Recording Requested By:

Well Works, LLC, Trustee

 

When Recorded Mail To:

Kameron A. Swithin

Akin Gump Strauss Hauer & Feld LLP

1111 Louisiana Street, 44th Floor

Houston, TX 77002-5200

 

 

 

 

 

 

 

SPACE ABOVE THIS LINE RESERVED FOR

RECORDER’S USE ONLY

 

MORTGAGE, DEED OF TRUST,

ASSIGNMENT OF PRODUCTION, SECURITY AGREEMENT

AND FINANCING STATEMENT

 

Dated as of

 

September 17, 2010

 

FROM

 

DAYBREAK OIL AND GAS, INC.

(“Mortgagor”)

 

TO

 

WELL WORKS, LLC, TRUSTEE

(“Trustee”)

 

In Trust for the Benefit of

 

WELL WORKS, LLC, AS LENDER

(“Lender”)

 

 

THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS.

 

THIS INSTRUMENT SECURES PAYMENT OF FUTURE ADVANCES.

 

THE OIL AND GAS INTERESTS INCLUDED IN THE MORTGAGED PROPERTIES WILL BE FINANCED
AT THE WELLHEADS OF THE WELLS LOCATED ON THE PROPERTIES DESCRIBED IN EXHIBIT A
HERETO, AND THIS FINANCING STATEMENT IS TO BE FILED FOR RECORD, AMONG OTHER
PLACES, IN THE REAL ESTATE RECORDS.

 

SOME OF THE PERSONAL PROPERTY CONSTITUTING A PORTION OF THE MORTGAGED PROPERTIES
IS OR IS TO BE FIXTURES AFFIXED TO THE PROPERTIES DESCRIBED IN EXHIBIT A HERETO,
AND THIS FINANCING STATEMENT IS TO BE FILED FOR RECORD, AMONG OTHER PLACES, IN
THE REAL ESTATE RECORDS.

 

THE MORTGAGOR HAS AN INTEREST OF RECORD IN THE REAL ESTATE CONCERNED, WHICH IS
DESCRIBED IN EXHIBIT A HERETO.

 

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MORTGAGE, DEED OF TRUST, ASSIGNMENT OF PRODUCTION,

SECURITY AGREEMENT AND FINANCING STATEMENT

 

THE STATE OF CALIFORNIA

§

 

§

COUNTY OF

§

KERN

§

 

 

THIS MORTGAGE, DEED OF TRUST, ASSIGNMENT OF PRODUCTION, SECURITY AGREEMENT AND
FINANCING STATEMENT (herein called the “Mortgage”), dated effective as of
September 17, 2010, from DAYBREAK OIL AND GAS, INC., a Washington corporation
(herein called “Mortgagor”), 601 W. Main Ave., Suite 1012, Spokane, WA 99201 to
WELL WORKS, LLC, Trustee (herein called “Trustee”) whose address is 1575 Federal
Heights Drive, Salt Lake City, UT 84103, for the benefit of Well Works, LLC,
whose address is 1575 Federal Heights Drive, Salt Lake City, UT 84103 as lender
pursuant to that certain Secured Promissory Note (the “Note”) dated of even date
herewith (the “Lender”). Any capitalized term used but not defined herein shall
have the meaning given such term in the Note. As of this date, the maximum
principal amount under the Note is $750,000.

 

WITNESSETH:

 

Mortgagor, for a sufficient consideration received, does hereby MORTGAGE, GRANT,
BARGAIN, SELL, ASSIGN, TRANSFER and CONVEY WITH POWER OF SALE unto Trustee and
to Trustee’s successors in this trust, the following described real and personal
property, rights, titles, interests and estates (herein collectively called the
“Mortgaged Properties”),

 

(a)  All rights, titles, interests and estates now owned or hereafter acquired
by Mortgagor in and to the oil and gas and/or the oil, gas and mineral leases
(herein sometimes called the “Leases”), operating rights, forced pooling orders
and farmout agreements and other contractual or other rights relating to oil,
gas and mineral rights, described on Exhibit “A” which is attached hereto and
made a part hereof for all purposes, or which Leases are otherwise mentioned or
referred to herein and specifically, but without limitation, Mortgagor’s
undivided interests in the Leases as specified on Exhibit “A”;

 

(b)  All rights, titles, interests and estates now owned or hereafter acquired
by Mortgagor in and to (i) the properties now or hereafter pooled or unitized
with the Leases; (ii) all presently existing or future unitization,
communitization, pooling agreements and declarations of pooled units and the
units created thereby (including, without limitation, all units created under
orders, regulations, rules or other official acts of any federal, state or other
governmental body or agency having jurisdiction) which may affect all or any
portion of the Leases including, without limitation, those units which may be
described or referred to in Exhibit “A”; (iii) all operating agreements,
contracts and other agreements described or referred to in this instrument which
relate to any of the Leases or interests in the Leases described or referred to
herein or in Exhibit “A” or to the production, sale, purchase, exchange or
processing of the Hydrocarbons (defined herein) from or attributable to such
Leases or interests; and (iv) the Leases even though Mortgagor’s interests
therein be incorrectly described or a description of a part or all of such
Leases or Mortgagor’s interests therein be omitted;

 

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(c)  All rights, titles, interests and estates now owned or hereafter acquired
by Mortgagor in and to all oil, gas, casinghead gas, condensate, distillate,
liquid hydrocarbons, gaseous hydrocarbons and all products refined therefrom and
all other minerals (herein collectively called the “Hydrocarbons”) in and under
and which may be produced and saved from or attributable to the Leases, the
lands covered thereby and Mortgagor’s interests therein, including all oil in
tanks and all rents, issues, profits, proceeds, products, revenues and other
income from or attributable to the Leases, the lands covered thereby and
Mortgagor’s interests therein which are subjected or required to be subjected to
the liens and security interests of this Mortgage;

 

(d)  All tenements, hereditaments, appurtenances and properties in anywise
appertaining, belonging, affixed or incidental to the Leases, properties,
rights, titles, interests and estates described or referred to in subparagraphs
(a) and (b) and (c) above, which are now owned or which may hereafter be
acquired by Mortgagor, including, without limitation, any and all property, real
or personal, now owned or hereafter acquired and situated upon, used, held for
use, or useful in connection with the operating, working or development of any
of such Leases or properties (excluding drilling rigs, automotive equipment or
other personal property which may be on such premises for the purpose of
drilling a well or for other similar temporary uses) and including any and all
oil wells, gas wells, injection wells or other wells including without
limitation those described on Exhibit “A” hereto, buildings, structures, field
separators, liquid extraction plants, plant compressors, pumps, pumping units,
field gathering systems, tanks and tank batteries, fixtures, valves, fittings,
machinery and parts, engines, boilers, meters, apparatus, equipment, appliances,
tools, implements, cables, wires, towers, casing, tubing and rods, surface
leases, rights-of-way, easements and servitudes together with all additions,
substitutions, replacements, accessions and attachments to any and all of the
foregoing properties;

 

(e)  Any property that may from time to time hereafter by delivery or by writing
of any kind be subjected to the lien or security interests hereof by Mortgagor
or by anyone on Mortgagor’s behalf; and the Trustee is hereby authorized to
receive the same at any time as additional security hereunder; and

 

(f)  All of the rights, titles and interests of every nature whatsoever now
owned or hereafter acquired by Mortgagor in and to the Leases, properties,
rights, titles, interests and estates and every part and parcel thereof,
including, without limitation, said Leases, properties, rights, titles,
interests and estates as the same may be enlarged by the discharge of any
payments out of production or by the removal of any charges or Permitted
Encumbrances(defined herein) to which any of said Leases, properties, rights,
titles, interests or estates are subject, or otherwise; together with any and
all renewals and extensions of any of said Leases, properties, rights, titles,
interests or estates; and all contracts and agreements supplemental to or
amendatory of or in substitution for the Leases, the contracts and agreements
described or mentioned above and any and all additional interests of any kind
hereafter acquired by Mortgagor in and to said Leases, properties, rights,
titles, interests or estates;

 

in trust, however, for the purposes, uses and benefits hereinafter set out,
provided further, however, that to the extent that pursuant to a final,
non-appealable judgment it is determined that this Mortgage requires the consent
of any third party to the mortgaging of any Mortgaged Property, this Mortgage
shall not constitute a mortgage, grant, bargain, sale, assignment, transfer or
conveyance of such Mortgaged Property if, pursuant to such judgment, it is
determined that an attempted mortgage, grant, bargain, sale, assignment,
transfer and conveyance without any such consent would constitute a breach or
violation of any lease or other instrument comprising such Mortgaged Property.

 

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TO HAVE AND TO HOLD the Mortgaged Properties unto Trustee, and Trustee’s
successors and assigns, forever, in accordance with the terms and provisions
hereof; and Mortgagor hereby covenants that Mortgagor is the lawful owner and
holder of the Mortgaged Properties, that Mortgagor has good right to transfer,
assign and mortgage the Mortgaged Properties, and that Mortgagor will warrant
and forever defend the same against the claims of all persons whomsoever
lawfully claiming or to claim the same or any part thereof.

 

ARTICLE I.

 

INDEBTEDNESS SECURED

 

1.1     The foregoing conveyance is made in trust to secure and enforce payment
(herein collectively called the “Indebtedness”) and performance of any and all
present or future indebtedness, obligations and liabilities of Mortgagor
incurred under, arising out of or in connection with the Note in the original
maximum principal amount of $750,000.00 (the “Loan”) bearing interest and
payable as provided therein, with such Note containing usual provisions for
increased interest rates after maturity or default, and acceleration and
attorneys’ fees in the event of a default under the terms thereof.

 

1.2     Mortgagor specifically waives presentment, protest, notices of dishonor,
intention to accelerate and acceleration.

 

ARTICLE II.

 

COVENANTS

 

2.1     Mortgagor covenants and agrees with Trustee, Lender, and with each of
them, so long as the Indebtedness or any part thereof remains unpaid, as
follows:

 

(a)  To the extent failure to do so would have a material adverse effect on the
value of the Mortgaged Properties, Mortgagor shall pay and discharge or cause to
be paid or discharged all rentals, delay rentals, royalties, production
payments, and indebtedness required to be paid by Mortgagor, and perform or
cause to be performed, each and every act, matter, or thing required of
Mortgagor by each and all of the Leases, assignments, deeds, subleases,
contracts and agreements in any way relating to the Mortgaged Properties and do
all other things necessary of Mortgagor to keep unimpaired the rights of
Mortgagor thereunder and to prevent the forfeiture thereof or default
thereunder.

 

(b)  Mortgagor shall pay and discharge promptly all taxes, assessments, and
governmental charges or levies imposed upon Mortgagor or upon the income of
Mortgagor or of any of the Mortgaged Properties as well as all claims of any
kind (including claims for labor, materials, supplies and rent) which, if
unpaid, might become a lien upon any or all of the Mortgaged Properties or
Hydrocarbons; provided, however, that Mortgagor shall not be required to pay any
such tax, assessment, charge, levy or claim if the amount, applicability or
validity thereof shall currently be contested in good faith by appropriate
proceedings diligently conducted and if Mortgagor shall have set up reserves
therefor adequate under generally accepted accounting principles.

 

(c)  Mortgagor shall operate or cause to be operated all Mortgaged Properties in
a careful and efficient manner in accordance with the practice of the industry
and in compliance with all applicable laws, rules and regulations, and, in the
case of the Leases, in compliance with all applicable proration and conservation
laws of the State in which the Leases are situated, and all applicable laws,
rules and regulations of every other agency and authority from time to time
constituted to regulate the development and operation of the Leases and the
production and sale of Hydrocarbons therefrom; provided,

 

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however, Mortgagor shall have the right to contest in good faith by appropriate
proceedings, the applicability or lawfulness of any such law, rule or regulation
and, pending such contest, may defer compliance therewith, so long as such
deferment shall not subject the Mortgaged Properties or any part thereof to
foreclosure or loss.

 

(d)  Mortgagor shall keep and maintain or cause to be kept and maintained all
buildings, improvements, equipment and personal property constituting part of
the Mortgaged Properties in good and workable condition at all times, ordinary
wear and tear excepted, and Mortgagor shall make all repairs, replacements,
additions, betterments and improvements to the Mortgaged Properties as are
needed and proper so that the business carried on in connection therewith may be
conducted properly and efficiently at all times. To the extent failure to do so
would have a material adverse effect on the value of the Mortgaged Properties,
Mortgagor will not (i) commit or suffer any waste of any of the Mortgaged
Properties, (ii) commit or suffer any violation of any law, regulation,
ordinance or contract affecting any of the Mortgaged Properties, (iii) commit or
suffer any demolition, removal or material alteration of any of the Mortgaged
Properties, (iv) fail to guard every part of the Mortgaged Properties from
removal, destruction and damage, or (v) do or suffer to be done any act whereby
the value of any part of the Mortgaged Properties may be lessened.

 

ARTICLE III.

 

ASSIGNMENT OF RUNS

 

 

3.1

 

 

(a)       For the purpose of additionally securing the payment of the
Indebtedness and to facilitate the discharge of any of the Indebtedness and as
cumulative of any and all rights and remedies herein provided for, effective as
of 12:01 a.m. Pacific Time for the Mortgaged Property on September 17, 2010,
Mortgagor hereby bargains, sells, transfers, assigns, sets over and conveys unto
Lender, its interest in the Hydrocarbons, together with its share of the
proceeds derived from the sale thereof (such proceeds being hereinafter called
“proceeds of runs”). Subject to Section 3.1(b), Mortgagor directs and instructs
each purchaser of the Hydrocarbons to pay to Lender all of the proceeds of runs
until such time as such purchaser has been furnished evidence that all
Indebtedness has been paid and that the lien evidenced hereby has been released.
Mortgagor authorizes Lender to receive and collect all sums of money derived
from the proceeds of runs, and no purchaser of the Hydrocarbons shall have the
responsibility for the application of any funds paid to Lender.

 

(b)      For its convenience and notwithstanding the foregoing, Lender has
elected not to exercise immediately its right to receive payment to it directly
of the proceeds of any sale of the oil, gas and other minerals produced or sold
from the Mortgaged Properties and agrees to exercise such right solely upon the
occurrence and continuance of an Event of Default and the purchasers may
continue to make such payment or delivery of the proceeds to Mortgagor until
such time as Mortgagor and the purchasers have received notice that an Event of
Default has occurred and is continuing, and that the purchasers are directed to
make payment or delivery of the proceeds directly to Lender.

 

3.2     Independent of the foregoing provisions and authorities herein granted,
Mortgagor agrees upon the occurrence and during the continuation of an Event of
Default to execute and deliver any and all transfer orders, division orders and
other instruments that may be requested by Lender or that may be required by the
purchaser of the Hydrocarbons for the purpose of effectuating payment for the
proceeds of runs to Lender.

 

5

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3.3     Upon the occurrence and during the continuation of an Event of Default,
the monthly proceeds of runs actually received by Lender may be held by Lender
and applied first to the payment of all accrued interest under the Note and then
to the payment of principal of the Loan. In its sole discretion, Lender may
elect to return any part of said funds to Mortgagor or to deposit the same to
Mortgagor’s account without applying it to the Indebtedness or holding the same
as cash collateral.

 

3.4     The receipt by Lender of any monies, including but not limited to money
received as proceeds of runs, shall not in any manner change or alter in any
respect the obligations of Mortgagor upon the Note or other evidence of the
Indebtedness, and nothing herein contained shall be construed as limiting the
Lender to the collection of any of the Indebtedness out of the proceeds of runs.
The Indebtedness shall continue as the absolute and unconditional obligation of
Mortgagor to pay, as provided in the Note or other instruments evidencing the
Indebtedness, the amount therein specified at its Maturity Date, whether by
acceleration or otherwise.

 

3.5     Each of the provisions of this Article III shall be deemed a covenant
running with the land and shall be binding upon Mortgagor, its successors and
assigns, and inure to the benefit of the Mortgagor and the Lender, its
successors and assigns.

 

ARTICLE IV.

 

DEFEASANCE

 

4.1     If the Indebtedness is paid in full, then this instrument shall have no
force and effect, this conveyance shall become null and void, the Mortgaged
Properties hereby conveyed shall become wholly clear of the liens, conveyances,
assignments and security interests evidenced hereby, and all such liens,
conveyances, assignments and security interests shall be released in due form at
Mortgagor’s cost. Lender agrees to execute and deliver or cause to be executed
and delivered such instruments of reconveyance, satisfaction and reassignment as
may be appropriate in connection with the foregoing.

 

ARTICLE V.

 

REMEDIES IN EVENT OF DEFAULT

 

5.1     The terms “Default” and “Event of Default” as used in this instrument
shall each mean the occurrence of an Event of Default under the Note.

 

5.2     Upon the occurrence and during the continuation of any Event of Default,
Lender may, at its option, without notice to Mortgagor, declare the principal of
and interest accrued on the Loan to be forthwith due and payable, whereupon the
same shall become due and payable without any presentment, demand, protest,
notice of protest, notice of intent to accelerate, notice of acceleration or
notice of any kind, all of which are all hereby waived. Lender agrees to deliver
to Mortgagor a written notice of acceleration promptly after such acceleration,
but the receipt or delivery of that notice shall not in any way affect or be a
condition precedent to the validity, effectiveness or enforceability of such
acceleration.

 

(a)  If Lender elects to foreclose by exercise of the power of sale in this
Mortgage, Lender will also deposit with Trustee this Mortgage, the Note and any
receipts and evidence of expenditures made and secured as Trustee may require.
If any notice of default has been given as then required by law, and after lapse
of the time that may then be required by law, after recordation of the notice of
default, Trustee, without demand on Mortgagor, will, after notice of sale having
been given as required by law, sell the Mortgaged Properties at the time and
place of sale fixed by it in the notice of sale, either as a whole or in
separate parcels as Trustee determines, and in any order that it may

 

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determine, at public auction to the highest bidder. Trustee may postpone sale of
all or any portion of the Mortgaged Properties by public announcement at the
time and place of sale, and from time to time after that may postpone the sale
by public announcement at the time fixed by the preceding postponement, and
without further notice make the sale at the time fixed by the last postponement;
or Trustee may, in its discretion, give a new notice of sale. Lender may rescind
any notice of default at any time before Trustee’s sale by executing a notice of
rescission and recording it. The recordation of the notice will constitute a
cancellation of any prior declaration of default and demand for sale and of any
acceleration of maturity of Indebtedness affected by any prior declaration or
notice of default. The exercise by Lender of the right of rescission will not
constitute a waiver of any default then existing or subsequently occurring, or
impair the right of Lender to execute other declarations of default and demand
for sale, or notices of default and of election to cause the Mortgaged
Properties to be sold, nor otherwise affect the Note or this Mortgage, or any of
the rights, obligations, or remedies of Lender or Trustee. After sale, Trustee
will deliver to the purchaser its deed covering the property sold, but without
any covenant or warranty, express or implied. The recitals in the deed of any
matters or facts will be conclusive proof of their truthfulness. Any person,
including Mortgagor, Trustee or Lender, may purchase at that sale. If allowed by
law, Lender, if it is the purchaser, may turn in the Note held by it at the
amount owing on it toward payment of the purchase price (or for endorsement of
the purchase price). Mortgagor expressly waives any right of redemption after
sale that Mortgagor may have at the time of sale or that may apply to the sale.

 

(b)  Trustee, upon the sale, will make (without any covenant or warranty,
express or implied), execute and, after due payment made, deliver to a purchaser
and its heirs or assigns a deed or other record of interest, as the case may be,
to the Mortgaged Properties sold, which will convey to the purchaser all the
title and interest of Mortgagor in the Mortgaged Properties and will apply the
proceeds of the sale in payment:

 

(i)  first, of the expenses of the sale together with the expenses of the trust,
including, without limitation, reasonable attorney costs, that may become due on
any default made by Mortgagor; and

 

(ii)  second, in payment of the Indebtedness then remaining unpaid, and the
amount of all other monies with interest in this Mortgage agreed or provided to
be paid by Mortgagor.

 

Trustee will pay the balance or surplus of the proceeds of sale to Mortgagor and
its successors or assigns as its interests may appear.

 

5.4     If there is a sale of the Mortgaged Properties, or any part thereof, and
the execution of a deed for it, the recital of default and of recording notice
of breach and election of sale, and of the elapsing of the required time between
the recording and the following notice, and of the giving of notice of sale, and
of a demand by Lender that the sale should be made, will be conclusive proof of
the default, recording, election, elapsing of time, and the due giving of
notice, and that the sale was regularly and validly made on proper demand by
Lender. Any deed with these recitals will be effectual and conclusive against
Mortgagor, its successors, and assigns, and all other persons or entities. The
receipt for the purchase money recited or in any deed executed to the purchaser
will be sufficient discharge to the purchaser from all obligations to see to the
proper application of the purchase money.

 

5.5.     If an Event of Default occurs and is continuing, Lender, as a matter of
strict right and without notice to Mortgagor or anyone claiming under Mortgagor
and without regard to the then value of the Mortgaged Properties, will have the
right to apply ex parte to any court having jurisdiction to appoint a receiver
of the Mortgaged Properties, and Mortgagor waives notice of

 

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any application for that, provided a hearing to confirm the appointment with
notice to Mortgagor is set within fourteen (14) days after the appointment. Any
receiver will have all the powers and duties of receivers in similar cases and
all the powers and duties of Lender in case of entry as provided in this
Mortgage, and will continue as such and exercise all those powers until the date
of confirmation of sale, unless the receivership is terminated sooner.

 

5.6     In addition to all other remedies herein provided for, after an Event of
Default has occurred and be continuing Lender shall, as a matter of right, be
entitled to the appointment of a receiver or receivers of its choice except as
may be prohibited by law, for all or any part of the Mortgaged Properties,
whether such receivership be incident to a proposed sale of the Mortgaged
Properties or otherwise, and Mortgagor does hereby consent to the appointment of
such receiver or receivers and agrees not to oppose any application therefor by
Lender.

 

5.7     All remedies herein expressly provided for are cumulative of any and all
other remedies now existing at law or in equity, and Lender shall, in addition
to the remedies herein provided, be entitled to avail itself of all such other
remedies as may now or hereafter exist at law or in equity for the collection of
the Indebtedness and the enforcement of the covenants herein and foreclosure of
the liens evidenced hereby. The resort to any remedy provided for by law shall
not prevent the concurrent or subsequent employment of any other appropriate
remedy.

 

5.8     Lender shall have the right to become the purchaser or purchasers at any
sale held by Trustee or by any receiver or public officer. Lender purchasing at
any such sale shall have the right to credit upon the amount of the bid made
therefor the unpaid Indebtedness owing to the Lender.

 

5.9     Lender may resort to any security given by this instrument or to any
other security now existing or hereafter given to secure the payment of the
Indebtedness, in whole or in part, and in such portions and in such order as may
seem best to Lender in its sole and uncontrolled discretion. Any such action
shall not in anywise be considered as a waiver of any of the rights, benefits or
liens evidenced by this instrument.

 

ARTICLE VI.

 

APPOINTMENT OF SUBSTITUTE OR SUCCESSOR TRUSTEE

 

6.1.     Lender may at any time, by an instrument in writing, appoint a
successor to Trustee, which instrument shall contain the name of Mortgagor, of
Trustee and of Lender, the places of recordation of this instrument in the real
property records of any county where it has been recorded, and the name and
address of the new Trustee. Such instrument when executed, acknowledged and
recorded shall be conclusive proof of the proper substitution of such successor
Trustee. Such successor Trustee, without conveyance from the predecessor
Trustee, shall succeed to all of the rights, titles, estates, powers and duties
of the predecessor Trustee. In like manner successive successor Trustees may be
appointed in place of any prior Trustee or successor.

 

ARTICLE VII.

 

SECURITY AGREEMENT

 

7.1     To further secure the Indebtedness, Mortgagor hereby grants to Lender a
security interest in all of Mortgagor’s rights, titles and interests in and to
the Mortgaged Properties insofar as such Mortgaged Properties consist of the
goods, equipment, accounts, contract rights, general intangibles, inventory,
hydrocarbons, fixtures and any and all other personal property of any kind or
character defined in and subject to the provisions of the California Uniform

 

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Commercial Code, including the proceeds and products from any and all of such
personal property (all of the foregoing being in this Article VII collectively
called the “Collateral”). Upon the occurrence and during the continuation of any
Event of Default, Lender is and shall be entitled to all of the rights, powers
and remedies afforded a secured party by the applicable California Commercial
Code with reference to the Collateral in which Lender has been granted a
security interest herein, or the Trustee or Lender may proceed as to both the
real and personal property covered hereby in accordance with the rights and
remedies granted under this instrument in respect of the real property covered
hereby. Such rights, powers and remedies shall be cumulative and in addition to
those granted Trustee or Lender under any other provision of this instrument or
under any other instrument executed in connection with or as security for the
Loan or any of the Indebtedness. Mortgagor, as Debtor (and in this Article VII
and otherwise herein called “Debtor”) covenants and agrees with Lender, as
secured party (and in this Article VII and otherwise herein called “Secured
Party”) that:

 

(a)  To the extent permitted by law, Debtor expressly waives any notice of sale
or other disposition of the Collateral and any other right or remedies of a
debtor or formalities prescribed by law relative to sale or disposition of the
Collateral or exercise of any other right or remedy of Secured Party existing
after default hereunder; and to the extent any such notice is required and
cannot be waived, Debtor agrees that if such notice is mailed, postage prepaid,
to Debtor at Debtor’s address set out herein at least ten (10) days before the
time of the sale or disposition, such notice shall be deemed reasonable and
shall fully satisfy any requirement for giving of said notice.

 

(b)  Following and during the continuation of an Event of Default, Secured Party
is expressly granted the right at its option, to transfer at any time to itself
or to its nominee the Collateral, or any part thereof, and to receive the
monies, income, proceeds, or benefits attributable or accruing thereto and to
hold the same as security for the Indebtedness or to apply it on the principal
and interest or other amounts owing on any of the Indebtedness, whether or not
then due, in such order or manner as Secured Party may elect. All rights to
marshalling of assets of Debtor, including any such right with respect to the
Collateral, are hereby waived.

 

(c)  All recitals in any instrument of assignment or any other instrument
executed by Secured Party incident to sale, transfer, assignment or other
disposition or utilization of the Collateral or any part thereof hereunder
shall, in the absence of manifest error, be prima facie evidence of the matter
stated therein, no other proof shall be required to establish full legal
propriety of the sale or other action or of any fact, condition or thing
incident thereto, and all prerequisites of such sale or other action and of any
fact, condition or thing incident thereto shall be presumed conclusively to have
been performed or to have occurred.

 

(d)  All expenses of preparing for sale, or other use or disposition, selling or
otherwise using or disposing of the Collateral and the like which are incurred
or paid by Secured Party as authorized or permitted hereunder, including also
all reasonable attorney costs, shall be added to the Indebtedness and the Debtor
shall be liable therefor.

 

(e)  Should Secured Party elect to exercise its rights under California Uniform
Commercial Code as to part of the Collateral, this election shall not preclude
Secured Party or the Trustee from exercising any other rights and remedies
granted by this instrument as to the remainder of the Collateral.

 

(f)  Any copy of this instrument may also serve as a financing statement under
California Uniform Commercial Code between the Debtor, whose present address is
Mortgagor’s address listed on the first page of this Mortgage, and Secured
Party, whose present address is the Lender’s address listed on the first page of
this Mortgage.

 

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(g)  Secured Party is authorized to file, in any jurisdiction where Secured
Party deems it necessary, a financing statement or statements covering the
Collateral, and at the reasonable request of Secured Party, Debtor will join
Secured Party in executing one or more such financing statements pursuant to
California Uniform Commercial Code in form satisfactory to Secured Party, in all
public offices at any time and from time to time whenever filing or recording of
any financing statement or of this instrument is reasonably deemed by Secured
Party to be necessary or desirable.

 

(h)  The office where Debtor keeps Debtor’s accounting records concerning the
Collateral covered by this Security Agreement is Mortgagor’s address listed on
the first page of this Mortgage.

 

7.2     Portions of the Collateral consist of (i) oil, gas and other minerals
produced or to be produced from the lands described in the Leases and to the
accounts resulting from the sale thereof at the wellhead, or (ii) goods which
are or will become fixtures attached to the real estate constituting a portion
of the Mortgaged Properties, and Debtor hereby agrees that this instrument shall
be filed in the Real Property Records and the Uniform Commercial Code Records of
the Counties in which the Mortgaged Properties are located as a financing
statement to perfect the security interest of Secured Party in said portions of
the Collateral. The said oil, gas and other minerals and accounts will be
financed at the wellhead of the oil and gas wells located on the lands described
in the Leases. The name of the record owner of the Mortgaged Properties is the
party named herein as Mortgagor and Debtor. Nothing herein contained shall
impair or limit the effectiveness of this document as a security agreement or
financing statement for other purposes.

 

7.3     This Mortgage constitutes a financing statement filed as a fixture
filing in the Official Records of the County Recorder of the county in which the
Mortgaged Properties are located with respect to all fixtures included within
the term Mortgaged Properties as used in this Mortgage and with respect to any
goods, Collateral, or other personal property that may now be or later become
fixtures.

 

ARTICLE XIII.

 

MISCELLANEOUS PROVISIONS

 

8.1     All options and rights of election herein provided for the benefit of
Lender are continuing, and the failure to exercise any such option or right of
election upon a particular Default or Event of Default or breach or upon any
subsequent Default or Event of Default or breach shall not be construed as
waiving the right to exercise such option or election at any later date. By the
acceptance of payment of any sum secured hereby after its due date, Lender shall
not be deemed to have waived the right either to require prompt payment when due
of all other sums so secured or to regard as an Event of Default the failure to
pay any other sums due which are secured hereby. No exercise of the rights and
powers herein granted and no delay or omission in the exercise of such rights
and powers shall be held to exhaust the same or be construed as a waiver
thereof, and every such right and power may be exercised at any time and from
time to time.

 

8.2     This Mortgage has been freely and fairly negotiated among the parties.
If an ambiguity or question of intent or interpretation arises, this Mortgage
will be construed as if drafted jointly by the parties and no presumption or
burden of proof will arise favoring or disfavoring any party because of the
authorship of any provision of this Mortgage. Unless the context requires
otherwise, any agreements, documents, instruments or laws defined or referred to
in this Mortgage will be deemed to mean or refer to such agreements, documents,
instruments or laws as from time to time amended, modified or supplemented,
including (a) in the case of agreements, documents or instruments, by waiver or
consent and (b) in the case of laws, by

 

10

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succession of comparable successor statutes. All references in this Mortgage to
any particular law will be deemed to refer also to any rules and regulations
promulgated under that law. The words “include, “includes” and “including will
be deemed to be followed by “without limitation.” The word “or” is used in the
inclusive sense of “and/or” unless the context requires otherwise. References to
a person are also to its permitted successors and assigns. Pronouns in
masculine, feminine and neuter genders will be construed to include any other
gender, and words in the singular form will be construed to include the plural
and vice versa, unless the context requires otherwise. When a reference in this
Mortgage is made to an Article, Section, Exhibit, Annex or Schedule, such
reference is to an Article or Section of, or Exhibit, Annex or Schedule to, this
Mortgage unless otherwise indicated. The words “this Mortgage,” “herein,”
“hereof,” “hereby,” “hereunder” and words of similar import refer to this
Mortgage as a whole and not to any particular subdivision unless expressly so
limited.

 

8.3     All Indebtedness shall be payable as set forth in the Note.

 

8.4     The terms, provisions, covenants and conditions hereof shall be binding
upon Mortgagor and Mortgagor’s successors, legal representatives, and assigns,
and shall inure to the benefit of Trustee and Trustee’s substitutes or
successors and assigns, and of Lender, its successors and assigns, subject to
the restrictions on assignment set forth in the Note.

 

8.5     If any provision hereof is invalid or unenforceable in any jurisdiction,
the other provisions hereof shall remain in full force and effect in such
jurisdiction, and the remaining provisions hereof shall be liberally construed
in favor of the Trustee and Lender in order to effectuate the provisions hereof,
and the invalidity or unenforceability of any provision hereof in any
jurisdiction shall not affect the validity or enforceability of any such
provision in any other jurisdiction.

 

8.6     (a)  It is the intention of the parties hereto to comply with applicable
usury laws, if any; accordingly, notwithstanding any provision to the contrary
in this Mortgage or the Note, in no event shall this Mortgage or the Note
require or permit the payment, taking, reserving, receiving, collection, or
charging of any sums constituting interest under applicable laws which exceed
the maximum amount permitted by such laws. If any such excess interest is called
for, contracted for, charged, taken, reserved, or received in connection with
the loans evidenced by the Note securing the payment thereof or otherwise
relating thereto, or in any communication by the Lender or any other person to
the Mortgagor or any other Person, or in the event all or part of the principal
or interest thereof shall be prepaid or accelerated, so that under any of such
circumstances or under any other circumstance whatsoever the amount of interest
contracted for, charged, taken, reserved, or received on the amount of principal
actually outstanding from time to time under the Note shall exceed the maximum
amount of interest permitted by applicable usury laws, then in any such event it
is agreed as follows: (i) the provisions of this paragraph shall govern and
control, (ii) neither the Mortgagor nor any other Person or entity now or
hereafter liable for the payment of the Loan shall be obligated to pay the
amount of such interest to the extent such interest is in excess of the maximum
amount of interest permitted by applicable usury laws, (iii) any such excess
which is or has been received notwithstanding this paragraph shall be credited
against the then unpaid principal balance of the Loan or, if the Loan has been
or would be paid in full, refunded to the Mortgagor, and (iv) the provisions of
this Mortgage and the Note securing the payment thereof and otherwise relating
thereto, and any communication to the Mortgagor, shall immediately be deemed
reformed and such excess interest reduced, without the necessity of executing
any other document, to the maximum lawful rate allowed under applicable laws as
now or hereafter construed by courts having jurisdiction hereof or thereof.
Without limiting the foregoing, all calculations of the rate of the interest
contracted for, charged, collected, taken, reserved, or received in connection
with the Note or this Mortgage which are made for the purpose of determining
whether such rate exceeds the maximum lawful rate shall be made to the extent
permitted by applicable laws by amortizing, prorating, allocating and spreading
during the period of the full term of the loans,

 

11

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including all prior and subsequent renewals and extensions, all interest at any
time contracted for, charged, taken, collected, reserved, or received. The terms
of this paragraph shall be deemed to be incorporated in every document and
communication relating to the Note.

 

            (b)  In the event applicable law provides for an interest ceiling
under Chapter 303 of the Texas Finance Code as amended, for that day, the
ceiling shall be the “weekly ceiling” as defined in the Texas Finance Code;
provided that if any applicable law permits greater interest, the law permitting
the greatest interest shall apply. As used in this section the term “applicable
law” means the laws of the State of Texas or the laws of the United States of
America, whichever laws allow the greater interest, as such laws now exist or
may be changed or amended or come into effect in the future.

 

8.7     THIS INSTRUMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE UNITED STATES AND STATE OF TEXAS, EXCEPT TO THE EXTENT REQUIRED
BY LOCAL LAW OF ANY STATE OTHER THAN TEXAS WHEREIN THE MORTGAGED PROPERTIES ARE
LOCATED.

 

8.8     Mortgagor requests that a copy of any notice of sale hereunder be mailed
to it at the address of Mortgagor first set forth above.

 

8.9     For the convenience of the parties, this instrument may be executed in
multiple counterparts. For recording purposes, various counterparts have been
executed and there may be attached to each such counterpart an “Exhibit A”
containing only the description of the Mortgaged Properties that are located in
the county or state in which the particular counterpart hereof is to be filed or
recorded. A complete original counterpart of this instrument with complete
Exhibits may be obtained from the Lender. Each of the counterparts hereof so
executed shall for all purposes be deemed an original, and all such counterparts
shall together constitute but one and the same instrument.

 

NOTICE: THIS DOCUMENT AND ALL OTHER DOCUMENTS RELATING TO THIS LOAN TOGETHER
CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE FINAL AGREEMENT BETWEEN
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS,
OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES RELATING TO THE LOANS.

 

 

[SIGNATURE PAGE FOLLOWS]

 

12

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  IN WITNESS WHEREOF, this instrument is executed in multiple counterparts, each
of which shall be deemed an original for all purposes.

 

 

DAYBREAK OIL AND GAS, INC., a Washington corporation

 

 

 

By:      /s/ James F. Westmoreland                              

Name:   James F. Westmoreland                               

Title:   President and Chief Executive Officer          

 

 

STATE OF _______________________

§

 

§

COUNTY OF _____________________

§

 

 

On September ___, 2010 before me, _______________________________, Notary Public
of said State, duly commissioned and sworn, personally appeared
_________________________________, ____________________________________ of
Daybreak Oil and Gas, Inc., a Washington corporation, personally known to me (or
proved to me on the basis of satisfactory evidence) to be the person whose name
is subscribed to the within instrument and acknowledged to me that he executed
the same in his authorized capacity, and that by his signature on the instrument
the person, or the entity upon behalf of which the person acted, executed the
instrument.

 

 

WITNESS my hand and official seal.

 

    

  __________________________________

 

NOTARY PUBLIC IN AND FOR

  THE STATE OF ________________

 

 

--------------------------------------------------------------------------------

 

WELL WORKS, LLC, a Utah limited liability company, as Lender

 

 

By:      /s/ Eric Hale                              

Name:   Eric Hale                               

Title:   Managing Member                  

 

 

 

STATE OF _______________________

§

 

§

COUNTY OF _____________________

§

 

On September ___, 2010 before me, Notary Public of said State, personally
appeared _________________________________, ____________________________________
of Well Works, LLC, a Utah limited liability company, who proved to me on the
basis of satisfactory evidence to be the person(s) whose name(s) is/are
subscribed to the within instrument and acknowledged to me that he/she executed
the same in his/her authorized capacity, and that by his/her signature(s) on the
instrument the person(s), or the entity upon behalf of which the person(s)
acted, executed the instrument.

 

 

I certify under PENALTY OF PERJURY that the foregoing paragraph is true and
correct.

 

 

WITNESS my hand and official seal.

 

 

  __________________________________

 

NOTARY PUBLIC IN AND FOR

  THE STATE OF ________________

 

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EXHIBIT A

 

(Attached to and made a part of Mortgage, Deed of Trust, Assignment of
Production, Security Agreement, and Financing Statement (“Mortgage”) executed by
Daybreak Oil and Gas, Inc., as Mortgagor, to Well Works, LLC, Trustee)

 

DEFINITIONS:

 

1.     The terms used in Exhibit A have the same meaning as defined in the
Mortgage.

 

2.     The term “working interest” as used herein means (a) when applied to
individual Leases, the undivided interest owned by Mortgagor in the leasehold
estate, out of which are paid Mortgagor’s share of (i) all costs of drilling,
completing, equipping and operating a well or wells, and (ii) all royalties,
overriding royalties, production payments and other interests in or measured by
production, and (b) when applied to Leases described as unitized or pooled, the
undivided interest owned by Mortgagor and out of which is paid all costs of
drilling, completing, equipping and operating a well or wells producing oil and
gas, or either of them, from the portions of the Leases so unitized or pooled.
The term “net revenue interest” as used herein means that portion of oil and gas
(or oil only, or gas only, where so limited herein) produced from the respective
properties herein described to which Mortgagor is entitled after deduction of
all royalties, overriding royalties, production payments and other interests in
or measured by production which are borne by Mortgagor.

 

3.     The term “Permitted Encumbrances” shall mean Permitted Liens under as
defined in Annex I hereto and the specific exceptions and encumbrances affecting
each of the Mortgaged Properties as described in this Exhibit INSOFAR ONLY as
said exceptions and encumbrances are valid and subsisting and are enforceable
against the particular Lease which is made subject to said exceptions and
encumbrances.

 

4.     With respect to the descriptions of each of the Mortgaged Properties, if
the description requires, such description may continue on several successive
pages of each Part of Exhibit A. Certain property descriptions are in
abbreviated form as to Sections, Townships and Ranges. In such descriptions the
following terms may be abbreviated as follows:

 

Northwest Quarter-NW, NW/4 or NW1/4;

Southwest Quarter-SW, SW/4 or SW1/4;

Southeast Quarter-SE, SE/4 or SE1/4;

Northeast Quarter-NE, NE/4 or NE1/4;

North Half-N/2 or N1/2;

South Half-S/2 or S1/2;

East Half-E/2 or E1/2; and

West Half-W/2 or W1/2.

The applicable Section, Township and Range may be identified by a series of
three numbers, each separated by a dash, with the first number being the Section
number, the second number being the Township number and the third number being
the Range number. The Township and Range numbers are followed by an N, S, E or W
to indicate whether the Township or Range is North,

 

Exhibit A

--------------------------------------------------------------------------------

South, East or West, respectively. In some instances, the Section number may be
stated by itself and not in conjunction with a series of dashed numbers
representing the appropriate Township and Range, e.g., the description “N/2 14,
SESW 21-29N-8W” means “North one-half of Section 14 and Southeast quarter of
Southwest quarter of Section 21, all in Township 29 North, Range 8 West.”
Certain descriptions merely refer to the subdivision or survey in which the
property is located in whole or in part. In such cases, the recorded Leases and
any amendments thereof and any other recorded instruments affecting Mortgagor’s
title more particularly describe the land within such subdivision or survey in
which Mortgagor owns an interest, and the descriptions contained in such
instruments are incorporated herein by this reference.

 

SYMBOLS AND ABBREVIATIONS:

 

1.     The abbreviation “BPO” or the term “before payout” as used herein means
that the figure next to which this abbreviation appears represents Mortgagor’s
net income interest until such time as the operator of the well or wells
situated on the described property has recovered from production from that well
or those wells all costs as specified in underlying farmouts, assignments or
other documents in the chain of title, usually including costs of drilling,
completing and equipping a well or wells plus costs of operating the well or
wells during the recoupment period.

 

2.     The abbreviation “APO” or the term “after payout” as used herein means
that the figure next to which this abbreviation appears represents Mortgagor’s
net income interest after the point in time when the operator of the well or
wells situated on the described property has recovered from production from that
well or those wells all costs as specified in underlying farmouts, assignments
or other documents in the chain of title, usually including costs of drilling,
completing and equipping a well or wells plus costs of operating the well or
wells during the recoupment period.

 

(see attached)

 

Exhibit A

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ANNEX I

 

As used in this Mortgage, “Permitted Lien” shall mean:

 

(a)

any Lien created under the Note or this Mortgage;

 

(b)

Liens for taxes, fees, assessments or other governmental charges which are not
delinquent or remain payable without penalty, or which are being contested in
good faith and by appropriate proceedings;

 

(c)

carriers’, warehousemen’s, mechanics’, landlords’, materialmen’s, repairmen’s or
other similar Liens arising in the ordinary course of business (whether by law
or by contract) which are not delinquent or remain payable without penalty or
which are being contested in good faith and by appropriate proceedings;

 

(d)

Liens consisting of pledges or deposits required in the ordinary course of
business in connection with workers’ compensation, unemployment insurance and
other social security legislation;

 

(e)

easements, rights of way, restrictions, defects or other exceptions to title and
other similar encumbrances incurred in the ordinary course of business which, in
the aggregate, are not substantial in amount, are not incurred to secure
Indebtedness, and which do not in any case materially detract from the value of
the property subject thereto or interfere with the ordinary conduct of the
businesses of Mortgagor or its subsidiaries;

 

(f)

Liens on the property of Mortgagor or any of its subsidiaries securing (i) the
non-delinquent performance of bids, trade contracts (other than for borrowed
money) or statutory obligations, (ii) contingent obligations on surety and
appeal bonds, and (iii) other non-delinquent obligations of a like nature; in
each case, incurred in the ordinary course of business;

 

(g)

Liens arising solely by virtue of any statutory or common law provision relating
to banker’s liens, rights of set-off or similar rights and remedies as to
deposit accounts or other funds maintained with a creditor depository
institution or under any deposit account agreement entered into in the ordinary
course of business; provided, however, that (i) such deposit account is not a
dedicated cash collateral account and is not subject to restrictions against
access by Mortgagor or any of its subsidiaries, (ii) Mortgagor or any of its
subsidiaries maintains (subject to such right of set off) dominion and control
over such account(s), and (iii) such deposit account is not intended by the
Mortgagor or any of its subsidiaries to provide cash collateral to the
depository institution; and

 

(h)

Oil and Gas Liens to secure obligations which are not delinquent and which do
not in any case materially detract from the value of the Mortgaged Property
subject thereto.

“Lien” shall mean any security interest, mortgage, deed of trust, pledge,
hypothecation, assignment, charge or deposit arrangement, encumbrance, lien
(statutory or other) or preferential arrangement of any kind or nature
whatsoever in respect of any real, personal or intangible property (including
those created by, arising under or evidenced by any conditional sale or other
title retention agreement and the interest of a lessor under a capital lease),
any financing lease having substantially the same economic effect as any of the
foregoing, or the filing of any financing statement naming the owner of the
asset to which such lien relates as debtor, under the Uniform Commercial Code or
any comparable law and any contingent or other agreement to provide any of the
foregoing.

 

Annex I

--------------------------------------------------------------------------------

“Oil and Gas Liens” means (a) Liens arising under oil and gas leases, overriding
royalty agreements, net profits agreements, royalty trust agreements, farm-out
agreements, division orders, contracts for the sale, purchase, exchange,
transportation, gathering or processing of oil, gas or other hydrocarbons,
unitizations and pooling designations, declarations, orders and agreements,
development agreements, operating agreements, production sales contracts, area
of mutual interest agreements, gas balancing or deferred production agreements,
injection, repressuring and recycling agreements, salt water or other disposal
agreements, seismic or geophysical permits or agreements, and other agreements
that are customary in the oil and gas business and are entered into by Mortgagor
in the ordinary course of business; and (b) Liens on pipelines or pipeline
facilities that arise by operation of law.

 

 

Annex I

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