ability to obtain needed capital. The 2019 novel coronavirus (“COVID-19") ~~and now the Omicron variant~~ that spread to countries throughout the world including the United States had a substantial negative impact on the demand for crude oil and is largely responsible for the decline in crude oil ~~prices in 2020.~~prices. No assurance can be given that we will be able to obtain funding under any loan commitments or any additional financing on favorable terms, if at all. Sales of interests in our assets may be another source of cash flow available to us.

21
The Company’s financial statements for the ~~nine~~three months ended ~~November 30, 2021~~May 31, 2022 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. We have incurred a cumulative net ~~losses~~loss since entering the crude oil exploration industry ~~in 2005,~~ and as of ~~the nine~~three months ended ~~November 30, 2021, we~~May 31, 2022 have an accumulated deficit of ~~$29.7~~$30.7 million and a working capital deficit of ~~$4.293~~$1.6 million which raises substantial doubt about our ability to continue as a going concern.

~~On October 20, 2021,~~In the current fiscal year, we ~~entered into an Equity Exchange Agreement (the “Exchange Agreement”) by~~may continue to seek additional financing for our planned exploration and ~~between Daybreak, Reabold California LLC, a California limited liability company (“Reabold”), and Gaelic Resources Ltd., a private company incorporated~~development activities in the Isle of Man and the 100% owner of Reabold (“Gaelic”), pursuant to which the parties propose for (i) Daybreak to acquire 100% ownership of Reabold, in exchange for (ii) Daybreak issuing 160,964,489 shares of its common stock, par value $0.0001 (“Common Stock”) to Gaelic (the “Exchange Shares”), which will result in Reabold becoming a wholly-owned subsidiary of Daybreak named “Daybreak, LLC” and Gaelic becoming the owner of the Exchange Shares and a major shareholder of Daybreak (the foregoing transaction and the transactions contemplated thereby, the “Equity Exchange”).
In connection with the Equity Exchange, and as conditions to closing the Equity Exchange, among other things we also propose to enter into agreements to sell a minimum of $2,500,000 of shares of Daybreak’s Common Stock, and a minimum of 125,000,000 shares of Common Stock, toCalifornia. We could obtain financing through one or more ~~investors~~various methods, including issuing debt securities, equity securities, or bank debt, or combinations of these instruments, which could result in ~~a private placement expected~~dilution to ~~close promptly following the closing~~existing security holders and increased debt and leverage. No assurance can be given that we will be able to obtain funding under any loan commitments or any additional financing on favorable terms, if at all. Sales of ~~the Equity Exchange (the “Capital Raise”), with the proceeds~~interests in our assets may be another source of ~~the Capital Raise to be used to repay in full the Company’s line of credit with UBS Bank and for drilling and exploration activities and other working capital purposes.~~
As of November 30, 2021, all of the conditions for the closing of the Exchange Agreement have not yet been met. The Company is continuing to work towards satisfying all of the Exchange Agreement conditions including having certain conditions of the Exchange Agreement approved by the Company’s shareholders.cash flow.

Changes in Financial Condition

During the ~~nine~~three months ended ~~November 30, 2021,~~May 31, 2022, we received crude oil sales revenue from 20 wells in our East slopes Project in Kern County, California. In May 2022, we acquired Reabold California, LLC from its previous owner. This property includes four producing wells in both Monterey and Contra Costa counties of California. Our commitment to improving corporate profitability remains unchanged. ~~We experienced an increase in revenues of $231,325 or 84.4% to $505,410 for~~During the ~~nine~~three months ended ~~November 30,~~May 31, 2022 and 2021, in comparison to revenues of $274,085 for the nine months ended November 30, 2020. The increase of $35.45 or 109.0% per barrel in the average realized price of a barrel of crude oil accounted for 129.1% of the increase in crude oil revenue ~~for~~from the ~~nine~~East Slopes Project was $247,615 and $147,300, respectively. For the three months ended ~~November 30, 2021. For the nine months ended November 30,~~May 31, 2022 and 2021, we had an operating loss of ~~$152,138 in comparison to an operating loss of $331,869 for the nine months ended November 30, 2020.~~$1,102,557 and $80,999, respectively.

Our balance sheet at ~~November 30, 2021~~May 31, 2022 reflects total assets of approximately ~~$0.91~~$8.792 million in comparison to approximately ~~$0.91~~$0.976 million at February 28, ~~2021. The decrease of $6,020 is primarily due to declines in our cash balance and depletion of our crude oil properties.~~
2022. At ~~November 30, 2021,~~May 31, 2022, total liabilities were approximately ~~$6.27~~$3.814 million in comparison to approximately ~~$6.03~~$4.322 million at February 28, 2021. The increase in liabilities of approximately $238,000 was primarily due to an increase in payables and revisions of the production revenue payable discount during the nine months ended November 30, 2021.2022.

~~The~~Common stock shares issued and outstanding ~~shares of common stock~~were 384,735,402 and 67,802,273 at ~~November 30, 2021 remained unchanged from the~~May 31, 2022 and February 28, ~~2021 balance of 60,491,122.~~2022, respectively.
~~Additional paid in capital (APIC) increased $4,422 to $24,254,978 at November 30, 2021 as a result of the recognition of warrant expense for investor relations services.~~
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On December 15, 2021, we finalized agreements with our directors, executive officers, and other employees with respect to the forgiveness and conversion of related party debts into shares of the Company’s common stock at a conversion rate of $0.45 per share of common stock.
The tables below detail the changes to certain Balance Sheet accounts either through debt forgiveness or conversion to the Company’s common stock. Since the common stock shares will be issued in the Company’s fourth quarter, this information is being presented in a pro forma format.
November 30, 2021 (Unaudited) Adjustments
Pro Forma
November 30, 2021 (Unaudited)

CURRENT LIABILITIES:
Accounts payable and other accrued liabilities $ 1,857,833 $ (194,030 )⁽¹⁾ $ 1,663,803
Accounts payable related parties 981,634 (938,310 )⁽²⁾ 43,324
Accrued interest 161,138 —   161,138
Note payable 120,000 —   120,000
12% Notes payable 315,000 —   315,000
12% Notes payable, related party 250,000 (250,000 )⁽³⁾ —
Note payable, related party 8,042 —   8,042
Production revenue payable – current, net of discount 85,759 (49,654 )⁽⁴⁾ 36,105
Line of credit 816,583 —   816,583
Total current liabilities 4,595,989 (1,431,994 ) 3,163,995

LONG TERM LIABILITIES:
Note payable, related party 129,407 —   129,407
Production revenue payable – net of discount and current 1,504,671 (871,192 )⁽⁴⁾ 633,479
Asset retirement obligation 36,700 —   36,700
Total long-term liabilities 1,670,778 (871,192 ) 799,586
Total liabilities 6,266,767 (2,303,186 ) 3,963,581

STOCKHOLDERS’ DEFICIT:
Preferred stock —   —   —
Series A Convertible preferred stock 710 —   710
Common stock 60,491,122 and 64,573,570 shares 60,491 4,082 ⁽⁵⁾ 64,573
Additional paid-in capital 24,254,978 2,299,104 ⁽⁶⁾ 26,554,082
Accumulated deficit (29,676,841 ) —   (29,676,841 )
Total stockholders’ deficit (5,360,662 ) 2,303,186 (3,057,476 )
⁽¹⁾ Adjustment of $194,030 consists of conversion of $141,501 estimated employee taxes previously recorded on accrued salaries into 314,447 shares of common stock; writing off of $52,529 estimated employer payroll taxes on previously recorded on accrued salaries that were converted
⁽²⁾ Adjustment of $938,310 consists of conversion of $487,545 employee net accrued salaries into 1,083,434 shares of common stock; conversion of $264,986 in 12% Note accrued interest into 588,859 shares of common stock; conversion of $142,969 accrued director fees into 317,708 shares of common stock; and forgiveness of $42,810 accounts payable related parties and employee net accrued salaries
⁽³~~) Adjustment of $250,000 consists of conversion of $250,000 related party 12% Note principal into 555,556 shares of common stock~~
⁽⁴⁾ ~~Adjustment represents the fair value of the current portion and long term portion of the $550,100 related party production revenue payable that was converted into 1,222,444 shares of common stock~~
⁽⁵⁾ ~~Adjustment of $4,082 reflecting 4,082,488 shares of common stock that will be issued for the conversion at par value $0.001~~
⁽⁶⁾ Adjustment of $2,299,104 consists of $105,528 fair value of the 4,082,448 shares to be issued for related party debt conversion, based on $0.0268 share closing price on November 30, 2021 net of the $4,082 par value; $2,193,776 forgiveness of liabilities to related parties for the difference of the fair value of the shares converted and the related party debt amount forgiven or converted.
~~An aggregate of 4,082,448 shares of common stock valued at $0.45 per share will be issued to satisfy certain related party debt as detailed in the table below:~~
~~Common Stock Activity~~
~~Share issuances for accrued salaries to employees~~ ~~1,397,881~~
~~Share issuances for accrued director fees~~ ~~317,708~~
~~Share issuances for related party 12% Subordinated Note and interest~~ ~~1,144,415~~
~~Share issuances for related party production revenue payable program~~ ~~1,222,444~~
~~Common stock increase~~ ~~4,082,448~~
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Cash Flows

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

Nine Months
Ended
November 30, 2021

Nine Months
Ended
November 30, 2020

Increase
(Decrease)

Percentage
Change

Net cash provided by (used in) operating activities $ 31,984 $ (17,019 ) 49,003 (287.9 %)
Net cash (used in) investing activities $ (14,673 ) $ —   14,673 —
Net cash used in financing activities $ (33,447 ) $ (15,307 ) 18,140 (118.5 %)

Three Months
Ended
May 31, 2022

Three Months
Ended
May 31, 2021

Increase
(Decrease)

Percentage
Change

Net cash (used in) provided by operating activities $ (132,636 ) $ 63,339 (195,975 ) (309.4 %)
Net cash used in investing activities $ — $ (10,584 ) (10,584 ) 100 %
Net cash provided by financing activities $ 1,152,532 $ 26,440 1,126,092 4,259.0 %

Cash Flow (Used In) Provided By ~~(Used In)~~ Operating Activities

Cash flow from operating activities is derived from the production of our crude oil reserves and changes in the balances of non-cash accounts, receivables, payables or other non-energy property asset account balances. For the ~~nine~~three months ended ~~November 30, 2021,~~May 31, 2022, cash flow used in operating activities was $132,636 in comparison to cash flow provided by operating activities ~~was $31,984 in comparison to cash flow used in operating activities~~ of ~~$17,019~~$63,339 for the ~~nine~~three months ended ~~November 30, 2020. The~~May 31, 2021. This increase of $195,975 in our cash flow ~~provided by~~used for operating activities ~~for~~included approximately $68,086 in one-time expenses associated with the ~~nine months ended November 30, 2021~~special shareholders meeting that was ~~due~~held to ~~a reduction in~~approve the acquisition of another crude oil and natural gas property, Reabold California, LLC. Additionally, we experienced transaction expenses of $1,025,541 associated with the acquisition and the sale of our ~~net loss, and a smaller increase in payables than in the comparative period.~~common stock. Variations in cash flow from operating activities may impact our level of exploration and development expenditures.
Our expenditures in operating activities consist primarily of exploration and drilling expenses, production expenses, geological, geophysical and engineering services and maintenance of existing mineral leases. Our expenses also consist of consulting and professional services, employee compensation, legal, accounting, travel and other G&A expenses that we have incurred in order to address normal and necessary business activities.
Cash Flow ~~(Used In)~~Used In Investing Activities

Cash flow from investing activities is derived from changes in ~~crude~~ oil and gas property balances and ~~any lending~~other investment activities. Cash flow used in ~~our~~ investing activities for the ~~nine~~three months ended ~~November 30,~~May 31, 2022 was $-0-. For the three months ended May 31, 2021 ~~was $14,673 in comparison to~~ cash flow used in ~~our~~ investing activities ~~of $-0- for the nine months ended November 30, 2020.~~was $10,584.

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Cash Flow ~~(Used In)~~ Provided By Financing Activities

Cash flow from financing activities is derived from changes in long-term liability account balances, our borrowing activities or in equity account balances, excluding retained earnings. Cash flow ~~used in our~~provided by financing activities ~~was $33,447~~ for the ~~nine~~three months ended ~~November 30, 2021~~May 31, 2022 was $1,152,532 in comparison to ~~cash flow used in our~~$26,440 provided by financing activities ~~of $15,307 for~~in the ~~nine~~three months ended ~~November 30, 2020. This increase in cash provided by our cash flow activities was primarily due to insurance financing payments and payments on our line~~May 31, 2021. During the three months ended May 31, 2022 we received $1,987,500 net of ~~credit offset by proceeds received~~transaction expenses from the ~~Small Business Administration (SBA) second-draw paycheck protection program loan. For~~sale of 128,125,000 shares of our common stock. Additionally, during the ~~nine~~three months ended ~~November 30, 2021,~~May 31, 2022, we ~~made total payments~~paid off the balance of ~~$45,000 to our~~$808,182 on the line of credit with UBS Bank.

The following discussion is a summary of cash flows provided by ~~and~~or used in ~~the Company’s~~our financing activities at ~~November 30, 2021.~~May 31, 2022.

~~Current debt (Short-term borrowings)~~SHORT-TERM AND LONG-TERM BORROWINGS:

Note Payable

In December 2018, the Company was able to settle an outstanding balance owed to one of its third-party vendors. This settlement resulted in a $120,000 note payable being issued to the vendor. Additionally, the Company agreed to issue 2,000,000 shares of the Company’s common stock as a part of the settlement agreement. Based on the closing price of the Company’s common stock on the date of the settlement agreement, the value of the common stock transaction was determined to be $6,000. The common stock shares were issued during the twelve months ended February 29, 2020. The note has a maturity date of January 1, 2022 and bears an interest rate of 10% rate per annum. Monthly interest is accrued and payable on January 1^st of each anniversary date until maturity of the note. At ~~February 28, 2021,~~May 31, 2022, the principal and accrued interest had not been paid and was outstanding. The accrued interest on the Note was ~~$35,000~~$41,000 and ~~$26,000~~$38,000 at ~~November 30, 2021~~May 31, 2022 and February 28, ~~2021,~~2022, respectively.
Note Payable – Related Party

On December 22, 2020, the Company entered into a Secured Promissory Note (the “Note”), as borrower, with James Forrest Westmoreland and Angela Marie Westmoreland, Co-Trustees of the James and Angela Westmoreland Revocable Trust, or its assigns (the “Noteholder”), as the lender. James F. Westmoreland is the Company’s Chairman, President and Chief Executive Officer. Pursuant to the Note, the Noteholder loaned the Company an aggregate principal amount of $155,548. After the deduction of loan fees of $10,929 the net proceeds from the loan were $144,619. The loan fees are being amortized as original issue discount (OID) over the term of the loan. The interest rate of the loan is 2.25%. The Note requires monthly payments on the Note balance until repaid in full. The maturity date of the Note is December 21, 2035. For the three months ended ~~November 30, 2021,~~May 31, 2022, the Company made principal payments of ~~$6,427~~$2,128 and amortized debt discount of ~~$546.~~$182. The obligations under the Note are secured by a lien on and security interest in the Company’s oil and gas assets located in Kern County, California, as described in a Deed of Trust entered into by the Company in favor of the Noteholder to secure the obligations under the Note. Such lien shall be a first priority lien, subject only to a pre-existing lien filed by a working interest partner of the Company.
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The Company may prepay the Note at any time. Upon the occurrence of any Event of Default and expiration of any applicable cure period, and at any time thereafter during the continuance of such Event of Default, the Noteholder may at its option, by written notice to the Company: (a) declare the entire principal amount of the Note, together with all accrued interest thereon and all other amounts payable hereunder, immediately due and payable; (b) exercise any of its remedies with respect to the collateral set forth in the Deed of Trust; and/or (c) exercise any or all of its other rights, powers or remedies under applicable law.

Current portion of note payable –related party balances at ~~November 30, 2021~~May 31, 2022 and February 28, ~~2021~~2022 are set forth in the table below:

November 30, 2021 February 28, 2021 May 31, 2022 February 28, 2022
Note payable –related party, current portion $ 8,772 $ 8,598 $ 8,888 $ 8,829
Unamortized debt issuance expenses (730 ) (728 ) (729 ) (729 )
Note payable – related party, current portion, net $ 8,042 $ 7,870 $ 8,159 $ 8,100

Note payable –related party long-term balances at ~~November 30, 2021~~May 31, 2022 and February 28, ~~2021~~2022 are set forth in the table below:

November 30, 2021 February 28, 2021 May 31, 2022 February 28, 2022
Note payable – related party, non-current $ 138,939 $ 145,540 $ 134,466 $ 136,710
Unamortized debt issuance expenses (9,532 ) (10,080 ) (9,168 ) (9,350 )
Note payable – related party, non-current, net $ 129,407 $ 135,460
Note payable– related party, non-current, net $ 125,298 $ 127,360

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Future estimated payments on the outstanding note payable – related party are set forth in the table below:

Twelve month periods ending November 30,
2022 $ 8,771
Twelve month periods ending May 31,
2023 9,006 $ 8,887
2024 9,247 9,126
2025 9,495 9,370
2026 9,750 9,622
2027 10,715
Thereafter 101,442 94,797
Total $ 147,711 $ 142,517
Short-term Convertible Note Payable
During the twelve months ended February 28, 2022, the Company executed a convertible promissory note with a third party for $200,000. The interest rate was 18% per annum and is payable in kind (PIK) solely by additional shares of the Company’s common stock. Regardless of when conversion occurred, a full 12 months of interest would be payable upon conversion. On May 5, 2022, the Company received notice of conversion of the promissory note. The face amount of the note and $36,000 in interest were converted at a rate of $0.0085 per share into 27,764,706 share of the Company’s common stock during the three months ended May 31, 2022.
12% Subordinated Notes

The Company’s 12% Subordinated Notes (“the Notes”) issued pursuant to a January 2010 private placement offering to accredited investors, resulted in $595,000 in gross proceeds (of which $250,000 was from a related party) to the Company and accrue interest at 12% per annum, payable semi-annually on January 29th and July 29th. On January 29, 2015, the Company and 12 of the 13 holders of the Notes agreed to extend the maturity date of the Notes for an additional two years to January 29, 2017. Effective January 29, 2017, the maturity date of the Notes and the expiration date of the warrants that were issued in conjunction with the Notes were extended for an additional two years to January 29, 2019.

As a result of the Company restructuring its balance sheet through conversions of related party debt to common stock, the related party 12% Noteholder chose to convert the principal and accrued interest of their Notes to the Company’s common stock. The related party Note for $250,000 and accrued interest of $264,986 were converted to common stock at a rate of approximately $0.45 for every dollar of principal and interest resulting in 1,144,415 shares of common stock being issued.
During the three months ended May 31, 2022, one 12% Note holder chose to convert the principal balance and accrued interest in to the Company’s common stock. The $25,000 Note and accrued interest of $10,520 were converted at a rate of approximately $0.45 for every dollar of principal and interest resulting in 78,934 shares of common stock being issued.
The Company has informed the remaining Note holders that the payment of principal and final interest will be late and is subject to future financing being completed. The Notes principal of ~~$565,000 was payable in full at the amended maturity date of the Notes, January 29, 2019, and~~$290,000 has not been paid. The terms of the Notes, state that should the Board of Directors decide that the payment of the principal and any unpaid interest would impair the financial condition or operations of the Company, the Company may then elect a mandatory conversion of the unpaid principal and interest into the Company’s common stock at a conversion rate equal to 75% of the average closing price of the Company’s common stock over the 20 consecutive trading days preceding December 31, 2018. ~~As of May 31, 2021, no conversion of the unpaid principal and interest into the Company’s common stock has occurred.~~ The accrued interest on the 12% Notes at ~~November 30, 2021~~May 31, 2022 and February 28, ~~2021~~2022 was ~~$391,124~~$133,480 and ~~$340,042,~~$135,229, respectively.

12% Note balances at ~~November 30, 2021~~May 31, 2022 and February 28, ~~2021~~2022 are set forth in the table below:

November 30, 2021 February 28, 2021
12% Subordinated Notes $ 315,000 $ 315,000
12% Subordinated Notes – related party 250,000 250,000
Total 12% Subordinated Note balance $ 565,000 $ 565,000
May 31, 2022 February 28, 2022
12% Subordinated notes – third party $ 290,000 $ 315,000
12% subordinated notes – related party — —
12% Subordinated notes balance $ 290,000 $ 315,000
Line of Credit

The ~~accrued interest owed~~Company had an $890,000 line of credit for working capital purposes with UBS Bank USA (“UBS”), established pursuant to a Credit Line Agreement dated October 24, 2011 that was secured by the personal guarantee of its Chairman, President and Chief Executive Officer. On May 26, 2022, the Company paid off the outstanding balance of $809,930 on the ~~12% Subordinated Note to~~line of credit. The payoff of the ~~related party is presented on~~line of credit was previously approved under terms of the Equity Exchange Agreement in which the Company acquired the Reabold property in California. The payoff was a part of the use of proceeds from the Company’s ~~Balance Sheets at February 28, 2021 under the caption~~ ~~Accounts payable – related party~~ ~~rather than under the caption~~ ~~Accrued interest~~.sale of common stock to a third party.

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Production Revenue Payable

Beginning in December 2018, the Company conducted a fundraising program to fund the drilling of future wells in California and Michigan and to settle some of its historical debt. The purchaser(s) of a production revenue payment interest ~~would receive~~received a production revenue payment on future wells to be drilled in California and Michigan in exchange for their purchase. ~~The~~As of May 31, 2022, the production revenue payment program balance ~~as of November 30, 2021~~ was $950,100 of which $550,100 was owed to a related party –- the Company’s Chairman, President and Chief Executive ~~officer.~~Officer.

~~The production revenue payment program balance as of November 30, 2021 was $400,000.~~ The production payment interest entitles the purchasers to receive production payments equal to twice their original amount paid, payable from a percentage of the Company’s future net production payments from wells drilled after the date of the purchase and until the Production Payment Target (as described below) is met. The Company shall pay fifty percent of its net production payments from the relevant wells to the purchasers until each purchaser has received two times the purchase price (the “Production Payment Target”). Once the Company pays the purchasers amounts equal to the Production Payment Target, it shall thereafter pay a pro-rated eight percent (8%) of $1.3 million on its net production payments from the relevant wells to each of the purchasers. However, if the total raised is less than the target $1.3 million, then the payment will be a proportionate amount of the eight percent (8%). Additionally, if the Production Payment Target is not met within the first three years, the Company shall pay seventy-five percent of its production payments from the relevant wells to the purchasers until the Production Payment Target is met.

The Company accounted for the amounts received from these sales in accordance with ASC 470-10-25 and 470-10-35 which require amounts recorded as debt to be amortized under the interest method as described in ASC 835-30, Interest Method. Consequently, the program balance of $950,100 has been recognized as a production revenue payable. The Company determined an effective interest rate based on future expected cash flows to be paid to the holders of the production payment interests. This rate represents the discount rate that equates estimated cash flows with the initial proceeds received from the sales and is used to compute the amount of interest to be recognized each period. Estimating the future cash outflows under this agreement requires the Company to make certain estimates and assumptions about future revenues and payments and such estimates are subject to significant variability. Therefore, the estimates are likely to change which may result in future adjustments to the accretion of the interest expense and the amortized cost based carrying value of the related payables.

Accordingly, the Company has estimated the cash flows associated with the production revenue payments and determined a discount of ~~$1,430,648~~$1,077,642 as of ~~November 30, 2021,~~May 31, 2022, which is being accounted as interest expense over the estimated period over which payments will be made based on expected future revenue streams. For the three months ended ~~November 30,~~May 31, 2022 and 2021, ~~and 2020,~~ amortization of the debt discount on these payables amounted to ~~$87,008~~$30,525 and ~~$88,786,~~$31,970, respectively, which has been included in interest expense in the statements of operations.

Production revenue payable balances at ~~November 30, 2021~~May 31, 2022 and February 28, ~~2021~~2022 are set forth in the table below:

November 30, 2021 February 28, 2021
Estimated payments of production revenue payable $ 2,380,748 $ 2,000,258
Less: unamortized discount (790,318 ) (496,836 )
1,590,430 1,503,422
Less: current portion (85,759 ) (111,753 )
Net production revenue payable – long-term $ 1,504,671 $ 1,391,669
~~Line of Credit~~
The Company has an existing $890,000 line of credit for working capital purposes with UBS Bank USA (“UBS”), established pursuant to a Credit Line Agreement dated October 24, 2011 that is secured by the personal guarantee of its Chairman, President and Chief Executive Officer. On July 10, 2017, a $700,000 portion of the outstanding line of credit balance was converted to a 24 month fixed term annual interest rate of 3.244% with interest payable monthly. On July 10, 2021, the fixed term loan amount of $700,000 was renewed at an annual percentage interest rate of 3.20%. The Company has been notified that effective January 1, 2022 a new interest rate benchmark will be used for fixed rate interest calculations. The new rate will use the UBS Bank USA Fixed Funding Rate (UBSFFR), which is based on the Chicago Mercantile Exchange (CME) Term SOFR Rate or US Treasury Rate, plus a liquidity premium depending on the duration of the contract. 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. The Company has been notified that effective January 1, 2022 a new interest rate benchmark will be used for interest calculations. The new rate will be the UBS Variable Rate (UBSVR), which is comprised of the 30-day average of the Secured Overnight Financing Rate (SOFR) plus a fixed spread of 0.110%.
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During the nine months ended November 30, 2021 and 2020, the Company did not receive any advances on the line of credit. During the nine months ended November 30, 2021 and 2020, the Company made payments to the line of credit of $45,000 and $45,000, respectively. Interest converted to principal for the nine months ended November 30, 2021 and 2020 was $20,679 and $21,744, respectively. At November 30, 2021 and February 28, 2021, the line of credit had an outstanding balance of $816,583 and $840,904, respectively.
~~Paycheck Protection Program (PPP) Loans~~
In March 2020, the Coronavirus Aid, Relief, and Economic Security Act commonly referred to as the CARES Act became law. One component of the CARES Act was the paycheck protection program (“PPP”) which provides small business with the resources needed to maintain their payroll and cover applicable overhead. The PPP is implemented by the Small Business Administration (“SBA”) with support from the Department of the Treasury. The Company applied for, and was accepted to participate in this program. On May 11, 2020, the Company received funding for approximately $74,355. On February 12, 2021, the Company applied for loan forgiveness under the provisions of Section 1106 of the CARES Act. Loan forgiveness was subject to the sole approval of the SBA. On February 23, 2021, the SBA notified our lender that the loan was forgiven and repaid the loan in full.
On March 4, 2021, the Company applied for, and was accepted to participate in the SBA PPP Second Draw program with funding pursuant to the Economic Aid Act that was passed in December, 2020. On March 15, 2021, Daybreak received funding for $72,800. The Company applied for full loan forgiveness for the PPP Second Draw PPP loan and on October 6, 2021, the SBA notified our lender that the loan was forgiven and repaid the loan in full.
May 31, 2022 February 28, 2022
Estimated payments of production revenue payable $ 991,638 $ 941,259
Less: unamortized discount (112,476 ) (124,134 )
879,162 817,125
Less: current portion (210,215 ) (78,877 )
Net production revenue payable – long term $ 621,461 $ 738,248

Encumbrances

On October 17, 2018, a working interest partner in California filed a UCC financing statement in regards to ~~payable amounts~~payables owed to the partner by the Company. As of ~~November 30,~~May 31, 2021 we had no encumbrances on our crude oil project in Michigan.

Operating Leases

~~The Company leases~~We lease approximately 988 rentable square feet of office space from an unaffiliated third party for our corporate office located in Spokane Valley, Washington. Additionally, we lease approximately 416 and 695 rentable square feet from unaffiliated third parties for our regional operations office in Friendswood, Texas and storage and auxiliary office space in Wallace, Idaho, respectively. The lease in Friendswood is a 12 month lease that expires in October ~~2022.~~2021 and as such is considered a short-term lease. The Company has elected to not apply the recognition requirements of ASC 842 to this short-term lease. The Spokane Valley and Wallace leases are currently on a month-to-month basis. ~~The Company’s~~Our lease agreements do not contain any residual value guarantees, restrictive covenants or variable lease payments. ~~The Company has~~We have not entered into any financing leases.

25
~~The Company determines~~
We determine if an arrangement is a lease at inception. Operating leases are recorded in operating lease right of use assets, net, operating lease liability – current, and operating lease liability, – long-term on its balance sheet.

Rent expense for the ~~nine~~three months ended ~~November 30,~~May 31, 2022 and 2021 was $5,947 and ~~2020 was $17,542 and $17,642, respectively.~~
~~Related Party Transactions~~
In California at the East Slopes Project, two of the vendors that the Company uses for services are partially owned by a related party, the Company’s Chief Operating Officer. The Company’s Chief Operating Officer is a 50% owner in both Great Earth Power and ABPlus Net Holdings. Great Earth Power began providing a portion of the solar power electrical service for production operations in July 2020. ABPlus Net Holdings began providing portable tank rentals to the Company as a part of its water treatment and disposal operations in September 2020. The services provided by Great Earth Power and ABPlus Net Holdings are competitive with other vendors and save the Company significant expense. For the nine months ended November 30, 2021 and 2020, Great Earth Power was paid $20,038 and $1,925, respectively. For the nine months ended November 30, 2021 and 2020, ABPlus Net holdings was paid $10,560 and $-0-,$5,947, respectively.

Capital Commitments

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

30
Management Plans to Continue as a Going Concern

We continue to implement plans to enhance Daybreak’s ability to continue as a going concern. The Company currently has a net revenue interest in 20 producing crude oil wells in our East Slopes Project located in Kern County, California. The revenue from these wells has created a steady and reliable source of revenue for the Company. Our average working interest in these wells is 36.6% and the average net revenue interest is ~~28.4%.~~
On October 20, 2021, we entered into an Equity Exchange Agreement (the “Exchange Agreement”) by and between Daybreak, Reabold California LLC, a California limited liability company (“Reabold”), and Gaelic Resources Ltd., a private company incorporated in the Isle of Man and the 100% owner of Reabold (“Gaelic”), pursuant to which the parties propose for (i) Daybreak to acquire 100% ownership of Reabold, in exchange for (ii) Daybreak issuing 160,964,489 shares of its common stock, par value $0.0001 (“Common Stock”) to Gaelic (the “Exchange Shares”), which will result in Reabold becoming a wholly-owned subsidiary of Daybreak named “Daybreak, LLC” and Gaelic becoming the owner of the Exchange Shares and a major shareholder of Daybreak (the foregoing transaction and the transactions contemplated thereby, the “Equity Exchange”)28.5%.

In ~~connection~~May 2022, the Company acquired Reabold California, LLC (“Reabold”) from a third party. This property includes producing wells in both the Monterey and Contra Costa counties of California. This project includes four producing wells. We have a 50% working interest with a 40% net revenue interest in this project. In conjunction with our acquisition of Reabold, the ~~Equity Exchange, and as conditions~~Company was able to ~~closing the Equity Exchange, among other things we also propose to enter into agreements to sell~~secure a ~~minimum~~capital raise of $2,500,000 ~~of shares of Daybreak’s Common Stock, and a minimum of 125,000,000 shares of Common Stock, to one or more investors in a private placement expected to close promptly following~~through the ~~closing~~issuances of the ~~Equity Exchange (the “Capital Raise”), with the proceeds of the Capital Raise to be used to repay in full the~~ Company’s ~~line of credit with UBS Bank and for drilling and exploration activities and other working capital purposes.~~common stock.

~~As of November 30, 2021, all of the conditions for the closing of the Exchange Agreement have not yet been met.~~ The Company ~~is continuing to work towards satisfying all of the Exchange Agreement conditions including having certain conditions of the Exchange Agreement approved by the Company’s shareholders.~~
~~We anticipate revenues~~anticipates its revenue will continue to increase as the Company participates in the drilling of more wells in the East Slopes ~~Project~~and Reabold projects in ~~California~~California. Daybreak’s sources of funds in the past have included the debt or equity markets and the sale of assets. 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 ~~our drilling operations begin in Michigan.~~a going concern.

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

Our financial statements as of ~~November 30, 2021~~May 31, 2022 do not include any adjustments that might result from the inability to implement or execute Daybreak’s plans to improve our ability to continue as a going concern.
Critical Accounting Policies

Refer to Daybreak’s Annual Report on Form 10-K for the fiscal year ended February 28, ~~2021.~~2022.

Off-Balance Sheet Arrangements

As of ~~November 30, 2021,~~May 31, 2022, we did not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partners that have been, or are reasonably likely to have, a material effect on our financial position or results of operations.

3126

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

Management’s Evaluation of Disclosure Controls and Procedures

As of the end of the reporting period, ~~November 30, 2021,~~May 31, 2022, an evaluation was conducted by Daybreak management, including our President and Chief Executive Officer, who is also serving as our interim principal finance and accounting officer, as to the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) of the Exchange Act. Such disclosure controls and procedures are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods specified by the SEC rules and forms. Additionally, it is vital that such information is accumulated and communicated to our management, including our President and Chief Executive Officer, in a manner to allow timely decisions regarding required disclosures. Based on that evaluation, our management concluded that our disclosure controls were effective as of ~~November 30, 2021.~~May 31, 2022.

Changes in Internal Control over Financial Reporting

~~During the three months ended November 30, 2021, there~~There have not been any changes in the Company’s internal control over financial reporting during the three months ended May 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Limitations
Our management does not expect that our disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions.

Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

3227

PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this ~~Form 10-Q Report,~~report, you should carefully consider the ~~various~~ factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the ~~year~~period ended February 28, ~~2021,~~2022, which could materially affect our business, financial condition or future results. ~~Our Annual Report is available from the SEC at www.sec.gov.~~ The risks described in this report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial could have a material adverse effect on our business, financial condition ~~or future~~and results of operations.

3328

ITEM 6. EXHIBITS

The following Exhibits are filed as part of the report:

Exhibit
Number
Description

~~2.1~~
~~Equity Exchange Agreement dated October 20, 2021 by and between Daybreak Oil and Gas, Inc., Reabold California LLC, and Gaelic Resources Ltd.~~ ~~(incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K dated October 26, 2021, and filed on October 27, 2021).~~
~~10.1~~⁽¹⁾
~~Form of letter agreement regarding conversion of accrued director fees.~~
~~10.2~~⁽¹⁾
~~Form of letter agreement regarding conversion of accrued salary.~~
~~10.3~~⁽¹⁾
~~Letter agreement dated December 3. 2021 by and between Daybreak Oil and Gas, Inc., and James F. Westmoreland regarding conversion of 12% subordinated note.~~
31.1⁽¹⁾ Certification of principal executive and principal financial officer as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.+

32.1⁽¹⁾ Certification of principal executive and principal financial officer as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.+

~~101.SCH~~101.INS Inline XBRL ~~Taxonomy Schema~~
~~101.CAL~~ ~~Inline XBRL Taxonomy Calculation Linkbase~~
~~101.DEF~~ ~~Inline XBRL Taxonomy Definition Linkbase~~
~~101.LAB~~ ~~Inline XBRL Taxonomy Label Linkbase~~
~~101.PRE~~ ~~Inline XBRL Taxonomy Presentation Linkbase~~
~~101~~
~~The following materials from~~Instance Document - the Company’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2021, were formatted in Inline XBRL (Extensible Business Reporting Language): (i) Balance Sheets, (ii) Statements of Operations, (iii) Statements of Changes in Stockholders’ Deficit, (iv) Statements of Cash Flows, and (v) Notes to Financial Statements. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

~~104~~101.SCH Inline XBRL Taxonomy Extension Schema Document*
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document*
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document*
104 Cover Page Interactive Data File ~~(formatted as~~- formatted in Inline XBRL and contained in Exhibit ~~101)~~101*

⁽¹⁾
+
Filed herewith.
*
Furnished herewith.

3429

SIGNATURES

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

DAYBREAK OIL AND GAS, INC.

By: /s/ JAMES F. WESTMORELAND
James F. Westmoreland, its
President, Chief Executive Officer and interim
principal finance and accounting officer
(Principal Executive Officer, Principal Financial
Officer and Principal Accounting Officer)

Date: ~~January 14,~~July 25, 2022

30

35


	Series A Convertible								Additional
	Preferred Stock				Common Stock				Paid-In		Accumulated
	Shares		Amount		Shares		Amount		Capital		Deficit			Total
BALANCE, FEBRUARY 28, 2021		709,568	$	710		60,491,122	$	60,491	$	24,250,556	$	(29,428,897	)	$	(5,117,140	)

Recognition of warrants issued for:
Investor relations services		—		—		—		—		1,474		—			1,474

Net loss		—		—		—		—		—		(132,651	)		(132,651	)

BALANCE, MAY 31, 2021		709,568		710		60,491,122		60,491		24,252,030		(29,561,548	)		(5,248,317	)

Recognition of warrants issued for:
Investor relations services		—		—		—		—		1,474		—			1,474

Net loss		—		—		—		—		—		(72,080	)		(72,080	)

BALANCE, AUGUST 31, 2021		709,568	$	710		60,491,122	$	60,491	$	24,253,504	$	(29,633,628	)	$	(5,318,923	)

Recognition of warrants issued for:
Investor relations services		—		—		—		—		1,474		—			1,474

Net loss		—		—		—		—		—		(43,213	)		(43,213	)

BALANCE, NOVEMBER 30, 2021		709,568	$	710		60,491,122	$	60,491	$	24,254,978	$	(29,676,841	)	$	(5,360,662	)


	Nine Months Ended						Three Months Ended
	November 30, 2021			November 30, 2020			May 31, 2022			May 31, 2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(247,944	)	$	(514,115	)	$	(1,173,487	)	$	(132,651	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation, depletion, amortization and impairment expense		44,004			42,318
Adjustments to reconcile net cash used in operating activities:
Depreciation, depletion and ARO expense								11,776			13,948
Amortization of debt discount		87,554			88,786			14,733			30,707
Operating lease expense in conjunction with right of use asset		—			5,857
Financing fee expense								512,500			—
Warrant issued for investor relations services		4,422			4,422			—			1,474
Gain on forgiveness of PPP 2^nd Draw loan		(72,800	)		—
Changes in assets and liabilities:
Accounts receivable – crude oil sales		(2,789	)		(81	)		29,176			14,303
Accounts receivable – joint interest participants		2,166			(10,817	)
Accounts receivable - joint interest participants								5,116			28,382
Prepaid expenses and other current assets		45,968			38,067			21,684			27,490
Accounts payable and other accrued liabilities		120,577			226,689			447,163			26,229
Accounts payable – related parties		(7,332	)		48,592
Operating lease liability in conjunction with right of use asset		—			(5,857	)
Accounts payable - related parties								452			34,038
Accrued interest		58,158			59,120			(1,749	)		19,419
Net cash provided by (used in) operating activities		31,984			(17,019	)		(132,636	)		63,339

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to crude oil properties		(5,213	)		—
Purchase of fixed assets		(9,460	)		—
Purchase of fixed assets (truck)								—			(8,500	)
Additions to oil and gas properties								—			(2,084	)
Net cash used in investing activities		(14,673	)		—			—			(10,584	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from paycheck protection program (PPP) loan		72,800			74,355			—			72,800
Insurance financing repayments								(24,601	)		(29,332	)
Proceeds from sale of common stock								1,987,500			—
Payments to note payable – related party								(2,185	)		(2,128	)
Payments to line of credit		(45,000	)		(45,000	)		(808,182	)		(15,000	)
Insurance financing repayments		(54,820	)		(44,662	)
Payments on note payable – related party		(6,427	)		—
Net cash used in financing activities		(33,447	)		(15,307	)
Net cash provided by financing activities								1,152,532			26,440

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(16,136	)		(32,326	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		33,528			94,043
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	17,392		$	61,717
NET INCREASE IN CASH								1,019,896			79,195
CASH AT BEGINNING OF PERIOD								139,573			33,528
CASH AT END OF PERIOD							$	1,159,469		$	112,723

CASH PAID FOR:
Interest	$	10,145		$	19,261		$	61,956		$	4,169
Income taxes	$	—		$	—		$	—		$	—

SUPPLEMENTAL CASH FLOW INFORMATION:
Unpaid additions to crude oil properties	$	—		$	10,826
Non-cash increase to line of credit due to monthly interest	$	20,679		$	21,744		$	—		$	6,892
Financing of insurance premiums	$	81,154		$	65,088
Common stock issued for settlement of related party note payable	$	—		$	27,835
Common stock issued for conversion of 12% Subordinated Note							$	35,520		$	—
Common stock issued for conversion of convertible Note							$	236,000		$	—
Common stock issued for acquisition of crude oil and natural gas property							$	4,167,325		$	—
Common stock issued for financing fees							$	125,125		$	—
Unpaid additions to O&G properties							$	263,619		$	—
Goodwill from acquisition of O&G properties							$	2,432,219		$	—

	November 30, 2021			February 28, 2021			May 31, 2022			February 28, 2022
Proved leasehold costs	$	115,119		$	115,119		$	115,119		$	115,119
Costs of wells and development		2,297,137			2,291,924			2,309,628			2,309,628
Capitalized exploratory well costs		1,341,494			1,341,494			1,341,494			1,341,494
Cost of proved crude oil properties		3,753,750			3,748,537			3,766,241			3,766,241
Accumulated depletion, depreciation, amortization and impairment		(3,230,344	)		(3,192,081	)		(3,239,463	)		(3,230,209	)
Proved crude oil properties, net	$	523,406		$	556,456
Michigan unproved crude oil properties		55,978			55,978
Total proved crude oil properties, net							$	526,778		$	536,032
Unproved leasehold costs								0			0
Total proved and unproved crude oil properties, net	$	579,384		$	612,434		$	0		$	536,032


Crude oil and natural gas property and equipment	$	4,694,563
Goodwill		2,168,600
Accounts payable		(263,619	)
Purchase price, net of closing adjustments	$	6,599,544

	November 30, 2021			February 28, 2021
Note payable – related party, current portion	$	8,772		$	8,598
Unamortized debt issuance expenses		(730	)		(728	)
Note payable – related party, current portion, net	$	8,042		$	7,870

	May 31, 2022			February 28, 2022
Note payable –related party, current portion	$	8,888		$	8,829
Unamortized debt issuance expenses		(729	)		(729	)
Note payable – related party, current portion, net	$	8,159		$	8,100

Twelve month periods ending November 30,
2022	$	8,771
Twelve month periods ending May 31
2023		9,006	$	8,887
2024		9,247		9,126
2025		9,495		9,370
2026		9,750		9,622
2027				10,715
Thereafter		101,442		94,797
Total	$	147,711	$	142,517

	November 30, 2021		February 28, 2021
12% Subordinated Notes	$	315,000	$	315,000
12% Subordinated Notes – related party		250,000		250,000
Total 12% Subordinated Note balance	$	565,000	$	565,000

	May 31, 2022		February 28, 2022
12% Subordinated notes – third party	$	290,000	$	315,000
12% Subordinated notes – related party		0		0
12% Subordinated notes balance	$	290,000	$	315,000

	November 30, 2021			February 28, 2021
Estimated payments of production revenue payable	$	2,380,748		$	2,000,258
Less: unamortized discount		(730,318	)		(496,836	)
		1,590,430			1,503,422
Less: current portion		(85,759	)		(111,753	)
Net production revenue payable – long-term	$	1,504,671		$	1,391,669

Fiscal Period Ended	Shares of Series A Preferred Converted to Common Stock		Shares of Common Stock Issued from Conversion		Number of Accredited Investors
Periods prior to February 29, 2014		662,200		1,986,600		41
February 28, 2015		3,000		9,000		1
February 29, 2016		10,000		30,000		1
February 28, 2017		0		0		0
February 28, 2018		14,997		44,991		1
February 28, 2019		0		0		0
February 29, 2020		0		0		0
February 28, 2021		0		0		0
November 30, 2021		0		0		0
Totals		690,197		2,070,591		44

Fiscal Period Ended	Shareholders at Period End	Accumulated Dividends
Periods prior to February 28, 2014		$	1,447,943
February 28, 2015	58		132,634
February 29, 2016	57		130,925
February 28, 2017	57		130,415
February 28, 2018	56		128,231
February 28, 2019	56		127,714
February 29, 2020	56		128,063
February 28, 2021	56		127,714
November 30, 2021	56		96,223
		$	2,449,862

	Common Stock Balance		Par Value
Common stock, Issued and Outstanding, February 28, 2021		60,491,122
Shares issued for Series A Preferred conversion		2,128,704	$	2,129
Shares issued for Series A accumulated dividend		1,100,000	$	1,100
Shares issued for debt conversion of accrued salaries		1,397,880	$	1,398
Shares issued for debt conversion of accrued directors fees		317,708	$	318
Shares issued for conversion of 12% Note principal and interest – related party		1,144,415	$	1,144
Shares issued for investment principal in production revenue program		1,222,444	$	1,222
Common stock, Issued and Outstanding, February 28, 2022		67,802,273
Shares issued for conversion of 12% Note principal and interest		78,934	$	79
Shares issued for conversion of convertible note		27,764,706	$	27,765
Shares issued for acquisition of crude oil and natural gas properties		160,964,489	$	160,964
Shares issued from sale of stock		128,125,000	$	128,125
Common stock, Issued and Outstanding, May 31, 2022		384,735,402

	Warrants		Weighted Average Exercise Price
Warrants outstanding, February 28, 2021		2,100,000	$	0.01

Changes during the nine months ended November 30, 2021:
Issued		0	$	0
Expired / cancelled / forfeited		0	$	0
Warrants outstanding, November 30, 2021		2,100,000	$	0.01
Warrants exercisable, November 30, 2021		528,507	$	0.01

	Warrants		Weighted Average Exercise Price
Warrants outstanding, February 28, 2022		2,100,000	$	0.01

Changes during the three months ended May 31, 2022:
Issued		0	$	—
Expired / cancelled / forfeited		0	$	—
Warrants outstanding, May 31, 2022		2,100,000	$	0.01
Warrants exercisable, May 31, 2022		2,100,000	$	0.01

Pro Forma	November 30, 2021 (Unaudited)			Adjustments			Pro Forma November 30, 2021 (Unaudited)
CURRENT LIABILITIES:
Accounts payable and other accrued liabilities	$	1,857,833		$	(194,030	)⁽¹⁾	$	1,663,803
Accounts payable related parties		981,634			(938,310	)⁽²⁾		43,324
Accrued interest		161,138			—			161,138
Note payable		120,000			—			120,000
12% Notes payable		315,000			—			315,000
12% Notes payable, related party		250,000			(250,000	)⁽³⁾		—
Note payable, related party		8,042			—			8,042
Production revenue payable – current, net of discount		85,759			(49,654	)⁽⁴⁾		36,105
Line of credit		816,583			—			816,583
Total current liabilities		4,595,989			(1,431,994	)		3,163,995

LONG TERM LIABILITIES:
Note payable, related party		129,407			—			129,407
Production revenue payable – net of discount and current		1,504,671			(871,192	)⁽⁴⁾		633,479
Asset retirement obligation		36,700			—			36,700
Total long-term liabilities		1,670,778			(871,192	)		799,586
Total liabilities		6,266,767			(2,303,186	)		3,963,581

STOCKHOLDERS’ DEFICIT:
Preferred stock		—			—			—
Series A Convertible preferred stock		710			—			710
Common stock 60,491,122 and 64,573,570 shares		60,491			4,082	⁽⁵⁾		64,573
Additional paid-in capital		24,254,978			2,299,104	⁽⁶⁾		26,554,082
Accumulated deficit		(29,676,841	)		—			(29,676,841	)
Total stockholders’ deficit		(5,360,662	)		2,303,186			(3,057,476	)

		~~Common Stock Activity~~
~~Share issuances for accrued salaries to employees~~		~~1,397,881~~
~~Share issuances for accrued director fees~~		~~317,708~~
~~Share issuances for related party 12% Subordinated Note and interest~~		~~1,144,415~~
~~Share issuances for related party production revenue payable program~~		~~1,222,444~~
~~Common stock increase~~		~~4,082,448~~

	Nine Months Ended November 30, 2021							Nine Months Ended November 30, 2020
	Expenses		Percentage			BOE Basis		Expenses		Percentage			BOE Basis
Production expenses	$	165,357		25.1	%			$	136,218		22.5	%
Exploration and drilling expenses		235		0.0	%				73		0.0	%
Depreciation, depletion, amortization (“DD&A”)		44,004		6.7	%				42,318		7.0	%
General and administrative (“G&A”) expenses		447,952		68.2	%				427,345		70.5	%
Total operating expenses	$	657,548		100.0	%	$	88.43	$	605,954		100.0	%	$	71.91

	Three Months Ended November 30, 2021							Three Months Ended November 30, 2020
	Expenses		Percentage			BOE Basis		Expenses		Percentage			BOE Basis
Production expenses	$	65,788		27.2	%			$	53,581		28.0	%
Exploration and drilling expenses		34		0.0	%				73		0.0	%
Depreciation, depletion, amortization (“DD&A”)		15,196		6.3	%				13,491		7.0	%
General and administrative (“G&A”) expenses		161,164		66.5	%				124,792		65.0	%
Total operating expenses	$	242,182		100.0	%	$	95.09	$	191,937		100.0	%	$	72.90

	Three Months Ended May 31, 2022						Three Months Ended May 31, 2021
	Expenses		Percentage		BOE Basis		Expenses		Percentage		BOE Basis
Production expenses	$	60,717	4.5	%			$	46,726	20.5	%
Depreciation, depletion, amortization (“DD&A”)		11,776	0.8	%				13,948	6.1	%
Transaction expenses		1,025,541	76.0	%				—	—
General and administrative (“G&A”) expenses		252,138	18.7	%				167,625	73.4	%
Total operating expenses	$	1,350,172	100.0	%	$	578.73	$	228,299	100.0	%	$	95.56

	November 30, 2021			February 28, 2021			Increase (Decrease)			Percentage Change			May 31, 2022			February 28, 2022			Increase (Decrease)			Percentage Change
Cash	$	17,392		$	33,528		$	(16,136	)		(48.1	%)	$	1,159,469		$	139,573		$	1,019,896		730.7	%
Current assets	$	302,912		$	283,239		$	19,673			6.9	%	$	1,380,571		$	416,651		$	963,920		231.3	%
Total assets	$	906,105		$	912,125		$	(6,020	)		(0.7	%)	$	8,792,745		$	975,704		$	7,817,041		801.2	%
Current liabilities	$	(4,595,989	)	$	(4,469,074	)	$	126,915			2.8	%	$	(3,013,189	)	$	(3,404,735	)	$	(391,546	)	(11.5	%)
Total liabilities	$	(6,266,767	)	$	(6,029,265	)	$	237,502			3.9	%	$	(3,814,247	)	$	(4,322,908	)	$	(508,661	)	(11.8	%)
Working capital deficit	$	(4,293,077	)	$	(4,185,835	)	$	107,242			2.6	%
Working capital													$	(1,632,618	)	$	(2,988,084	)	$	1,355,466		45.4	%

		~~Common Stock Activity~~
~~Share issuances for accrued salaries to employees~~		~~1,397,881~~
~~Share issuances for accrued director fees~~		~~317,708~~
~~Share issuances for related party 12% Subordinated Note and interest~~		~~1,144,415~~
~~Share issuances for related party production revenue payable program~~		~~1,222,444~~
~~Common stock increase~~		~~4,082,448~~

	Nine Months Ended November 30, 2021			Nine Months Ended November 30, 2020			Increase (Decrease)		Percentage Change
Net cash provided by (used in) operating activities	$	31,984		$	(17,019	)		49,003		(287.9	%)
Net cash (used in) investing activities	$	(14,673	)	$	—			14,673		—
Net cash used in financing activities	$	(33,447	)	$	(15,307	)		18,140		(118.5	%)

	Three Months Ended May 31, 2022			Three Months Ended May 31, 2021			Increase (Decrease)			Percentage Change
Net cash (used in) provided by operating activities	$	(132,636	)	$	63,339			(195,975	)		(309.4	%)
Net cash used in investing activities	$	—		$	(10,584	)		(10,584	)		100	%
Net cash provided by financing activities	$	1,152,532		$	26,440			1,126,092			4,259.0	%

Exhibit Number		Description

~~2.1~~		~~Equity Exchange Agreement dated October 20, 2021 by and between Daybreak Oil and Gas, Inc., Reabold California LLC, and Gaelic Resources Ltd.~~ ~~(incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K dated October 26, 2021, and filed on October 27, 2021).~~

~~10.1~~⁽¹⁾		~~Form of letter agreement regarding conversion of accrued director fees.~~

~~10.2~~⁽¹⁾		~~Form of letter agreement regarding conversion of accrued salary.~~

~~10.3~~⁽¹⁾		~~Letter agreement dated December 3. 2021 by and between Daybreak Oil and Gas, Inc., and James F. Westmoreland regarding conversion of 12% subordinated note.~~

31.1⁽¹⁾		Certification of principal executive and principal financial officer as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.+

32.1⁽¹⁾		Certification of principal executive and principal financial officer as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.+

~~101.SCH~~101.INS		Inline XBRL ~~Taxonomy Schema~~

~~101.CAL~~		~~Inline XBRL Taxonomy Calculation Linkbase~~

~~101.DEF~~		~~Inline XBRL Taxonomy Definition Linkbase~~

~~101.LAB~~		~~Inline XBRL Taxonomy Label Linkbase~~

~~101.PRE~~		~~Inline XBRL Taxonomy Presentation Linkbase~~

~~101~~		~~The following materials from~~Instance Document - the Company’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2021, were formatted in Inline XBRL (Extensible Business Reporting Language): (i) Balance Sheets, (ii) Statements of Operations, (iii) Statements of Changes in Stockholders’ Deficit, (iv) Statements of Cash Flows, and (v) Notes to Financial Statements. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

~~104~~101.SCH		Inline XBRL Taxonomy Extension Schema Document*

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document*

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document*

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document*

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document*

104		Cover Page Interactive Data File ~~(formatted as~~- formatted in Inline XBRL and contained in Exhibit ~~101)~~101*

DAYBREAK OIL AND GAS, INC.

By:	/s/ JAMES F. WESTMORELAND
	James F. Westmoreland, its
	President, Chief Executive Officer and interim
	principal finance and accounting officer
	(Principal Executive Officer, Principal Financial
	Officer and Principal Accounting Officer)

Date:	~~January 14,~~July 25, 2022