UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant x
Filed by a Party other than the Registrant o
Check the appropriate box:
o | Preliminary Proxy Statement |
o | Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) |
x | Definitive Proxy Statement |
o | Definitive Additional Materials |
o | Soliciting Material under § 240.14a-12 |
oPreliminary
DAYBREAK OIL AND GAS, INC.
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement,
oConfidential, for Use of if Other Than the Commission Only (as permitted by Rule 14a-6(e)(2))Registrant)
xDefinitive Proxy Statement
oDefinitive Additional Materials
oSoliciting Material under § 240.14a-12
Payment of Filing Fee (Check the appropriate box):
xNo fee required.
oFee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
required. |
x | Fee paid previously with preliminary materials. |
o |
DAYBREAK OIL AND GAS, INC.
601 W. Main Avenue, 1101 N. Argonne Rd.
Suite 1012A 211
Spokane Valley, WA 9920199212
June 10, 2010April 21, 2022
TO OUR SHAREHOLDERS:
TO OUR SHAREHOLDERS:
We cordiallyare pleased to provide you notice of, and to invite you to attend, the Annuala Special Meeting of the Shareholders (the “Annual“Special Meeting”) of Daybreak Oil and Gas, Inc., a Washington corporation (“Daybreak”, the “Company,” “we,” “our” or “us”), as called by the Board of Directors to be held on Thursday, July 22, 2010,May 20, 2022 at 10:00 AM (PDT)a.m., local time, at 601 W. Main Avenue, Spokane, Washington 99201.4800 Bee Caves Rd., Suite 100, Austin, Texas 78746 (subject to postponement(s) or adjournment(s) thereof).
The attached Notice of AnnualSpecial Meeting of Shareholders and proxy statement provide more information concerning the matters to be considered at the AnnualSpecial Meeting. We do not expect to transact any other business at the Special Meeting.
Pursuant
Daybreak has faced the challenges of declining oil prices (historically) and the lack of outside financing for several years. We have been working steadily to rules promulgatedminimize overhead and unnecessary expenditures, simplify our share structure, and position the Company for a strategic turnaround transaction. We are excited to let you know that we have simplified and optimized the Company, and have entered into an agreement for a proposed transaction that we believe will position Daybreak for future success.
This transaction involves us issuing Company common stock to acquire another California oil and gas exploration and production company. You are not being asked to sell or exchange your shares and you will keep your Daybreak shares.
On October 20, 2021, and subsequently amended on February 22, 2022, we entered into an Equity Exchange Agreement (as amended, 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 U.S. SecuritiesIsle 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 $0.001 (“Common Stock”) to Gaelic (the “Exchange Shares”), which will result in Reabold becoming a wholly-owned subsidiary of Daybreak named “Reabold California, LLC” and Gaelic becoming the owner of the Exchange Commission,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, we also propose to:
(a) | Amend and restate our Amended and Restated Articles of Incorporation by adopting the Second Amended and Restated Articles of Incorporation of the Company to (i) increase the number of total authorized shares of Common Stock to 500,000,000 to provide enough shares to accomplish the transactions contemplated by the Equity Exchange and conducted in anticipation of the Equity Exchange, complete the Capital Raise (defined below under (d)), and have shares available for other potential future issuances, and (ii) allow a majority share vote to approve transactions where a higher vote is provided by the Washington Business Corporation Act; |
(b) | Nominate a nominee selected by Reabold to the Daybreak Board of Directors, such nominee, if elected, to join the board effective as of the closing of the Equity Exchange; |
(c) | Enter into a voting agreement by and among Daybreak, Gaelic and the Company’s Chairman and Chief Executive Officer, James F. Westmoreland, where, on the terms therein, Daybreak and the |
shareholder parties thereto agree to nominate a person designated by Gaelic and a person designated by James F. Westmoreland to Daybreak’s Board of Directors, and the parties thereto agree to vote their shares in favor of such candidates (the “Voting Agreement”); |
(d) | 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; |
(e) | Enter into a registration rights agreement between Daybreak and the purchasers of common stock pursuant to the Capital Raise giving such purchasers rights to demand or participate in registration of Common Stock held by them on the terms contained therein; |
(f) | Effective upon the closing of the Equity Exchange, appoint Integrity Management Solutions, Inc. (“Integrity”), a California operating company that provides engineering and contract operating services for Reabold California LLC’s oil and gas properties. Integrity has been providing these services for the Reabold properties since July, 2018, as contract operator of Reabold’s oil and gas license interests for a minimum of a one (1) year period. |
(g) | Effective upon the closing of the Equity Exchange, enter into indemnification agreements between Company and its directors. |
Further, in connection with the Equity Exchange, and as conditions to closing the Equity Exchange, we have already taken the following steps to simplify the Company’s share structure and eliminate indebtedness:
(h) | Converted all shares of Series A Preferred Stock of the Company to Common Stock by approval of the holders of a majority of the shares of Series A Preferred Stock (the “Series A Conversion”); |
(i) | Converted $1,837,101 of related party liabilities of Daybreak into Common Stock of the Company (the “Related Party Debt Conversion”), including all accrued and unpaid salary and fees of our named executive officers, certain other employees, and directors. |
(j) | The Company’s President and Chief Executive Officer forgave $43,192 in deferred salary payments, net of related taxes and expense reimbursements. |
The Daybreak Board of Directors believes the Equity Exchange and the transactions contemplated thereby and described above, are the best path forward for the Company and are in the best interest of the shareholders.
At the Special Meeting, we will be seeking the shareholder approvals necessary to complete the Equity Exchange. Specifically, we will be asking you to, among other things:
1. | Consider and vote upon a proposal to approve the Equity Exchange and the issuance of the Exchange Shares pursuant to the terms of the Exchange Agreement. |
2. | Consider and vote upon a proposal to approve amending and restating our Amended and Restated Articles of Incorporation to (i) increase the number of total authorized shares of Common Stock to 500,000,000 to provide enough shares to accomplish the transactions contemplated by the Equity Exchange and conducted in anticipation of the Equity Exchange, complete the Capital Raise, and have shares available for other potential future issuances, (ii) eliminate the designation of the Series A Convertible Preferred Stock and (iii) allow a majority share vote to approve transactions where a higher vote is provided by the Washington Business Corporation Act. |
3. | Consider and vote upon a proposal to elect the following four (4) directors nominated by our Board of Directors to the Daybreak Board of Directors, to serve until the Company’s next Annual Meeting of Shareholders, or until their earlier, death, resignation or removal: |
Further, as we have previously disclosed, due to our limited financial resources, the Company has not held an annual meeting of our shareholders since 2010. Therefore, at the Special Meeting, in addition to matters involving the Equity Exchange and the election of directors, we will also providing accessbe asking you to consider the following matters:
4. | Consider and vote, on an advisory basis, on the compensation of our Named Executive Officers. |
5. | Consider and vote, on an advisory basis, on the frequency of future advisory votes regarding compensation. |
6. | Ratify the appointment of our independent registered public accountant for the fiscal year ended February 28, 2022. |
Since our proxy materials overare being furnished fewer than 40 days prior to the Internet. As a result,shareholder meeting date, we are mailing to most of our shareholders a Notice of Internet Availability of Proxy Materials (“Notice”) instead of a paper copy of this proxy statement, a proxy card, a letter to shareholders from our President and Chief Executive Officer, and our annual report on Form 10-K for the fiscal year ended February 28, 2010. The Notice contains instructions on how2021. Pursuant to rules promulgated by the U.S. Securities and Exchange Commission, we are also providing access those documentsto our proxy materials over the Internet, as well as instructions on how to request a paper copy of our proxy materials. All shareholders who do not receive a Notice should receive a paper copy of the proxy materials by mail. We believe that the Notice process represents a more direct mechanism for disseminating information, and will reduce both the environmental impact and associated costs of producing and delivering the proxy materials.Internet.
As owners of Daybreak Oil and Gas, Inc. stock, your
Your vote is important. Whether or notEnclosed is a proxy that will entitle you planto vote your shares on the matters presented at the Special Meeting, even if you are unable to attend the Annual Meeting, we hope that you will vote as soon as possible.in person. You may vote by proxy over the Internet or by telephone using the instructions on the Notice, or, if you received a paper copy of the proxy card, by signingyou can mark the proxy to indicate your vote, date and returningsign the proxy and return it in the postage-paidenclosed envelope provided. You may also attend and voteas soon as possible for receipt prior to the Special Meeting. Regardless of the number of shares you own; please be sure you are represented at the AnnualSpecial Meeting either by attending in person or by returning your proxy or voting on the internet as soon as possible.
Even if you plan to attend the Special Meeting, we request that you submit a proxy by following the instructions on your proxy card as soon as possible and thus ensure that your shares will be represented at the Special Meeting if you are unable to attend.
We are excited about the opportunities for the Company’s future, and our Board of Directors recommends that you vote your shares in favor of the proposals to be presented at the Special Meeting.
On behalf of our Board of Directors, thank you for your continued interest in Daybreak Oil and Gas, Inc. We look forward to seeing you on July 22nd.May 20, 2022.
Sincerely,
Sincerely, | |
/s/ James F. Westmoreland | |
James F. Westmoreland | |
Chairman of the Board of Directors |
/s/ Dale B. Lavigne
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this proxy statement. Any representation to the contrary is a criminal offense.
Dale B. LavigneThe accompanying proxy statement is dated April 21, 2022, and is first being mailed to Daybreak shareholders on or about April 21, 2022.
Chairman of the Board of Directors
DAYBREAK OIL AND GAS, INC.
1101 N. Argonne Rd. Suite A 211
Spokane Valley, WA 99212
______________
N601 W. Main Avenue, Suite 1012
Spokane, WA 99201
NOTICEOTICE OF ANNUAL MEETINGSPECIAL MEETING OF SHAREHOLDERSSHAREHOLDERS
July 22, 2010April 21, 2022
______________
NOTICE IS HEREBY GIVENNotice Is Hereby Given that the 2010 Annuala Special Meeting of Shareholders of Daybreak Oil and Gas, Inc. will be held at 10:00 AM (PDT)a.m., local time, at 4800 Bee Caves Rd., Suite 100, Austin, Texas 78746, on Thursday, July 22, 2010, at 601 W. Main Avenue, Spokane, Washington 99201,April 21, 2022, to consider and act upon the following matters:
1. | To consider and vote upon a proposal to approve the Equity Exchange as contemplated by the Equity Exchange Agreement (as amended, 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 a plan of share exchange whereby (i) Gaelic will irrevocably assign and transfer all of its ownership interests in Reabold to Daybreak, and (ii) Daybreak will issue 160,964,489 shares of its common stock to Gaelic (the “Exchange Shares”), which will result in Reabold becoming a wholly-owned subsidiary of Daybreak named “Reabold California, LLC” and Gaelic becoming the owner of Exchange Shares (the foregoing transaction, the “Equity Exchange”), on the terms and subject to the conditions set forth in the Exchange Agreement; A copy of the Exchange Agreement, and amendment is attached as Annex A to the accompanying proxy statement. |
2. | To consider and vote upon a proposal to approve amending and restating the Company’s Amended and Restated Articles of Incorporation by adopting the Company’s Second Amended and Restated Articles of Incorporation to increase the number of total authorized shares of Daybreak Common Stock to 500,000,000 to provide enough shares to accomplish the transactions contemplated by the Equity Exchange and conducted in anticipation of the Equity Exchange, complete the Capital Raise, and have shares available for other potential future issuances; eliminate the designation of the Series A Convertible Preferred Stock; and allow a majority share vote to approve transactions where a higher vote is provided by the Washington Business Corporation Act. A copy of the Second Amended and Restated Articles is attached as Annex B to the accompanying proxy statement. |
3. | To consider and vote upon a proposal to elect |
4. | To consider and vote, on an advisory basis, on the compensation of our Named Executive Officers, as disclosed in |
5. | To consider and vote, on an advisory basis, on the frequency of future advisory votes regarding compensation of our Named Executive Officers; |
| To ratify our appointment of MaloneBailey, LLP as our independent registered public accountants for the fiscal year ending February 28, |
| To consider |
We have not received notice of other matters that may be properly presented at the AnnualSpecial Meeting or any adjournment or postponement thereof.
Only shareholders of record of the Company’s common stock and Series A Convertible Preferred stock at the close of business on May 27, 2010March 22, 2022 are entitled to notice of and to vote at the AnnualSpecial Meeting.
Please take the time to vote by following the Internet or telephone voting instructions provided. If you received a paper copy of the proxy card, you may also vote by completing and mailing the proxy card in the postage-prepaid envelope provided for your convenience.
We recommend that you complete and return a proxy even if you plan to attend the AnnualSpecial Meeting; you will be free to revoke your proxy and vote in person at the meeting if you wish. If you wish to vote your shares at the meeting, the inspector of election will be available to record your vote at the meeting site beginning at 9:30 AM (PDT)a.m. on the date of the meeting.
By Order of the Board of Directors,
/s/ Karol L. Adams
Karol L. Adams
Corporate Secretary
Spokane, Washington
June 10, 2010
TABLETHE DAYBREAK BOARD OF CONTENTSDIRECTORS HAS DETERMINED AND BELIEVES THAT EACH OF THE PROPOSALS OUTLINED ABOVE IS ADVISABLE TO, AND IN THE BEST INTERESTS OF, DAYBREAK AND ITS SHAREHOLDERS AND HAS APPROVED EACH PROPOSAL. THE DAYBREAK BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT DAYBREAK SHAREHOLDERS VOTE “FOR” PROPOSAL NOS. 1 THROUGH 7.
By Order of the Board of Directors, | |
/s/ Karol L. Adams | |
Karol L. Adams | |
Corporate Secretary |
Spokane Valley, Washington
April 21, 2022
TABLE OF CONTENTS
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Consideration of Nominees and Qualifications for Nominations to the Board of Directors |
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Communications Between Interested Parties and the Board of Directors |
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General Discussion of Executive Compensation | 64 |
Summary Compensation Table |
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Payments Upon Termination or Change of Control | 66 |
Pension Plan Benefits | 66 |
Deductibility of Compensation | 66 |
Stock Compensation Expense | 66 |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
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SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE |
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SHAREHOLDER PROPOSALS FOR |
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INFORMATION INCORPORATED BY REFERENCE | 71 |
DAYBREAK OIL AND GAS, INC.
601 W. Main Avenue,1101 N. Argonne Rd. Suite 1012A 211
Spokane Valley, WA 9920199212
____________
PROXY STATEMENT
FOR
ANNUALSPECIAL MEETING OF SHAREHOLDERS
To Be Held May 20, 2022
____________
To Be Held July 22, 2010
GENERAL INFORMATION ABOUT THE MEETING, VOTING AND PROXIES
Date, Time and Place of Meeting
The Board of Directors (the “Board”) of Daybreak Oil and Gas, Inc., a Washington corporation (the “Company” or “Daybreak”), is soliciting your proxy to be voted at the AnnualSpecial Meeting of Shareholders (the “Annual“Special Meeting”) to be held aton May 20, 2022 10:00 AM (PDT)a.m., on Thursday, July 22, 2010,local time, at our corporate headquarters at 601 W. Main Avenue, Spokane, Washington 99201,4800 Bee Caves Rd., Suite 100, Austin, Texas 78746, for the purposes set forth in the accompanying Notice of AnnualSpecial Meeting of Shareholders, and at any adjournments of the AnnualSpecial Meeting. The proxy materials, including this proxy statement, proxy card or voting instructions, a letter to shareholders from our President and Chief Executive Officer, and our annual report on Form 10-K for the fiscal year ended February 28, 20102021 are first being distributed and made available to Shareholders on or about June 11, 2010.April 21, 2022. You should carefully read the entire proxy statement and the additional documents referred to in this proxy statement for a more complete understanding of the matters being considered at the special meeting. In this Proxy Statement,proxy statement, unless the context requires otherwise, when we refer to “we,” “us,” “our” or the “Company,” we are describing Daybreak Oil and Gas, Inc.
At the AnnualSpecial Meeting, we will ask our shareholders to consider and act upon the following matters:
1. | To consider and vote upon a proposal to approve the Equity Exchange as contemplated by the Equity Exchange Agreement, (as amended, 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 a plan of share exchange whereby (i) Gaelic will irrevocably assign and transfer all of its ownership interests in Reabold to Daybreak, and (ii) Daybreak will issue 160,964,489 shares of its common stock to Gaelic (the “Exchange Shares”), which will result in Reabold becoming a wholly-owned subsidiary of Daybreak named “Reabold California, LLC” and Gaelic becoming the owner of Exchange Shares (the foregoing transaction, the “Equity Exchange”), on the terms and subject to the conditions set forth in the Exchange Agreement; |
| To consider and vote upon a proposal to approve amending and restating the Company’s Amended and Restated Articles of Incorporation to increase the number of total authorized shares of Daybreak Common Stock to 500,000,000 to provide enough shares to accomplish the transactions contemplated by the Equity Exchange and conducted in anticipation of the Equity Exchange, complete the Capital Raise, and have shares available for other potential future issuances; eliminate the designation of the Series A Convertible Preferred Stock; and allow a majority share vote to approve transactions where a higher vote is provided by the Washington Business Corporation Act; |
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3. | To consider and vote upon a proposal to elect |
4. | To consider and |
| To consider and vote, on an advisory basis, on the frequency of future advisory votes regarding compensation of our Named Executive Officers; |
6. | To ratify our appointment of MaloneBailey, LLP as our independent registered public accountants for the fiscal year ending February 28, |
| To consider |
Recommendations of the Board of Directors
Our Board of Directors unanimously recommends athat Daybreak Shareholders vote “FOR” the election of eachproposal to approve the Equity Exchange on the terms set forth in the Equity Exchange Agreement and “FOR” all the other proposals to be considered at the special meeting. For a description of the six director nominees, and “FOR”reasons considered by the ratificationBoard in deciding to recommend the adoption of the appointmentEquity Exchange Agreement, see the section entitled “The Equity Exchange Agreement (Proposal 1) — Recommendation of MaloneBailey, LLP as Daybreak’s independent registered public accountantsthe Board and Reasons for the Exchange Agreement” beginning on page 35 of this proxy statement.
Notice of Mailing of Proxy Materials
Since our proxy materials are being furnished fewer than 40 days prior to the shareholder meeting date, we are mailing our shareholders a paper copy of this proxy statement, a proxy card, a letter to shareholders from our President and Chief Executive Officer, and our annual report on Form 10-K for the fiscal year endingended February 28, 2011.
Information About the Notice of Internet Availability of Proxy Materials
In accordance with2021. Pursuant to rules and regulations adoptedpromulgated by the U.S. Securities and Exchange Commission (the “SEC”), we are also providing our shareholders access to our proxy materials onover the Internet. Accordingly, a Notice of Internet Availability of Proxy Materials (“Notice”) will be mailed to most of our shareholders on or about June 11, 2010. Shareholders will have the ability to access the proxy materials on a web site referred to in the Notice or request a printed set or e-mail copy of the proxy materials to be sent to them by following the instructions in the Notice.
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Daybreak is providing certain shareholders, including those who have previously requested to receive paper copies of the proxy materials, with paper copies of the proxy materials instead of a Notice. If you would like to reduce the costs incurred by Daybreak in mailing proxy materials, you can consent to receive all future proxy statements, proxy cards and annual reports electronically via e-mail or the Internet. To sign up for electronic delivery, please follow the instructions provided with your proxy materials and on your proxy card or voting instruction card to vote using the Internet. When prompted, indicate that you agree to receive or access shareholder communications electronically in the future. Your election to receive proxy materials by e-mail or printed form will remain in effect until you terminate it.
Notice of Internet Availability of Proxy Materials
Daybreak is pleased to be using the SEC rule that allows companies to furnish their proxy materials over the Internet. As a result, Daybreak is mailing to many of its shareholders a Notice about the Internet availability of the proxy materials instead of mailing a paper copy of the proxy materials. All shareholders receiving the Notice will have the ability to access the proxy materials over the Internet and request to receive a paper copy of the proxy materials by mail. Instructions on how to access the proxy materials over the Internet or to request a paper copy may be found on the Notice.
Important Notice Regarding the Internet Availability of Proxy Materials for the AnnualUpcoming Special Meeting of Shareholders to be Held on July 22, 2010:
This Proxy Statement,proxy statement, letter to shareholders from our President and Chief Executive Officer, and 20102021 Annual Report on Form 10-K are available at: on our website at www.proxyvote.comwww.daybreakoilandgas.com., from commercial document retrieval services and on the website maintained by the SEC at http://www.sec.gov.
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This solicitation of proxies is by Daybreak, the registrant.
In addition to the solicitation of proxies by use of this Proxy Statement,proxy statement, our directors, officers and employees may solicit the return of proxies by mail, personal interview, telephone or facsimile. We will not pay additional compensation to our directors, officers or employees for their solicitation efforts, but we will reimburse them for any out–of–pocket expenses they incur in their solicitation efforts. We will request that brokerage houses and other custodians, nominees and fiduciaries forward solicitation materials to the beneficial owners of stock registered in their names. We will ask brokerage houses and other custodians and nominees whether other persons are beneficial owners of Daybreak common stock. If so, we will supply them with additional copies of the proxy materials for distribution to the beneficial owners. We will also reimburse banks, nominees, fiduciaries, brokers and other custodians for their costs of sending the proxy materials to the beneficial owners of Daybreak common stock.
We will bear all costs of preparing, printing, assembling and mailing the Notice of AnnualSpecial Meeting of Shareholders, this Proxy Statement,proxy statement, the enclosed form of proxy and any additional materials, as well as the cost of forwarding solicitation materials to the beneficial owners of stock and all other costs of solicitation.
In anticipation of the need to utilize a proxy solicitation firm to aid in solicitation of Proxies from its shareholders, Daybreak has retained Alliance Advisors to assist in the solicitation of the return of proxies, and will be paid customary fees and reimbursed for out-of-pocket expenses. The estimated cost for this service is approximately $8,000.
Record Date, Shareholders Entitled to Vote
The Company has determined May 27, 2010,March 22, 2022 as the record date with respect to the determination of shareholders entitled to vote at the AnnualSpecial Meeting. Daybreak’s outstanding stock includes both common stock and Series A Convertible Preferred stock.only Common Stock. Only shareholders of record of the Company’s common stock and Series A Convertible Preferred stock at the close of business on May 27, 2010March 22, 2022 are entitled to notice of and to vote at the AnnualSpecial Meeting.
Outstanding Shares, Quorum and Voting
As of May 27, 2010,March 22, 2022, the record date, there were 47,785,59967,881,207 shares of Daybreak common stock outstanding and entitled to one vote each at the Annual MeetingSpecial Meeting. Of these, 2,738,705 shares of common stock were issued prior to 2005 and 1,008,565the Company has made multiple attempts over the years but not been able to locate the holders of these shares. We have also made attempts to locate other shareholders with shares issued in 2005 and after, and determined that 2,617,923 shares have bad addresses; meaning they have returned mail and/or insufficient/incomplete mailing addresses on file. Our records show that 14,375 shares have been turned over to various states in accordance with state escheatment laws. As a result of these conditions, 5,371,003 shares will not be voted, and will not be counted in determining the number of shares necessary for a quorum or for shareholder action during this meeting. With this, as of March 22, 2022, the record date, there were 62,510,204 shares of Daybreak Series A Convertible Preferredcommon stock outstanding and entitled to 3,025,595 aggregate votesone vote (“voting shares”) each at the Annual Meeting, which number is equal to the number ofSpecial Meeting. The outstanding voting shares of common stock into which such shares of Series A Convertible Preferred stock could be convertedentitled to vote on the record date. Holders of the common stock and the Series A Convertible Preferred stock vote together as a single class. The outstanding shares of common stockdate were registered in the names of 2,227 shareholders and the outstanding shares of Series A Convertible Preferred stock were registered in the names of 74242 shareholders.
The presence of the holders of a majority of the outstanding shares of the voting powershares of common stock, as determined and Series A Convertible Preferred stock,stated above, either in person or by proxy, is required to constitute a quorum at the AnnualSpecial Meeting.
We will count abstentions and broker non-votes for purposes of determining whether a quorum is
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present. Therefore, proxies that are submitted but are not voted FOR or AGAINST (because of abstention, broker non-votes, or otherwise) will be treated as present for all matters considered at the meeting. However, although they are considered in determining the presence of a quorum, abstentions and “broker non-votes” will not be considered “votes cast”. Because abstentions are not counted as votes cast, they will have no effect on any vote, including as to the election of directors. Similarly, broker non-votes will have no effect on the vote.
The stock does not have cumulative voting rights, which means that the holders of more than fifty percent (50%) of the voting power of the shares voting in an election of directors, acting together (as applicable), may elect all of the directors if they choose to do so. In such event, the holders of the remaining shares aggregating less than fifty percent (50%) would not be able to elect any directors. Each common shareholder has the right to vote in
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person or by proxy one vote for every share of stock standing in his or her name on the books of the Company on the record date,date.
Proposal Numbers 1 and each holder2 require a vote of Series A Convertible Preferred stock hastwo-thirds (66 2/3%) of the rightvotes of the voting shares eligible to vote in person or by proxyorder to pass. If Proposal Numbers 1 and 2 are not approved, we will be unable to consummate the numberEquity Exchange.
Proposal Number 3– Election of shares of common stock into which such shares of Series A Convertible Preferred stock could be converted.
Directors - will be elected by a plurality of votes cast. “Plurality”“Plurality” means that the individuals who receive the largest number of votes cast are elected as directors up to the maximum number of directors to be chosen at the meeting. Consequently, withholding authority to vote for a director nominee and broker non-votes in the election of directors will not affect the outcome of the election of directors, except to the extent that the failure to vote for an individual results in another individual receiving a larger number of votes. The election of directors will be accomplished by determining the sixfour nominees receiving the highest total votes. However, if Proposal Numbers 1 and 2 are not also approved, director nominee Darren Williams will not join the board even if he receives enough votes, because his election is not effective unless the Equity Exchange is completed. Further, if Darren Williams is not elected, we will be unable to consummate the Equity Exchange.
All other proposals
Proposal Numbers 4 through 7 will be decided by a majority vote of the votes cast with respect thereto. Although they are considered in determining the presence of a quorum, abstentions and “broker non-votes” will not be considered “votes cast.” Because abstentions are not counted as votes cast, they will have no effect on any vote, including as to the election of directors. Similarly, broker non-votes will have no effect on the vote.
Karol L. Adams and Thomas C. Kilbourne will vote all forms of proxy that are properly completed, signed and returned prior to the AnnualSpecial Meeting in accordance with the instructions indicated thereon, and in their discretion as to any other matters that may properly come before the meeting.
Broadridge Financial Solutions, Inc.,
Issuer Direct, an independent third party, will tabulate and certify the vote, and will have a representative in attendance, by phone, to act as the independent inspector of elections for the AnnualSpecial Meeting.
Most shareholders have a choice of voting on the Internet, by telephone, or by mail using a traditional proxy card. Please refer to the proxy card or other voting instructions included with these proxy materials for information on the voting methods available to you. If you vote by telephone or on the Internet, you do not need to return your proxy card.
Your telephone or Internet vote authorizes the named proxies to vote your shares in the same manner as if you had returned your proxy card. We encourage you to use these cost effective and convenient ways of voting, 24 hours a day, 7 days a week.
Telephone voting is available for residents of the U.S. and Canada.
You can vote by calling the toll-free telephone number on your proxy card or by visiting the Internet voting website. Please have your proxy card in hand when you call. Easy-to-follow voice prompts allow you to vote your shares and confirm that your instructions have been properly recorded. Telephone voting is only available for residents of the U.S. and Canada.
Telephone and Internet voting facilities for shareholders of record will be available 24 hours a day, and will close at 11:59 PM Eastern Time on July 21, 2010.May 19, 2022.
The
If you provide specific voting instructions, your shares will be voted as you instruct.
For Beneficial Owners who hold their shares through a broker, bank or other financial institution, the availability of telephone and Internet voting for beneficial owners will depend on the voting processes of your broker, bank or other holder of record. Therefore, we recommend that you follow the voting instructions in the materials you receive.
If you provide specific voting instructions, your shares will be voted as you instruct. If you hold your shares directly
Broker Discretionary Voting and sign the proxy card but do not provide instructions, or if you do not make specific Internet or telephone voting choices, your shares will be voted “FOR” the electionEffect of all director nominees, and “FOR” the ratification of the appointment of MaloneBailey, LLP (“MaloneBailey”), as our independent registered public accountants for the year ending February 28, 2011.Abstentions
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If you hold your shares through a broker, bank or other financial institution, the SEC has approved a New York Stock Exchange (“NYSE”) rule that changes the manner in which your vote in the election of directors will be handled at our upcoming 2010 Annual Meeting.
Effective January 1, 2010, if you hold your shares through a broker, bank or other financial institution, your broker will no longernot be permitted to vote on Proposals 1 through 6 on your behalf on the election of directors unless you provide specific instructions by completing and returning the proxy card or following the instructions provided to you to vote your shares via telephone or the Internet. For your vote to be counted, you will now need to communicate your voting decisions to your broker, bank or other financial institution before the date of the shareholder meeting.
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If you sign the proxy card of your broker, trustee, or other nominee, but do not provide instructions, or if you do not make specific Internet or telephone voting choices, your shares will not be voted unless your broker, trustee,on Proposals 1 through 5 or other nominee has discretionary authority to vote.Proposal 7. When a broker, trustee, or other nominee holding shares for a beneficial owner does not vote on a particular proposal because the broker does not have authority to vote in the absence of timely instructions from the beneficial owner, this is referred to as a “broker non-vote.” Brokers who are members of the NYSE have discretionary authority to vote the shares of a beneficial owner in the ratification of MaloneBailey as our independent registered public accountants, but such brokers aremay not empowered to vote for the election of directors in the absence of specific instructions from the beneficial owner.
If you complete and submit your proxy, the shares represented by your proxy will be voted at the Annual Meeting in accordance with your instructions. If you submit a properly executed a proxy but you do not fill out the voting instructions on the proxy card, the shares represented by your proxy will be voted as follows:
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In addition, if other matters come before the Annual Meeting, the persons named as proxies have discretionary authority to vote on those mattersany Proposals except Proposal Number 6.
An “abstention” occurs when a shareholder sends in accordance with their best judgment.a proxy by mail, telephone or the internet, but does not provide specific voting instructions, fails to cast a ballot or declines to vote regarding a particular matter or attends the Special Meeting and elects not to vote or fails to cast a ballot. Abstentions are treated as shares present in person or by proxy and entitled to vote.
Although the Company will include abstentions and broker non-votes as present or represented for purposes of establishing a quorum for the transaction of business, for Proposals 1 and 2, which require approval of two-thirds of all shares eligible to vote, abstentions and broker non-votes will have the effect of a “NO” vote. The Board is not currently awareCompany intends to exclude abstentions and broker non-votes from the tabulation of any other matters to come before the meeting.
We intend to announce preliminary voting results atfor Proposals 3 – 7, which require approval of a majority of the Annual Meeting and publish final results in a Current Report on Form 8-K within four business days following the Annual Meeting.votes cast.
You have the right to revoke your proxy at anytimeany time prior to its exercise by written notice to the Corporate Secretary at: Daybreak Oil and Gas, Inc., 601 W. Main Avenue,1101 N. Argonne Rd., Suite 1012,A 211, Spokane Washington 99201.Valley, WA 99212. Your written revocation will be effective only if the Corporate Secretary receives the notice at least twenty-four (24) hours prior to the AnnualSpecial Meeting, or if the Inspector of Election receives the notice at the AnnualSpecial Meeting.
AnnualSpecial Meeting Attendance
Subject to space availability, all shareholders as of the record date, or their duly appointed proxies, may attend the AnnualSpecial Meeting, and each may be accompanied by one guest. Admission to the AnnualSpecial Meeting will be on a first-come, first-served basis. Registration will begin at 9:30 AM (PDT)a.m. and the AnnualSpecial Meeting will begin at 10:00 AM (PDT).a.m., local time. Please note that we may ask you to present valid identification when you check in at the registration desk.
If you hold your shares in “street name” (that is, through a broker or other nominee), you will need to bring a copy of a brokerage statement reflecting your stock ownership as of the record date.
You may not bring cameras, recording equipment, electronic devices, large bags, briefcases or packages into the AnnualSpecial Meeting.
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We intend to announce preliminary voting results at the Special Meeting and publish final results in a Current Report on Form 8-K within four business days following the Special Meeting.
Proxy Statement Mailing Information;
Delivery of Documents to Security Holders Sharing an Address; Householding
The SEC rules permit companies and intermediaries, such as brokers and banks, to satisfy delivery requirements for proxy statements with respect to two or more shareholders sharing the same address, by delivering a single proxy statement, letter to shareholders from our President and Chief Executive Officer, and annual report on Form 10-K to those shareholders. This method of delivery, often referred to as “householding” is meant to reduce both the amount of duplicate information that shareholders receive and printing and mailing costs. To take advantage of this opportunity, the Company delivers only one proxy statement, letter to shareholders from our President and Chief Executive Officer, and annual report on Form 10-K to multiple shareholders who share an address. If you prefer to receive separate copies of a proxy statement, letter to shareholders from our President and Chief Executive Officer, or annual report on Form 10-K, either now or in the future, or if you currently are a shareholder sharing an address with another shareholder and wish to receive only one copy of future proxy materials for your household, please send your request in writing to the Company at the following address: 601 W. Main Avenue,1101 N. Argonne Rd., Suite 1012,A 211, Spokane Washington 99201,Valley, WA 99212, Attn: Corporate Secretary or call (509) 232-7674.
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We are mailing this Proxy Statementproxy statement and the accompanying Notice of AnnualSpecial Meeting of Shareholders and form of proxy to our shareholders on or about June 11, 2010.April 21, 2022.
Access to Corporate Governance Documents and Annual Reports on Form 10-K
Our Corporate Governance policies and procedures are available under the “Shareholder/FinancialFinancial” - Corporate“Corporate Governance” section of our website at www.daybreakoilandgas.comand are also available upon request, without charge, by contacting the Corporate Secretary at Daybreak Oil and Gas, Inc., 601 W. Main Avenue,1101 N. Argonne Rd., Suite 1012, A 211,
Spokane Washington 99201.Valley, WA 99212. The contents of this website are not incorporated by reference and the website address provided in this Proxy Statementproxy statement is intended to be an inactive textual reference only.
We refer you to our Annual Report on Form 10-K for the fiscal year ended February 28, 2010,2021, which includes our audited financial statements; however, that report does not form anyapplicable provisions of our Annual Report on Form 10-K are hereby incorporated by reference into, and made a part of, the material for the solicitation of proxies.this proxy statement.
The Annual Report on Form 10-K is available under the “Shareholder/Financial – Annual and Quarterly Reports” section of our website at www.daybreakoilandgas.comand is also available upon request, without charge, by contacting the Corporate Secretary at Daybreak Oil and Gas, Inc., 601 W. Main Avenue,1101 N. Argonne Rd., Suite 1012,A 211, Spokane Valley, WA 99212.
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SUMMARY OF THE EXCHANGE TRANSACTION AND THE RELATED TRANSACTIONS
The following is a summary of the material terms of the Exchange Agreement. Please see below under “Proposal Number 1” for a more detailed discussion.
On October 20, 2021, and subsequently amended on February 22, 2022, Daybreak entered into an Equity Exchange Agreement (as amended, 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 $0.001 (“Common Stock”) to Gaelic (the “Exchange Shares”), which will result in Reabold becoming a wholly-owned subsidiary of Daybreak named “Reabold California, 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”). The Exchange Agreement and subsequent Amendment are described in more detail beginning on page 35, and attached hereto as Annex A.
Following the closing of the Equity Exchange, Daybreak will be appointed the sole manager of “Reabold California, LLC”, the Daybreak Subsidiary.
In connection with the Equity Exchange, and as conditions to closing the Equity Exchange, we also propose to, or are required to:
(a) | Amend and restate our Amended and Restated Articles of Incorporation to (i) increase the number of total authorized shares of Common Stock to 500,000,000 to provide enough shares to accomplish the transactions contemplated by the Equity Exchange and conducted in anticipation of the Equity Exchange, and other potential future issuances, and (ii) allow a majority share vote to approve transactions where a higher vote is provided by the Washington Business Corporation Act (Proposal; Number 2, see page 38); |
(b) | Nominate Darren Williams, a nominee selected by Reabold, to the Daybreak Board of Directors, to join the board effective as of the closing of the Equity Exchange (Proposal; Number 3, see page 40); |
(c) | Enter into a voting agreement by and among Daybreak, Gaelic and the Company’s Chairman and Chief Executive Officer, James F. Westmoreland, where, on the terms therein, Daybreak and the shareholder parties thereto agree to nominate a person designated by Gaelic and a person designated by James F. Westmoreland to Daybreak’s Board of Directors, and the parties thereto agree to vote their shares in favor of such candidates (the “Voting Agreement”). The Voting Agreement is described in more detail beginning on page 69, and attached hereto as Exhibit D to the Exchange Agreement (Annex A); |
(d) | 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; |
(e) | Enter into a registration rights agreement between Daybreak and the purchasers of common stock pursuant to the Capital Raise giving such purchasers rights to demand or participate in registration of Common Stock held by them on the terms contained therein; |
(f) | Effective upon the closing of the Equity Exchange, appoint Integrity Management Solutions, Inc. (“Integrity”), a California operating company that provides engineering and contract operating services for Reabold California LLC’s oil and gas properties. Integrity has been providing these services for the Reabold properties since July, 2018, as contract operator of Reabold’s oil and gas license interests for a minimum of a one (1) year period; and |
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(g) | Effective upon the closing of the Equity Exchange, enter into indemnification agreements between Company and its directors. |
Also, in connection with the Equity Exchange, and as conditions to closing the Equity Exchange, we have already taken the following steps to simplify the Company’s share structure and eliminate indebtedness:
(h) | Converted all shares of Series A Preferred Stock of the Company to Common Stock by approval of the holders of a majority of the shares of Series A Preferred Stock (the “Series A Conversion”); |
(i) | Converted $1,837,101 of related party liabilities of Daybreak into Common Stock of the Company (the “Related Party Debt Conversion”), including all accrued and unpaid salary and fees of our named executive officers, certain other employees and directors. |
(j) | The Company’s President and Chief Executive Officer forgave $43,192 in deferred salary payments, net of related taxes and expense reimbursements. |
On February 22, 2022 the Equity Exchange Agreement was amended, effective as of February 14, 2022, to (1) allow Daybreak to sell a convertible promissory note to a Private Investor in the amount of US$200,000; (2) extend the Long Stop Date to April 29, 2022; (3) Allow Reabold California LLC to borrow up to $250,000 from Reabold Resources PLC to conduct certain operational activities necessary to maintain the production of oil and gas on its leases. This money will be paid back to Reabold Resources PLC upon the closing of the Equity Exchange Agreement; and (4) Daybreak agreed to compensate Gaelic in the form of a breakage fee of US$500,000 in Daybreak common stock if the Equity Exchange is not closed by April 29, 2022.
Reabold California LLC, a California limited liability company (“Reabold”), is an oil and gas exploration and production company based in California located at 5701 Lonetree Blvd., Rocklin, CA 95765, and can be reached by phone number at 916-872-1833.
Reabold invests in the exploration and production sector of the energy industry. Its investing policy is to acquire direct and indirect interests in exploration and producing projects and assets in the natural resources sector. As an investor in upstream oil and gas projects, Reabold aims to create value from each asset by investing in undervalued, low-risk, upstream oil and gas opportunities with near-term activity and by identifying potential monetization plans prior to investment.
Reabold invests in projects that have limited correlation to the oil price. They believe the value realization of a project is determined by monetizing the asset (putting it into production or selling it); and the value increase of an asset from the acquisition entry point to monetization is achieved through successful appraisal and/or development drilling.
A brief description of the transaction. If approved, upon the closing of the Equity Exchange, (i) Daybreak will acquire 100% ownership of Reabold, in exchange for (ii) Daybreak issuing 160,964,489 shares of its Common Stock (the “Exchange Shares”) to Reabold’s owner, Gaelic, which will result in Reabold becoming a wholly-owned subsidiary of Daybreak named “Reabold California, 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).
Consideration offered to security holders. The only consideration being offered in connection with the Equity Exchange is assignment of membership interests of Reabold from Gaelic to Daybreak, and the issuance of the Exchange Shares from Daybreak to Gaelic. The existing shareholders of Daybreak will not receive any consideration.
The reasons for engaging in the transaction. Daybreak proposes to complete the Equity Exchange as part of a larger reorganization of the Company as described herein. Daybreak has faced the challenges of declining oil prices (historically) and the lack of outside financing for several years. We have been working steadily to minimize overhead and unnecessary expenditures, simplify our share structure, and position the Company for a strategic
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turnaround transaction. The Company has already converted certain related party debt, certain of the Company’s 12% subordinated notes and the Company’s Series A preferred stock into Common Stock to achieve this goal. Completing the Equity Exchange and the Capital Raise are the next two important steps in the Company’s growth strategy.
The vote required for approval of the transaction. Pursuant to Section 23B.11.030 of the Washington 99201.Business Corporation Act, to be approved, the Equity Exchange must be approved by Daybreak shareholders by a vote of two thirds (66 2/3%) of all votes entitled to be cast, or two-thirds of all outstanding shares of Common Stock entitled to vote. Gaelic, Reabold’s sole shareholder, has approved the transaction on behalf of Gaelic.
An explanation of any material differences in the rights of security holders as a result of the transaction, if material.The Equity Exchange and the transactions contemplated thereby will dilute the overall percentage ownership of each existing shareholders pro rata to the number of shares owned. However, we believe the transactions, including the proposed authorization of additional shares of Common Stock to issue in the Equity Exchange, will increase the value of the Company and ultimately build shareholder value for all shareholders, including existing shareholders.
A brief statement as to the accounting treatment of the transaction. There are no material considerations to our shareholders associated with the accounting treatment of the Equity Exchange.
The federal income tax consequences of the transaction. The Equity Exchange is expected to be a tax-free transaction. There should not be any tax effect to our existing shareholders as a result of the Equity Exchange.
Additional Financial Considerations Related to the Equity Exchange Agreement
Pursuant to the amendment to the Equity Exchange Agreement entered into on February 22, 2022 (the “Exchange Agreement Amendment”), Daybreak and Gaelic agreed to allow Reabold to borrow up to $250,000 from Gaelic’s parent company, Reabold Resources PLC, to conduct certain operational activities necessary to maintain the production of oil and gas on its leases, to be paid back to Reabold Resources PLC by Daybreak upon the closing of the Equity Exchange Agreement.
Also pursuant to the Exchange Agreement Amendment, Daybreak agreed to issue to Gaelic shares of Daybreak common stock worth US$500,000 if the Equity Exchange is not closed by April 29, 2022 (the “Break Fee Shares”), priced according to the average price calculated over the five trading days prior to and including the Long-Stop Date, with payment (to be satisfied by the issuance of the Break Fee Shares) made as soon as practicably possible after the amended Long-Stop Date has expired. However, if the Equity Exchange Agreement is completed after an agreed upon date after April 29, 2022, then 50% of the Break Fee Shares issued to Gaelic will be applied in part satisfaction of the number of the Parent Shares that are due to Gaelic under the Exchange Agreement; and
On or about February 22, 2022, Company issued a convertible promissory note to a private investor (the “purchaser”) in the amount of US$200,000 (the “Convertible Note”). The Convertible Note will convert into shares of the Company’s common stock upon the earlier of the closing of the Equity Exchange Agreement or the purchaser’s instruction any time on or after April 29, 2022. If the closing of the Equity Exchange Agreement is on or before April 29, 2022, the Convertible Note will convert at a price of $0.017 per share, into approximately 13,882,353 common shares, including payable-in-kind interest. If the Convertible Note converts after April 29, 2022, it will convert at a price of $0.0085 per share, into approximately 27,764,706 common shares, including payable-in-kind interest. Payable-in-kind interest accrues on the Convertible Note at a rate of 18% per annum with a minimum of one year of interest payable. The terms of the Convertible Note also provide that if the Company sells shares over the next six months for a price less than $0.02 per share, the Company will adjust the number of conversion shares issued under the Convertible Note accordingly, at a conversion price equal to the sale price with a 15% discount.
Therefore, if the Equity Exchange Agreement is not closed by April 29, 2022, the existing shareholders will experience additional significant dilution.
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There are no federal or state regulatory requirements that must be complied with, or approvals that must be obtained from federal or state regulatory officials, in connection with the Equity Exchange and the transactions contemplated thereby.
The parties to the Equity Exchange have not obtained any reports, opinions or appraisals from any outside parties materially relating to the Equity Exchange.
Past Contacts, Transactions or Negotiations
Other than the negotiations with respect to the Equity Exchange, there have been no other transactions or material contacts during the past two years between Daybreak or any of its affiliates and Reabold or any of its affiliates concerning any merger, consolidation, acquisition, tender offer, election of directors, or sale or other transfer of a material amount of assets of Reabold or Daybreak.
Appraisal Rights and Dissenters’ Rights
Holders of Daybreak Common Stock are not entitled to appraisal or dissenters’ rights in connection with the Equity Exchange.
Interests of Certain Persons in the Equity Exchange
In considering the recommendation of the Daybreak Board of Directors with respect to the approval of the Equity Exchange and the transactions contemplated by the Exchange Agreement, and the other matters to be acted upon by the Daybreak shareholders at the Special Meeting, the Daybreak shareholders should be aware of the following potential conflict of interest: if the Equity Exchange is approved, Daybreak, Gaelic and Daybreak’s Chairman and Chief Executive Officer, James F. Westmoreland, will enter into the Voting Agreement, where, on the terms therein, Daybreak and the parties thereto agree to nominate a person designated by Gaelic (Darren Williams) and a person designated by James F. Westmoreland (James F. Westmoreland) to Daybreak’s Board of Directors, and the parties thereto agree to vote their shares in favor of such candidates.
The Board of Directors of Daybreak was aware of these potential conflicts of interest and considered it, among other matters, in reaching its decision to approve the Equity Exchange, and to recommend that the Daybreak shareholders approve the proposals to be presented to them for consideration at the Special Meeting as contemplated by this proxy statement.
There are no agreements between any named executive officer and the Company, Gaelic, or Reabold concerning any type of compensation, whether present, deferred or contingent, that is based on or otherwise relates to the completion of the Equity Exchange.
FINANCIAL INFORMATION AND BACKGROUND ABOUT THE PARTIES
For more information about Daybreak, we refer you to our Annual Report on Form 10-K for the fiscal year ended February 28, 2021, which includes our audited financial statements; applicable provisions of our Annual Report on Form 10-K are hereby incorporated by reference into, and made a part of, this proxy statement.
Organizational History
Reabold California, LLC, a California limited liability company (“referred to in this Section as “we,” “our,” “us,” or “Reabold” or the “Company”), is a wholly owned subsidiary of Gaelic Resources Ltd. (“Gaelic”), a private company incorporated in the Isle of Man, a self-governing British Crown dependency. Gaelic is a wholly owned subsidiary of Reabold Resources Plc (“RBD Plc”), a company incorporated in the United Kingdom and listed on the Alternative Investment Market of the London Stock Exchange. Our operating and financial results are included in the public filings by RBD Plc of consolidated financial reporting in the United Kingdom.
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Business Description
Overview
We invest in the exploration and production sector of the energy industry. Our investing policy is to acquire direct and indirect interests in exploration and producing projects and assets in the natural resources sector. As an investor in upstream oil and gas projects, we aim to create value from each asset by investing in undervalued, low-risk, upstream oil and gas opportunities with near-term activity and by identifying potential monetization plans prior to investment.
We invest in projects that have limited correlation to the oil price. The value realization of a project is determined by monetizing the asset (putting it into production or selling it). The value increase of an asset from the acquisition entry point to monetization is achieved through successful appraisal and/or development drilling.
California Crude Oil and Natural Gas Projects
Our crude oil and natural gas production is located in the Sacramento Basin within Monterey and Contra-Costa Counties in California. Production in Monterey County is from the Monroe Swell area for our three Burnett wells. Production in Contra-Costa County is from the Meganos Unconformity area for our three West Brentwood wells. California is a state with very high renewable energy generation which feeds into the energy required for hydrocarbon extraction. By industry standards, our oil and gas activities require a very low level of energy to extract the hydrocarbons.
Reabold’s interests in US oil and gas leases are operated by Integrity Management Solutions, Inc. (“Integrity”), a California operating company that leads direct operational decisions pertaining to these leases, in consultation with Reabold management to ensure high standards of conduct in line with Reabold’s policies. Integrity has been providing these services for the Reabold properties since July, 2018. Integrity led a successful five well drilling program in 2018 and 2019. Two of these wells the Burnett 2A and 2B are located in the Monroe Swell Field, the other three wells, the VG-3, VG-4 and VG-6 are located in the West Brentwood Field. We completed the fifth well of that program, the VG-6, in February 2020. Since that time we have been concentrating our efforts on reducing the operating expenses of our three VG wells through the successful permitting of a disposal/injection well permit to dispose of our produced water.
Our California assets are characterized by relatively low cash operating costs and continued to be cash generative amidst the lower oil and gas price environment that was experienced during much of 2020. With the significant increase in oil prices in 2021 crude oil revenues increased while operating profit was offset by lower production due to workover of wells and bringing enhanced storage infrastructure online. Operating costs per barrel in 2020 and 2021 were negatively impacted by significantly increased water disposal costs, which will be reduced when the water disposal wells are brought online in 2022.
California Reserves
Our total crude oil and natural gas reserves as of April 1, 2021, were comprised of our 50% working interest in the Monroe Swell and West Brentwood Fields. Pricing is based on New York Mercantile Exchange (“NYMEX”) Brent as published by CME Group and are subject to the usual adjustments for quality, transportation fees, market differentials and other local conditions.
Proved Reserves | ||||||||||||||||
Reserve Category | Crude Oil (Barrels) | Natural Gas (Mcf) (1) | Total Crude Oil Equivalents (BOE) | Percent of Oil Equivalents (BOE) | ||||||||||||
Developed | 285,360 | 36,790 | 291,492 | 47.6 | % | |||||||||||
Undeveloped | 321,500 | — | 321,500 | 52.4 | % | |||||||||||
Total Proved | 606,860 | 36,790 | 612,992 | 100.0 | % |
(1) One barrel of crude oil equivalent (“BOE”) is roughly equivalent to 6,000 cubic feet or 6 Mcf of gas
Our estimated proved reserves (BOE) and PV-10 valuation in California at April 1, 2021 are set forth in the table below.
Proved Reserves | ||||||||||
PV-10 as a | ||||||||||
Total Oil | PV-10 of | Percentage of | ||||||||
Locations | Equivalents (BOE) (1) | Proved Reserves | Proved Reserves | |||||||
Monroe Swell and West Brentwood Fields, California | 612,992 | $ | 12,944,960 | 100.0 | % |
(1) One barrel of crude oil equivalent (“BOE”) is roughly equivalent to 6,000 cubic feet or 6 Mcf of gas
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Financial Information
The financial statements shown below for Reabold are derived from the audited consolidated financial statements of RBD Plc for the years ended December 31, 2019 and 2020 and the unaudited financial statements of Reabold for the twelve months ended December 31, 2019 and 2020.
Reabold California, LLC
Balance Sheets - 5Unaudited
As of December 31, 2020 | As of December 31, 2019 | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 107,000 | $ | 43,000 | ||||
Restricted cash | 250,000 | 450,000 | ||||||
Trade and other receivables | 174,000 | 823,000 | ||||||
Inventory | 46,000 | 26,000 | ||||||
Total current assets | 577,000 | 1,342,000 | ||||||
LONG TERM ASSETS | ||||||||
Oil and gas properties | 1,583,000 | 2,079,000 | ||||||
Property, plant and equipment | 6,236,000 | 5,812,000 | ||||||
Total long-term assets | 7,819,000 | 7,891,000 | ||||||
Total assets | $ | 8,396,000 | $ | 9,223,000 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Trade and other payables | $ | 250,000 | $ | 1,090,000 | ||||
Notes payable - related parties | 8,587,000 | 7,964,000 | ||||||
Accrued liabilities | — | 85,000 | ||||||
Total current liabilities | 8,837,000 | 9,139,000 | ||||||
LONG TERM LIABILITIES: | ||||||||
Asset retirement obligation | 52,000 | 89,000 | ||||||
Total long-term liabilities | 52,000 | 89,000 | ||||||
Total liabilities | 8,889,000 | 9,228,000 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
STOCKHOLDERS’ EQUITY: | ||||||||
Common stock | 1,000 | 1,000 | ||||||
Accumulated deficit | (494,000 | ) | 4,000 | |||||
Total stockholders’ equity | (493,000 | ) | 5,000 | |||||
Total liabilities and stockholders' equity | $ | 8,147,000 | $ | 9,223,000 |
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Reabold California, LLC
Statements of Operations - Unaudited
Twelve Months Ended December 31, 2020 | Twelve Months Ended December 31, 2019 | |||||||
REVENUE: | ||||||||
Crude oil and natural gas sales | $ | 1,063,000 | $ | 1,483,000 | ||||
OPERATING EXPENSES: | ||||||||
Production | 639,000 | 425,000 | ||||||
Exploration and drilling | — | 245,000 | ||||||
Depreciation, depletion and amortization | 418,000 | 298,000 | ||||||
Impairment | 307,000 | 205,000 | ||||||
General and administrative | 149,000 | 136,000 | ||||||
Total operating expenses | 1,513,000 | 1,309,000 | ||||||
OPERATING LOSS | (450,000 | ) | 174,000 | |||||
OTHER EXPENSE: | ||||||||
Interest expense, net | (48,000 | ) | (183,000 | ) | ||||
NET LOSS | $ | (498,000 | ) | $ | (9,000 | ) |
Reabold California, LLC
Statements of Cash Flows - Unaudited
Twelve Months Ended | ||||||||
December 31, 2020 | December 31, 2019 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (498,000 | ) | $ | (9,000 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Capitalized costs expensed to exploration | — | 245,000 | ||||||
Depreciation, depletion and amortization | 418,000 | 298,000 | ||||||
Impairment | 307,000 | 205,000 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | 649,000 | (436,000 | ) | |||||
Inventory | (20,000 | ) | 15,000 | |||||
Accounts payable | (926,000 | ) | 607,000 | |||||
Provisions | (37,000 | ) | 89,000 | |||||
Net cash provided by (used in) operating activities | (107,000 | ) | 1,014,000 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Additions to crude oil and natural gas properties | (142,000 | ) | (880,000 | ) | ||||
Additions to property, plant and equipment | (511,000 | ) | (4,349,000 | ) | ||||
Changes in restricted cash | 200,000 | (225,000 | ) | |||||
Net cash used in investing activities | (453,000 | ) | (5,454,000 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds on notes payable – related party | 624,000 | 3,250,000 | ||||||
Net cash (used in) provided by financing activities | 624,000 | 3,250,000 | ||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 64,000 | (1,190,000 | ) | |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 43,000 | 1,233,000 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 107,000 | $ | 43,000 |
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The financial statements shown below for Reabold are derived from the audited consolidated financial statements of RBD Plc for the year ended December 31, 2020 and the unaudited financial statements of Reabold for the twelve months ended December 31, 2020 and the eleven months ended November 30, 2021.
Reabold California, LLC
Balance Sheets - Unaudited
As of November 30, 2021 | As of December 31, 2020 | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 292,000 | $ | 107,000 | ||||
Restricted cash | 250,000 | 250,000 | ||||||
Trade and other receivables | 55,000 | 174,000 | ||||||
Inventory | 29,000 | 46,000 | ||||||
Total current assets | 626,000 | 577,000 | ||||||
LONG TERM ASSETS | ||||||||
Oil and gas properties | 1,697,000 | 1,583,000 | ||||||
Property, plant and equipment | 5,824,000 | 6.236,000 | ||||||
Total long-term assets | 7,521,000 | 7,819,000 | ||||||
Total assets | $ | 8,147,000 | $ | 8,396,000 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Trade and other payables | $ | 232,000 | $ | 250,000 | ||||
Notes payable - related parties | 6,449,000 | 8,587,000 | ||||||
Total current liabilities | 6,681,000 | 8,837,000 | ||||||
LONG TERM LIABILITIES: | ||||||||
Asset retirement obligation | 54,000 | 52,000 | ||||||
Total long-term liabilities | 54,000 | 52,000 | ||||||
Total liabilities | 6,735,000 | 8,889,000 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
STOCKHOLDERS’ EQUITY: | ||||||||
Common stock | 2,205,000 | 1,000 | ||||||
Accumulated deficit | (793,000 | ) | (494,000 | ) | ||||
Total stockholders’ equity | 1,412,000 | (493,000 | ) | |||||
Total liabilities and stockholders' equity | $ | 8,147,000 | $ | 8,396,000 |
-14- |
Reabold California, LLC
Statements of Operations - Unaudited
Nine Months Ended November 30, 2021 | Nine Months Ended November 30, 2020 | |||||||
REVENUE: | ||||||||
Crude oil and natural gas sales | $ | 1,013,000 | $ | 655,000 | ||||
OPERATING EXPENSES: | ||||||||
Production | 776,000 | 485,000 | ||||||
Depreciation, depletion and amortization | 389,000 | 308,000 | ||||||
General and administrative | 97,000 | 142,000 | ||||||
Total operating expenses | 1,262,000 | 935,000 | ||||||
OPERATING LOSS | (249,000 | ) | (280,000 | ) | ||||
OTHER EXPENSE: | ||||||||
Interest expense, net | (10,000 | ) | (25,000 | ) | ||||
NET LOSS | $ | (259,000 | ) | $ | (305,000 | ) |
Reabold California, LLC
Statements of Cash Flows - Unaudited
Nine Months Ended | ||||||||
November 30, 2021 | November 30, 2020 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (259,000 | ) | $ | (305,000 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Depreciation, depletion and amortization | 389,000 | 308,000 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | 85,000 | 668,000 | ||||||
Inventory | 17,000 | 2,000 | ||||||
Accounts payable | 8,000 | (916,000 | ) | |||||
Provisions | — | (39,000 | ) | |||||
Net cash provided by (used in) operating activities | 240,000 | (282,000 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Additions to crude oil and natural gas properties | (80,000 | ) | (222,000 | ) | ||||
Additions to property, plant and equipment | (22,000 | ) | (346,000 | ) | ||||
Changes in restricted cash | — | 200,000 | ||||||
Net cash used in investing activities | (102,000 | ) | (368,000 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds on notes payable – related party | 64,000 | 617,000 | ||||||
Net cash (used in) provided by financing activities | 64,000 | 617,000 | ||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 202,000 | (33,000 | ) | |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 90,000 | 18,000 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 292,000 | $ | (15,000 | ) |
-15- |
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Safe Harbor Provision
Certain statements contained in Reabold’s Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 facts contained in this MD&A report, including statements regarding Reabold’s current expectations and projections about future results, intentions, plans and beliefs, business strategy, performance, prospects and opportunities, are inherently uncertain and are forward-looking statements.
Results of Operations – For the Years ended December 31, 2020 and 2019
California Crude Oil and Natural Gas Prices
Our crude oil and natural gas pricing is based on New York Mercantile Exchange (“NYMEX”) Brent as published by CME Group and are subject to the usual adjustments for quality, transportation fees, market differentials and other local conditions.
The price we receive for natural gas sales in California is based on published pricing in the Natural Gas Intelligence, Gas Price Index – Bidweek Averages for “California”, “PG&E Citygate” of 95%, less deductions for transport rates and transmission shrinkage.
It is beyond our ability to accurately predict the level at which crude oil and natural gas prices will remain or when and at what level they may stabilize.
California Crude Oil and Natural Gas Revenue
Crude oil and natural gas revenue in California for the twelve months ended December 31, 2020 decreased $420,000 or 28.3% to $1,063,000 in comparison to revenue of $1,483,000 for the twelve months ended December 31, 2019. The average sale price of a barrel of crude oil equivalent (BOE)(1)(2) for the twelve months ended December 31, 2021 was $38.40 in comparison to $60.00 for the twelve months ended December 31, 2019.
(1) | One barrel of crude oil equivalent (“BOE”) is roughly equivalent to 6,000 cubic feet or 6 Mcf of gas |
(2) | Net average sales price before royalties of 20% |
Our crude oil net sales volume for the twelve months ended December 31, 2020 was 31,728 barrels of crude oil in comparison to 29,345 barrels sold for the twelve months ended December 31, 2019. Reabold’s natural gas net sales volume for the twelve months ended December 31, 2020 was 17,129 Mcf in comparison to 9,219 Mcf for the twelve months ended December 31, 2019.
Operating Expenses
Total operating expenses for the twelve months ended December 30, 2020 were $1,514,000, an increase of $205,000 or 15.7% compared to $1,309,000 for the twelve months ended December 31, 2019. Operating expenses for the twelve months ended December 30, 2020 and 2019 are set forth in the table below:
Twelve Months Ended December 31, 2020 | Twelve Months Ended December 31, 2019 | |||||||||||||||
Expenses | Percentage | Expenses | Percentage | |||||||||||||
Production expenses | $ | 639,000 | 42.2 | % | $ | 425,000 | 32.5 | % | ||||||||
Exploration expenses | — | 0.0 | % | 245,000 | 18.7 | % | ||||||||||
Depreciation, depletion and amortization (“DD&A”) | 418,000 | 27.7 | % | 298,000 | 22.7 | % | ||||||||||
Impairment | 307,000 | 20.3 | % | 205,000 | 15.7 | % | ||||||||||
General and administrative (“G&A”) expenses | 149,000 | 9.8 | % | 136,000 | 10.4 | % | ||||||||||
Total operating expenses | $ | 1,513,000 | 100.0 | % | $ | 1,309,000 | 100.0 | % |
-16- |
Results of Operations – For the Nine Months ended November 30, 2021 and 2020
California Crude Oil and Natural Gas Revenue
Crude oil and natural gas revenue in California for the nine months ended November 30, 2021 increased $358,000 or 54.7% to $1,013,000 in comparison to revenue of $655,000 for the nine months ended November 30, 2020.
Operating Expenses
Total operating expenses for the nine months ended November 30, 2021 were $1,262,000, an increase of $327,000 or 35.0% compared to $935,000 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 | Expenses | Percentage | |||||||||||||
Production expenses | $ | 776,000 | 61.5 | % | $ | 485,000 | 51.9 | % | ||||||||
Depreciation, depletion and amortization (“DD&A”) | 389,000 | 30.8 | % | 308,000 | 32.9 | % | ||||||||||
General and administrative (“G&A”) expenses | 97,000 | 7.7 | % | 142,000 | 15.2 | % | ||||||||||
Total operating expenses | $ | 1,262,000 | 100.0 | % | $ | 935,000 | 100.0 | % |
Material Changes in Financial Condition
During the nine months ended November 30, 2021 Reabold experienced an increase in revenues of $358,000 or 54.7% to $1,013,000 in comparison to revenues of $655,000 for the nine months ended November 30, 2020.
For the nine months ended November 30, 2021, Reabold had an operating loss of $249,000 in comparison to an operating loss of $289,000 for the nine months ended November 30, 2020.
Reabold’s balance sheet at November 30, 2021 comprises total assets of $10,700,000 in comparison to $10,949,000 at December 31, 2020. The decrease of $249,000 is primarily due to depreciation of property, plant and equipment.
At November 30, 2021, total liabilities were $6,735,000 in comparison to $8,889,000 at December 31, 2020. The decrease in liabilities of $2,154,000 was primarily due to a redemption in the in notes payable to Gaelic in the amount of $2,204,000 in exchange for the issue of new common stock.
The common stock balance at November 30, 2021 increased by $2,204,000 from the December 31, 2020 balance as a result of the issue of new common stock in Reabold in exchange for the redemption of notes payable in the amount of $2,204,000.
The accumulated deficit increased by $299,000 to $793,000 at November 30, 2021 in comparison to $494,000 at December 31, 2020.
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Capital Resources and Liquidity
Our primary capital 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 and natural gas sales, the success of our future drilling programs and the availability of capital resource financing.
Changes in our capital resources at November 30, 2021 in comparison to December 31, 2020 are set forth in the table below:
November 30, 2021 | December 31, 2020 | Increase (Decrease) | Percentage Change | |||||||||||||
Cash | $ | 292,000 | $ | 107,000 | $ | 185,000 | 172.9 | % | ||||||||
Restricted cash | $ | 250,000 | $ | 250,000 | $ | — | — | |||||||||
Current assets | $ | 626,000 | $ | 578,000 | $ | 48,000 | 8.5 | % | ||||||||
Total assets | $ | 10,700,000 | $ | 10,949,000 | $ | (249,000 | ) | (2.3 | %) | |||||||
Current liabilities | $ | (6,681,000 | ) | $ | (8,837,000 | ) | $ | (2,156,000 | ) | (24.4 | %) | |||||
Total liabilities | $ | (6,735,000 | ) | $ | (8,889,000 | ) | $ | (2,154,000 | ) | (24.2 | %) | |||||
Working capital deficit | $ | (6,055,000 | ) | $ | (8,259,000 | ) | $ | (2,204,000 | ) | (26.7 | %) |
Our working capital deficit decreased by $2,204,000 or 26.7% to $6,055,000 at November 30, 2021 in comparison to $8,259,000 at December 31, 2020 due to a redemption in the notes payable to Gaelic in the amount of $2,204,000 in exchange for the issue of new common stock. It is noted that the balance of the loan notes issued by Reabold to RBD Plc ($6,449,000 as of November 30, 2021) are to be redeemed in full by the issue of new units in Reabold to Gaelic, prior to the completion of the acquisition of Reabold by Daybreak.
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. Since our future operations will continue to be dependent on successful exploration evaluation 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 impaired.
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.
MARKET FOR REABOLD’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no public trading market for the common equity of Reabold.
Gaelic, Reabold’s parent, is the only holder of Reabold’s equity.
SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES OF REABOLD
Critical accounting policies are policies that are both most important to the portrayal of Reabold’s financial condition and results, and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management’s discussion and analysis of Reabold’s financial condition and results of operations are based on its financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
On an ongoing basis, Reabold evaluates its estimates, including those related to revenue recognition, bad debts, cancellation costs associated with long term commitments, investments, intangible assets, assets subject to disposal, income taxes, service contracts, contingencies and litigation. Reabold bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which
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form the basis for making estimates and judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Estimates, by their nature, are based on judgment and available information. These judgments and uncertainties do affect the application of these critical accounting policies. There is a strong likelihood that materially different amounts could be reported under different conditions or using different assumptions. Therefore, actual results could differ from those estimates and could have a material impact on Reabold's financial statements, and it is possible that such changes could occur in the near term.
Proved Crude Oil and Natural Gas Reserves
Proved reserves are defined by the SEC as those quantities of crude oil and natural gas which, by analysis of geoscience and engineering data can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulation before the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether the estimate is a deterministic estimate or probabilistic estimate. Proved developed reserves are proved reserves that can be expected to be recovered through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared with the cost of a new well or through installed extraction equipment and infrastructure operational at the time of the reserve estimates if the extraction is by means not involving a well. Although Reabold’s external engineers are knowledgeable of and follow the guidelines for reserves as established by the SEC, the estimation of reserves requires the engineers to make a significant number of assumptions based on professional judgment. Estimated reserves are often subject to future revision, certain of which could be substantial, based on the availability of additional information, including reservoir performance, new geological and geophysical data, additional drilling, technological advancements, price changes and other economic factors. Changes in crude oil and natural gas prices can lead to a decision to start-up or shut-in production, which can lead to revisions to reserve quantities. Reserve revisions inherently lead to adjustments of depreciation rates used by Reabold. Reabold cannot predict the types of reserve revisions that will be required in future periods.
While the estimates of Reabold’s proved reserves at April 1, 2021 included in this report have been prepared based on what it and its independent reserve engineers believe to be reasonable interpretations of the SEC rules, those estimates could differ materially from its actual results.
Successful Efforts Accounting Method
Reabold uses the successful efforts method of accounting for crude oil and natural gas property acquisition, exploration, development, and production activities. Costs to acquire mineral interests in crude oil and natural gas properties, to drill and equip exploratory wells that find proved reserves, and to drill and equip development wells are capitalized as incurred. Costs to drill exploratory wells that are unsuccessful in finding proved reserves are expensed as incurred. In addition, the geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed as incurred. Costs to operate and maintain wells and field equipment are expensed as incurred.
Capitalized proved property acquisition costs are amortized by field using the unit-of-production method based on proved reserves. Capitalized exploration well costs and development costs (plus estimated future dismantlement, surface restoration, and property abandonment costs, net of equipment salvage values) are amortized in a similar fashion (by field) based on their proved developed reserves. Support equipment and other property and equipment are depreciated over their estimated useful lives.
Pursuant to Financial Accounting Standards Board Codification (“ASC”) Topic 360, “Property, Plant and Equipment,” Reabold reviews proved oil and natural gas properties and other long-lived assets for impairment. These reviews are predicated by events and circumstances, such as downward revision of the reserve estimates or commodity prices that indicate a decline in the recoverability of the carrying value of such properties. Reabold estimates the future cash flows expected in connection with the properties and compare such future cash flows to the carrying amount of the properties to determine if the carrying amount is recoverable. When the carrying amounts of the properties exceed their estimated undiscounted future cash flows, the carrying amounts of the properties are reduced to their estimated fair value. The factors used to determine fair value include, but are not limited to, estimates of proved reserves, future commodity prices, the timing of future production, future capital expenditures and a risk-adjusted discount rate.
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Unproved crude oil and natural gas properties that are individually significant are also periodically assessed for impairment of value. An impairment loss for unproved crude oil and natural gas properties is recognized at the time of impairment by providing an impairment allowance.
On the retirement or sale of a partial unit of proved property, the cost is charged to accumulated DD&A with a resulting gain or loss recognized in income.
Revenue Recognition
Reabold’s customer sales contracts include only crude oil and natural gas sales in California. Each unit (crude oil barrel or Mcf of natural gas) of commodity product represents a separate performance obligation which is sold at variable prices, determinable on a monthly basis. The pricing provisions of Reabold’s crude oil and natural gas contracts are primarily tied to a market index with certain adjustments based on factors such as delivery, product quality and prevailing supply and demand conditions in the geographic areas in which it operates. Reabold will allocate the transaction price to each performance obligation and recognize revenue upon delivery of the commodity product when the customer obtains control. Control of Reabold’s produced crude oil volumes passes to its customers when the oil is measured by a trucking oil ticket. Reabold has no control over the crude oil after this point and the measurement at this point dictates the amount on which the customer's payment is based. Reabold’s crude oil revenue stream includes volumes burdened by royalty and other joint owner working interests. Reabold’s revenues are recorded and presented on its financial statements net of the royalty and other joint owner working interests. Reabold’s revenue stream does not include any payments for services or ancillary items other than sale of crude oil. Reabold records revenue in the month its crude oil production is delivered to the purchaser.
Suspended Well Costs
Reabold accounts for any suspended well costs in accordance with FASB ASC Topic 932, “Extractive Activities – Oil and Gas” (“ASC 932”). ASC 932 states that exploratory well costs should continue to be capitalized if: (1) a sufficient quantity of reserves are discovered in the well to justify its completion as a producing well and (2) sufficient progress is made in assessing the reserves and the economic and operating feasibility of the well. If the exploratory well costs do not meet both of these criteria, these costs should be expensed, net of any salvage value. Additional annual disclosures are required to provide information about management's evaluation of capitalized exploratory well costs.
In addition, ASC 932 requires annual disclosure of: (1) net changes from period to period of capitalized exploratory well costs for wells that are pending the determination of proved reserves, (2) the amount of exploratory well costs that have been capitalized for a period greater than one year after the completion of drilling and (3) an aging of exploratory well costs suspended for greater than one year, designating the number of wells the aging is related to. Further, the disclosures should describe the activities undertaken to evaluate the reserves and the projects, the information still required to classify the associated reserves as proved and the estimated timing for completing the evaluation.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, Reabold is not required to provide the information otherwise required by this Item.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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PRO FORMA FINANCIAL INFORMATION
The combined condensed and consolidated pro forma financial statements shown below for Daybreak and Reabold are derived from Daybreak’s public filings and the unaudited management accounts of Reabold for the nine months ended November 30, 2021 and the twelve months ended February 28, 2021.
Pro Forma Condensed Consolidated Balance Sheets – Unaudited
Pro Forma | |||||||||||||||||
Historical as of November 30, 2021 | Acquisition | Pro Forma | |||||||||||||||
Daybreak | Reabold | Adjustment | Combined | ||||||||||||||
ASSETS | |||||||||||||||||
CURRENT ASSETS: | |||||||||||||||||
Cash and cash equivalents | $ | 17,392 | $ | 292,000 | $ | 1,245,917 | (1) | $ | 1,555,309 | ||||||||
Restricted cash | — | 250,000 | — | 250,000 | |||||||||||||
Trade and other accounts receivable: | 189,027 | 55,000 | — | 244,027 | |||||||||||||
Inventory | — | 29,000 | 29,000 | ||||||||||||||
Prepaid expenses and other current assets | 96,493 | — | — | 96,493 | |||||||||||||
Total current assets | 302,912 | 626,000 | 1,245,917 | 2,174,829 | |||||||||||||
LONG-TERM ASSETS: | |||||||||||||||||
Oil and gas properties | 579,384 | 1,697,000 | — | 2,276,384 | |||||||||||||
Property, plant & equipment | 23,809 | 5,824,000 | — | 5,847,809 | |||||||||||||
Total long-term assets | 603,193 | 7,521,000 | — | 8,124,193 | |||||||||||||
Total assets | $ | 906,105 | $ | 8,147,000 | $ | 1,245,917 | $ | 10,299,022 | |||||||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | |||||||||||||||||
CURRENT LIABILITIES: | |||||||||||||||||
Trade accounts payable and other accrued liabilities | $ | 1,857,833 | $ | 232,000 | $ | (197,755 | ) | (2) | $ | 1,892,078 | |||||||
Accounts payable – related parties | 981,634 | — | (939,043 | ) | (3) | 42,591 | |||||||||||
Accrued interest | 161,138 | — | (10,520 | ) | (4) | 150,618 | |||||||||||
Note(s) payable | 435,000 | — | (25,000 | ) | (5) | 410,000 | |||||||||||
Note(s) payable – related party | 258,042 | 6,449,000 | (6,699,000 | ) | (6) | 8,042 | |||||||||||
Other payables | 85,759 | — | (49,654 | ) | (7) | 36,105 | |||||||||||
Line of credit | 816,583 | — | (816,583 | ) | (8) | — | |||||||||||
Total current liabilities | 4,595,989 | 6,681,000 | (8,737,555 | ) | 2,539,434 | ||||||||||||
LONG-TERM LIABILITIES: | |||||||||||||||||
Note payable – related party | 129,407 | — | — | 129,407 | |||||||||||||
Other long-term liabilities | 1,504,671 | — | (871,192 | ) | (9) | 633,479 | |||||||||||
Asset retirement obligation | 36,700 | 54,000 | — | 90,700 | |||||||||||||
Total long-term liabilities | 1,670,778 | 54,000 | (871,192 | ) | 853,586 | ||||||||||||
Total liabilities | 6,266,767 | 6,735,000 | (9,608,747 | ) | 3,393,020 | ||||||||||||
COMMITMENTS AND CONTINGENCIES | |||||||||||||||||
STOCKHOLDERS’ DEFICIT: | |||||||||||||||||
Preferred stock | — | — | — | — | |||||||||||||
Series A Convertible Preferred stock | 710 | — | (710 | ) | (10) | — | |||||||||||
Common stock | 60,491 | 2,205,000 | (1,908,509 | ) | (11) | 356,982 | |||||||||||
Additional paid-in capital | 24,254,978 | — | 9,157,719 | (12) | 33,412,697 | ||||||||||||
Accumulated deficit | (29,676,841 | ) | (793,000 | ) | 3,606,164 | (13) | (26,863,677 | ) | |||||||||
Total stockholders’ equity (deficit) | (5,360,662 | 1,412,000 | 10,854,664 | 6,906,002 | |||||||||||||
Total liabilities and stockholders’ equity | $ | 906,105 | $ | 8,147,000 | $ | 1,245,917 | $ | 10,299,022 |
(1) | Adjustment represents the net proceeds from the sale of 125,000,000 shares of common stock to a third party for $2.5 million, net of $437,500 cash for stock sale fees and settlement of the $816,583 line of credit balance |
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(2) | Adjustment represents employer payroll taxes of $52,530 in debt forgiveness on related party accrued salary, employee payroll taxes of $135,607 converted to 313,669 common stock shares, and settlement of $9,618 in other assorted payables through loan forgiveness |
(3) | Adjustment represents employee net accrued salaries of $493,359; accrued director fees of $142,969; 12% Note interest – related party of $264,986 converted to 2,002,921 shares of common stock plus the net settlement of related party receivables and payables forgiveness of $37,729 |
(4) | Adjustment represents conversion of $10,520 12% Note interest into 23,379 shares of common stock by a third party |
(5) | Adjustment represents conversion of 12% Note principal of $25,000 into 55,555 shares of common stock by a third party |
(6) | Adjustment represents the conversion of $250,000 of 12% Note principal into 555,556 shares of common stock offset by the loan notes issued by Reabold to RBD Plc for $6,449,000 that are to be redeemed in full by the issue of new units in Reabold to Gaelic, prior to the completion of the acquisition of Reabold by Daybreak |
(7) | Adjustment represents short-term related party production revenue payable of $49,654 converted into 65,916 shares of common stock |
(8) | Adjustment represents payoff of line of credit balance of $816,583 with cash from common stock sale proceeds |
(9) | Adjustment represents long-term related party production revenue payable of $871,192 converted into 1,156,528 shares of common stock |
(10) | Adjustment represents the par value of $0.001 per share for the conversion of 709,568 shares of Series A preferred stock into 2,128,704 shares of common stock |
(11) | Adjustment represents the par value of $160,964 for the 160,964,489 common stock shares issued for the acquisition, the par value of $128,125 for the 128,125,000 common stock shares issued for the stock sale and associated stock fees, the par value of $3,229 for the 3,228,704 common stock shares issued for the Series A Preferred stock and dividend conversion, the par value of $79 for the 78,934 common stock shares issued for the 12% Note and interest conversion by a third party, the par value of $1,728 for the 1,727,731 common stock shares issued for the conversion of related party accrued salaries and director fees, the par value of $1,144 for the 1,144,415 common stock shares issued for the conversion of related party 12% Note and interest, the par value of $1,222 for the 1,222,444 common stock shares issued for the conversion of the related party production revenue payable, offset by the Reabold equity of $2,205,000 |
(12) | Adjustment represents the excess value over par value of the common stock shares issued for the acquisition $5,327,925, the $1,934,375 for the common stock sale for fundraising, the $28,380 for the Series A Preferred stock dividend, and $1,867,039 for the conversion of debt and related party debt to common stock |
(13) | Adjustment represents the sum of the gain on related party debt conversion of the production revenue payable in the amount of $370,846, the gain on the related party accrued payroll conversion of $52,530, the net gain on debt forgiveness of $47,347, the bargain purchase gain of $2,371,821 on the acquisition, and the Reabold accumulated deficit of $793,000, less the $29,480 for the 1,100,000 common stock shares issued to satisfy the accumulated dividend for all the Series A Preferred shareholders |
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Pro Forma Condensed Consolidated Statements of Operations – Unaudited
Historical for the Nine Months | Pro Forma | ||||||||||||||||
Ended November 30, 2021 | Acquisition | Pro Forma | |||||||||||||||
Daybreak | Reabold CA, LLC | Adjustment | Combined | ||||||||||||||
REVENUE: | |||||||||||||||||
Crude oil and natural gas sales | $ | 505,410 | $ | 1,013,000 | $ | — | $ | 1,518,410 | |||||||||
OPERATING EXPENSES: | |||||||||||||||||
Production | 165,592 | 776,000 | — | 941,592 | |||||||||||||
Depreciation, depletion, and amortization (DD&A) | 44,004 | 389,000 | — | 433,004 | |||||||||||||
General and administrative | 447,952 | 97,000 | (69,000 | ) | (1) | 475,952 | |||||||||||
Total operating expenses | 657,548 | 1,262,000 | (69,000 | ) | 1,850,548 | ||||||||||||
OPERATING LOSS | (152,138 | ) | (249,000 | ) | 69,000 | (332,138 | ) | ||||||||||
Other Expense | (95,806 | ) | (10,000 | ) | 10,000 | (2) | (95,806 | ) | |||||||||
NET LOSS | (247,944 | ) | (259,000 | ) | 79,000 | (427,944 | ) | ||||||||||
Cumulative convertible preferred stock dividend requirement | (96,223 | ) | — | 96,223 | (3) | — | |||||||||||
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS | $ | (344,167 | ) | $ | (259,000 | ) | $ | 175,223 | $ | (427,944 | ) | ||||||
NET LOSS PER COMMON SHARE, basic and diluted | $ | (0.006 | ) | $ | (3.74 | ) | $ | — | $ | (0.001 | ) | ||||||
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING | |||||||||||||||||
Basic and diluted | 60,491,122 | 69,326 | 296,422,391 | (4) | 356,982,839 |
(1) | Adjustment represents elimination of the inter-Group management and non-recurring charges of $69,000 between RBD Plc and Reabold |
(2) | Adjustment represents elimination of the interest of $10,000 charged on the loan notes issued by Reabold to RBD Plc |
(3) | Adjustment represents conversion of $96,223 of Series A preferred stock dividend into common stock |
(4) | Adjustment represents the 296,491,717 common stock shares issued for the acquisition, common stock sale, the Series A Preferred stock and dividend conversion, and conversion of debt and related party debt to common stock, less the 69,326 Reabold common stock shares eliminated through the acquisition |
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Pro Forma Condensed Consolidated Statements of Operations – Unaudited
Historical for the Twelve Months | Pro Forma | ||||||||||||||||
Ended February 28, 2021 | Acquisition | Pro Forma | |||||||||||||||
Daybreak | Reabold CA, LLC | Adjustment | Combined | ||||||||||||||
REVENUE: | |||||||||||||||||
Crude oil and natural gas sales | $ | 404,901 | $ | 904,000 | $ | — | $ | 1,308,901 | |||||||||
OPERATING EXPENSES: | |||||||||||||||||
Production | 187,941 | 679,000 | — | 866,941 | |||||||||||||
Depreciation, depletion, and amortization (DD&A) | 60,063 | 391,000 | — | 451,063 | |||||||||||||
Impairment | — | 307,000 | — | 307,000 | |||||||||||||
General and administrative | 505,704 | 176,000 | (65,000 | ) | (1) | 616,704 | |||||||||||
Total operating expenses | 753,708 | 1,553,000 | (65,000 | ) | 2,241,708 | ||||||||||||
OPERATING LOSS | (348,807 | ) | (649,000 | ) | 65,000 | (932,807 | ) | ||||||||||
Other Expense | (163,458 | ) | (28,000 | ) | 28,000 | (2) | (163,458 | ) | |||||||||
NET LOSS | (512,265 | ) | (677,000 | ) | 93,000 | (1,096,265 | ) | ||||||||||
Cumulative convertible preferred stock dividend requirement | (127,714 | ) | — | 127,714 | (3) | — | |||||||||||
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS | $ | (639,979 | ) | $ | (677,000 | ) | $ | 220,714 | $ | (1,096,265 | ) | ||||||
NET LOSS PER COMMON SHARE, basic and diluted | $ | (0.01 | ) | $ | (13.54 | ) | $ | — | $ | (0.00 | ) | ||||||
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING | |||||||||||||||||
Basic and diluted | 57,916,382 | 50,000 | 296,441,717 | (4) | 354,408,099 |
(1) | Adjustment represents elimination of the inter-Group management and non-recurring charges of $65,000 between RBD Plc and Reabold |
(2) | Adjustment represents elimination of $28,000 for the interest charged on the loan notes issued by Reabold to RBD Plc |
(3) | Adjustment represents conversion of $127,714 Series A preferred stock dividend to common stock |
(4) | Adjustment represents the 296,491,717 common stock shares issued for the acquisition, common stock sale, the Series A Preferred stock and dividend conversion, and conversion of debt and related party debt to common stock, less the 50,000 Reabold common stock shares eliminated through the acquisition |
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The combined company will be faced with a market environment that cannot be predicted and that involves significant risks, many of which will be beyond its control. In addition to the other information contained in this proxy statement, you should carefully consider the material risks described below before deciding how to vote your shares of Daybreak common stock.
Risks Related to the Equity Exchange
The number of shares of common stock issuable pursuant to the Equity Exchange and the Capital Raise will cause significant dilution to existing shareholders and a change of control.
Following the closing of the Equity Exchange, the Capital Raise and the transactions contemplated thereby, the Company will have issued at least 285,964,489 new shares of Common Stock, representing at least 81% of the total outstanding voting securities of the Company. The shareholders of the Company immediately prior to the transaction are expected to hold approximately 19% of the total outstanding voting securities of the Company. No one shareholder is expected to beneficially own a majority of the outstanding shares of the Company. As a result of these transactions, the total shares of common stock issuable upon closing of the Equity Exchange and the Capital Raise will cause significant dilution to existing shareholders, and result in a change of control.
The number of shares that will be issuable in the Equity Exchange are not adjustable based on the market price of Daybreak common stock, so the shares issued at the closing may have a greater or lesser value than the market price at the time the Equity Exchange Agreement was signed.
The number of shares of common stock issuable at the closing of the Equity Exchange is fixed. Any changes in the market price of Daybreak common stock before the closing will not affect the number of shares Gaelic will be entitled to receive pursuant to the Equity Exchange. Therefore, if before the closing, the market price of Daybreak’s common stock declines from the market price on the date of the Equity Exchange Agreement, then Gaelic could receive consideration with a substantially lower value. Similarly, if before the closing, the market price of Daybreak’s common stock increases from the market price on the date of the Equity Exchange Agreement, then Gaelic could receive consideration with substantially more value for its shares of Daybreak common stock. The Equity Exchange Agreement does not include a price-based termination right.
The market price of Daybreak’s common stock following the Equity Exchange may decline as a result of the transactions.
The market price of Daybreak’s common stock may decline as a result of the Equity Exchange for a number of reasons, including if investors react negatively to the combined company’s business and prospects.
Daybreak’s shareholders may not realize a benefit from the Equity Exchange and Capital Raise commensurate with the ownership dilution they will experience in connection with the Equity Exchange and Capital Raise.
If the combined company is unable to realize the full strategic and financial benefits anticipated from the Equity Exchange and Capital Raise, Daybreak’s shareholders will have experienced substantial dilution of their ownership interests without receiving any commensurate benefit, or only receiving part of the commensurate benefit to the extent the combined company is able to realize only part of the strategic and financial benefits currently anticipated from the Equity Exchange and Capital Raise.
Daybreak’s shareholders will have a reduced ownership and voting interest in, and will exercise less influence over the management of, the combined company following the completion of the Equity Exchange.
After the completion of the Equity Exchange and the Capital Raise, the current shareholders of Daybreak will own a significantly smaller percentage of the combined company than their ownership of Daybreak prior to the Equity Exchange. At the effective time of the Equity Exchange and the Capital Raise, Daybreak’s equity holders will collectively own approximately19% of the outstanding shares of the combined company, based on the current number of Daybreak shares outstanding. This calculation does not contemplate the outstanding Daybreak warrant, which will remain outstanding under its existing terms following the Equity Exchange. In addition, following the closing, the board of directors of the combined company will be comprised of four members, including one director
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nominated by Gaelic. The 160,964,489 shares of Daybreak Common Stock to be owned by Gaelic following the Equity Exchange are subject to the terms of the Voting Agreement by and among Daybreak, Gaelic and the Company’s Chairman and Chief Executive Officer, James F. Westmoreland, where, on the terms therein, Daybreak and the shareholder parties thereto agree to nominate a person designated by Gaelic and a person designated by James F. Westmoreland to Daybreak’s Board of Directors, and the parties thereto agree to vote their shares in favor of such candidates (the “Voting Agreement”). The Voting Agreement shall terminate by mutual written consent of the parties, at such time as Gaelic no longer holds at least 20% of the issued and outstanding shares of Common Stock of Daybreak, or at such time as James F. Westmoreland no longer holds the minimum threshold of Common Stock of Daybreak as set forth in the Voting Agreement. Consequently, Daybreak’s shareholders will be able to exercise less influence over the management and policies of the combined company than they currently exercise over the management and policies of Daybreak.
Combining Reabold and the Company may be more difficult, costly, or time-consuming than expected and the Company may fail to realize the anticipated benefits of the Equity Exchange and Capital Raise, including expected financial and operating performance of the combined company.
The success of the Equity Exchange and Capital Raise will depend, in part, on the combined company’s ability to realize operational efficiencies and anticipated cost savings from combining the businesses of the Company and Reabold. To realize the anticipated benefits and cost savings from the Equity Exchange and Capital Raise, the Company and Reabold must successfully integrate and combine their businesses in a manner that permits those cost savings to be realized. If the Company and Reabold are not able to successfully achieve these objectives, the anticipated benefits of the Equity Exchange and Capital Raise may not be realized fully or at all or may take longer to realize than expected. In addition, the actual cost savings of the Equity Exchange and Capital Raise could be less than anticipated.
Daybreak will need to raise additional funding prior to closing.
A required condition to closing the Equity Exchange is that Daybreak 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, for drilling and exploration activities and other working capital purposes. As of the date hereof, Daybreak is still in the process of seeking and obtaining commitments from interested investors. As such, prior to closing, Daybreak will need to secure all $2,500,000 in funding commitments. In the event that Daybreak does not obtain these funding commitments required by closing, the closing may not occur, unless Gaelic agrees to reduce such amount of funding required at closing or waive such condition to closing.
We will be subject to business uncertainties and contractual restrictions while the Equity Exchange and Capital Raise is pending.
Uncertainty about the effect of the Equity Exchange and Capital Raise on employees and partners may have an adverse effect on us. These uncertainties may impair our ability to attract, retain and motivate key personnel until the Equity Exchange and Capital Raise is completed, and could cause partners and others that deal with us to seek to change existing business relationships, cease doing business with us or cause potential new partners to delay doing business with us until the Equity Exchange and Capital Raise has been successfully completed. Retention of certain employees may be challenging during the pendency of the Equity Exchange and Capital Raise, as certain employees may experience uncertainty about their future roles or compensation structure. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the business, our business following the Equity Exchange and Capital Raise could be negatively impacted.
The Equity Exchange Agreement may be terminated in accordance with its terms and the Equity Exchange and Capital Raise may not be completed.
The Equity Exchange Agreement is subject to several conditions that must be fulfilled in order to complete the Equity Exchange and Capital Raise. These conditions to the closing of the Equity Exchange and Capital Raise may not be fulfilled and, accordingly, the Equity Exchange and Capital Raise may not be completed. In addition, the parties to the Equity Exchange Agreement can generally terminate such agreement if the transactions contemplated thereby do not close by April 29, 2022, under certain other conditions if the terms of the Equity Exchange
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Agreement are breached, and the parties can mutually decide to terminate the Equity Exchange Agreement at any time.
The conditions under the Equity Exchange Agreement required to consummate the Equity Exchange may not be satisfied at all or in the anticipated timeframe. If the Equity Exchange Agreement is not closed on or before April 29, 2022, the Equity Exchange Agreement could be terminated and we will incur penalties. We do not expect that the Equity Exchange will close by this date and expect that we will incur these additional penalties.
Approval of Proposals 1, 2, and 3 are required to be able to consummate the Equity Exchange. If our shareholders do not approve each of these Proposals, the Equity Exchange will not occur. Further, if we do not close the Equity Exchange Agreement, or if we do not close the Equity Exchange Agreement on or before April 29, 2022, we will incur financial costs and penalties, including:
·Pursuant to the amendment to the Equity Exchange Agreement entered into on February 22, 2022 (the “Exchange Agreement Amendment”), Daybreak agreed to issue to Gaelic shares of Daybreak common stock worth US$500,000 if the Equity Exchange is not closed by April 29, 2022 (the “Break Fee Shares”). However, if the Equity Exchange Agreement is completed after an agreed upon date after April 29, 2022, then 50% of the Break Fee Shares issued to Gaelic will be applied in part satisfaction of the number of the Parent Shares that are due to Gaelic under the Exchange Agreement; and
·On or about February 22, 2022, Company issued a convertible promissory note to a private investor (the “purchaser”) in the amount of US$200,000 (the “Convertible Note”). The Convertible Note will convert into shares of the Company’s common stock upon the earlier of the closing of the Equity Exchange Agreement or the purchaser’s instruction any time on or after April 29, 2022. If the closing of the Equity Exchange Agreement is on or before April 29, 2022, the Convertible Note will convert at a price of $0.017 per share, into approximately 13,882,353 common shares, including payable-in-kind interest. If the Convertible Note converts after April 29, 2022, it will convert at a price of $0.0085 per share, into approximately 27,764,706 common shares, including payable-in-kind interest. Payable-in-kind interest accrues on the Convertible Note at a rate of 18% per annum with a minimum of one year of interest payable. The terms of the Convertible Note also provide that if the Company sells shares over the next six months for a price less than $0.02 per share, the Company will adjust the number of conversion shares issued under the Convertible Note accordingly, at a conversion price equal to the sale price with a 15% discount.
Therefore, if the Equity Exchange Agreement is not closed by April 29, 2022, the existing shareholders will experience additional significant dilution. We do not expect that the Equity Exchange will close by this date and expect that we will incur these additional penalties.
Termination of the Equity Exchange Agreement could negatively impact the Company.
In the event the Equity Exchange Agreement is terminated, our business may have been adversely impacted by our failure to pursue other beneficial opportunities due to the focus of management on the Equity Exchange and Capital Raise, and the market price of our common stock might decline to the extent that the current market price reflects a market assumption that the Equity Exchange and Capital Raise will be completed. If the Equity Exchange Agreement is terminated and our board of directors seeks another acquisition or business combination, our shareholders cannot be certain that we will be able to find a party willing to offer equivalent or more attractive consideration than the consideration provided for by the Equity Exchange and Capital Raise.
Significant costs are expected to be incurred in connection with the consummation of the Equity Exchange and Capital Raise and integration of Reabold into the operations of the Company, including legal, accounting, financial advisory and other costs.
If the Equity Exchange and Capital Raise are consummated, the Company expects to incur significant costs in connection with integrating their operations and personnel. First, in connection with the Exchange Agreement Amendment, Daybreak and Gaelic agreed to allow Reabold to borrow up to $250,000 from Gaelic’s parent company, Reabold Resources PLC, to conduct certain operational activities necessary to maintain the production of oil and gas on its leases, to be paid back to Reabold Resources PLC by Daybreak upon the closing of the Equity Exchange Agreement. In addition, the Company expects to incur a number of non-recurring costs associated with combining the operations of the two companies, which cannot be estimated accurately at this time. The Company
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will also incur transaction fees and other costs related to the Equity Exchange and Capital Raise. Additional unanticipated costs may be incurred in the integration of the businesses of the Company and Reabold. Although the Company and Reabold expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, may offset incremental transaction and transaction-related costs over time, this net benefit may not be achieved in the near term, or at all. There can be no assurance that the Company will be successful in these integration efforts.
Daybreak and the combined company will incur substantial transaction-related costs in connection with the Equity Exchange and Capital Raise.
Daybreak has incurred, and expects to continue to incur, a number of non-recurring transaction-related costs associated with completing the Equity Exchange and Capital Raise and related transactions. These fees and costs have been, and will continue to be, substantial. Non-recurring transaction costs include, but are not limited to, fees paid to legal, financial and accounting advisors, filing fees and printing costs, and could have a material adverse effect on the combined company’s financial condition and operating results.
Daybreak may become involved in securities class action litigation that could divert management’s attention and harm the combined company’s business, and insurance coverage may not be sufficient to cover all costs and damages.
In the past, securities class action or shareholder derivative litigation often follows certain significant business transactions, such as the sale of a business division or announcement of a business combination. The combined company may become involved in this type of litigation in the future. Litigation often is expensive and diverts management’s attention and resources, which could adversely affect the combined company’s business.
Risks Related to Daybreak’s Operations, Business and Industry
You should carefully consider the risk factors regarding Daybreak discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended February 28, 2021, and which are hereby incorporated by reference into, and made a part of, this proxy statement.
Risks Related to Reabold’s Operations, Business and Industry
There is substantial volatility and uncertainty in crude oil and natural gas prices, which has adversely affected, and in the future may continue to adversely affect, Reabold’s financial condition, liquidity, results of operations, cash flows, access to capital markets, and ability to grow.
Reabold’s revenues, operating results, liquidity, cash flows, profitability, and valuation of proved reserves depend substantially upon the market prices of crude oil and natural gas. Product prices affect Reabold’s cash flow available for capital expenditures and Reabold’s ability to access funds through the capital markets. Declines in commodity prices have historically adversely affected the estimated value of Reabold’s proved reserves and cash flows.
The commodity prices received for Reabold’s crude oil and natural gas depend upon factors beyond Reabold’s control, including among others:
— changes in the supply of and demand for crude oil and natural gas;
— market uncertainty;
— the level of consumer product demands;
— hurricanes and other weather conditions;
— domestic governmental regulations and taxes;
— the foreign supply of crude oil and natural gas;
— the price of crude oil and natural gas imports
— national and international pandemics like the COVID-19; and
— overall domestic and foreign relations and economic conditions.
These factors make it very difficult to predict future hydrocarbon commodity price movements with any certainty. It is beyond Reabold’s control and ability to accurately predict when there will be a sustained improvement in
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hydrocarbon prices. All of Reabold’s crude oil and natural gas sales are made pursuant to contracts based on spot market prices and are not based on long-term fixed price contracts. Crude oil and natural gas prices do not necessarily fluctuate in direct relation to each other.
The crude oil and natural gas business is highly competitive, placing Reabold at an operating disadvantage.
We expect to be at a competitive disadvantage in (a) seeking to acquire suitable crude oil and or natural gas drilling prospects; (b) undertaking exploration and development; and (c) seeking additional financing. We base Reabold’s preliminary decisions regarding the acquisition of crude oil and or natural gas prospects and undertaking of drilling ventures upon general and inferred geology and economic assumptions. This public information is also available to Reabold’s competitors.
In addition, Reabold competes with larger crude oil and natural gas companies with longer operating histories and greater financial resources than us. These larger competitors, by reason of their size and greater financial strength, can more easily:
— access capital markets;
— recruit more qualified personnel;
— absorb the burden of any changes in laws and regulation in applicable jurisdictions;
— handle longer periods of reduced prices of crude oil and natural gas;
— acquire and evaluate larger volumes of critical information; and
— compete for industry-offered business ventures.
These disadvantages could create negative results for Reabold’s business plan and future operations.
Reabold’s ability to reach and maintain profitable operating results is dependent on Reabold’s ability to find, acquire, and develop crude oil and natural gas properties.
Reabold’s future performance depends upon Reabold’s ability to find, acquire, and develop crude oil and natural gas reserves that are economically recoverable. Without successful exploration and acquisition activities, Reabold will not be able to develop reserves or generate production revenues to achieve and maintain profitable operating results. No assurance can be given that Reabold will be able to find, acquire or develop these reserves on acceptable terms. We also cannot assure that commercial quantities of crude oil and natural gas deposits will be discovered that are sufficient to enable us to recover Reabold’s exploration and development costs.
Reabold’s limited capital expenditures and drilling program, when coupled with a sustained depression in crude oil and natural gas prices, will significantly reduce Reabold’s cash flow and constrain any future drilling, which would have a material adverse effect on Reabold’s business, financial condition and results of operations.
Volatility in hydrocarbon prices combined with reduced production and accompanying lower cash flows will continue to adversely affect Reabold’s business financial condition and results of operations.
Reabold’s proved reserves are estimates and depend on many assumptions. Any material inaccuracies in these assumptions could cause the quantity and value of Reabold’s crude oil reserves, and Reabold’s revenues, profitability, and cash flows to be materially different from Reabold’s estimates.
The accuracy of estimated proved reserves and estimated future net cash flows from such reserves is a function of the quality of available geological, geophysical, engineering, and economic data and is subject to various assumptions. Although it is believed that Reabold’s estimated proved reserves represent reserves that it is reasonably certain to recover, actual future production, crude oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable crude oil and natural gas reserves will most likely vary from the assumptions and estimates used to determine proved reserves. Any significant variance could materially affect the estimated quantities and value of Reabold’s crude oil and natural gas reserves, which in turn could adversely affect Reabold’s cash flows, results of operations, financial condition, and the availability of capital resources. In addition, Reabold may adjust estimates of proved reserves to reflect production history, results of exploration and development, prevailing crude oil and natural gas prices and other factors, many of which are beyond Reabold’s control. Downward adjustments to Reabold’s estimated proved reserves could require us to
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impair the carrying value of Reabold’s crude oil and natural gas properties, which would reduce Reabold’s earnings and increase Reabold’s stockholders’ deficit.
The present value of proved reserves will not necessarily equal the current fair market value of Reabold’s estimated crude oil and natural gas reserves. The timing of both the production and expenses with respect to the development and production of crude oil and natural gas properties will affect the timing of future net cash flows from proved reserves and their present value.
The estimated proved reserve information is based upon reserve reports prepared by an independent engineer. From time to time, estimates of Reabold’s reserves are also made by Reabold’s company engineer for use in developing business plans and making various decisions. Such estimates may vary significantly from those of the independent engineers and may have a material effect upon Reabold’s business decisions and available capital resources.
We may not be able to replace current production with new crude oil and natural gas reserves.
In general, the volume of production from a crude oil and natural gas property declines as reserves related to that property are depleted. The decline rates depend upon reservoir characteristics. We cannot guarantee the production life of Reabold’s wells.
We may reclassify proved undeveloped reserves to unproved reserves due to Reabold’s inability to commit sufficient capital within the required five-year development window, which could adversely affect the value of Reabold’s properties. True statement but I believe all the PUDS are within the first two years
The SEC generally requires that any undrilled location can be classified as a proved undeveloped reserve only if a development plan has been adopted indicating that the location is scheduled to be drilled within five years. The reduction of Reabold’s drilling program in response to depressed crude oil and natural gas prices and a lack of drilling capital has impacted Reabold’s ability to develop proved undeveloped reserves within such five-year period. If Reabold’s reduced drilling plans continue over a significant period of time, Reabold’s future access to capital resources will be limited, and Reabold will also likely further delay the development of Reabold’s proved undeveloped reserves or ultimately suspend such development which could result in the reclassification of a significant amount of Reabold’s proved undeveloped reserves as probable or possible reserves. A significant reclassification of proved undeveloped reserves could adversely affect the value of Reabold’s properties.
Reabold’s producing reserves are located in one major geographic area. Concentration of reserves in limited geographic areas may disproportionately expose us to operational, regulatory, and geological risks.
Reabold’s core producing properties are located in the Sacramento Basin within Monterey and Contra-Costa Counties in California. As a result of this concentration, Reabold may be disproportionately exposed to the impact of regional supply and demand factors, delays, or interruptions of production from wells in this area caused by governmental regulation, processing or transportation capacity constraints, market limitations, or interruption of the processing or transportation of crude oil and natural gas.
When Reabold makes the determination to invest in crude oil or natural gas properties, Reabold relies upon geological and engineering estimates, which involve a high level of uncertainty.
Geologic and engineering data are used to determine the probability that a reservoir of crude oil or natural gas exists at a particular location. This data is also used to determine whether crude oil and natural gas are recoverable from a reservoir. Recoverability is ultimately subject to the accuracy of data including, but not limited to, geological characteristics of the reservoir, structure, reservoir fluid properties, the size and boundaries of the drainage area, reservoir pressure, and the anticipated rate of pressure depletion. Also, an increase in the costs of production operations may render some deposits uneconomic to extract.
The evaluation of these and other factors is based upon available seismic data, computer modeling, well tests and information obtained from production of crude oil and natural gas from adjacent or similar properties. There is a high degree of risk in proving the existence and recoverability of reserves. Actual recoveries of proved reserves can differ materially from original estimates. Accordingly, reserve estimates may be subject to downward adjustment. Actual production, revenue and expenditures will likely vary from estimates, and such variances may be material.
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Shortages of oilfield equipment, services and qualified personnel could delay Reabold’s drilling program and increase the prices Reabold pays to obtain such equipment, services, and personnel.
The demand for qualified and experienced field personnel to drill wells and conduct field operations in the crude oil and natural gas industry can fluctuate significantly, often in correlation with crude oil and natural gas prices, causing periodic shortages. Historically, there have been shortages of drilling and workover rigs, pipe and other oilfield equipment as demand for rigs and equipment has increased along with the number of wells being drilled. These factors also cause significant increases in costs for equipment, services and personnel. Higher crude oil and natural gas prices generally stimulate demand and result in increased prices for drilling and workover rigs, crews, and associated supplies, equipment and services. It is beyond Reabold’s control and ability to predict whether these conditions will exist in the future and, if so, what their timing and duration will be.
Drilling is a high-risk activity and, as a result, Reabold may not be able to adhere to its proposed drilling schedule, or Reabold’s drilling program may not result in commercially productive reserves.
Reabold’s future success will partly depend on the success of Reabold’s drilling programs. The future cost or timing of drilling, completing, and producing wells is inherently uncertain. Reabold’s drilling operations may be curtailed, delayed, or canceled as a result of a variety of factors including:
— | unexpected drilling conditions; |
— | well integrity issues and surface expressions; |
— | pressure or irregularities in formations; |
— | equipment failures or accidents; |
— | compliance with landowner requirements; |
— | current crude oil and natural gas prices and estimates of future crude oil and natural gas prices; |
— | availability, costs, and terms of contractual arrangements with respect to pipelines and related facilities to gather, process, transport and market crude oil and natural gas; and |
— | shortages or delays in the availability of drilling rigs and the delivery of equipment and/or services, including experienced labor. |
Reabold’s financial condition will deteriorate, if Reabold is unable to retain its interests in Reabold’s leased crude oil and natural gas properties.
All of Reabold’s properties are held under interests in crude oil and natural gas mineral leases. If Reabold fails to meet the specific requirements of any lease, such lease may be terminated or otherwise expire. We cannot be assured that they will be able to meet Reabold’s obligations under each lease. The termination or expiration of Reabold’s “working interests” (interests created by the execution of a crude oil or natural gas lease) relating to these leases would impair Reabold’s financial condition and results of operations.
We will need significant additional funds to meet capital calls, drilling and other production costs in Reabold’s effort to explore, produce, develop and sell the crude oil and natural gas produced by Reabold’s leases. We may not be able to obtain any such additional funds on acceptable terms.
Title deficiencies could render Reabold’s crude oil and natural gas leases worthless; thus damaging the financial condition of Reabold’s business.
The existence of a material title deficiency can render a lease worthless, resulting in a large expense to Reabold’s business. We rely upon the judgment of crude oil and natural gas lease brokers who perform the fieldwork and examine records in the appropriate governmental office before attempting to place a specific mineral interest under lease. This is a customary practice in the crude oil and natural gas industry.
We anticipate that we, or the person or company acting as operator on the properties that Reabold leases, will examine title prior to any well being drilled. Even after taking these precautions, deficiencies in the marketability of the title to the leases may still arise. Such deficiencies may render some leases worthless, negatively impacting Reabold’s financial condition.
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If Reabold as operator of Reabold’s crude oil and natural gas project fail to maintain adequate insurance, Reabold’s business could be exposed to significant losses.
Reabold’s crude oil and natural gas projects are subject to risks inherent in the crude oil and natural gas industry. These risks involve explosions, uncontrollable flows of crude oil, natural gas or well fluids, pollution, fires, earthquakes and other environmental issues. These risks could result in substantial losses due to injury and loss of life, severe damage to and destruction of property and equipment, pollution and other environmental damage. As protection against these operating hazards Reabold maintains insurance coverage to include physical damage and comprehensive general liability. However, Reabold is not fully insured in all aspects of Reabold’s business. The occurrence of a significant event on any project against which Reabold is not adequately covered by insurance could have a material adverse effect on Reabold’s financial position.
In any project in which Reabold is not the operator, Reabold will require the operator to maintain insurance of various types to cover Reabold’s operations with policy limits and retention liability customary in the industry. The occurrence of a significant adverse event on any of these projects if they are not fully covered by insurance could result in the loss of all or part of Reabold’s investment. The loss of any such project investment could have a material adverse effect on Reabold’s financial condition and results of operations.
New technologies may cause Reabold’s current exploration and drilling methods to become obsolete.
There have been rapid and significant advancements in technology in the crude oil and natural gas industry, including the introduction of new products and services using new technologies. As competitors use or develop new technologies, Reabold may be placed at a competitive disadvantage, and competitive pressures may force us to implement new technologies at a substantial increase in cost. Further, competitors may obtain patents which might prevent us from implementing new technologies. In addition, competitors may have greater financial, technical and personnel resources that allow them to enjoy technological advantages and may in the future allow them to implement new technologies before Reabold can. One or more of the technologies that Reabold currently uses or that Reabold may implement in the future may become obsolete. We cannot be certain that Reabold will be able to implement technologies on a timely basis or at a cost that is acceptable to us. If Reabold is unable to maintain technological advancements consistent with industry standards, Reabold’s operations and financial condition may be adversely affected.
Recent and future actions by the state of California could result in restrictions to Reabold’s operations and result in decreased demand for oil and gas within the state.
In September 2020, Governor Gavin Newsom of California issued an executive order (Order) that seeks to reduce both the demand for and supply of petroleum fuels in the state. The Order establishes several goals and directs several state agencies to take certain actions with respect to reducing emissions of greenhouse gases (GHGs), including, but not limited to: phasing out the sale of new emissions-producing passenger vehicles, drayage trucks and off-road vehicles by 2035 and, to the extent feasible, medium and heavy duty trucks by 2045; developing strategies for the closure and repurposing of crude oil and natural gas facilities in California; and proposing legislation to end the issuance of new hydraulic fracturing permits in the state by 2024. The Order also directs the California Department of Conservation, Geologic Energy Management Division (CalGEM) to strictly enforce bonding requirements for crude oil and natural gas operations and to complete its ongoing public health and safety review of crude oil and natural gas production and propose additional regulations, which are expected to include expanded land use setbacks or buffer zones.
In October 2020, the Governor issued an executive order that establishes a state goal to conserve at least 30% of California’s land and coastal waters by 2030 and directs state agencies to implement other measures to mitigate climate change and strengthen biodiversity. In February 2021, SB 467 was introduced in the state senate. If passed, the bill would ban new permits for hydraulic fracturing, acid well stimulation treatments, cyclic steaming, water flooding and steam flooding – beginning in 2022 and would ban these activities in total beginning in 2027. The bill would also allow local governments to prohibit such practices prior to 2027. After the bill was introduced one of the authors announced that it would also be amended to add a 2,500 feet setback for new wells from sensitive receptors. We cannot predict the outcome of this most recent legislative effort. Previous high-profile efforts to pass mandatory setbacks have failed; however, any of the foregoing developments and other future actions taken by the state may materially and adversely affect Reabold’s operations and properties and the demand for Reabold’s products.
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We face various risks associated with the trend toward increased anti-crude oil and natural gas development activity.
In recent years, Reabold have seen significant growth in opposition to crude oil and natural gas development in the United States. Companies in Reabold’s industry can be the target of opposition to hydrocarbon development from stakeholder groups, including national, state, and local governments, regulatory agencies, non-government organizations and public citizens. This opposition is focused on attempting to limit or stop hydrocarbon development. Examples of such opposition include: efforts to reduce access to public and private lands; delaying or canceling permits for drilling or pipeline construction; limiting or banning industry techniques such as hydraulic fracturing, and/or adding restrictions on or the use of water and associated disposal; imposition of set-backs on crude oil and natural gas sites; delaying or denying air-quality permits; advocating for increased punitive taxation or citizen ballot initiatives or moratoriums on industry activity; and the use of social media channels to cause reputational harm. Recent efforts by the US Administration to modify federal crude oil and natural gas regulations could intensify the risk of anti-development efforts from grass roots opposition.
Reabold’s need to incur costs associated with responding to these anti-development efforts, including legal challenges, or complying with any new legal or regulatory requirements from these efforts, could have a material adverse effect on Reabold’s business.
Restricted land access could reduce Reabold’s ability to explore for and develop crude oil and natural gas reserves.
Reabold’s ability to adequately explore for and develop crude oil and natural gas resources is affected by a number of factors related to access to land. Examples of factors which reduce Reabold’s access to land include, among others:
— | new municipal, state, or federal land use regulations, which may restrict drilling locations or certain activities such as hydraulic fracturing; |
— | local and municipal government control of land or zoning requirements, which can conflict with state law and deprive landowners of property development rights; |
— | landowner, community and/or governmental opposition to infrastructure development; |
— | regulation of federal and Indian land by the Bureau of Land Management; |
— | anti-development activities, which can reduce Reabold’s access to leases through legal challenges or lawsuits, disruption of drilling, or damage to equipment; |
— | the presence of threatened or endangered species or of their habitat; |
— | Disputes regarding leases; and |
— | Disputes with landowners, royalty owners, or other operators over such matters as title transfer, joint interest billing arrangements, revenue distribution, or production or cost sharing arrangements. |
Reduced ability to obtain new leases could constrain Reabold’s future growth and opportunity resulting in a material adverse effect on Reabold’s business, financial condition, results of operations and Reabold’s cash flows.
Reabold’s crude oil and natural gas exploration and production, and related activities are subject to extensive environmental regulations, and to laws that can give rise to substantial liabilities from environmental contamination.
Reabold’s operations are subject to extensive federal, state, and local environmental laws and regulations, which impose limitations on the discharge of pollutants into the environment, establish standards for the management, treatment, storage, transportation, and disposal of hazardous materials and of solid and hazardous wastes, and impose obligations to investigate and remediate contamination in certain circumstances. Liabilities to investigate or remediate contamination, as well as other liabilities concerning hazardous materials or contamination such as claims for personal injury or property damage, may arise at many locations, including properties in which Reabold may have an ownership interest but no operational control, properties Reabold formerly owned or operated, and sites where Reabold’s wastes have been treated or disposed of, as well as at properties that Reabold currently owns or operates. Such liabilities may arise even where the contamination does not result from any noncompliance with applicable environmental laws. Under a number of environmental laws, such liabilities may also be joint and several, meaning that Reabold could be held responsible for more than Reabold’s share of the liability involved,
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or even the entire share. Environmental requirements generally have become more stringent in recent years, and compliance with those requirements more expensive.
We have incurred expenses in connection with environmental compliance, and Reabold anticipate that Reabold will continue to do so in the future. Failure to comply with extensive applicable environmental laws and regulations could result in significant civil or criminal penalties and remediation costs. Some of Reabold’s properties may be affected by environmental contamination that may require investigation or remediation. In addition, claims are sometimes made or threatened against companies engaged in crude oil and natural gas exploration and production by owners of surface estates, adjoining properties or others alleging damage resulting from environmental contamination and other incidents of operation. Compliance with, and liabilities for remediation under, these laws and regulations, and liabilities concerning contamination or hazardous materials, may adversely affect Reabold’s business, financial condition, and results of operations.
Climate change legislation or regulations restricting emissions of greenhouse gases (“GHG”) could result in increased operating costs and reduced demand for the crude oil and natural gas that Reabold produces.
Climate change continues to attract considerable public and scientific attention. As a result, numerous proposals have been made and are likely to continue to be made at the international, national, regional, and state levels of government to monitor and limit emissions of GHGs. These efforts have included consideration by states or groupings of states of cap-and-trade programs, carbon taxes, GHG reporting and tracking programs, and regulations that directly limit GHG emissions from certain sources.
At the federal level, no comprehensive climate change legislation has been implemented to date. However, the EPA has determined that emissions of carbon dioxide, methane and other GHGs present an endangerment to public health and the environment and has adopted regulations under existing provisions of the Clean Air Act. The EPA has also adopted rules requiring the monitoring and reporting of GHG emissions from specified sources in the United States on an annual basis, including, among others, onshore and offshore crude oil and natural gas production facilities and onshore processing, transmission, storage, and distribution facilities. In October 2015, the EPA amended and expanded the GHG reporting requirements to all segments of the crude oil and natural gas industry, including gathering and boosting facilities and blowdowns of natural gas transmission pipelines, and in January 2016, the EPA proposed additional revisions to leak detection methodology.
The adoption and implementation of any international, federal, or state legislation, regulations or other regulatory initiatives that require reporting of GHGs or otherwise restricts emissions of GHGs from Reabold’s equipment and operations could cause us to incur increased costs that could have an adverse effect on Reabold’s business, financial condition, and results of operations. Moreover, such new legislation or regulatory programs could also increase the cost to the consumer, and thereby reduce demand for crude oil and natural gas, which could reduce the demand for the crude oil or natural gas that Reabold produces and lower the value of Reabold’s reserves.
Finally, it should be noted that some scientists have concluded that increasing concentrations of greenhouse gases in the Earth’s atmosphere may be associated with extreme weather conditions such as more intense hurricanes, thunderstorms, tornados and snow or ice storms, as well as rising sea levels. Another possible consequence of climate change is increased volatility in seasonal temperatures. Some studies indicate that climate change could cause some areas to experience temperatures substantially hotter or colder than their historical averages. Extreme weather conditions can interfere with Reabold’s production and increase Reabold’s operating expenses. Such damage or increased expenses from extreme weather may not be fully insured. If any such effects were to occur, they could have an adverse effect on Reabold’s financial condition and results of operations. At this time, Reabold has not developed a comprehensive plan to address the legal, economic, social, or physical impacts of climate change on Reabold’s operation.
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EQUITY EXCHANGE
To approve the plan of Equity Exchange as contemplated by the Equity Exchange Agreement, pursuant to which (i) Daybreak will acquire 100% of the ownership interests of Reabold California LLC from its owner, Gaelic, and (ii) in exchange, Daybreak will issue 160,964,489 shares of its common stock to Gaelic (the “Exchange Shares”), on the terms and subject to the conditions set forth in the Exchange Agreement.
A copy of the Exchange Agreement is attached as Annex A to the accompanying proxy statement.
Please see the Letter to Shareholders enclosed at the beginning of this proxy statement and the Section entitled “Summary of the Exchange Transaction and the Related Transactions” for and overview of what you will be approving if you approve the plan of the Equity Exchange and Daybreak completing the transactions contemplated by the Exchange Agreement.
Overview
In the Equity Exchange contemplated by the Exchange Agreement, as subsequently amended (i) Daybreak will acquire 100% ownership of Reabold, in exchange for (ii) Daybreak issuing 160,964,489 shares of its Common Stock to Gaelic (the “Exchange Shares”), which will result in Reabold becoming a wholly-owned subsidiary of Daybreak named “Reabold California, 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”).
Following the closing of the Equity Exchange, Daybreak will be appointed the sole manager of “Reabold California, LLC”, the Daybreak Subsidiary.
Change in Control
The terms of the Exchange Agreement require that, promptly following the closing of the Equity Exchange, the Company will sell a minimum of 125,000,000 additional shares of Common Stock to one or more investors in a private placement for a minimum of $2,500,000 (the “Capital Raise”). Between the closing of the Equity Exchange and the closing of the Capital Raise, Gaelic will hold approximately 70% of the issued and outstanding shares of our Common Stock. Therefore, the Equity Exchange may be deemed a change in control of the Company. Upon the closing of the Capital Raise, in which we anticipate issuing shares constituting at least 35% of the Company’s total issued and outstanding shares of Common Stock, Gaelic’s percentage ownership of our Common Stock is expected to drop below 50%.
Following the closing of the Equity Exchange, the Capital Raise and the transactions contemplated thereby, the Company will have issued at least 285,964,489 new shares of Common Stock, representing at least 81% of the total outstanding voting securities of the Company. The shareholders of the Company immediately prior to the transaction are expected to hold approximately 18% of the total outstanding voting securities of the Company. However, no one shareholder is expected to beneficially own a majority of the outstanding shares of the Company.
Conditions to Closing
In connection with the Equity Exchange, and as conditions to closing the Equity Exchange, we also propose to, or are required to:
(a) | Amend and restate our Amended and Restated Articles of Incorporation to increase the number of total authorized shares of Common Stock to 500,000,000 to provide enough shares to accomplish the transactions contemplated by the Equity Exchange and conducted in anticipation of the Equity Exchange, complete the Capital Raise, and have shares for other potential future issuances. |
(b) | Nominate Darren Williams, a nominee selected by Reabold, to the Daybreak Board of Directors, to join the board effective as of the closing of the Equity Exchange. |
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(c) | Enter into a voting agreement by and among Daybreak, Gaelic and the Company’s Chairman and Chief Executive Officer, James F. Westmoreland, where, on the terms therein, Daybreak and the shareholder parties thereto agree to nominate a person designated by Gaelic and a person designated by James F. Westmoreland to Daybreak’s Board of Directors, and the parties thereto agree to vote their shares in favor of such candidates (the “Voting Agreement”); |
(d) | Enter into agreements with respect to the Capital Raise. The proceeds of the Capital Raise will be used to repay in full the Company’s line of credit with UBS Bank; reimburse Reabold Resources PLC for up to $250,000 for operational expenditures between February 22, 2022 and April 29, 2022; and for future development and exploration drilling and exploration activities and other working capital purposes; |
(e) | Enter into a registration rights agreement between Daybreak and the purchasers of common stock pursuant to the Capital Raise giving such purchasers rights to demand or participate in registration of Common Stock held by them on the terms contained therein; |
(f) | Effective upon the closing of the Equity Exchange, appoint Integrity Management Solutions, Inc. (“Integrity”), a California operating company that provides engineering and contract operating services for Reabold California LLC’s oil and gas properties. Integrity has been providing these services for the Reabold properties since July, 2018, as contract operator of Reabold’s oil and gas license interests for a minimum of a one (1) year period; and |
(g) | Effective upon the closing of the Equity Exchange, enter into indemnification agreements between Company and its directors. |
Also, in connection with the Equity Exchange, and as conditions to closing the Equity Exchange, we have already:
(h) | Converted all shares of Series A Preferred Stock of the Company to Common Stock by approval of the holders of a majority of the shares of Series A Preferred Stock (the “Series A Conversion”); |
(i) | Converted $1,837,101 of related party liabilities of Daybreak into Common Stock of the Company (the “Related Party Debt Conversion”), including all accrued and unpaid salary and fees of our named executive officers and directors; and |
(j) | The Company’s President and Chief Executive Officer forgave $43,192 in salary payments, net of related taxes and expense reimbursements. |
On February 22, 2022 the Equity Exchange Agreement was amended, effective as of February 14, 2022, to (1) allow Daybreak to sell a convertible promissory note to a Private Investor in the amount of US$200,000; (2) extend the Long Stop Date to April 29, 2022; (3) Allow Reabold California LLC to borrow up to $250,000 from Reabold Resources PLC to conduct certain operational activities necessary to maintain the production of oil and gas on its leases. This money will be paid back to Reabold Resources PLC upon the closing of the Equity Exchange Agreement; and (4) Daybreak agreed to compensate Gaelic in the form of a breakage fee of US$500,000 in Daybreak common stock if the Equity Exchange is not closed by April 29, 2022.
The Daybreak Board of Directors believes the Equity Exchange and the transactions contemplated thereby and described above, are the best path forward for the Company and are in the best interest of the shareholders.
Vote Required
The Equity Exchange must be approved by a vote of two thirds (66 2/3%) of all outstanding shares of Common Stock entitled to vote.
Further, we cannot complete the Equity Exchange unless Proposal 2 is also approved, to amend our Amended and Restated Articles of Incorporation. This is because we need to authorize more shares to have enough to issue in the Equity Exchange and the Capital Raise.
If Darren Williams is not elected in Proposal Number 3, we will be unable to consummate the Equity Exchange.
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THEREFORE, EACH OF PROPOSAL NUMBERS 1, 2 AND 3 ARE CONDITIONED UPON EACH OTHER AND THE APPROVAL OF EACH SUCH PROPOSAL IS REQUIRED TO CONSUMMATE THE EQUITY EXCHANGE.
Board Recommendation
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” PROPOSAL NUMBER 1. EACH OF
PROPOSAL NUMBERS 1, 2 AND 3 ARE CONDITIONED UPON EACH OTHER AND THE APPROVAL OF EACH SUCH PROPOSAL IS REQUIRED TO CONSUMMATE THE SHARE EXCHANGE.
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APPROVE SECOND AMENDED AND RESTATED ARTICLES OF INCORPORATION
To amend and restate the Company’s Amended and Restated Articles of Incorporation by adopting the Second Amended and Restated Articles of Incorporation of the Company, in order to:
(1) increase the number of total authorized shares of Daybreak Common Stock to 500,000,000;
(2) eliminate designation of the Series A Convertible Preferred Stock, which has all been converted to Common Stock; and
(3) allow a majority share vote to approve transactions where a higher vote is provided by the Washington Business Corporation Act.
A copy of the Second Amended and Restated Articles is attached as Annex B to the accompanying proxy statement.
(1) Increase to Number of Authorized Shares of Common Stock
The Company’s Amended and Restated Articles of Incorporation currently authorizes the Company to issue up to 200,000,000 shares of Common Stock. As of the date of this proxy statement, there are [●] of those shares already issued and outstanding; 2,100,000 shares reserved for issuance pursuant to an outstanding warrant; and 4,921,066 shares reserved for issuance related to conversion of the 12% Subordinated Notes, for a total of [●].
The Exchange Agreement contemplates that we will issue 160,964,489 shares of Common Stock to Gaelic.
The Capital Raise contemplates that we will issue at least 125,000,000 additional shares of Common Stock to investors.
We also need to have authorized unissued shares available for issuance in the ordinary course of business moving forward. The Company has financed its operations primarily through public and private offerings of securities, and debt financing. Until the Company can continually generate positive cash flow from operations, it will need to continue to fund its operations with the proceeds from offerings of the Company’s securities as well as debt financings when available. The Company will need additional capital to further fund development of its properties, including the properties included in the Equity Exchange Agreement as discussed in Proposal Number 1, and detailed beginning on page 7 under the caption “SUMMARY OF THE EXCHANGE TRANSACTION AND THE RELATED TRANSACTION” as well as to have available for future opportunities. The Company intends to cover future operating expenses through cash on hand, revenue derived from production, and through the issuance of additional Company securities. Depending on market conditions, the Company cannot be sure that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to the Company or its shareholders. Therefore, we are asking the shareholders to approve an increase to the authorized shares to give the Company and the Board the option to issue shares in a financing transaction or otherwise in the operation of the Company.
The additional Common Stock to be authorized would have rights identical to the currently outstanding Common Stock of the Company. Adoption of the proposed Second Amended and Restated Articles would not affect the rights of the holders of currently outstanding common stock of the Company, except for effects incidental to increasing the number of shares of the Company’s common stock outstanding, such as dilution of the earnings per share and voting rights of current holders of common stock. Though the increase in authorized common stock could make more difficult or discourage attempts to obtain control of the Company, thereby having an implicit anti-takeover effect, the Board does not view this proposal as an anti-takeover mechanism. The increase in authorized shares of Common Stock is not being proposed in response to any known threat to acquire control of the Company.
(2) Eliminate designation of Series A Convertible Preferred Stock
The holders of the Series A Convertible Preferred Stock of the Company recently approved a conversion of all Series A shares to Common Stock. As a result, the Company has no shares of Series A stock outstanding. Further, we do not plan to ever reissue the Series A shares on the exact same terms. Therefore, as a cleanup item if we are amending the Amended and Restated Articles of Incorporation anyway, we will remove this designation.
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The Board of Directors, under the Amended and Restated Articled of Incorporation, will still be able to divide the Preferred Stock into any number of series; fix and determine rights and preferences; and to amend the rights and preferences of the shares of any series that has been established but is wholly unissued. With this, the Board and the Company do not currently foresee designating any series of Preferred Stock in the near future.
(3) Allow for approval of transactions with a majority shareholder vote, where permitted by the Washington Business Corporation Act.
The Washington Business Corporation Act requires, for certain transactions like the Equity Exchange, the approval of two-thirds of all shares entitled to vote. But, it permits companies to require a lesser vote (but not less than a majority of all shares entitled to vote) where permitted by the articles of incorporation of the company.
Our shareholder base has, as a general matter, had Daybreak shares for many years. We are unable to locate a significant portion of our shareholders. This makes it very difficult to obtain a shareholder vote, even for proposals that our shareholders would generally find favorable. For this reason, we would like to lower the vote requirement to a majority of all shares entitled to vote where a higher vote is provided by the Washington Business Corporation Act.
General Effect of the Second Amended and Restated Articles of Incorporation Upon the Rights of Existing Shareholders.
The Second Amended and Restated Articles of Incorporation will not authorize any classes of stock with rights senior or preferential to the existing Common Stock shareholders. The only effect on the existing shareholders will be that, by authorizing more Common Stock for the Company’s planned issuances pursuant to the Equity Exchange and the Capital Raise, the shareholders will be diluted if and when these issuances occur.
Please refer to Annex B attached to this proxy statement to review the full text of the Second Amended Articles.
Vote Required
Proposal Number 2 – adopting our Second Amended and Restated Articles of Incorporation – must be approved by a vote of two thirds (66 2/3%) of all outstanding shares of Common Stock entitled to vote.
If Proposal 2 is also approved, and if Darren Williams is not elected in Proposal Number 3, we will be unable to consummate the Equity Exchange.
THEREFORE, EACH OF PROPOSAL NUMBERS 1, 2 AND 3 ARE CONDITIONED UPON EACH OTHER AND THE APPROVAL OF EACH SUCH PROPOSAL IS REQUIRED TO CONSUMMATE THE EQUITY EXCHANGE.
Board Recommendation
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE APPROVAL OF PROPOSAL NUMBER 2. EACH OF PROPOSAL NUMBERS 1, 2 AND 3 ARE CONDITIONED UPON EACH OTHER AND THE APPROVAL OF EACH SUCH PROPOSAL IS REQUIRED TO CONSUMMATE THE SHARE EXCHANGE.
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ELECTION OF DIRECTORS
To consider and vote upon a proposal to elect the following four (4) directors nominated by our Board of Directors to the Daybreak Board of Directors, to serve until the Company’s next Annual Meeting of Shareholders, or until their earlier, death, resignation or removal:
⦁ | Darren Williams, the Reabold nominee, such nominee, if elected, to join the Board effective as of the closing of the Equity Exchange; |
Our Board is currently comprised of three directors. The Board has nominated each of the four persons named below for election to the Board for a term that will expire at the next Annual Meeting of Shareholders.
Directors will be elected by a plurality of the votes cast at the meeting. The effects of abstentions and broker non-votes are discussed under “General Information About the Meeting, Voting and Proxies, Outstanding Shares, Quorum and Voting” on page 4.
A shareholder may (i) vote for the election of any one or more of the nominees, or (ii) withhold authority to vote for any one or more of the nominees by so indicating on the proxy card. Shares will be voted as specified on the enclosed proxy card or as so instructed via the alternative voting procedure described on the proxy card. If you sign, date and return the proxy card without specifying how you want your shares voted, they will be voted for the election of the director nominees. If, at the time of or prior to the Special Meeting, any of the nominees are unable or decline to serve, the persons named as proxies may use the discretionary authority provided in the proxy to vote for a substitute or substitutes designated by the Board. The Board has no reason to believe that any substitute nominee or nominees will be required.
Our shareholders do not have the right to cumulative voting in the election of our directors. Cumulative voting could allow a minority group to elect at least one director to our Board. Because there is no provision for cumulative voting, a minority group will not be able to elect any directors. Conversely, if our principal beneficial shareholders and directors wish to act in concert, they would be able to vote to elect directors of their choice, and otherwise directly or indirectly, control the direction and operation of the Company.
Nominees for Election as Directors
The names and professional backgrounds of the nominees for election at the Special Meeting are set forth below.
Name | Age | Director Since | |||
Timothy R. Lindsey | 69 | 2007 | |||
James F. Meara | 68 | 2008 | |||
James F. Westmoreland | 66 | 2008 | |||
Darren Williams | 50 | - |
Timothy R. Lindsey has served as a member of the Board of Directors since January 2007. He served as the Company’s Interim President and Chief Executive Officer from December 2007 until his resignation in October 2008. Mr. Lindsey has over 40 years of energy and mineral exploration, technical and executive leadership in global exploration, production, technology, and business development. From March 2005 to the present, Mr. Lindsey has been the Principal of Lindsey Energy and Natural Resources, an independent consulting firm specializing in energy and mining industry issues. From September 2003 to March 2005, Mr. Lindsey held executive positions including Senior Vice-President, Exploration with The Houston Exploration Company, a Houston-based independent natural
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gas and oil company formerly engaged in the exploration, development, exploitation and acquisition of domestic natural gas and oil properties. From October 1975 to February 2003, Mr. Lindsey was employed with Marathon Oil Corporation, a Houston-based company engaged in the worldwide exploration and production of crude oil and natural gas, as well as the domestic refining, marketing and transportation of petroleum products. During his 27-year tenure with Marathon, Mr. Lindsey held a number of positions including senior management roles in both domestic and international exploration and business development. Mr. Lindsey served as a director and Chairman of the Board of Directors of Revett Mining Company., a publicly-listed company with mining activities in Montana from April 2009 until the merger of Revett Mining Company into Helca Mining in June 2015. Mr. Lindsey obtained his Bachelor of Science degree in geology at Eastern Washington University in 1973, and completed graduate studies in economic geology from the University of Montana in 1975. In addition, he completed the Advanced Executive Program from the Kellogg School of Management, Northwestern University, in 1990. Mr. Lindsey is a member of the American Association of Petroleum Geologists, the Rocky Mountain Association of Geologists, the Montana Mining Association, and, the American Exploration and Mining Association.
James F. Meara has served as a member of the Board of Directors since March 2008. From 1980 through December 2007, Mr. Meara was employed with Marathon Oil Corporation, a Houston-based company engaged in the worldwide exploration and production of crude oil and natural gas, as well as the domestic refining, marketing and transportation of petroleum products. During his 27-year tenure with Marathon, Mr. Meara moved through a series of posts in the tax department, becoming manager of Tax Audit Systems and Planning in 1988, and in 1995 he was named Commercial Director of Sakhalin Energy in Moscow, Russia. In 2000, Mr. Meara served as Controller and was appointed to Vice President of Tax in January 2002, serving until his retirement in December 2007. Mr. Meara holds a bachelor’s degree in accounting from the University of Kentucky and a master’s degree in business administration from Bowling Green State University, and is a member of the American Institute of Certified Public Accountants.
James F. Westmoreland was elected Chairman of the Board of Directors in 2014, and appointed President and Chief Executive Officer and director in October 2008. He also serves as interim principal finance and accounting officer. Prior to that, he had been our Executive Vice President and Chief Financial Officer since April 2008. He also served as the Company’s interim Chief Financial Officer from December 2007 to April 2008. From August 2007 to December 2007, he consulted with the Company on various accounting and finance matters. Prior to that time, Mr. Westmoreland was employed in various financial and accounting capacities for The Houston Exploration Company for 21 years, including Vice President, Controller and Corporate Secretary, serving as its Vice President and Chief Accounting Officer from October 1995 until its acquisition by Forest Oil Corporation in June 2007. Mr. Westmoreland has almost 40 years of experience in oil and gas accounting, finance, corporate compliance and governance, both in the public and private sector. He earned his Bachelor of Business Administration in accounting from the University of Houston. Mr. Westmoreland is the nominee selected by him to be nominated to the Daybreak Board of Directors pursuant to the terms of the Voting Agreement.
Darren Williams is being nominated by the Board of Directors as agreed pursuant to the terms of the Exchange Agreement. Mr. Williams brings over 28 years of experience in various areas in the Oil and Gas industry. In 2021 he was appointed Chief Operating Officer of Black Knight Energy, LLC, a California-based, private energy company focused on the acquisition and development of large, cash flowing oil and natural gas assets across the Lower 48. Prior to that, from 2014 to 2021, Mr. Williams served as Executive Vice President - Operations/Exploration & Development for California Resources Corp (NYSE: CRC), California’s largest independent oil and gas producer. From 1997 to 2014, Mr. Williams held many positions within Marathon Oil Corporation (MRO), domestically as well as internationally. His titles included Africa Exploration Manager President Marathon Upstream Gabon, Vice-President Marathon Oil Investments Limited; Oklahoma Exploration & Production Manager; Gulf of Mexico Exploration & Appraisal Manager; and Geophysicist/Technical Supervisor. Before joining Marathon, Mr. Williams was Geophysicist/Technical Supervisor in London and Houston, TX from 1997 to 2008. From 1994 to 1997 he Special Projects Geophysicist with Ikon Science. Mr. Williams holds a MSc Basin Evolutions & Dynamics (Petroleum Geology) from Royal Holloway, University of London, UK; and a BSc Geophysics, University of Leicester, UK. Mr. Williams is the Gaelic nominee selected by Gaelic to be nominated to the Daybreak Board of Directors pursuant to the terms of the Voting Agreement. Mr. Williams will only join the Board of Directors if the Equity Exchange closes.
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Consideration of Director Nominees.
When analyzing whether directors and nominees have the experience, qualifications, attributes and skills, taken as a whole, to enable the Board of Directors to satisfy its oversight responsibilities effectively in light of the Company’s business and structure, the Governance Committee and the Board focus on the information as summarized in each of the Directors’ individual biographies set forth above.
In particular, the Governance Committee and the Board considered:
The Company’s bylaws prescribe not fewer than three nor more than nine directors, and the current number of directors has been set at four. If Mr. Williams is not elected, or if he is elected but does not become a director because Proposals 1 and 2 are not approved, one director seat will remain vacant until it is filled. The proxies cannot be voted for a greater number of persons than the number of nominees named, and cannot be voted for an alternate to Mr. Williams.
Vote Required
Proposal Number 3 – Election of Directors - will be elected by a plurality of votes cast. “Plurality” means that the individuals who receive the largest number of votes cast are elected as directors up to the maximum number of directors to be chosen at the meeting. Consequently, withholding authority to vote for a director nominee and broker non-votes in the election of directors will not affect the outcome of the election of directors, except to the extent that the failure to vote for an individual results in another individual receiving a larger number of votes. The election of directors will be accomplished by determining the four nominees receiving the highest total votes.
However, if director nominee Darren Williams is not elected to the Board, we will be unable to consummate Proposal Number 1 – the Equity Exchange – since this is a condition precedent to the Equity Exchange. Further, even if Darren Williams is elected, if Proposal Number 1 – the Equity Exchange – and Proposal Number 2 – adopting our Second Amended and Restated Articles of Incorporation – are not approved, then Darren Williams will not become a director because approval of these proposals are required to complete the Equity Exchange and his election is not effective unless the Equity Exchange is completed.
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Legal Proceedings
With respect to Darren Williams, director nominee, in July 2020, California Resources Corporation, where Mr. Williams served as Executive Vice President, filed for voluntary Chapter 11 bankruptcy protection as part of a debt restructuring undertaken in agreement with a majority of its creditors. The company cited an unsustainable debt burden given the prevailing commodity markets at the time as the reason for the filing and restructuring.
Board Recommendation
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE ELECTION OF EACH OF THE FOUR DIRECTOR NOMINEES. EACH OF PROPOSAL NUMBERS 1, 2 AND 3 ARE CONDITIONED UPON EACH OTHER AND THE APPROVAL OF EACH SUCH PROPOSAL IS REQUIRED TO CONSUMMATE THE SHARE EXCHANGE.
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SAY ON PAY
To approve, on an advisory basis, the compensation of our Named Executive Officers, as disclosed in the proxy statement accompanying this notice.
Under Section 14A of the Securities Exchange Act, as amended (the “Exchange Act”), our Board of Directors is providing our shareholders with a non-binding advisory vote on the Company’s executive compensation as reported in this proxy statement, or “say on pay” vote. The Company’s shareholders are being asked to vote on the following resolution:
“RESOLVED, that the compensation paid to the Company’s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion, is hereby approved.”
This vote is not intended to address any specific item of compensation, but rather the overall compensation of Daybreak’s NEOs and the compensation philosophy, policies and practices described in this proxy statement. The compensation of Daybreak’s NEOs subject to the vote is disclosed in the compensation tables and the related narrative disclosure contained in this proxy statement. This is an advisory vote and the results will not be binding; however, we, our Board of Directors, and the Compensation Committee value the views of our shareholders and intend to consider the outcome of this vote when making future compensation decisions of our NEOs and on our executive compensation principles, policies, and procedures and will evaluate whether any actions are necessary to address the shareholders’ concerns.
Before you vote on this proposal, we urge you to read the executive compensation information (including the compensation tables and the accompanying footnotes and narrative) set forth in this proxy statement. As we describe in these disclosures, the current and future objectives of Daybreak’s compensation program are to keep compensation aligned with Daybreak’s cost structure, financial position, and strategic business and financial objectives. Daybreak’s financial position and its plans going forward are integral to the design and implementation of officer and employee compensation.
Accordingly, our Board of Directors is asking shareholders to indicate their support for the compensation of Daybreak’s Named Executive Officers by casting a non-binding advisory vote “FOR” the compensation paid to Daybreak’s Named Executive Officers, as disclosed in the proxy statement pursuant to Item 402 of Regulation S-K, including the compensation table and narrative discussion.
Vote Required
Proposal Number 4 – Say on Pay – will be decided by a majority vote of the votes cast with respect thereto.
Board Recommendation
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” PROPOSAL NUMBER 4.
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SAY WHEN ON PAY
To Approve, on an advisory basis, the preferred frequency of future advisory votes on the compensation of our Named Executive Officers.
In accordance with Section 14A of the Exchange Act, our Board of Directors is also providing our shareholders with a non-binding advisory vote on whether future advisory votes on executive compensation of the nature reflected in Proposal 4 should be held every year, every two years or every three years. While this vote is non-binding and solely advisory in nature, our Board of Directors and the Compensation Committee will carefully review and consider the voting results when determining the frequency of future advisory votes on executive compensation.
Upon the recommendation of the Governance Committee and after careful consideration, the Board has determined that providing shareholders with the opportunity to cast an advisory vote on executive compensation annually is the most appropriate alternative for Daybreak and its shareholders. The Board believes that an annual advisory “say on pay” vote will provide the Board with current information on shareholder sentiment about our executive compensation program and enable the Board to respond timely, when deemed appropriate, to shareholder concerns about our executive compensation.
The enclosed proxy card gives shareholders four choices for voting on this item. Shareholders can choose whether the advisory vote on executive compensation should be conducted every year, every two years or every three years. Shareholders may also abstain from voting on this item. Shareholders are not voting to approve or disapprove the Board of Directors’ recommendation on this item. While the result of the advisory vote on this proposal is not binding on our Board, our Board will consider the overall outcome of the vote in establishing the frequency that the advisory vote on executive compensation is submitted to our shareholders.
Vote Required
The choice that receives the highest number of votes cast will be the frequency selected by our shareholders for the “say on pay” advisory vote.
Board Recommendation
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR “ONE YEAR,” ON AN ADVISORY BASIS, AS TO THE FREQUENCY OF ADVISORY VOTES ON THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS.
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RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
Our Audit Committee has appointed the firm of MaloneBailey, LLP (“MaloneBailey”) as our independent registered public accountants to audit our accounts for the fiscal year ending February 28, 2022. MaloneBailey has served as our independent registered public accountants since November 2006, including the fiscal year ended February 28, 2021. While the Audit Committee is responsible for the appointment, compensation, retention, termination and oversight over the independent registered public accountants, our bylaws do not require that our shareholders ratify the appointment of our independent registered public accountants. We are requesting, as a matter of good corporate governance, that the shareholders ratify the appointment of MaloneBailey to audit the books, records and accounts of Daybreak for the year ending February 28, 2022. If the shareholders fail to ratify the selection, the Audit Committee will reconsider whether to retain MaloneBailey and may retain that firm or another without re-submitting the matter to our shareholders. Even if the appointment is ratified, the Audit Committee may, in its discretion, direct the appointment of different independent registered public accountants at any time during the year if it determines that such change would be in the best interest of our shareholders.
A representative of MaloneBailey will be available by phone at the Special Meeting to respond to appropriate questions and to make such statements as they may desire.
Pre-Approval Policies and Procedures
The Audit Committee has adopted guidelines for the pre-approval of audit and permitted non-audit services by our independent registered public accountants, as described under “Pre-Approval Policies and Procedures” on page 53.
Consistent with such policy, all of the fees listed below that we incurred for services rendered by MaloneBailey were pre-approved by our audit committee.
Fees Billed by Independent Registered Public Accountants
The following table provides a summary of fees for professional services performed by MaloneBailey for the audit of our financial statements for the fiscal years ended February 29, 2020 and February 28, 2021 together with fees billed for other services:
Services Rendered | Fees Billed FY 2020 | Fees Billed FY 2021 | ||||||
Audit fees | $ | 70,000 | $ | 70,000 | ||||
Audit-related fees | — | — | ||||||
Tax fees | — | — | ||||||
All other fees | — | — | ||||||
Total | $ | 70,000 | $ | 70,000 |
The Audit Committee has reviewed the nature and scope of the services provided by MaloneBailey and considers the services provided to have been compatible with the maintenance of MaloneBailey’s independence.
The Audit Committee has determined that the scope of services to be provided by MaloneBailey for the year ending February 28, 2022 will generally be limited to audit and audit-related services. The Audit Committee must expressly approve the provision of any service by MaloneBailey outside the scope of the foregoing services.
Vote Required
Ratification of Proposal No. 6 requires approval by the holders of a majority of the votes cast at the Special Meeting (either in person or by proxy).
Board Recommendation
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” PROPOSAL NUMBER 6.
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APPROVAL OF POSSIBLE ADJOURNMENT OF THE SPECIAL MEETING
Approval of a proposal to adjourn the Special Meeting to a later date, if necessary or appropriate, to permit further solicitation and vote of proxies in the event that there are insufficient votes for, or otherwise in connection with, the approval of Proposal Numbers 1 or 2.
General |
If Daybreak fails to receive a sufficient number of votes to approve Proposal Numbers 1 or 2, Daybreak may propose to adjourn the Special Meeting for a period of not more than 45 days, for the purpose of soliciting additional proxies to approve Proposal Numbers 1 and 2. Daybreak currently does not intend to propose adjournment at the Special Meeting if there are sufficient votes to approve Proposal Numbers 1 and 2.
Vote Required
The affirmative vote of a majority of the votes cast with respect to shares of Daybreak common stock present in person (including virtually) or represented by proxy at the Special Meeting and entitled to vote on the proposal is required to adjourn the Special Meeting for the purpose of soliciting additional proxies to approve Proposal Numbers 1 and 2.
Board Recommendation
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" PROPOSAL NUMBER 7.
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Corporate governance is the process by which public corporations are governed and/or monitored. Corporate governance also refers to the structures and processes for the direction and control of companies. Corporate governance concerns the relationships among the management, Board, and all shareholders. Good corporate governance enhances the performance of companies and shareholder value.
The Board ensures the soundness of policies and the overall direction of the Company. The Board has focused on building Daybreak’s strong corporate governance practices. Accordingly, our corporate governance policies and practices are designed not only to satisfy regulatory requirements, but also to provide for the effective oversight and management of the Company. Daybreak has adopted various corporate governance enhancements, which formalize Daybreak’s corporate governance policies and practices, highlighted in this Proxy Statementproxy statement and include:
§ | Committee Charters; |
§ | Amended and Restated Ethical Business Conduct Policy Statement; |
§ | Senior Financial Officers Code of Ethics; |
§ | Corporate Governance Guidelines; |
§ | Qualifications for Nominations to the Board of Directors; |
§ | Related Party Transactions Policy; |
§ | Securities Compliance Policy; |
§ | Fair Disclosure Policy; |
§ | Director Education Policy; |
§ | Board Member Independence Standards; |
§ | Audit Committee Fee Pre-Approval Policy. |
Our Corporate Governance policies and procedures comply with regulatory requirements.
Corporate Governance Guidelines
Our Board has adopted comprehensive Corporate Governance Guidelines outlining the functions and responsibilities of the Board and various processes and procedures designed to ensure effective and responsive corporate governance. The Nominating and Corporate Governance Committee (the “Governance Committee”) has the responsibility to review these guidelines periodically in response to changing regulatory requirements and best practices and revises them accordingly. Our Corporate Governance Guidelines are designed to conform to all rules and regulations of the SEC. The full text of our Corporate Governance Guidelines is available under the “Shareholder/Financial - Corporate Governance” section of our website at www.daybreakoilandgas.com.
Ethical Business Conduct Policy Statement and Code of Ethics for Senior Financial Officers
All of our employees, officers and directors are required to comply with our Ethical Business Conduct Policy Statement to help ensure that our business is conducted in accordance with the highest standards of moral and ethical behavior. Our Code of Business Conduct covers all areas of professional conduct including:
§ | Conflicts of interest; |
§ | Customer relationships; |
§ | Insider trading of our securities; |
§ | Financial disclosure; |
§ | Protection of confidential information; |
§ | Strict legal and regulatory compliance. |
Our employees, officers and directors are required to certify their compliance with our Ethical Business Conduct Policy Statement once each year.
In addition to the Ethical Business Conduct Policy Statement, all members of our senior financial management, including our President and Chief Executive Officer, have agreed in writing to our Code of Ethics for Senior Financial Officers, which prescribes additional ethical obligations pertinent to the integrity of our internal controls and financial reporting process, as well as the overall fairness of all financial disclosures.
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The full text of our Ethical Business Conduct Policy Statement, as amended and restated in April 2010, and the Code of Ethics for Senior Financial Officers, are available under the “Shareholder/Financial - Corporate Governance” section of our website at www.daybreakoilandgas.com and are also available upon request, without charge, by contacting the Corporate Secretary at Daybreak Oil and Gas, Inc., 601 W. Main Avenue,1101 N. Argonne Rd., Suite 1012,A-211, Spokane Valley, Washington 99201.99212.
We intend to promptly disclose via a Current Report on Form 8-K or an update to our website information about any amendment to, or waiver of, these codes with respect to our executive officers and directors.
BOARD LEADERSHIP, STRUCTURE AND RISK OVERSIGHT
Our Board is currently comprised of sixthree directors. The Board has nominated sixfour persons for election to the Board for the term which expires at the next Annual Meeting of Shareholders to be held in 2011.Shareholders.
Although not required by our governance documents, since 2004
Daybreak has chosen not to separate the role of Chief Executive Officer and Chairman of the Board of Directors. We believe that having an independent, non-executiveexecutive Chairman of the Board represents an appropriate governance practice for Daybreak at this time. This structure creates a separationstructure allowing for quality function of the day-to-day administrative and strategic planning activities of managementthe Company from the Board'sBoard’s oversight function. This structure creates a more purposeful communication between management and the Board in order to achieve the overall corporate goals and objectives that are aligned with shareholder interests.
Our Board has three standing committees: Audit, Compensation, and Nominating and Corporate Governance. All of the Board committees are comprised solely of independent non-employee directors. Each of the three committees has a different Chairman, each arean independent non-employee directors. Additionally,director serving as common practice, each member of the Board is invited to attend committee meetings as a guest. We believe that this practice provides greater transparency and in-depth knowledge of committee practices, procedures and activities.Chairman.
The Board of Directors and its committees play an important risk oversight role at Daybreak. The entire Board reviews and determines Daybreak’s business strategy, the management of its balance sheet, and each year'syear’s annual goals and objectives.
In addition, the Audit Committee of the Board is specifically charged with reviewing Daybreak’s financial risk exposures. The Audit Committee reports to the full Board regarding its review and assessment of Daybreak’s financial reports. Further, Daybreak’s independent registered public accountants report to the Audit Committee.
We believe that the Board'sBoard’s structure is an effective leadership structure for the Company. Further, we believe that the Board’s structure, with its committees, and the experience and diverse backgrounds of our directors all help to ensure the integrity of Daybreak’s risk management and oversight.
Directors hold office until the next annual meetingAnnual Meeting of shareholdersShareholders and the election and qualification of their successors.
Consideration of Nominees and Qualifications for Nominations to the Board of Directors
Our Corporate Governance Guidelines, which can be found under the “Shareholder/Financial -– Corporate Governance” section of our website at www.daybreakoilandgas.com, contain Board membership criteria that apply to nominees recommended by the Nominating and Corporate Governance Committee (the “Governance Committee”) for a position on the Board. The Corporate Governance Guidelines state that the Board’s Governance Committee is responsible for making recommendations to the Board concerning the appropriate size and composition of the Board, as well as for recommending to the Board nominees for election or re-election to the Board. In formulating its recommendations for Board nominees, the Governance Committee will assess each proffered candidate’s independence and weigh theirhis or her qualifications in accordance with the Governance Committee’s stated Qualifications for Nominations to the Board of Directors, which can be found under the “Shareholder/Financial -– Corporate Governance” section of our website at www.daybreakoilandgas.com.
All candidates are considered under the Qualifications for Nominations to the Board of Directors Policy. In addition, we have an established process for the selection of nominees as described in Item 8 of the Corporate Governance Guidelines. Nominees are evaluated based on their background, experience and other relevant factors
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described in the Qualifications for Nominations to the Board of Directors Policy, including the size, composition and diversity of the Board. However, no formal diversity policy exists, and the ultimate goal is to select individuals for Board service having sufficiently broad skills and characteristics that taken together will assure a strong Board with wide-ranging experience and expertise in the oil and gas business and in corporate governance.
The Governance Committee independently identifies qualified candidates for nomination to the Board and evaluates, in the same manner as all other candidates, the qualifications of all candidates that shareholders properly recommend for nomination. We have not, and we do not plan to engage a third-party to identify, evaluate, or assist in identifying or evaluating potential nominees. In accordance with our Amended and Restated Bylaws and Corporate Governance Guidelines, recommendations for nominations by shareholders must be preceded by notification in writing received by the Secretary of the Company and otherwise comply with the timing and other requirements for shareholder nominations in our Amended and Restated Bylaws, which are described under “Shareholder Proposals for 2011Next Annual Meeting”Meeting of Shareholders” on page 32.70. Such notification shall contain the written consent of each proposed nominee to serve as a director if so elected and the following information as to each proposed nominee and as to whether each person, acting alone or in conjunction with one or more other persons as a partnership, limited partnership, syndicate or other group, who participates or is expected to participate in making such nomination or in organizing, directing or financing such nomination or solicitation of proxies to vote for the nominee:
(A) the name, age, residence, personal address and business address of each proposed nominee and of each such person;
(B) the principal occupation or employment, the name, type of business and address of the corporation or other organization in which such employment is carried on of each proposed nominee and of each such person;
(C) the amount of capital stock of the Company owned beneficially, either directly or indirectly, by each proposed nominee and each such person;
(D) a description of any arrangement or understanding of each proposed nominee and of each such person with each other or any other person regarding future employment or any future transaction to which the Company will or may be a party; and
(E) any other information concerning the nominee that must be disclosed regarding nominees in proxy solicitations pursuant to Section 14(a) of the Securities Exchange Act of 1934, as amended, and the rules under such section.
No such recommendations have been received with respect to our 2010 Annual2022 Special Meeting.
Each of the current nominees for director listed under the caption “Proposal Number 1:3: Election of Directors” is an existing director standing for re-election.re-election or a nominee nominated by the Board of Directors. The Governance Committee did not receive any recommendation for a nominee proposed from any shareholder or group of shareholders with respect to our 2010 Annual2022 Special Meeting.
Please see “Proposal Number 1:3: Election of Directors” beginning on page 1640 for a discussion of the specific experience, qualifications, attributes and skills of each director considered in determining whether such person should serve on our Board.
We seek individuals who are able to guide our operations based on their business experience, both past and present, or their education. Our business model is not complex and our accounting issues are straightforward.
The Governance Committee is delegated with the responsibility to review the independence and qualifications of each member of the Board and its various Committees. Directors are deemed independent only if the Board affirmatively determines that they have no material relationship with Daybreak, directly, or as an officer, shareowner or partner of an organization that has a relationship with us.
The Company has adopted the standards of the NYSE Amex LLC, formerly known as the American Stock Exchange,(formerly NYSE MKT LLC) for determining the independence of its directors. The Company is not listed on NYSE American and is not subject to the rules of NYSE American but applies the rules established by NYSE American to establish director independence.
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These independence standards specify the relationships deemed sufficiently material to create the presumption that a director is not independent. No director qualifies as independent unless the Company’s Board affirmatively determines that the director does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a
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director. In addition, Section 803A of the NYSE Amex LLCAmerican Company Guide (and related commentary) sets forth the following non-exclusive list of persons who shall not be considered independent:
(a) | a director who is, or during the past three years was, employed by the Company, other than prior employment as an interim executive officer (provided the interim employment did not last longer than one year); |
(b) | a director who accepted or has an immediate family member who accepted any compensation from the Company in excess of $120,000 during any period of twelve consecutive months within the three years preceding the determination of independence, other than the following: |
(i) | compensation for Board or Board committee service, |
(ii) | compensation paid to an immediate family member who is an employee (other than an executive officer) of the Company, |
(iii) | compensation received for former service as an interim executive officer (provided the interim employment did not last longer than one year), or |
(iv) | benefits under a tax-qualified retirement plan, or non-discretionary compensation; |
(c) | a director who is an immediate family member of an individual who is, or at any time during the past three years was, employed by the Company as an executive officer; |
(d) | a director who is, or has an immediate family member who is, a partner in, or a controlling shareholder or an executive officer of, any organization to which the Company made, or from which the Company received, payments (other than those arising solely from investments in the Company’s securities or payments under non-discretionary charitable contribution matching programs) that exceed 5% of the organization’s consolidated gross revenues for that year, or $200,000, whichever is more, in any of the most recent three fiscal years; |
(e) | a director who is, or has an immediate family member who is, employed as an executive officer of another entity where at any time during the most recent three fiscal years any of the issuer’s executive officers serve on the compensation committee of such other entity; or |
(f) | a director who is, or has an immediate family member who is, a current partner of the Company’s outside auditor, or was a partner or employee of the Company’s outside auditor who worked on the Company’s audit at any time during any of the past three years. |
Directors serving on the Company’s audit committee must also comply with the additional, more stringent requirements set forth in Section 803B of the NYSE Amex LLCAmerican (formerly NYSE MKT LLC) Company Guide and Rule 10A-3 of the Securities Exchange Act of 1934, as amended.
Consistent with these considerations, after review of all relevant transactions and/or relationships between each director orand any of his family members and Daybreak, its senior management and its independent registered public accountants, the Board affirmatively determined that fourtwo of the current directors, Messrs. Wayne G. Dotson,Timothy R. Lindsey, and James F. Meara Dale B. Lavigne and Ronald D. Lavigne are independent. Messrs. Timothy R. Lindsey, our former Interim President and Chief Executive Officer, and Mr. James F. Westmoreland, our President and Chief Executive Officer, areis not independent. If Mr. Darren Williams is elected to the Board, he is expected to be independent. Beginning July 1, 2013, directors serving on the Company’s compensation committee must also comply with the additional, more stringent requirements as set forth in Section 805(c) of the NYSE American (formerly NYSE MKT LLC) Company Guide.
Executive Sessions of the Board
Our Corporate Governance Guidelines require our non-employee directors to meet in executive session in conjunction with each of the Board’s regularly scheduled meetings and our independent directors to meet alone in special session at least once each calendar year. Executive sessions including only non-employee directors are chaired by the Chairman of the Audit Committee. The Chairman of the Governance Committee would preside over executive sessions of only independent directors.
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Director Orientation and Continuing Education
The Board has adopted a Director Education Policy that encourages all directors to pursue ongoing education and development studies on topics that they deem relevant given their individual backgrounds and committee assignments on the Board. The Governance Committee is authorized to make such director educational recommendations to individual directors as the Committee deems is in the best interest of effective stewardship and
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Board operation. The directors are provided with continuing education materials covering upcoming seminars and conferences.
Communications Between Interested Parties and the Board of Directors
Our Corporate Governance Guidelines permit interested parties to communicate in writing directly with our Board or individual Board members. Correspondence must be addressed to the intended recipient, c/o Corporate Secretary, Daybreak Oil and Gas, Inc.1101 N. Argonne Rd., 601 W. Main Avenue, Suite 1012,A 211, Spokane Washington 99201.Valley, WA 99212. All communications received as described above and intended for the Board as a group or any director individually will be relayed to the appropriate directors.
Board Structure; Committee Composition; Meetings
As of the date of this proxy statement, our Board has sixthree members and three standing committees: (1) Audit Committee; (2) Compensation Committee; and (3) Nominating and Corporate Governance Committee. The membership and function of each of the committees are described below. Each of the committees operates under a written charter adopted by the Board.
Our Corporate Governance Guidelines states that all directors are expected to meet as frequently as necessary to properly discharge their responsibilities, and use all reasonable efforts to attend all meetings of shareholders, the Board and all Committees on which they serve, unless impracticable or excused. For the fiscal year ended February 28, 2010,2022, our Board met eightfive times. Each director attended the 2009our last Annual Meeting of Shareholders and at least 75 percent of the aggregate number of meetings of our Board and meetings of Committees on which they served.
The following table reflects the committee assignments for the fiscal year ended February 28, 2010.