Document:

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.

         

        

        

        MORTGAGE, DEED OF TRUST, ASSIGNMENT OF PRODUCTION,

        SECURITY AGREEMENT AND FINANCING STATEMENT

         

        
            	
                        THE STATE OF CALIFORNIA

                    	
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                        COUNTY OF

                    	
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                        KERN

                    	
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        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. 

         

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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

        

        

        

        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

        

        

        

        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

        

        

        

          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 ________________

    

         

        

        

        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

        

        

          

          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 ITECHNICAL AND CONSULTING SERVICES AGREEMENT

         

        This TECHNICAL AND CONSULTING SERVICES AGREEMENT (this “Agreement”) is effective as of September 17, 2010 (the “Effective Date”), by and between WELL WORKS, LLC, a Utah limited liability company (“Well
        Works”), and DAYBREAK OIL AND GAS, INC., a Washington corporation (together with its successors and assigns, “Daybreak”). Well Works and Daybreak are hereinafter collectively referred to as the “Parties” and each may be individually referred to as a “Party.”

         

        RECITALS

         

        WHEREAS, this Agreement is entered into simultaneously in connection with and in consideration of that certain Promissory Note of even date herewith (the “Promissory Note”) by Daybreak Oil and Gas, Inc. in favor of Well Works, LLC;

         

        WHEREAS, Daybreak is an independent oil and gas exploration company engaged in the exploration, development and production of oil and gas; 

         

        WHEREAS, Well Works owns the Perkins-Martin-Dial lease and the J.J. Perkins lease in Hutchinson County, Texas (the “Leases”), a description of which is set forth in Schedule A; and

         

        WHEREAS, the Parties desire to enter into this Agreement to set forth the terms and conditions upon which Daybreak will provide certain technical and consulting services to Well Works in connection with the Leases according to the terms herein.

         

        NOW, THEREFORE, in consideration of the foregoing, the respective undertakings of the Parties herein and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Parties hereby agree as follows:

         

        
            	
                         

                    	
                        1.

                    	
                        Defined and Other Terms.

                    

        

         

        (a)       “Dollars” means dollars, the legal currency of the U.S.A.

         

        (b)       “Fully Loaded Costs” means the amounts paid or incurred by, or on behalf of Daybreak, its successors or assigns in connection with performing the Services and supplying, directly or indirectly, employees, personnel, equipment and facilities to provide the Services (other than the
        wages, salaries, benefits and employment Taxes of employees and personnel of the Company providing the Services), but including a reasonable allocation of direct and indirect overhead expenses (including equipment, facilities, rent, utilities, legal and administrative costs related to this Agreement, and any business and occupation or other Taxes attributable to the performance of the Services) and all costs and expenses incurred by Daybreak in performing the Services, including travel
        expenses, contractor and subcontractor costs, permits, fees and retainers.

         

        (c)       “Governmental Entity” means any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, taxing, regulatory or administrative functions of or pertaining to government, any province, 

         

        1

        

        

        

        commonwealth, territory, possession, county, parish, town, township, village or municipality, whether now existing or hereafter constituted or existing.

         

        (d)       “Losses” means claims, liabilities, damages, losses, costs, expenses (including, but not limited to, settlements, judgments, court costs, and regardless of whether legal proceedings are instituted, reasonable attorneys’ fees), fines, or penalties.

         

        (e)       “Person” means any individual, corporation (including any non-profit corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization, labor union, Governmental Entity or other entity.

         

        (f)        “Taxes” means all taxes, charges, fees, levies, or other assessments, including, but not limited to, all net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, withholding, consumption, payroll, employment, social security
        (including health, welfare, pension and workman’s accidental compensation insurance), unemployment, excise, estimated, severance, stamp, occupation, property or other taxes, customs duties, fees, assessments or charges of any kind whatsoever, including all interest and penalties thereon, imposed by any taxing authority or other Governmental Entity, domestic or foreign.

         

        Any reference in this Agreement to a statute shall be to such statute, as amended from time to time, and to the rules and regulations promulgated thereunder.

         

        
            	
                         

                    	
                        2.

                    	
                        Services.

                    

        

         

        (a)       Services. During the Term, subject to the terms and conditions hereof, Daybreak shall perform the services set forth in Schedule B (the “Services”) in connection with the Leases.
        Except as expressly agreed herein, in connection with the performance of the Services, in no event shall Daybreak be obligated to: (i) make modifications to its existing systems or business operations; (ii) acquire additional assets, equipment, rights or properties (including computer equipment, software, furniture, furnishings, fixtures, machinery, vehicles, tools and other tangible or intangible property) that are not in the ordinary course of operation of Daybreak; (iii) hire
        additional employees or personnel; or (iv) be required to obtain any bonds or insurance in connection with the performance of the Services. 

         

        (b)       Scope of Services. If the Parties agree upon a new project or additional services, then a new Schedule, in the form of Schedule B, will be prepared for the new project or services. The new Schedule will be subject to approval by both Parties
        and will be subject to the terms and conditions of this Agreement.

         

        (c)       Access. Well Works will permit any of Daybreak’s personnel who are supporting this Agreement reasonable access to its equipment, office space, real property, telecommunications and computer equipment and systems, and any other areas and equipment necessary or required to perform the Services. Well Works shall ensure observance of all
        safety and security rules and regulations applicable to Well Works’ facilities by such personnel. 

         

        (d)       Independent Contractor. Daybreak will be in an independent contractor relationship to Well Works at all times, and neither Daybreak nor any employee or subcontractor 

         

        2

        

        

        

        of Daybreak will be, or be deemed to be, and employee or agent of Well Works. Nothing contained herein, shall be deemed to constitute a joint venture or partnership between Well Works and Daybreak. Under no circumstances shall Daybreak be deemed to be the Operator of the Leases unless an operating agreement between Daybreak and Well Works shall be entered into, in accordance with
        Schedule B.

         

        (e)       Subcontracting. Daybreak may provide the Services at Daybreak facilities. Daybreak may subcontract all or any part of its obligations under this Agreement to an affiliate, subsidiary or third party contractor, but any such subcontracting to a third party contractor by Daybreak will not relive
        Daybreak of any of its obligations under this Agreement.

         

        (f)        Monthly Meeting. The Parties agree on a monthly basis during the Term of this Agreement, or on such other frequency as mutually agreed to by the parties, to reconcile their respective accounts receivable and accounts payable incurred in connection with the performance of the Services
        under this Agreement and to update each other on the status of, and the progress made with respect to, each of the Services and any other matters relating to this Agreement. Each party has the right to designate representatives to participate in such meetings, including counsel, accountants and other advisors.

         

        (g)       Record Keeping. Each Party agrees to maintain or cause to be maintained true and correct records of all receipts, invoices, reports and such other documents as are customarily maintained by it for its own operations relating to the Services rendered hereunder, including records evidencing
        third party costs and expenses. During the Term of this Agreement and for the period ending five years after the termination of this Agreement, each Party shall grant the other Party, its auditors or other representatives the right to inspect and review such records during regular business hours following reasonable prior written notice of any such inspection. 

         

        
            	
                         

                    	
                        3.

                    	
                        Compensation.

                    

        

         

        (a)       Calculation and Payment. In consideration for the Services provided by Daybreak pursuant to this Agreement, Daybreak shall invoice, and Well Works shall pay to Daybreak within thirty (30) days of the date of such invoice, a fee equal to the Fully Loaded Costs, whether incurred during the Term
        or thereafter as a result of the termination of this Agreement. 

         

        (b)       Method of Payment. All payments hereunder shall be net of all Taxes which Well Works is obliged to withhold or deduct by applicable law and shall be made in Dollars by wire transfer to the bank account specified by Daybreak in writing from time to time. After 30 days, any outstanding invoices
        will accrue interest at the rate of 2% until paid in full.     

         

        (c)       Election to Receive Working Interest. Daybreak shall have the right to elect to receive a 10% (or such higher percentage) working interest on the Leases commencing with the 6-month anniversary date of the Effective Date by providing notice to Well Works. Upon such election, the Parties agree
        to use reasonable efforts to negotiate, execute and deliver mutually agreeable documentation regarding such working interest.

         

        3

        

        

        

        
            	
                         

                    	
                        4.

                    	
                        Taxes.

                    

        

         

        Well Works is responsible for, and will pay, any and all federal, state or local Taxes (other than taxes based on Daybreak’s income), including sales and use taxes imposed in connection with the Services provided under this Agreement. Well Works will indemnify Daybreak and hold Daybreak harmless from and against any such Taxes and will promptly reimburse Daybreak for the amount of
        any Taxes that Daybreak is required to pay as a result of Well Work’s failure to pay such Taxes.

         

        
            	
                         

                    	
                        5.

                    	
                        Representations and Warranties.

                    

        

         

        (a)       Representations and Warranties of Well Works. Well Works hereby represents and warrants to Daybreak that: Well Works is a legal entity duly organized and validly existing under the laws of the state of Utah; Well Works has the requisite corporate power and authority to execute and deliver this
        Agreement and perform its obligations hereunder and the legal right and entitlement to cause the Services to be performed on the Leases; this Agreement has been duly executed and delivered by Well Works; and this Agreement constitutes a valid and binding obligation of Well Works, enforceable in accordance with its terms, subject to the applicable laws of bankruptcy, insolvency, moratorium, reorganization, 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); and that Well Works will comply with United States laws protecting the civil rights of Daybreak employees while providing Services hereunder, regardless of the location of the work performed, including but not limited to Title VII, the Age Discrimination in Employment Act and the Americans with Disabilities Act. 

         

        (b)       Representations and Warranties of Daybreak. Daybreak hereby represents and warrants to Well Works that: Daybreak is a legal entity duly organized and validly existing under the laws of the state of Washington; Daybreak has the requisite corporate power and authority to execute and deliver this
        Agreement and perform its obligations hereunder; this Agreement has been duly executed and delivered by Daybreak; and this Agreement constitutes a valid and binding obligation of Daybreak, enforceable in accordance with its terms, subject to the applicable laws of bankruptcy, insolvency, moratorium, reorganization, or similar laws affecting the enforcement of creditors’ rights generally.

         

        
            	
                         

                    	
                        6.

                    	
                        Confidential Information.

                    

        

         

        (a)       Scope. For purposes of this Agreement, “Confidential Information” means all non-public information owned or used by a Party and supplied to or obtained by the other Party, whether in oral or documentary form, during the course of
        performing its obligations under this Agreement, including trade secrets, proprietary technology, know-how or other non-public or proprietary business or technical information. Confidential Information shall not include information that (i) at the time of disclosure or thereafter is generally available to the public (other than as a result of a disclosure in violation of this Agreement directly or indirectly by a receiving Party or its Representatives (defined below)),
        (ii) was available to the receiving Party on a non-confidential basis from a source other than the disclosing Party or its Representatives, provided that such source was not known by the receiving Party to be bound by 

         

        4

        

        

        

        a confidentiality agreement regarding the disclosing Party, or (iii) can be shown to have been independently acquired or developed by the receiving Party without violating any of the receiving Party’s obligations.

         

        (b)       Use. Each receiving Party shall use Confidential Information solely for the purpose of performing its obligations under this Agreement, and shall not disclose Confidential Information of a disclosing Party except to its, or its Subsidiaries’, directors, officers and employees and legal,
        financial or other advisors who need to know such information solely for the purpose of allowing the receiving Party to perform its obligations under this Agreement (the Persons to whom such disclosure is permissible being collectively called “Representatives”). Before disclosing Confidential Information of the disclosing Party to its Representatives, each receiving Party shall inform its Representatives of the confidential
        nature of the Confidential Information and shall direct its Representatives to comply with the terms of this Section 6. Each Party agrees to be responsible for any breach of this Section 6 by its Representatives.

         

        (c)       Certain Disclosures. In the event that a receiving Party or its Representative becomes legally compelled (by deposition, interrogatory, request for documents, subpoena, civil investigative demand or similar process) to disclose Confidential Information of a disclosing Party, such receiving
        Party shall use reasonable efforts to provide the disclosing Party with prior written notice of such requirements so that the disclosing Party may seek a protective order or other appropriate remedy and/or waive compliance with the terms of this Section 6. In the event that such protective order or other remedy is not obtained, the receiving Party shall furnish only that portion of the Confidential Information of the disclosing Party
        that is legally required and shall exercise reasonable efforts to obtain assurance that confidential treatment will be accorded to such Confidential Information.

         

        (d)       Destruction or Return. Each receiving Party will, and will cause its Representatives to, at the request of the disclosing Party, destroy or return the Confidential Information without retaining copies, summaries or compilations thereof, if and when this Agreement is terminated or
        expires.

         

        (e)       Survival of Obligations. The provisions of this Section 6 shall survive the termination of this Agreement.

         

        
            	
                         

                    	
                        7.

                    	
                        Term and Termination.

                    

        

         

        (a)       Term. The “Term” of this Agreement will commence on the Effective Date and will end on the one year anniversary date of the Effective Date, unless earlier terminated pursuant to this Section 7. The “Term” may be
        extended by the Parties by agreement in writing, under mutually agreeable terms. Obligations under this Agreement that survive termination for any reason are: Sections 3, 4, 6, 8, 9 and 14(a), 14(b) and 14(p). 

         

        
            	
                         

                    	
                        (b)

                    	
                        Termination for Cause.

                    

        

         

        5

        

        

        

        (i)        Either Party will have the option, but not the obligation, to terminate this Agreement in its entirety, except as otherwise provided herein, for cause immediately effective upon delivery of notice to the other Party:

         

        (A)      if the other Party materially breaches any of its obligations or fails to perform its responsibilities under this Agreement, except for Well Works’s failure to make payments when due, which will be governed by Section 7(b)(ii), and either (I) the breaching Party fails to cure such breach or failure within 45 days after receipt of written
        notice thereof or (II) such breach or failure is not reasonably curable within 45 days after receipt of notice thereof; 

         

        (ii)       Daybreak shall have the option, but not the obligation, to terminate this Agreement in its entirety, except as otherwise provided herein, immediately effective upon delivery of notice to Well Works if Well Works fails to pay when due any amounts Well Works owes to Daybreak under Section 3 or any other Section of this Agreement.

         

        (c)       Termination at the Option of Either Party. Either Party shall have the option, but not the obligation, to terminate this Agreement in its entirety, except as otherwise provided herein, immediately effective upon delivery of 30 days’ notice to the other Party.

         

        (d)       Termination for Insolvency. Either Party shall have the option, but not the obligation, to terminate this Agreement in its entirety, except as otherwise provided herein, without cause if the other Party (i) becomes insolvent or is unable to meet its debts as they mature, (ii) files a
        voluntary petition in bankruptcy or seeks reorganization or to effect a plan or other arrangement with creditors generally, (iii) files an answer or other pleading admitting, or fails to deny or contest, the material allegations of an involuntary petition filed against it pursuant to any act of any Governmental Entity relating to bankruptcy, arrangement or reorganization, (iv) shall be adjudicated bankrupt or shall make an assignment for the benefit of its creditors generally,
        (v) shall apply for, consent to or acquiesce in the appointment of any receiver or trustee for all or a substantial part of its property, (vi) is appointed a receiver or trustee that is not discharged within thirty (30) days after the date of such appointment, (vii) is ordered to suspend business or commence liquidation procedures, or (viii) has filed against it a petition for attachment, provisional attachment or provisional disposition, or procedures for the
        commencement of compulsory execution or disposition of tax and public dues. A Party may exercise its termination option pursuant to this Section 7(d) by delivering to the other Party prior written notice of such termination specifying the termination date, and such termination shall be effective as of such specified termination date.

         

        (e)       Termination Upon Force Majeure Event. If a Force Majeure Event affecting the Party who is not the non-performing party continues for more than thirty (30) days after the date that notice was delivered pursuant to Section 13, then the Party who
        delivered notice pursuant to Section 13 shall have the option, but not the obligation, to terminate this Agreement in its entirety, except as otherwise provided herein, by delivering to the other Party prior written notice of such termination identifying the date of termination.

         

        (f)        Termination for Volume. It is the intent of the Parties that the provision of the Services by Daybreak pursuant to this Agreement not materially impact the ordinary course of

         

        6

        

        

        

        business and operations of Daybreak. If during the Term, the Services materially impact the business and operations as measured by factors described in subsections (i), (ii), (iii) or (iv) of Section 2(a), Daybreak may terminate this Agreement by providing 30 days’ written notice to Wells Works or if Daybreak does not elect to terminate this Agreement pursuant to the foregoing, Wells Works agrees to
        use reasonable efforts to renegotiate the terms of this Agreement, including the terms regarding compensation, in order to reach a mutual agreement regarding the provision of the Services as modified pursuant to such renegotiation.

         

        (g)       Effect of Termination. All obligations of Daybreak under this Agreement to provide Services will cease upon expiration or termination of this Agreement. Daybreak shall not be required to provide or make available any termination or transition assistance for the benefit of Well Works.
        Termination of this Agreement for any reason under this Section 7 shall not affect or limit, except as expressly provided in this Agreement, any  liabilities or obligations of either Party arising before such termination, including the payment obligations pursuant to Section 3.

         

        8.         Negotiation between Parties. In the event of a controversy, dispute or claim arising out of, in connection with, or in relation to the existence, interpretation, performance, nonperformance, validity or breach of this Agreement or otherwise arising out of, or in any way
        related to this Agreement or the transactions contemplated hereby, including, without limitation, any claim based on contract, tort, statute or constitution (collectively, “Disputes”), the Parties shall negotiate in good faith for a reasonable period of time to settle such Disputes, provided such reasonable period shall not, unless otherwise agreed by the Parties in writing, exceed 45 days from the date one of the Parties
        first provides written notice to the other that a Dispute exists and requests negotiation pursuant to this Section 8. If after such reasonable period the Parties are unable to settle such Dispute (and, in any event, unless otherwise agreed in writing by the Parties, after sixty (60) days have elapsed from the date one of the Parties served notice of a Dispute requesting negotiation pursuant to this Section
        8), such Dispute shall be determined, at the request of any Party, by arbitration in accordance with Section 14(a).

         

        
            	
                         

                    	
                        9.

                    	
                        Indemnification.

                    

        

         

        (A)      INDEMNIFICATION OF DAYBREAK. WELL WORKS SHALL INDEMNIFY AND HOLD HARMLESS DAYBREAK, THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, CONTRACTORS, SUBCONTRACTORS, SHAREHOLDERS, PARTNERS, REPRESENTATIVES, CONSULTANTS AND AGENTS (THE “DAYBREAK INDEMNIFIED
        PARTIES”) FROM AND AGAINST ANY LOSSES THAT ANY OF THE DAYBREAK INDEMNIFIED PARTIES MAY SUSTAIN OR INCUR ARISING OR ALLEGEDLY ARISING IN CONNECTION WITH OR RELATED TO (I) THIS AGREEMENT, (II) ANY AMENDMENT TO THIS AGREEMENT, (III) ANY ADDITIONAL AGREEMENT OR (IV) THE PERFORMANCE OF SERVICES OR ADDITIONAL SERVICES REQUESTED BY, OR RENDERED FOR THE BENEFIT OF, WELL WORKS, EXCEPT TO THE EXTENT SUCH LOSS AROSE OUT OF THE WILLFUL MISCONDUCT OR GROSS
        NEGLIGENCE OF THE DAYBREAK INDEMNIFIED PARTIES IN THE PERFORMANCE OR NONPERFORMANCE OF THIS AGREEMENT.

         

        7

        

        

        

        

        (b)       Notice of Claim. In the event that an Daybreak Indemnified Party is made a defendant in or party to any action or proceeding, judicial or administrative, instituted by any third party for the liability or the costs or expenses of any Losses (any such third party action or proceeding being
        referred to as a “Claim”), the Daybreak Indemnified Party shall give Well Works prompt notice thereof. The failure to give such notice shall not affect any Daybreak Indemnified Party’s ability to seek reimbursement unless such failure has materially and adversely affected either Party’s ability to defend successfully a Claim. 

         

        (c)       Contesting Claims. Each Daybreak Indemnified Party shall be entitled to participate in such contest and defense and to be represented by attorneys of its or their own choosing. If the Daybreak Indemnified Party elects to participate in such defense, the Daybreak Indemnified Party will
        cooperate with Well Works in the conduct of such defense.

         

        (d)       Compromise of Claims. None of the Daybreak Indemnified Parties or Well Works may concede, settle or compromise any Claim without the consent of both of the Parties. Notwithstanding any provisions in this Section 10, Well Works shall not be liable for any monetary settlement made by the
        Daybreak Indemnifies Parties without the consent of Well Works, which consent shall not be unreasonably withheld.

         

        (e)       Other Claims. In the event any Daybreak Indemnified Party should have a right of indemnification against Well Works that does not involve a Claim, the Daybreak Indemnified Party shall deliver a written notice of such claim with reasonable promptness to Well Works. If Well Works notifies the
        Daybreak Indemnified Party in writing that it does not dispute the claim described in such notice, the Loss in the amount specified in the Daybreak Indemnified Party’s notice will be conclusively deemed a liability of Well Works and Well Works shall pay the amount of such Loss to the Daybreak Indemnified Party on demand in immediately available funds. If Well Works has not so notified the Daybreak Indemnified Party within thirty (30) days after delivery of the said notice by
        the Daybreak Indemnified Party, the Parties shall cause the appropriately designated Persons of each of Well Works and the Daybreak Indemnified Party to negotiate in good faith a resolution of such Dispute for at least sixty (60) days before resorting to an arbitration pursuant to Section 14(a).

         

        10.       Consequential and Other Damages. The Daybreak Indemnified Parties shall not be liable to Well Works, or to any officer, director, employee, shareholder, partner, Representative, consultant or agent of Well Works, whether in contract, tort (including negligence and strict liability) or
        otherwise, for any special, punitive, indirect, incidental or consequential damages whatsoever.

         

        11.       NO WARRANTY. NONE OF THE NAME INDEMNIFIED PARTIES MAKE ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, REGARDING ANY MATTER WITH RESPECT TO THE SERVICES, INCLUDING THE MERCHANTABILITY, SUITABILITY, ORIGINALITY, FITNESS FOR A PARTICULAR USE OR
        PURPOSE, OR RESULTS TO BE DERIVED FROM THE SERVICES.

         

        12.       Limitation of Liability. In no event will the aggregate liability of Daybreak to Well Works or any other Person arising out of or relating to the provision of Services, whether 

         

        8

        

        

        

        arising in contract, tort or otherwise, ever exceed the aggregate amount of Fully Loaded Costs paid by Well Works to Daybreak with respect to the Services. 

         

        13.       Excused Performance. Neither Party will be deemed to be in default or breach hereunder, or will be liable to the other, for failure to perform any of its non-monetary obligations under this Agreement for any period and to the extent that such failure results from any event or
        circumstance beyond that Party’s reasonable control, including acts or omissions of the other Party or third parties, natural disasters, riots, blockage, war, acts of terrorism, civil disorder, fire, floods, labor strikes, orders, decisions, acts of or interference (actual or threatened) or regulations of Governmental Entities, force majeure (including acts of God) labor disputes or failures or fluctuations in electrical power, heat, light, air conditioning or telecommunications
        equipment or lines, and which a Party could not have prevented by reasonable precautions or could not have remedied by the exercise of reasonable efforts (each, a “Force Majeure Event”). Notwithstanding the foregoing, if a Party cannot perform under this Agreement for an aggregate of thirty (30) days during the Term due to such event or circumstance, the other Party may deliver notice to the non-performing Party describing
        the effect on it and providing notice of its intention to terminate this Agreement pursuant to Section 7(c).

         

        
            	
                         

                    	
                        14.

                    	
                        General Provisions.

                    

        

         

        (a)       Governing Law and Disputes. This Agreement shall be governed by and interpreted and construed in accordance with the laws of the state of Texas without regard to any rule or principle of conflict of laws therein contained. Any dispute, claim or controversy arising out
        of or in connection with this Agreement shall be finally settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association Rules by three arbitrators, one arbitrator appointed by each Party within 30 days after the respondent receives notice of the filing of the arbitration and a third neutral arbitrator appointed by the two arbitrators designated by the Parties. The arbitration shall be conducted in the English language at Houston,
        Texas, U.S.A. Judgment for enforcement on the award may be entered by any court of competent jurisdiction.

         

        (b)       Future Cooperation. Each Party agrees to act reasonably and in good faith in connection with this Agreement and the activities contemplated under this Agreement. Daybreak and Well Works recognize that during the Term, either Party may determine that additional services may be necessary. In the
        event that either Party determines that such additional services are required, each Party hereby agrees to negotiate in good faith for the provision of such additional services.

         

        (c)       Severability. If any provision of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, then the remainder of the provisions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. A provision
        that is valid, legal and enforceable shall be substituted for the severed provision.

         

        (d)       General Assignment. This Agreement and the rights and obligations hereunder shall not be assigned by either Party to any other Person without the prior written 

         

        9

        

        

        

        consent of the other Party and any assignment not in conformance with the foregoing shall be null and void ab initio; notwithstanding the foregoing, Daybreak may assign this Agreement or delegate its performance of the Services to a subsidiary or affiliate of Daybreak without the consent of Well Works or any other Party. This Agreement
        and all of the provisions hereof shall be binding upon and inure to the benefit of the Parties hereto and their respective successors and assigns.

         

        (e)       Amendment and Waiver. This Agreement may not be amended or waived except in a writing executed by the Party against which such amendment or waiver is sought to be enforced. No course of dealing between or among any Persons having any interest in this Agreement will be deemed effective to
        modify or amend any part of this Agreement or any rights or obligations of any Person under or by reason of this Agreement.

         

        (f)        Notices. All notices, consents, waivers and other communications required or permitted by this Agreement shall be in writing, and shall be deemed given to a Party when (i) delivered to the appropriate address by hand or by internationally recognized overnight courier service (costs
        prepaid); (ii) sent by facsimile or e-mail with confirmation of transmission by the transmitting equipment; or (iii) received or rejected by the addressee, if sent by certified mail, return receipt requested; in each case to the following addresses, facsimile numbers or e-mail addresses and marked to the attention of the Person (by name or title) designated below (or to such other address, facsimile number, e-mail address or Person as a Party may designate by notice to the
        other Party):

         

        Notices to Daybreak:

         

        Daybreak Oil and Gas, Inc.

        601 W. Main Ave., Suite 1012 

        Spokane, WA 99201

        Attn: James F. Westmoreland, Chief Executive Officer

         

        Notices to Well Works:

         

        Well Works, LLC

        1575 Federal Heights Drive

        Salt Lake City, UT 84103

        Attn: Eric Hale, Managing Member

         

        (g)       Entire Agreement. This Agreement contains the entire understanding of the Parties in respect of the subject matter hereof, and supersedes all prior negotiations and understandings among the Parties, whether written or oral, with respect to the subject matter hereof and constitute a complete
        and exclusive statement of the terms of the agreement between the Parties with respect to the subject matter hereof.

         

        (h)       Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. The 

         

        10

        

        

        

        exchange of copies of this Agreement and of signature pages by facsimile or portable document format (.pdf) shall constitute effective execution and delivery of this Agreement as to the Parties and may be used in lieu of the original Agreement for all purposes. Signatures of the Parties transmitted by facsimile or e-mail shall be deemed to be their original signatures for all
        purposes.

         

        (i)        Effect of Headings. The section headings herein are for convenience only and shall not affect the construction or interpretation of this Agreement.

         

        (j)        Further Assurances. The Parties agree (i) to furnish upon request to each other such further information as reasonably requested, (ii) to execute and deliver to each other such other documents as reasonably requested, (iii) to cooperate in order to maximize income and transaction tax
        efficiency and (iv) to do such other acts and things, all as the other Party may reasonably request for the purpose of carrying out the intent of this Agreement and the documents referred to in this Agreement.

         

        (k)       Incorporation of Schedules. The schedules identified in this Agreement are incorporated herein by reference and made a part hereof.

         

        (l)        Third Party Beneficiaries. The Parties hereby expressly agree and consent to this Agreement being entered into for the benefit of the Daybreak Indemnified Parties for the purposes of Sections 9,
        10, 11, and 12. Well Works further agrees that any duty or obligation to the Daybreak Indemnified Parties stated therein shall, to the fullest extent permitted by law, inure to the benefit of and be deemed to be a duty and obligation to each of the Daybreak Indemnified Parties, which benefit shall be fully enforceable by each of those
        parties.

         

        (m)      Disclaimer of Agency; Independent Contractor. This Agreement shall not be deemed to constitute either Party to be the agent of the other. Well Works and Daybreak acknowledge that Daybreak is an independent contractor and shall perform this Agreement solely as an independent contractor. Neither Party
        has any authority to make any statement, representation, or commitment of any kind or to take any action binding upon the other Party without the other Party’s written consent.

         

        (n)       Construction. This Agreement has been freely and fairly negotiated among the parties. If an ambiguity or question of intent or interpretation arises, this Agreement 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 Agreement. Unless the context requires otherwise, any agreements, documents, instruments or laws defined or referred to in this Agreement 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 Agreement 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 

         

        11

        

        

        

        and vice versa, unless the context requires otherwise. When a reference in this Agreement 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 Agreement unless otherwise indicated. The words “this Agreement,” “herein,” “hereof,” “hereby,”
        “hereunder” and words of similar import refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited.

         

        (o)       Non-solicitation. Wells Works, on behalf it itself, its successors and assigns, agrees that, during the term of this Agreement for the one year period following termination of this Agreement, such Persons will not employ, or solicit the employment of, any Daybreak employee or personnel
        assigned to provide the Services under this Agreement, without the prior express written consent of Daybreak.

         

        [Remainder of Page Intentionally Left Blank]

         

        12

        

        

        

        IN WITNESS WHEREOF, the Parties have executed and delivered this Agreement as of the Effective Date.

         

        
            	 	DAYBREAK OIL AND GAS, INC.
	 	 	 
	
                         

                    	
                        By:

                    	
                      /s/ James F. Westmoreland

                    	 
	 	Name:	James F. Westmoreland	 
	 	Title:	
                      President, Chief Executive Officer and interim principal finance and accounting officer

                    
	 	 	 	 
	 	WELL WORKS, LLC
	 	 	 	 
	 	By:	/s/ Eric Hale	 
	 	Name:	Eric Hale	 
	 	Title:	Managing Member	 

        

         

        Signature Page

        

        

        

        Schedule A

         

        Description of Dial-Perkins Lands and Leases in Hutchinson County, Texas

         

        Perkins-Martin-Dial Lease. Lease No. 01254 (dated January 17, 1936, Recorded                    , as Clerk’s No. 30470 in Vol. 70. Page 562 of the Deed Records of Hutchinson County.
        Texas)

         

        The East 292.5 acres of Section Thirty-Six (36), Block M-23, Texas Central Railroad Company Survey, Abstract Number 909, Certificate Number 1001, Hutchinson County, Texas.

         

        J.J. Perkins, et al. Lease. Lease No. 01126 (dated November 10, 1949, recorded December 7, 1949, as Clerk’s File No. 73483 in Vol. 133, Pages 186-189 of the Deed Records of Hutchinson County, Texas)

         

        The North one-half (l/2) of the Alfred Benton Survey, Certificate 329, patented September 15, 1926, shown in Volume Number 31-A, and being Patent Number 19, and being a part of what is generally known in that area as the Dial Ranch.

         

        Schedule A

        

        

        

        SCHEDULE B

         

        SCOPE OF SERVICES

         

        
            	
                         

                    	
                        1.

                    	
                        Engineering 

                    

        

        
            	
                         

                    	
                        a.

                    	
                        Interview and select for consideration by Well Works technical and field contractors.

                    

        

        
            	
                         

                    	
                        b.

                    	
                        Prepare a well development procedure for consideration by Well Works and get bids for the contractual work.

                    

        

        
            	
                         

                    	
                        c.

                    	
                        Advise regarding the execution of field work-overs, drilling and construction.

                    

        

        
            	
                         

                    	
                        2.

                    	
                        Geological Services

                    

        

        
            	
                         

                    	
                        a.

                    	
                        Review and assess historical field data.

                    

        

        
            	
                         

                    	
                        b.

                    	
                        Provide a reservoir study.

                    

        

        
            	
                         

                    	
                        c.

                    	
                        Prepare a field prognosis.

                    

        

        
            	
                         

                    	
                        3.

                    	
                        Provide weekly communication for Well Works, LLC to update partners on progress as well as provide a forum for questions, input and direction of the field.

                    

        

        
            	
                         

                    	
                        4.

                    	
                        Operating Service and Accounting Support

                    

        

        
            	
                         

                    	
                        a.

                    	
                        Submit Texas RR Commission reports.

                    

        

        
            	
                         

                    	
                        b.

                    	
                        Prepare and provide monthly production reports.

                    

        

        
            	
                         

                    	
                        c.

                    	
                        Sell oil and distribute revenues and royalties.

                    

        

        
            	
                         

                    	
                        d.

                    	
                        If Daybreak becomes the operator of record for the field then standard operating agreement will be signed between Well Works, LLC and Daybreak prior to commencement of the responsibility. Normal operation fee’s would be paid to Daybreak such as per well fee for records, reports, filings, royalty and other field expense payments
                        covered under the standard operating agreement.

                    
	 	 	 

    

        If requested by Daybreak, or if necessary or appropriate for Daybreak to provide the Services, Well Works shall cause Daybreak to be named as an additional insured or loss payee to otherwise be covered under Well Works’ insurance policies and bonds.

         

        Schedule B

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