Document:

Exhibit 10.1

Exhibit
10.1

 

 

SECURED
PROMISSORY NOTE

 

	Effective
    Date:  December 22, 2020	Principal
    Amount of Note: $155,548.34

FOR VALUE RECEIVED,
and subject to the terms and conditions set forth herein, DAYBREAK OIL AND GAS, INC., a Washington corporation (the “Borrower”),
hereby unconditionally promises to pay to the order of JAMES FORREST WESTMORELAND and ANGELA MARIE WESTMORELAND, Co-Trustees
of the James and Angela Westmoreland Revocable Trust, or any assigns (the “Noteholder”, and together with
the Borrower, the “Parties”), any principal amounts outstanding hereunder (the “Loan”), together
with all accrued interest thereon, as provided in this Promissory Note (this “Note”). The amounts outstanding
hereunder with respect to the Loan, including principal, interest, fees or other charges, and all other amounts, are referred to
herein as the “Obligations.”

The Loan shall be loaned to the Borrower on the Effective Date.

1.     
Definitions. Capitalized terms used herein shall have the meanings set forth in this
Section 1.

“Borrower” has
the meaning set forth in the introductory paragraph.

“Business
Day” means a day other than a Saturday, Sunday or other day on which commercial banks in Houston, Texas are authorized
or required by law to close.

“Change
in Control” means: (a) the acquisition (whether by purchase, merger, consolidation, combination or other similar
transaction) by any Person of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Securities Exchange
Act of 1934) of more than 50% (on a fully diluted basis) of the combined voting power of the then outstanding voting securities
of the Borrower or (b) the sale, transfer or other disposition of all or substantially all of the assets of the Borrower to any
Person other than an affiliate.

“Collateral”
has the meaning set forth in Section 10.1.

“Debt” of
the Borrower, means all (a) indebtedness for borrowed money; (b) obligations for the deferred purchase price of property or services,
except trade payables arising in the ordinary course of business; (c) obligations evidenced by notes, bonds, debentures or other
similar instruments; (d) obligations as lessee under capital leases; (e) obligations in respect of any interest rate swaps, currency
exchange agreements, commodity swaps, caps, collar agreements or similar arrangements entered into by the Borrower providing for
protection against fluctuations in interest rates, currency exchange rates or commodity prices or the exchange of nominal interest
obligations, either generally or under specific contingencies; (f) obligations under acceptance facilities and letters of credit;
(g) guaranties, endorsements (other than for collection or deposit in the ordinary course of business), and other contingent obligations
to purchase, to provide funds for payment, to supply funds to invest in any Person, or otherwise to assure a creditor against loss,
in each case, in respect of indebtedness set out in clauses (a) through (f) of a Person other than the Borrower; and (h) indebtedness
set out in clauses (a) through (g) of any Person other than the Borrower secured by any lien on any asset of the Borrower, whether
or not such indebtedness has been assumed by the Borrower.

“Deed
of Trust” has the meaning set forth in Section 10.1.

“Default” means
any of the events specified in Section 9 which constitutes an Event of Default or which, upon the giving of notice, the lapse of
time, or both pursuant to Section 9 would, unless cured or waived, become an Event of Default.

 

    	 

 

    	 

    

“Effective
Date” means the date first referenced above.

“Event
of Default” has the meaning set forth in Section 9.

“Governmental
Authority” means the government of any nation or any political subdivision thereof, whether at the national, state,
territorial, provincial, municipal or any other level, and any agency, authority, instrumentality, regulatory body, court, central
bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of,
or pertaining to, government.

“Interest
Rate” means the rate equal to 2.25%.

“Law” as
to any Person, means any law (including common law), statute, ordinance, treaty, rule, regulation, policy or requirement of any
Governmental Authority and authoritative interpretations thereon, whether now or hereafter in effect, in each case, applicable
to or binding on such Person or any of its properties or to which such Person or any of its properties is subject.

“Lien” means
any mortgage, pledge, hypothecation, encumbrance, lien (statutory or other), charge or other security interest.

“Loan” has
the meaning set forth in the introductory paragraph.

“Material
Adverse Effect” means a material adverse effect on (a) the validity or enforceability of this Note; (b) the priority
or effectiveness of any Lien purported to be created under this Note; or (c) the rights or remedies of the Noteholder hereunder.

“Maturity
Date” means the earlier of (a) December 21, 2036 and (b) the date on which all amounts under this Note shall become
due and payable pursuant to this Agreement or the Deed of Trust.

“Note” has
the meaning set forth in the introductory paragraph.

“Noteholder” has
the meaning set forth in the introductory paragraph.

“Obligations” has
the meaning set forth in the introductory paragraph.

“Order” as
to any Person, means any order, decree, judgment, writ, injunction, settlement agreement, requirement or determination of an arbitrator
or a court or other Governmental Authority, in each case, applicable to or binding on such Person or any of its properties or to
which such Person or any of its properties is subject.

“Parties” has
the meaning set forth in the introductory paragraph.

“Payment
Date” means the 22nd day of each month, commencing on January 22, 2021.

“Permitted
Debt” means Debt (a) existing or arising under this Note and any refinancing thereof; and (b) accounts payable and
accrued expenses, liabilities or other obligations from time to time incurred in the ordinary course of business.

“Person” means
any individual, corporation, limited liability company, trust, joint venture, association, company, limited or general partnership,
unincorporated organization, Governmental Authority or other entity.

“UCC” means
the Uniform Commercial Code as in effect from time to time in the State of Washington.

 

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2.     
 Payments.

2.1      
Monthly Payments. A monthly payment of $1,048.14 shall be payable to the Noteholder
on each Payment Date.

2.2      
Final Payment Date. The aggregate unpaid principal amount of the Loan, all accrued
and unpaid interest and all other amounts payable under this Note shall be due and payable on the Maturity Date.

2.3      
Optional Prepayment. The Borrower may prepay the Loan in whole or in part at any time
or from time to time without penalty or premium by giving five days’ advance written notice to Noteholder and, on such prepayment
date, paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. No prepaid amount
may be reborrowed.

3.     
Interest.

3.1      
Interest Rate. Except as otherwise provided herein, the outstanding principal amount
of the Loan made hereunder shall bear interest at the Interest Rate from the date the Loan was made until the Loan is paid in full,
whether at maturity, upon acceleration, by prepayment or otherwise.

3.2      
Default Interest. If any amount payable hereunder is not paid when due (after expiration
of any applicable grace or cure periods), whether at stated maturity, by acceleration or otherwise, such overdue amount shall bear
interest at the Default Rate from the date of such non-payment until such overdue amount is paid in full. 

3.3      
Interest Rate Limitation. If at any time and for any reason whatsoever, the interest
rate payable on the Loan shall exceed the maximum rate of interest permitted to be charged by the Noteholder to the Borrower under
applicable Law, such interest rate shall be reduced automatically to the maximum rate of interest permitted to be charged under
applicable Law.

4.     
Use of Proceeds. All proceeds of the Loan shall be used payroll and general working
capital purposes.

5.     
Payment Mechanics.

5.1      
Manner of Payments. All payments of interest and principal shall be made in lawful
money of the United States of America no later than 5:00 PM Houston, Texas time on the date on which such payment is due by wire
transfer of immediately available funds to the Noteholder’s account at a bank specified by the Noteholder in writing to the
Borrower from time to time.

5.2      
Application of Payments. All payments made hereunder shall be applied first to the
payment of any fees or charges outstanding hereunder, second to accrued interest, and third to the payment of the principal amount
outstanding under this Note.

5.3      
Business Day Convention. Whenever any payment to be made hereunder shall be due on
a day that is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension will be taken
into account in calculating the amount of interest payable under this Note.

5.4      
Rescission of Payments. If at any time any payment made by the Borrower under this
Note is rescinded or must otherwise be restored or returned upon the insolvency, bankruptcy or reorganization of the Borrower or
otherwise, the Borrower’s obligation to make such payment shall be reinstated as though such payment had not been made. 

6.     
Representations and Warranties. The Borrower hereby represents and warrants to the
Noteholder on the date hereof as follows:

 

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6.1      
 Existence; Compliance with Laws. The Borrower is (a) a corporation duly formed, validly
existing and in good standing under the laws of the state of its jurisdiction of organization and has the requisite power and authority,
and the legal right, to own, lease and operate its properties and assets and to conduct its business as it is now being conducted
and (b) in compliance with all Laws and Orders except to the extent that the failure to comply therewith would not, in the aggregate,
reasonably be expected to have a Material Adverse Effect.

6.2      
Power and Authority. The Borrower has the power and authority, and the legal right,
to execute and deliver this Note and to perform its obligations hereunder.

6.3      
Authorization; Execution and Delivery. The execution and delivery of this Note, the
Deed of Trust, and the other transaction documents by the Borrower and the performance of its obligations hereunder have been duly
authorized and approved by all necessary corporate action in accordance with all applicable Laws, including the unanimous approval
of the members of the board directors of the Borrower. The Borrower has duly executed and delivered this Note.

6.4      
No Approvals. No consent or authorization of, filing with, notice to or other act by,
or in respect of, any Governmental Authority or any other Person is required in order for the Borrower to execute, deliver, or
perform any of its obligations under this Note or the Deed of Trust.

6.5      
No Violations. The execution and delivery of this Note and the Deed of Trust and the
consummation by the Borrower of the transactions contemplated hereby do not and will not (a) violate any provision of the Borrower’s
organizational documents; (b) violate any Law or Order applicable to the Borrower or by which any of its properties or assets may
be bound; or (c) constitute a default under any material agreement or contract by which the Borrower may be bound. 

6.6      
Enforceability. This Note is a valid, legal and binding obligation of the Borrower,
enforceable against the Borrower in accordance with its terms except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by general
equitable principles (whether enforcement is sought by proceedings in equity or at law). 

6.7      
No Litigation. No action, suit, litigation, investigation or proceeding of, or before,
any arbitrator or Governmental Authority is pending or, to the knowledge of the Borrower, threatened by or against the Borrower
or any of its property or assets (a) with respect to this Note or any of the transactions contemplated hereby or (b) that could
be expected to materially adversely affect the Borrower’s financial condition or the ability of the Borrower to perform its
obligations under this Note. As used herein, the “knowledge of Borrower” means the actual knowledge of any executive
officer of Borrower.

7.     
Affirmative Covenants. Until all Obligations have been paid in full, the Borrower shall:

7.1      
Financial Information. Keep the Noteholder informed of the financial condition of the
Borrower, including but not limited to furnishing financial statements when available and upon request and upon request providing
other information to the Noteholder about the Borrower’s liabilities and expenditures.

7.2      
Notice of Events of Default. As soon as possible and in any event within five (5) Business
Days after it becomes aware that a Default or an Event of Default has occurred, notify the Noteholder in writing of the nature
and extent of such Default or Event of Default and the action, if any, it has taken or proposes to take with respect to such Default
or Event of Default.

7.3      
Further Assurances. Upon the reasonable request of the Noteholder, promptly execute
and deliver such further instruments and do or cause to be done such further acts as may be necessary or advisable to carry out
the intent and purposes of this Note. 

8.     
Negative Covenants. Until all Obligations have been paid in full, the Borrower shall
not, without the consent of Noteholder:

 

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8.1      
 Indebtedness. Incur, create or assume any Debt, other than Permitted Debt. 

8.2      
Liens. Incur, create, assume or suffer to exist any Lien on any of its property or
assets, whether now owned or hereinafter acquired except for (a) Liens for taxes not yet due or which are being contested in good
faith by appropriate proceedings; (b) Liens existing as of the date hereof; and (b) Liens created pursuant to this Note.

8.3      
Change of Control. Permit a Change in Control to occur.

8.4      
Dividends. Make any cash dividend, distribution or other payment in respect of any
securities of the Borrower or to any officer, director or affiliate of the Borrower, other than salaries payable in the ordinary
course of business or compensation approved by a unanimous vote of the board of directors of the Borrower.

9.     
Events of Default. The occurrence and continuance of any of the following shall constitute
an Event of Default hereunder:

9.1      
Failure to Pay. The Borrower fails to make any payment when due and such failure continues
for 30 days after written notice to the Borrower.

9.2      
Breach of Representations and Warranties. Any representation or warranty made or deemed
made by the Borrower to the Noteholder herein is incorrect in any material respect on the date as of which such representation
or warranty was made or deemed made.

9.3      
Breach of Covenants. The Borrower fails to observe or perform any material covenant,
obligation, condition or agreement contained in this Note other than those specified in Section 9.1 and such failure continues
for 45 days after written notice to the Borrower.

9.4      
Breach of Deed of Trust. The Borrower fails to observe or perform any material covenant,
obligation, condition or agreement contained in the Deed of Trust, which remains uncured following thirty (30) days after written
notice to the Borrower.

9.5      
Enforceability. Any material provision of this Note or any agreement entered into in
connection with this Note for any reason ceases to be valid, binding and enforceable in accordance with its terms, or the Borrower,
any member of the board of directors of the Borrower or any shareholder of the Borrower shall challenge the enforceability of this
Note or any agreement entered into in connection with this Note or shall assert in writing, or engage in any action or inaction
that evidences its assertion, that any provision of any of this Note or any agreement entered into in connection with this Note
has ceased to be or otherwise is not valid, binding and enforceable in accordance with its terms.

9.6      
Bankruptcy.

(a)     
the Borrower commences any case, proceeding or other action (i) under any existing or future
Law relating to bankruptcy, insolvency, reorganization, or other relief of debtors, seeking to have an order for relief entered
with respect to it, or seeking to adjudicate it as bankrupt or insolvent, or seeking reorganization, arrangement, adjustment,
winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts or (ii) seeking appointment
of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets,
or the Borrower makes a general assignment for the benefit of its creditors;

(b)     
there is commenced against the Borrower any case, proceeding or other action of a nature
referred to in Section 9.6(a) above which (i) results in the entry of an order for relief or any such adjudication or appointment
or (ii) remains undismissed, undischarged or unbonded for a period of 60 days;

 

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(c)     
there is commenced against the Borrower any case, proceeding or other action seeking issuance
of a warrant of attachment, execution or similar process against all or any substantial part of its assets which results in the
entry of an order for any such relief which has not been vacated, discharged, or stayed or bonded pending appeal within 60 days
from the entry thereof; or

(d)     
the Borrower takes any action in furtherance of, or indicating its consent to, approval of,
or acquiescence in, any of the acts set forth in Section 9.6(a), Section 9.6(b) or Section 9.6(c) above.

10.  
Security Agreement.

10.1   
Security Interest. As collateral security for the Borrower’s payment and performance
of its obligations hereunder, the Borrower hereby pledges and grants to the Noteholder, a lien on and security interest in and
to all of the right, title and interest of the Borrower in, to and under the property of the Borrower described on Exhibit A
hereto, wherever located, and whether now existing or hereafter arising or acquired from time to time (collectively, the “Collateral”).
Such lien shall be subject only to subject only to a pre-existing lien filed by a working interest partner of the Company, but
shall otherwise be a first priority lien.

10.2   
Execution and Delivery of Deed of Trust. In furtherance of the security interest in
the Collateral, the Borrower hereby agrees to authorize, execute and deliver, effective as of the Effective Date: (a) a deed of
trust or mortgage (the “Deed of Trust”) with respect to the Collateral, in substantially the form agreed upon
between the Parties; and (b) such additional security instruments for the purpose of granting and perfecting the security interests
in the Collateral, including authorizing the filing of a financing statement in the relevant jurisdictions with respect to any
of the Collateral.

11.  
Remedies.

11.1   
Generally. 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 Borrower: (a) declare the entire principal amount of this 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; provided,
however that, if an Event of Default described in Section 9.6 shall occur, the principal of and accrued interest on the Loan
shall become immediately due and payable without any notice, declaration or other act on the part of the Noteholder. 

11.2   
Remedies Regarding the Collateral. If any Event of Default shall have occurred and
be continuing:

(a)     
The Noteholder may exercise, without any other notice to or demand upon the Borrower, in
addition to the other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured
party upon default under the UCC (whether or not the UCC applies to the affected Collateral) and also may exercise any rights
or remedies pursuant to the Deed of Trust. 

(b)      All payments received by the Borrower in respect of the Collateral shall be received in trust
for the benefit of the Noteholder, shall be segregated from other funds of the Borrower and shall be forthwith paid over the Noteholder
in the same form as so received (with any necessary endorsement). 

(c)      
The Noteholder may, without notice to the Borrower, except as required by law and at any
time or from time to time, charge, set off and otherwise apply all or part of the obligations of the Borrower pursuant to the
Note against any funds deposited with it or held by it.

 

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12.  
 Miscellaneous.

12.1   
Notices.  

(a)     
All notices, requests or other communications required or permitted to be delivered hereunder
shall be delivered in writing, in each case to the address for a Party as such Party may from time to time specify in writing.

(b)     
Notices if (i) mailed by certified or registered mail or sent by hand or overnight courier
service shall be deemed to have been given when received; and (ii) sent by e-mail shall be deemed received upon the sender’s
receipt of an acknowledgment from the intended recipient (by return e-mail or other written acknowledgment).

12.2   
Choice of Law. This Note, and all matters arising out of or relating to this Note,
whether sounding in contract, tort, or statute, will be governed by and construed in accordance with the internal laws of the State
of Washington, without giving effect to the conflict of laws provisions thereof to the extent such principles or rules would require
or permit the application of the laws of any jurisdiction other than those of the State of Washington.

12.3   
Approval. The Borrower hereby represents that its board of directors, in the exercise
of its fiduciary duty, has approved the Borrower’s execution of this Note based upon a reasonable belief that the principal
provided hereunder is appropriate for the Borrower after reasonable inquiry concerning the Borrower’s financing objectives
and financial situation. In addition, the Borrower hereby represents that it intends to use the principal of this Note primarily
for the operations of its business.

12.4   
Waiver of Jury Trial. THE BORROWER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY RELATING TO
THIS NOTE OR THE TRANSACTIONS CONTEMPLATED HEREBY WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY. 

12.5   
Counterparts; Integration; Effectiveness. This Note and any amendments, waivers, consents
or supplements hereto may be executed in counterparts, each of which shall constitute an original, but all taken together shall
constitute a single contract. This Note constitutes the entire contract between the Parties with respect to the subject matter
hereof and supersede all previous agreements and understandings, oral or written, with respect thereto. Delivery of an executed
counterpart of a signature page to this Note by facsimile or in electronic (i.e., “pdf” or “tif”) format
shall be effective as delivery of a manually executed counterpart of this Note.

12.6   
Successors and Assigns. This Note may be assigned or transferred by the Noteholder
to any Person. The Borrower may not assign or transfer this Note or any of its rights hereunder without the prior written consent
of the Noteholder. This Note shall inure to the benefit of, and be binding upon, the Parties and their permitted assigns.

12.7   
Waiver of Notice. The Borrower hereby waives demand for payment, presentment for payment,
protest, notice of payment, notice of dishonor, notice of nonpayment, notice of acceleration of maturity and diligence in taking
any action to collect sums owing hereunder.

12.8   
Interpretation. For purposes of this Note (a) the words “include,” “includes”
and “including” shall be deemed to be followed by the words “without limitation”; (b) the word “or”
is not exclusive; and (c) the words “herein,” “hereof,” “hereby,” “hereto” and
“hereunder” refer to this Note as a whole. The definitions given for any defined terms in this Note shall apply equally
to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding
masculine, feminine and neuter forms. Unless the context otherwise requires, references herein: (x) to Schedules, Exhibits and
Sections mean the Schedules, Exhibits and Sections of this Note; (y) to an agreement, instrument or other document means such agreement,
instrument or other document as amended, supplemented and modified from time to time to the extent permitted by the provisions
thereof; and (z) to a statute means such statute as amended from time to time and includes any successor legislation thereto and
any regulations promulgated thereunder. This Note shall be construed without

 

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regard
to any presumption or rule requiring construction or interpretation against the party drafting an instrument or causing any instrument
to be drafted.

12.9   
Amendments and Waivers. No term of this Note may be waived, modified or amended except
by an instrument in writing signed by both of the parties hereto. Any waiver of the terms hereof shall be effective only in the
specific instance and for the specific purpose given. 

12.10 Headings.
The headings of the various Sections and subsections herein are for reference only and shall not define, modify, expand or limit
any of the terms or provisions hereof.

12.11 No Waiver;
Cumulative Remedies. No failure to exercise and no delay in exercising on the part of the Noteholder, of any right, remedy,
power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy,
power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or
privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies,
powers and privileges provided by law.

12.12 Severability.
If any term or provision of this Note is invalid, illegal or unenforceable in any jurisdiction, such invalidity, illegality or
unenforceability shall not affect any other term or provision of this Note or invalidate or render unenforceable such term or provision
in any other jurisdiction. Upon such determination that any term or other provision is invalid, illegal or unenforceable, the parties
hereto shall negotiate in good faith to modify this Note so as to effect the original intent of the parties as closely as possible
in a mutually acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to
the greatest extent possible.

[signature page follows]

 

 

 

 

 

 

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IN WITNESS WHEREOF, the Borrower has executed this Note
as of the Effective Date.

 

	BORROWER:
	 	 
	DAYBREAK OIL AND GAS, INC.
	 	 
	By:	/s/ KAROL L ADAMS
	Name:	Karol L Adams
	Title:	Corporate Secretary and Chief Compliance Officer
	 	 
	 	 
	 	 
	NOTEHOLDER:
	 	 
	/s/ JAMES FORREST WESTMORELAND
	 	 
	/s/ ANGELA MARIE WESTMORELAND
	 	 
	Name:	JAMES FORREST WESTMORELAND and ANGELA MARIE WESTMORELAND, Co-Trustees of the James and Angela Westmoreland Revocable Trust

 

 

 

 

 

 

 

 

 

 

 

 

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EXHIBIT
a

COLLATERAL

 

		(a)	“Collateral” shall mean all of Borrower’s present and future right,
title and interest in, to and under the following described property (unless otherwise defined herein, each capitalized term used
herein shall have the meaning given to it in the UCC (as hereinafter defined)): all of the Borrower’s oil and gas assets
located in Kern County, California, and such other collateral, all as described in the Deed of Trust.Exhibit 10.2

Exhibit 10.2

 

	 	 
	
        Recording Requested By:

        JAMES FORREST WESTMORELAND and ANGELA MARIE WESTMORELAND,
        Co-Trustees of the James and Angela Westmoreland Revocable Trust
	 
	 	 
	
        When Recorded Mail To:

        James F. Westmoreland

        1414 S. Friendswood Dr., Suite 212

        Friendswood, TX 77546

         
	
        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

 

December 22, 2020

 

FROM

 

DAYBREAK OIL AND GAS, INC.

(“Mortgagor”)

 

TO

 

JAMES FORREST WESTMORELAND and ANGELA MARIE
WESTMORELAND, Co-Trustees of the James and Angela Westmoreland Revocable Trust

(“Trustee”)

 

In Trust for the Benefit of

 

JAMES FORREST WESTMORELAND and ANGELA MARIE
WESTMORELAND, Co-Trustees of the James and Angela Westmoreland Revocable Trust, 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.

 

 

    	 

 

    	 

    

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 December 22, 2020, from DAYBREAK OIL AND GAS, INC., a Washington corporation (herein called “Mortgagor”),
1101 N. Argonne Road, Suite A-211, Spokane Valley, WA, to JAMES FORREST WESTMORELAND and ANGELA MARIE WESTMORELAND, Co-Trustees
of the James and Angela Westmoreland Revocable Trust, residents of the State of Texas, as Trustee
(herein called “Trustee”) whose address is 3910 Longherridge Dr., Pearland, TX 77581, for
the benefit of JAMES FORREST WESTMORELAND and ANGELA MARIE WESTMORELAND, Co-Trustees of the James and Angela Westmoreland
Revocable Trust, residents of the State of Texas whose address is 3910 Longherridge
Dr., Pearland, TX 77581 (the “Lender”), as lender pursuant to that
certain Secured Promissory Note (the “Note”) dated of even date herewith. 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 $155,548.34 (“Loan Amount”).

 

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 in 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 in 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; 

 

(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

 

    	2 

 

    	 

    

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 to mean Permitted Liens under as defined in Annex
I hereto and the specific exceptions and encumbrances affecting each of the Mortgaged Properties as described on Exhibit
“A” 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) 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;

 

(g)all
of Mortgagor’s Oil and Gas Assets located in Kern County, California, whether or not associated with the Leases listed in
Exhibit “A” or the assets described in (a) through (f), above;

 

(h)all
other liquid or gaseous hydrocarbon licenses, leases, fee mineral interests, term mineral interests, subleases, mineral servitudes,
farm-outs, royalties, overriding royalty and royalty interests, non-consent interests arising out of or pursuant to contracts,
net profit interests, net revenue and profit interests, oil payments, production payments, production payment interests and similar
interests and estates, which in each instance relate to the any of the assets described in Paragraphs (a) through (f) above,
including all reserved or residual interests of whatever nature and all reversionary or carried interests relating to any of the
foregoing;

 

(i)all
surface leases, rights-of-way, franchises, easements, servitudes, licenses, privileges, tenements, hereditaments and appurtenances
now existing or in the future obtained in connection with any of the assets described in Paragraphs (a) through (f) above,
and all other items of value and incident thereto which Mortgagor may, at any time, have or be entitled;

 

(j)all
presently existing and future agreements entered into between Mortgagor and any third party that provide for the acquisition by
Mortgagor of any interest in any of the properties or interests described in Exhibit “A” or that relate
to any of the properties and interests described in Exhibit “A”; and

 

(k)all
and any different and additional rights of any nature, of value or convenience in the enjoyment, development, operation or production,
in any way, of any property or interest included in any of the foregoing clauses, and in all revenues, income, rents, issues, profits
and other benefits arising therefrom or from any contract now in existence or hereafter entered into pertaining thereto, and in
all rights and claims accrued or to accrue for the removal by anyone of Hydrocarbons from, or other act causing damage to, any
of such properties or interests;

 

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.

 

    	3 

 

    	 

    

       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 and performance of the Obligations, including, without limitation,
any and all present or future indebtedness, obligations and liabilities of Mortgagor incurred under, arising out of or in connection
with the Loan bearing interest and payable as provided therein, with such Loan 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 Obligations 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, 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

 

    	4 

 

    	 

    

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       For
the purpose of additionally securing the payment of the Obligations and to facilitate the discharge of any of the Obligations 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 December 22, 2020, 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”). Mortgagor directs and instructs each purchaser of the Hydrocarbons to, upon the
receipt of written instruction from the Lender, pay all of the proceeds of runs directly into any receivables account that the
Lender may establish from time to time upon notice to Mortgagor (a “Receivables Account” until such time
as such purchaser has been furnished evidence that all Obligations has been paid and that the lien evidenced hereby has been released.
Mortgagor authorizes the foregoing receipt and collection 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 the Receivables Account.

 

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.

 

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 Obligations 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 Obligations, and nothing herein contained
shall be construed as limiting the Lender to the collection of any of the Obligations out of the proceeds of runs. The Obligations
shall continue as the absolute and unconditional obligation of Mortgagor to pay, as provided in the Note or other instruments evidencing
the Obligations, 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 Obligations are 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
term “Event of Default” as used in this instrument shall mean the occurrence of an Event of Default under
the Note.

 

    	5 

 

    	 

    

 

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 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 Obligations 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 Obligations 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.

 

    	6 

 

    	 

    

 

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 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 Obligations 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 Obligations 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 Obligations, 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 Obligations, 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 Washington Uniform 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 Washington 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
Obligations including, without limitation, the Note. Mortgagor, as Debtor (and in this Article VII and otherwise

 

    	7 

 

    	 

    

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 Obligations or to apply it on the principal and interest
or other amounts owing on any of the Obligations, 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 Obligations and the Debtor shall be liable therefor.

 

(e)Should
Secured Party elect to exercise its rights under Washington 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 Washington 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.

 

(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 Washington 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.

 

    	8 

 

    	 

    

 

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

 

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

 

    	9 

 

    	 

    

 

8.8       For
the convenience of the parties, this instrument may be executed and acknowledges in multiple counterparts. For recording purposes,
various counterparts have been executed and acknowledged 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 and acknowledged 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]

 

 

 

 

 

 

 

 

 

 

 

    	10 

 

    	 

    

       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/ KAROL L ADAMS
	Name:	Karol L Adams
	Title:	Corporate Secretary and Chief Compliance Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    	11 

 

    	 

    

 

	STATE OF	 	)
	 	 	)ss.
	County of	 	)

 

 

On __________________, before me, ___________________, personally
appeared _______________, who 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/she executed the same in his/her authorized capacity, and that by his/her signature
on the instrument, the person, or the entity upon behalf of which the person acted, executed the instrument.

 

I certify under penalty
of perjury under the laws of the State of ____________________ that the foregoing paragraph is true and correct.

 

WITNESS my hand and official seal.

 

 

_________________________________ (Notary Seal)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    	Exhibit A

 

    	 

    

EXHIBIT A

 

The Leases

 

 

 

 

 

 

 

 

 

 

 

 

 

    	Exhibit A

 

    	 

    

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;

		(h)	Liens arising by operation of law; and

		(i)	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.

    	 

 

    	 

    

“Oil and Gas Liens”
means (a) Liens arising under oil and gas leases, overriding royalty agreements, net profits agreements, royalty trust agreements,
preferential rights 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.

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