| Short-Term and Long-Term Borrowings | NOTE 7 — SHORT-TERM AND LONG-TERM BORROWINGS: Note Payable In December 2018, the Company was able to settle an
outstanding balance owed to one of its third-party vendors. This settlement resulted in a $120,000 note payable being issued to the vendor.
Additionally, the Company agreed to issue 2,000,000 shares of the Company’s common stock as a part of the settlement agreement.
Based on the closing price of the Company’s common stock on the date of the settlement agreement, the value of the common stock
transaction was determined to be $6,000. The common stock shares were issued during the twelve months ended February 29, 2020. The note
has a maturity date of January 1, 2022 and bears an interest rate of 10% rate per annum. Monthly interest is accrued and payable on January
1 st Note Payable – Related Party On December 22, 2020, the Company entered into a Secured
Promissory Note (the “ Note Noteholder The Company may prepay the Note at any time. Upon
the occurrence of any Event of Default and expiration of any applicable cure period, and at any time thereafter during the continuance
of such Event of Default, the Noteholder may at its option, by written notice to the Company: (a) declare the entire principal amount
of the Note, together with all accrued interest thereon and all other amounts payable hereunder, immediately due and payable; (b) exercise
any of its remedies with respect to the collateral set forth in the Deed of Trust; and/or (c) exercise any or all of its other rights,
powers or remedies under applicable law. Current portion of note payable –related party
balances at May 31, 2021 and February 28, 2021 are set forth in the table below:
May 31, 2021 February 28, 2021
Note payable –related party, current portion $ 8,656 $ 8,598
Unamortized debt issuance expenses (729 ) (728 )
Note payable – related party, current portion, net $ 7,927 $ 7,870 Note payable –related party long-term balances
at May 31, 2021 and February 28, 2021 are set forth in the table below:
May 31, 2021 February 28, 2021
Note payable – related party, non-current $ 143,354 $ 145,540
Unamortized debt issuance expenses (9,897 ) (10,080 )
Note payable– related party, non-current, net $ 133,457 $ 135,460 Future estimated payments on the outstanding note
payable – related party are set forth in the table below:
Twelve month periods ending May 31
2022 $ 7,927
2023 8,159
2024 8,397
2025 8,642
2026 8,893
Thereafter 99,366
Total $ 141,384 12% Subordinated Notes The Company’s 12% Subordinated Notes (“the
Notes”) issued pursuant to a January 2010 private placement offering to accredited investors, resulted in $595,000 in gross proceeds
(of which $250,000 was from a related party) to the Company and accrue interest at 12% per annum, payable semi-annually on January 29th
and July 29th. On January 29, 2015, the Company and 12 of the 13 holders of the Notes agreed to extend the maturity date of the Notes
for an additional two years to January 29, 2017. Effective January 29, 2017, the maturity date of the Notes and the expiration date of
the warrants that were issued in conjunction with the Notes were extended for an additional two years to January 29, 2019. The Company has informed the Note holders that the
payment of principal and final interest will be late and is subject to future financing being completed. The Notes principal of $565,000
was payable in full at the amended maturity date of the Notes, January 29, 2019, and has not been paid. The terms of the Notes, state
that should the Board of Directors decide that the payment of the principal and any unpaid interest would impair the financial condition
or operations of the Company, the Company may then elect a mandatory conversion of the unpaid principal and interest into the Company’s
common stock at a conversion rate equal to 75% of the average closing price of the Company’s common stock over the 20 consecutive
trading days preceding December 31, 2018. As of May 31, 2021, no conversion of the unpaid principal and interest into the Company’s
common stock has occurred. The accrued interest on the 12% Notes at May 31, 2021 and February 28, 2021 was $357,132 and $340,042, respectively. 12% Note balances at May 31, 2021 and February 28,
2021 are set forth in the table below:
May 31, 2021 February 28, 2021
12% Subordinated Notes $ 315,000 $ 315,000
12% Subordinated Notes, related party 250,000 250,000
Total 12% Subordinated Note balance $ 565,000 $ 565,000 The accrued interest owed on the 12% Subordinated
Note to the related party is presented on the Company’s Balance Sheets under the caption Accounts payable – related party Accrued interest Production Revenue Payable Beginning in December 2018, the Company conducted
a fundraising program to fund the drilling of future wells in California and Michigan and to settle some of its historical debt. The purchaser(s)
of a production revenue payment interest received a production revenue payment on future wells to be drilled in California and Michigan
in exchange for their purchase. As of May 31, 2021, the production revenue payment program balance was $950,100 of which $550,100 was
owed to a related party - the Company’s Chairman, President and Chief Executive Officer. The production payment interest entitles the purchasers
to receive production payments equal to twice their original amount paid, payable from a percentage of the Company’s future net
production payments from wells drilled after the date of the purchase and until the Production Payment Target (as described below) is
met. The Company shall pay fifty percent of its net production payments from the relevant wells to the purchasers until each purchaser
has received two times the purchase price (the “Production Payment Target”). Once the Company pays the purchasers amounts
equal to the Production Payment Target, it shall thereafter pay a pro-rated eight percent (8%) of $1.3 million on its net production payments
from the relevant wells to each of the purchasers. However, if the total raised is less than the target $1.3 million, then the payment
will be a proportionate amount of the eight percent (8%). Additionally, if the Production Payment Target is not met within the first three
years, the Company shall pay seventy-five percent of its production payments from the relevant wells to the purchasers until the Production
Payment Target is met. The Company accounted for the amounts received from
these sales in accordance with ASC 470-10-25 and 470-10-35 which require amounts recorded as debt to be amortized under the interest method
as described in ASC 835-30, Interest Method. Consequently, the program balance of $950,100 has been recognized as a production revenue
payable. The Company determined an effective interest rate based on future expected cash flows to be paid to the holders of the production
payment interests. This rate represents the discount rate that equates estimated cash flows with the initial proceeds received from the
sales and is used to compute the amount of interest to be recognized each period. Estimating the future cash outflows under this agreement
requires the Company to make certain estimates and assumptions about future revenues and payments and such estimates are subject to significant
variability. Therefore, the estimates are likely to change which may result in future adjustments to the accretion of the interest expense
and the amortized cost based carrying value of the related payables. Accordingly, the Company has estimated the cash flows
associated with the production revenue payments and determined a discount of $1,077,642 Production revenue payable balances at May 31, 2021
and February 28, 2021 are set forth in the table below:
May 31, 2021 February 28, 2021
Estimated payments of production revenue payable $ 2,029,742 $ 2,000,258
Less: unamortized discount (495,795 ) (496,836 )
1,533,947 1,503,422
Less: current portion (98,336 ) (111,753 )
Net production revenue payable – long term $ 1,435,611 $ 1,391,669 Line of Credit The Company has an existing $890,000 line of credit
for working capital purposes with UBS Bank USA (“UBS”), established pursuant to a Credit Line Agreement dated October 24,
2011 that is secured by the personal guarantee of its Chairman, President and Chief Executive Officer. On July 10, 2017, a $700,000 portion
of the outstanding line of credit balance was converted to a 24 month fixed term annual interest rate of 3.244% with interest payable
monthly. On July 10, 2019, the 24-month fixed term loan amount of $700,000 was renewed at the same annual percentage interest rate of
3.244% for an additional 24 months. The remaining principal balance of the line of credit has a stated reference rate of 0.249% + 337.5
basis points with interest payable monthly. The reference rate is based on the 30 day LIBOR (“London Interbank Offered Rate”)
and is subject to change from UBS. During the three months ended May 31, 2021 and 2020,
the Company did not receive any advances on the line of credit. During the three months ended May 31, 2021 and 2020, the Company made
payments to the line of credit of $15,000 and $15,000, respectively. Interest converted to principal for the three months ended May 31,
2021 and 2020 was $6,892 and $7,389, respectively. At May 31, 2021 and February 28, 2021, the line of credit had an outstanding balance
of $832,796 and $840,904, respectively. Paycheck Protection Program (PPP) Loans In March 2020, the Coronavirus Aid, Relief, and Economic
Security Act commonly referred to as the CARES Act became law. One component of the CARES Act was the paycheck protection program (“PPP”)
which provides small business with the resources needed to maintain their payroll and cover applicable overhead. The PPP is implemented
by the Small Business Administration (“SBA”) with support from the Department of the Treasury. The Company applied for, and
was accepted to participate in this program. On May 11, 2020, the Company received funding for approximately $74,355. On February 12,
2021, the Company applied for loan forgiveness under the provisions of Section 1106 of the CARES Act. Loan forgiveness was subject to
the sole approval of the SBA. On February 23, 2021, the SBA notified our lender that the loan was forgiven and repaid the loan in full. On March 4, 2021, the Company applied for, and was
accepted to participate in the SBA PPP Second Draw program with funding pursuant to the Economic Aid Act that was passed in December,
2020. On March 15, 2021, Daybreak received funding for $72,800. The second-draw loan is a five-year loan with a maturity date of March
6, 2026. The loan bears an annual interest rate of 1%. The monthly payment is $1,670 with the first payment due on July 6, 2022. We intend
to use the loan proceeds to partially subsidize direct payroll, rent and utility expenses. It is the Company’s intent to apply for
loan forgiveness for the PPP Second Draw PPP loan. Loan forgiveness is subject to the sole approval of the SBA. Encumbrances On October 17, 2018, a working interest partner in
California filed a UCC financing statement in regards to payable amounts owed to the partner by the Company. As of May 31, 2021, we had
no encumbrances on our crude oil project in Michigan. |
