NOTES TO FINANCIAL STATEMENTS
NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION:
Originally incorporated as Daybreak Uranium, Inc.,
(“Daybreak Uranium”) on March 11, 1955, under the laws of the State of Washington, Daybreak Uranium was organized to explore
for, acquire, and develop mineral properties in the Western United States. In August 1955, the assets of Morning Sun Uranium, Inc. were
acquired by Daybreak Uranium. In May 1964, Daybreak Uranium changed its name to Daybreak Mines, Inc. During 2005, management of the Company
decided to enter the crude oil and natural gas exploration and production industry. On October 25, 2005, the Company’s shareholders
approved a name change from Daybreak Mines, Inc. to Daybreak Oil and Gas, Inc. (referred to herein as “Daybreak” or the “Company”)
to better reflect the business of the Company.
All of the Company’s crude oil production is
sold under contracts that are market-sensitive. Accordingly, the Company’s financial condition, results of operations, and capital
resources are highly dependent upon prevailing market prices of, and demand for, crude oil. These commodity prices are subject to wide
fluctuations and market uncertainties due to a variety of factors that are beyond the control of the Company. These factors include the
level of global demand for petroleum products, foreign supply of crude oil and natural gas, the establishment of and compliance with production
quotas by crude oil-exporting countries, the relative strength of the U.S. dollar, weather conditions, the price and availability of alternative
fuels, and overall economic conditions, both foreign and domestic, crude oil disputes between OPEC members; and national and international
pandemics like the coronavirus outbreak.
NOTE 2 — GOING CONCERN:
Financial Condition
Daybreak’s financial statements for the twelve
months ended February 28, 2022 and February 28, 2021 have been prepared on a going concern basis, which contemplates the realization of
assets and the settlement of liabilities in the normal course of business. Daybreak has incurred net losses since inception and has accumulated
a deficit of approximately $29.5 million and a working capital deficit of approximately
$3.0 million, which raises substantial doubt about the Company’s ability to continue
as a going concern.
Management Plans to Continue as a Going Concern
Revenue
The Company continues to implement plans to enhance
its ability to continue as a going concern. Daybreak currently has a net revenue interest in 20 producing crude oil wells in its East
Slopes Project located in Kern County, California (the “East Slopes Project”). The revenue from these wells has created a
steady and reliable source of revenue. The Company’s average working interest in these wells is 36.6% and the average net revenue
interest is 28.4% for these same wells.
In December 2019, the 2019 novel coronavirus (“COVID-19")
surfaced in Wuhan, China. The World Health Organization declared a global emergency on January 30, 2020, with respect to the outbreak
and several countries, including the United States, Japan, parts of Europe and Australia have initiated travel restrictions to and from
China. The impacts of the outbreak are unknown and rapidly evolving. This widespread health crisis and the governmental restrictions associated
with it, have adversely affected demand for crude oil, depressed crude oil prices, and affected our ability to access capital. These factors,
in turn, have had a negative impact on our operations, and financial condition as evidenced by the unprecedented decline in crude oil
prices and our revenues during this same time period.
On March 27, 2020, the Coronavirus Aid, Relief, and
Economic Security Act commonly referred to as the CARES Act became law. One component of the CARES Act was the paycheck protection program
(“PPP”) which provides small business with the resources needed to maintain their payroll and cover applicable overhead. The
PPP is implemented by the Small Business Administration (“SBA”) with support from the Department of the Treasury. The Company
applied for, and was accepted to participate in this program. On May 11, 2020, the Company received funding for approximately $74,355.
In February 2021, the Company applied for full loan forgiveness and later that month was notified by our lender that the SBA had forgiven
our original loan in full. On March 15, 2021, the Company received $72,800 in funding through the SBA second draw paycheck protection
program. Second Draw PPP loans can be used to help fund payroll costs, including
benefits. Funds can also be used to pay for mortgage interest, rent and utilities over a 24 week period. The Company applied for
full loan forgiveness on this PPP second draw loan and on October 6, 2021, and the SBA notified our lender that the loan was forgiven
and repaid the loan in full.
On October 20, 2021, the Company entered into an Equity
Exchange Agreement (the “Exchange Agreement”) by and between Daybreak, Reabold California LLC, a California limited liability
company (“Reabold”), and Gaelic Resources Ltd., a private company incorporated in the Isle of Man and the 100% owner of Reabold
(“Gaelic”), pursuant to which the parties propose for (i) Daybreak to acquire 100% ownership of Reabold, in exchange for (ii)
Daybreak issuing 160,964,489 shares of its common stock, par value $0.001 (“Common Stock”) to Gaelic (the “Exchange
Shares”), which will result in Reabold becoming a wholly-owned subsidiary of Daybreak and Gaelic becoming the owner of the Exchange
Shares and a major shareholder of Daybreak (the foregoing transaction and the transactions contemplated thereby, the “Equity Exchange”).
At a special meeting of shareholders held on May 20,
2022, shareholders approved the Equity Exchange Agreement between Daybreak, Reabold California, LLC (“Reabold”) and Gaelic
Resources, Ltd. (“Gaelic”). As a result of this approval, on May 25, 2022, the Company proceeded with the acquisition of Reabold
and its producing crude oil and natural gas properties in California. The acquisition was completed by Daybreak issuing 160,964,489 common
stock shares to Gaelic, along with the customary closing terms and conditions for acquisitions of this nature.
Also during the special meeting of shareholders, approval
was granted to Amend and Restate the Company’s Articles of Incorporation. This would allow for the increase in the number of authorized
common stock shares of the Company from 200,000,000 shares to 500,000,000 shares. The increase in common stock shares will give the Company
enough authorized common stock shares to complete the transaction with Reabold and Gaelic. Also, all the Preferred stock classification
was eliminated.
In conjunction with the Company’s efforts to
acquire Reabold, and as a condition of closing the acquisition, the Company was to secure a capital raise of $2,500,000 through the issuance
of shares of the Company’s common stock. The commitment for that capital raise was executed on May 5, 2022, and subsequently 128,125,000
shares were issued.
As of February 28, 2022, all of the conditions for
the closing of the Exchange Agreement had not yet been met. The Company was continuing to work towards satisfying all of the Exchange
Agreement conditions including having certain conditions of the Exchange Agreement approved by the Company’s shareholders. Please
refer to Note 16 – Subsequent Events in the Notes to these financial statements.
The Company anticipates revenue will continue to increase
as the Company participates in the drilling of more wells in the East Slopes Project in California. Daybreak’s sources of funds
in the past have included the debt or equity markets and the sale of assets. While the Company has experienced periodic revenue growth,
which has resulted in positive cash flow from its crude oil and natural gas properties, it has not yet established a positive cash flow
on a company-wide basis. It will be necessary for the Company to obtain additional funding from the private or public debt or equity markets
in the future. However, the Company cannot offer any assurance that it will be successful in executing the aforementioned plans to continue
as a going concern.
Daybreak’s financial statements as of February
28, 2022 and February 28, 2021 do not include any adjustments that might result from the inability to implement or execute Daybreak’s
plans to improve our ability to continue as a going concern.
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
Cash and Cash Equivalents
Cash equivalents include demand deposits with banks
and all highly liquid investments with original maturities of three months or less. The Company has in the past maintained balances in
financial institutions where deposits may exceed the federally insured deposit limit of $250,000. The Company has not experienced any
losses from such accounts and does not believe it is exposed to any significant credit risk on cash.
Accounts Receivable
The Company routinely assesses the recoverability
of all material trade and other receivables. The Company accrues a reserve on a receivable when, based on the judgment of management,
it is probable that a receivable will not be collected and the amount of any reserve may be reasonably estimated. Actual write-offs may
exceed the recorded allowance. Substantially all of the Company’s trade accounts receivable result from crude oil in California
or joint interest billings to its working interest partners in California. This concentration of customers and joint interest owners may
impact the Company’s overall credit risk as these entities could be affected by similar changes in economic conditions as well as
other related factors. Trade accounts receivable are generally not collateralized. There were no allowances for doubtful accounts for
the Company’s trade accounts receivable at February 28, 2022 and February 28, 2021.
Crude Oil and Natural Gas Properties
The Company uses the successful efforts method of
accounting for crude oil and natural gas property acquisition, exploration, development, and production activities. Costs to acquire mineral
interests in crude oil and natural gas properties, to drill and equip exploratory wells that find proved reserves, and to drill and equip
development wells are capitalized as incurred. Costs to drill exploratory wells that are unsuccessful in finding proved reserves are expensed
as incurred. In addition, the geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed as
incurred. Costs to operate and maintain wells and field equipment are expensed as incurred.
Capitalized proved property acquisition costs are
amortized by field using the unit-of-production method based on estimated proved reserves. Capitalized exploration well costs and development
costs (plus estimated future dismantlement, surface restoration, and property abandonment costs, net of equipment salvage values) are
amortized in a similar fashion (by field) based on their estimated proved developed reserves. Support equipment and other property and
equipment are depreciated over their estimated useful lives.
Pursuant to the provisions of Financial Accounting
Standards Codification (“ASC”) Topic 360, “Property, Plant and Equipment” the Company reviews proved crude
oil and natural gas properties and other long-lived assets for impairment. These reviews are predicated by events and circumstances, such
as downward revision of the reserve estimates or commodity prices that indicate a decline in the recoverability of the carrying value
of such properties. The Company estimates the future cash flows expected in connection with the properties and compares such future cash
flows to the carrying amount of the properties to determine if the carrying amount is recoverable. When the carrying amounts of the properties
exceed their estimated undiscounted future cash flows, the carrying amounts of the properties are reduced to their estimated fair value.
The factors used to determine fair value include, but are not limited to, estimates of proved reserves, future commodity prices, the timing
of future production, future capital expenditures and a risk-adjusted discount rate. These estimates of future product prices may differ
from current market prices of crude oil and natural gas. Any downward revisions to management’s estimates of future production or
product prices could result in an impairment of the Company’s crude oil and natural gas properties in subsequent periods. Unproved
crude oil and natural gas properties that are individually significant are also periodically assessed for impairment of value. An impairment
loss for unproved crude oil and natural gas properties is recognized at the time of impairment by providing an impairment allowance.
For the twelve months ended February 28, 2022, the
Company recognized an impairment of unproved properties in Michigan and wrote down the entire $55,978 balance in Michigan. For the twelve
months ended February 28, 2021 the Company did not recognize any impairment of its properties.
On the retirement or sale of a partial unit of proved
property, the cost is charged to accumulated DD&A with a resulting gain or loss recognized in income.
Property and Equipment
Vehicles
Machinery and Equipment
Fixed assets are stated at cost. Depreciation on vehicles
is provided using the straight-line method over expected useful lives of three years. Depreciation on machinery and equipment is provided
using the straight-line method over expected useful life of three years. Depreciation of production facilities and natural gas pipelines
are recorded using the unit-of-production method based on estimated reserves.
Long Lived Assets
The Company reviews long-lived assets and identifiable
intangibles whenever events or circumstances indicate that the carrying amounts of such assets may not be fully recoverable. The Company
evaluates the recoverability of long-lived assets by measuring the carrying amounts of the assets against the estimated undiscounted cash
flows associated with these assets. If this evaluation indicates that the future undiscounted cash flows of certain long-lived assets
are not sufficient to recover the assets' carrying value, the assets are adjusted to their fair values (based upon discounted cash flows).
Fair Value of Financial Instruments
The carrying value of short-term financial instruments
including cash, receivables, prepaid expenses, accounts payable, and other accrued liabilities, short-term liabilities and the line of
credit approximated their fair values due to the relatively short period to maturity for these instruments. The long-term notes payable
approximates fair value since the related rates of interest approximate current market rates.
Share Based Payments
Stock awards are accounted for under FASB ASC Topic
718, “Compensation-Stock Compensation” (“ASC 718”). Under ASC 718, compensation for all share-based
payment awards is based on estimated fair value at the grant date. The value of the portion of the award that is ultimately expected to
vest is recognized as expense on a straight-line basis over the requisite service periods, if any.
The Company estimates the fair value of stock purchase
warrants on the grant date using the Black-Scholes option pricing model (“Black-Scholes Model”) as its method of valuation
for warrant awards granted during the year. The Company’s determination of fair value of warrant awards on the date of grant using
an option-pricing model is affected by the Company’s stock price, as well as assumptions regarding a number of subjective variables.
These variables include, but are not limited to, the Company’s expected price volatility over the term of the awards and discount
rates assumed.
Earnings (Loss) per Share of Common Stock
Basic earnings (loss) per share of Common Stock is
calculated by dividing net earnings (loss) available to common stockholders by the weighted average number of common shares issued and
outstanding during the year. Diluted earnings per share is computed based on the weighted average number of common shares outstanding,
increased by dilutive Common Stock equivalents. For the years ended February 28, 2022 and February 28, 2021, Common Stock equivalents
are excluded from the calculations since their effect is anti-dilutive due to the Company’s net loss.
Concentration of Credit Risk
Substantially all of the Company’s accounts
receivable result from crude oil sales in California or joint interest billings to its working interest partners in California. This concentration
of customers and joint interest owners may impact the Company’s overall credit risk as these entities could be affected by similar
changes in economic conditions as well as other related factors.
Customer Concentration
At the Company’s East Slopes project in California
we deal with only one buyer for the purchase of all crude oil production. The Company has no natural gas production in California. At
February 28, 2022 and February 28, 2021, this one individual customer represented 100.0% of crude oil sales receivable from operations.
If this buyer is unable to resell its products or if they lose a significant sales contract then the Company may incur difficulties in
selling its crude oil production.
The Company’s accounts receivable in California
for crude oil sales at February 28, 2022 and February 28, 2021, respectively are set forth in the table below.
Summary of Significant Accounting Policies -
Schedule of Concentration of Risk, by Risk Factor
Customer Concentration Risk
Accounts Receivable - Crude Oil Sales | |
| |
February 28, 2022 | | |
February 28, 2021 | |
Project | |
Customer | |
Accounts Receivable Crude Oil Sales | |
Percentage | | |
Accounts Receivable Crude Oil Sales | |
Percentage | |
California – East Slopes Project (Crude oil) | |
Plains Marketing | |
$ | 117,727 | |
| 100.0 | % | |
$ | 108,993 | |
| 100.0 | % |
Revenue Recognition
The Company recognizes revenue under ASC 606, Revenue
from Contracts with Customers (“Topic 606”). Under Topic 606, revenue will generally be recognized upon delivery of our
produced crude oil and natural gas volumes to our customers. Our customer sales contracts include only crude oil sales in California.
Under Topic 606, each unit (crude oil barrel) of commodity product represents a separate performance obligation which is sold at variable
prices, determinable on a monthly basis. The pricing provisions of our crude oil contracts are primarily tied to a market index with certain
adjustments based on factors such as delivery, product quality and prevailing supply and demand conditions in the geographic areas in
which we operate. We will allocate the transaction price to each performance obligation and recognize revenue upon delivery of the commodity
product when the customer obtains control. Control of our produced crude oil volumes passes to our customers when the oil is measured
by a trucking oil ticket. The Company has no control over the crude oil after this point and the measurement at this point dictates the
amount on which the customer’s payment is based. Our crude oil revenue stream includes volumes burdened by royalty and other joint
owner working interests. Our revenues are recorded and presented on our financial statements net of the royalty and other joint owner
working interests. Our revenue stream does not include any payments for services or ancillary items other than sale of crude oil. We record
revenue in the month our crude oil production is delivered to the purchaser.
Asset Retirement Obligation (“ARO”)
The Company follows the provisions of FASB ASC Topic
410, “Asset Retirement and Environmental Obligations” (“ASC 410”), which addresses financial accounting
and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs.
This standard requires that the Company recognize the fair value of a liability for an asset retirement obligation (“ARO”)
in the period in which it is incurred. The ARO is capitalized as part of the carrying value of the assets to which it is associated, and
depreciated over the useful life of the asset. The ARO and the related asset retirement cost are recorded when an asset is first drilled,
constructed or purchased. The asset retirement cost is determined and discounted to present value using a credit-adjusted risk-free rate.
After initial recording, the liability is increased for the passage of time, with the increase being reflected as accretion expense in
the statements of operations. Subsequent adjustments in the cost estimate are reflected in the ARO liability and the amounts continue
to be amortized over the useful life of the related long-lived assets.
Suspended Well Costs
The Company accounts for any suspended well costs
in accordance with FASB ASC Topic 932, “Extractive Activities – Oil and Gas” (“ASC 932”). ASC 932
states that exploratory well costs should continue to be capitalized if: (1) a sufficient quantity of reserves are discovered in the well
to justify its completion as a producing well and (2) sufficient progress is made in assessing the reserves and the economic and operating
feasibility of the well. If the exploratory well costs do not meet both of these criteria, these costs should be expensed, net of any
salvage value. Additional annual disclosures are required to provide information about management’s evaluation of capitalized exploratory
well costs.
In addition, ASC 932 requires annual disclosure of:
(1) net changes from period to period of capitalized exploratory well costs for wells that are pending the determination of proved reserves,
(2) the amount of exploratory well costs that have been capitalized for a period greater than one year after the completion of drilling
and (3) an aging of exploratory well costs suspended for greater than one year, designating the number of wells the aging is related to.
Further, the disclosures should describe the activities undertaken to evaluate the reserves and the projects, the information still required
to classify the associated reserves as proved and the estimated timing for completing the evaluation.
Income Taxes
The Company follows the provisions of FASB ASC Topic
740, “Income Taxes” (“ASC 740”). As required under ASC 740, the Company accounts for income taxes using
an asset and liability approach, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences
of temporary differences between the financial statements and tax bases of assets and liabilities at the applicable tax rates. A valuation
allowance is utilized when it is more likely than not, that some portion of, or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
ASC 740 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under
ASC 740, the Company recognizes tax benefits only for tax positions that are more likely than not to be sustained upon examination by
tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% (percent) likely to be realized
upon settlement. A liability for “unrecognized tax benefits” is recorded for any tax benefits claimed in our tax returns that
do not meet these recognition and measurement standards.
Use of Estimates and Assumptions
In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions. These
estimates and assumptions may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements, and reported amounts of revenues and expenses during the reporting periods. Actual results could
differ materially from those estimates. The accounting policies most affected by management’s estimates and assumptions are as follows:
|
· |
The reliance on estimates of proved reserves to compute the provision for depreciation, depletion and amortization and to determine the amount of any impairment of proved properties; |
|
· |
The valuation of unproved acreage and proved crude oil and natural gas properties to determine the amount of any impairment of crude oil and natural gas properties; |
|
· |
Judgment regarding the productive status of in-progress exploratory wells to determine the amount of any provision for abandonment; and |
|
· |
Estimates regarding the timing and cost of future abandonment obligations; and, |
|
· |
Estimates regarding projected cash flows used in determining the production payable discount. |
Recent Accounting
Pronouncements
Accounting
Standards Issued and Adopted
The Company
does not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would
have a material effect on the Company’s financial statements.
NOTE 4 — ACCOUNTS RECEIVABLE:
Accounts receivable consists primarily of receivables
from the sale of crude oil production by the Company and receivables from the Company’s working interest partners in crude oil projects
in which the Company acts as Operator of the project.
Crude oil sales receivables balances of $117,727 and
$108,993 at February 28, 2022 and February 28, 2021, represent crude oil sales that occurred in February 2022 and 2021, respectively.
Joint interest participant receivables balances
of $85,339 and $79,411 at February 28, 2022 and February 28, 2021,
respectively, represent amounts due from working interest partners in California, where the Company is the Operator.
There were no allowances for doubtful accounts for
the Company’s trade accounts receivable at February 28, 2022 and February 28, 2021.
NOTE 5 — CRUDE OIL PROPERTIES:
Crude oil property balances at February 28, 2022 and
February 28, 2021 are set forth in the table below:
Crude
Oil Properties - Schedule of Crude Oil Activities
| |
February 28, 2022 | | |
February 28, 2021 | |
Proved leasehold costs | |
$ | 115,119 | | |
$ | 115,119 | |
Unproved leasehold costs | |
| — | | |
| 55,978 | |
Costs of wells and development | |
| 2,309,628 | | |
| 2,291,924 | |
Capitalized exploratory well costs | |
| 1,341,494 | | |
| 1,341,494 | |
Total cost of oil and gas properties | |
| 3,766,241 | | |
| 3,804,515 | |
Accumulated depletion, depreciation amortization and impairment | |
| (3,230,209 | ) | |
| (3,192,081 | ) |
Oil and gas properties, net | |
$ | 536,032 | | |
$ | 612,434 | |
For the twelve months ended February 28, 2022 and
February 28, 2021, the Company recognized depletion expense of $38,125 and $56,013, respectively which is included in DD&A in the
statement of operations. Impairment expense for the twelve months ended February 28, 2022 and February
28, 2021 was $55,978 and $-0-, respectively.
NOTE 6 — ASSET RETIREMENT OBLIGATION (“ARO”)
The Company’s financial statements reflect the
provisions of ASC 410. The ARO primarily represents the estimated present value of the amount the Company will incur to plug, abandon
and remediate its producing properties at the end of their productive lives, in accordance with applicable state laws. The Company determines
the ARO on its crude oil and natural gas properties by calculating the present value of estimated cash flows related to the liability.
As of February 28, 2022 and February 28, 2021, ARO obligations were considered to be long-term based on the estimated timing of the anticipated
cash flows. For the twelve months ended February 28, 2022 and February 28, 2021, the Company recognized accretion expense of $8,574 and
$4,050, respectively which is included in DD&A in the statements of operations.
Changes in the asset retirement obligations for the
twelve months ended February 28, 2022 and February 28, 2021 are set forth in the table below.
Asset Retirement Obligation (“ARO”) -
Schedule of Changes in the Asset Retirement Obligations
| |
February 28, 2022 | | |
February 28, 2021 | |
Asset retirement obligation, beginning of period | |
$ | 33,062 | | |
$ | 27,149 | |
Accretion expense | |
| 8,574 | | |
| 4,050 | |
Revisions to asset retirement obligation | |
| 10,929 | | |
| 1,863 | |
Asset retirement obligation, end of period | |
$ | 52,565 | | |
$ | 33,062 | |
NOTE 7 — ACCOUNTS PAYABLE:
On March 1, 2009, the Company became the
operator for the East Slopes Project located in Kern County, California. Additionally, the Company then assumed certain original
defaulting partners’ approximate $1.5
million liability representing
a 25% working interest in the drilling and completion costs associated with the East Slopes Project four earning wells program. The
Company subsequently sold the 25% working interest on June 11, 2009. Approximately $244,849 of
the $1.5 million default remains
unpaid and is included in the February 28, 2022 and February 28, 2021 accounts payable balance. Payment of this liability has been
delayed until the Company’s cash flow situation improves. On October 17, 2018, a working interest partner in California filed
a UCC financing statement in regards to payables owed to the partner by the Company. At February 28, 2022 and February 28, 2021, the
balance owed this working interest partner was $76,268 and
$88,905,
respectively and is included in the accounts payable balances. During the twelve months ended February 28, 2022, the Company worked
to restructure its balance sheet. Employer payroll tax estimates of $52,530 and employee payroll tax estimates of $135,687
that had been recognized as a part of the accounts payable balances were eliminated either through debt forgiveness or conversion
to 301,527 shares
of the Company’s common stock.
NOTE 8 — ACCOUNTS PAYABLE-
RELATED PARTIES:
The February 28, 2022 and February 28, 2021 accounts
payable – related parties balances of $49,228
and $988,966,
respectively, were comprised primarily of deferred salaries of one of the Company’s Executive Officers and certain employees; directors’
fees; expense reimbursements; and deferred interest payments on a 12% Subordinated Notes owed to the Company’s Chairman, President
and Chief Executive Officer.
During the twelve months ended February 28,
2022, the Company worked to restructure its balance sheet through the conversion of related party debt to the Company’s common
stock. Accrued employee net salaries of approximately $493,359 were converted into 1,096,353 shares of common stock. Accrued
director fees of $142,969 were converted into 317,708 shares of common stock. Additionally, $264,986 of 12% Note related party
interest was converted into 588,859 shares of common stock.
NOTE 9 — SHORT-TERM AND LONG-TERM BORROWINGS:
Note Payable
In December 2018, the Company was able to settle an
outstanding balance owed to one of its third-party vendors. This settlement resulted in a $120,000 note payable being issued to the vendor.
Additionally, the Company agreed to issue 2,000,000 shares of the Company’s common stock as a part of the settlement agreement.
Based on the closing price of the Company’s common stock on the date of the settlement agreement, the value of the common stock
transaction was determined to be $6,000. The common stock shares were issued during the twelve months ended February 29, 2020. The note
has a maturity date of January 1, 2022 and bears an interest rate of 10% rate per annum. Monthly interest is accrued and payable on January
1st of each anniversary date until maturity of the note. At February 28, 2022, the principal and accrued interest had not been
paid and was outstanding. The accrued interest on the Note was $38,000 and $26,000 at February 28, 2022 and February 28, 2021, respectively.
Note Payable – Related Party
Chief Executive Officer
Secured Debt
On December 22, 2020, the Company entered into a Secured
Promissory Note (the “Note”), as borrower, with James Forrest Westmoreland and Angela Marie Westmoreland, Co-Trustees
of the James and Angela Westmoreland Revocable Trust, or its assigns (the “Noteholder”), as the lender. James F. Westmoreland
is the Company’s Chairman, President and Chief Executive Officer.
Pursuant to the Note, the Noteholder loaned the Company an aggregate
principal amount of $155,548. After the deduction of loan fees of $10,929 the net proceeds from the loan were $144,619. The loan fees
are being amortized as original issue discount (OID) over the term of the loan. The interest rate of the loan is 2.25%. The Note requires
monthly payments on the Note balance until repaid in full. The maturity date of the Note is December 21, 2035. For the twelve months ended
February 28, 2022, the Company made principal payments of $8,599 and amortized debt discount of $729. The obligations under the Note are
secured by a lien on and security interest in the Company’s oil and gas assets located in Kern County, California, as described
in a Deed of Trust entered into by the Company in favor of the Noteholder to secure the obligations under the Note. Such lien shall be
a first priority lien, subject only to a pre-existing lien filed by a working interest partner of the Company.
The Company may prepay the Note at any time. Upon
the occurrence of any Event of Default and expiration of any applicable cure period, and at any time thereafter during the continuance
of such Event of Default, the Noteholder may at its option, by written notice to the Company: (a) declare the entire principal amount
of the Note, together with all accrued interest thereon and all other amounts payable hereunder, immediately due and payable; (b) exercise
any of its remedies with respect to the collateral set forth in the Deed of Trust; and/or (c) exercise any or all of its other rights,
powers or remedies under applicable law.
Current
portion of note payable – related party balances at February 28, 2022 and February 28, 2021 are set forth in the table
below:
Short-Term and Long-Term Borrowings - Schedule
of Related Party Notes Payable
| |
February 28, 2022 | | |
February 28, 2021 | |
Note payable – related party, current portion | |
$ | 8,829 | | |
$ | 8,598 | |
Unamortized debt issuance expenses | |
| (729 | ) | |
| (728 | ) |
Note payable – related party, current portion, net | |
$ | 8,100 | | |
$ | 7,870 | |
Note payable – related party long-term
balances at February 28, 2022 and February 28, 2021 are set forth in the table below:
| |
February 28, 2022 | | |
February 28, 2021 | |
Note payable – related party, non-current | |
$ | 136,710 | | |
$ | 145,540 | |
Unamortized debt issuance expenses | |
| (9,350 | ) | |
| (10,080 | ) |
Note payable – related party, non-current, net | |
$ | 127,360 | | |
$ | 135,460 | |
Future estimated payments on the outstanding note
payable – related party are set forth in the table below:
Short-Term and Long-Term Borrowings - Schedule of Future Estimated Payments
Twelve month periods ending February 28/29, | | |
| |
2023 | | |
| 8,829 | |
2024 | | |
| 9,065 | |
2025 | | |
| 9,309 | |
2026 | | |
| 9,558 | |
2027 | | |
| 9,815 | |
Thereafter | | |
| 98,963 | |
Total | | |
$ | 145,539 | |
Short-term Convertible Note Payable
Convertible Debt
During the twelve months ended February 28, 2022,
the Company executed a convertible promissory note with a third party for $200,000. The interest rate is 18% per annum and is payable
in kind (PIK) solely by additional shares of the Company’s common stock. Regardless of when conversion occurs, a full 12 months
of interest will be payable upon conversion. The maturity date of the note is the date of the closing of the transactions contemplated
by the Equity Exchange Agreement with Reabold California, LLC and Gaelic Resources, Ltd. as described above under the Capital Resources
and Liquidity caption found in this Item 7, Management’s Discussion and Analysis (MD&A). The conversion price was to be determined
by one of two cases. In Case 1, the conversion price would be $0.017 and in Case 2, the conversion price would be $0.0085. The Case 1
conversion price scenario would apply if the terms of the Equity Exchange Agreement were met by a Long Stop Date of April 29, 2022. The
Case 2 conversion price scenario would apply if the terms of the Equity Exchange Agreement were not met by a Long Stop Date of April 29,
2022. The terms of the Equity Exchange Agreement were not met by the Long Stop Date of April 29, 2022 and the conversion price was determined
to be the $0.0085 rate. Under ASC 855-10-55-1, the Company determined that a derivate issue did not exist since the Company was able to
determine the impact of the subsequent event.
On May 5, 2022, the Company received notice from
the third party of their intent to convert the note principal and interest in the amount of $236,000
at the conversion price of $0.0085.
Consequently, 27,764,706
shares of the Company’s common stock were issued to the third party to satisfy the obligation.
12% Subordinated Notes
The Company’s 12% Subordinated Notes (“the
Notes”) issued pursuant to a January 2010 private placement offering to accredited investors, resulted in $595,000 in gross proceeds
(of which $250,000 was from a related party) to the Company and accrue interest at 12% per annum, payable semi-annually on January 29th
and July 29th. On January 29, 2015, the Company and 12 of the 13 holders of the Notes agreed to extend the maturity date of the Notes
for an additional two years to January 29, 2017. Effective January 29, 2017, the maturity date of the Notes was extended for an additional
two years to January 29, 2019. The 980,000 warrants held by ten noteholders expired on January 29, 2019.
Private Placement
The Company has informed the Note holders that the
payment of principal and final interest will be late and is subject to future financing being completed. The Notes principal of $565,000
was payable in full at the amended maturity date of the Notes, and has not been paid. Interest continues to accrue on the unpaid $565,000
principal balance. The terms of the Notes, state that should the Board of Directors, on any future maturity date, decide that the payment
of the principal and any unpaid interest would impair the financial condition or operations of the Company, the Company may then elect
a mandatory conversion of the unpaid principal and interest into the Company’s common stock at a conversion rate equal to 75% of
the average closing price of the Company’s common stock over the 20 consecutive trading days preceding December 31, 2018.
As a result of the Company restructuring its
balance sheet through conversions of related party debt to common stock, the related party 12% Noteholder chose to convert the
principal and accrued interest of their Notes to the Company’s common stock. The related party Note for $250,000 and
accrued interest of $264,986 were
converted to common stock at a rate of approximately $0.45 for
every dollar of principal and interest resulting in 1,144,415 shares
of common stock being issued. The accrued interest on the 12% Notes at February 28, 2022 and February 28, 2021 was $135,229 and
$340,042,
respectively.
12% Note balances at February 28, 2022 and February
28, 2021 are set forth in the table below:
Short-Term and Long-Term Borrowings - Schedule
of Subordinated Notes
12% Subordinated Notes
| |
February 28, 2022 | | |
February 28, 2021 | |
12% Subordinated notes – third party | |
$ | 315,000 | | |
$ | 315,000 | |
12% subordinated notes – related party | |
| — | | |
| 250,000 | |
12% Subordinated notes balance | |
$ | 315,000 | | |
$ | 565,000 | |
The accrued interest at February 28, 2021 owed on
the 12% Subordinated Note to the related party is presented on the Company’s Balance Sheets under the caption Accounts payable
– related party rather than under the caption Accrued interest.
Line of Credit
Line of Credit
The Company has an existing $890,000 line of credit
for working capital purposes with UBS Bank USA (“UBS”), established pursuant to a Credit Line Agreement dated October 24,
2011 that is secured by the personal guarantee of our President and Chief Executive Officer. On November 10, 2021, the Company was notified
that effective January 1, 2022, a new interest rate benchmark the UBS Variable Rate (UBSVR) would replace the existing 30-day LIBOR (“London
Interbank Offered Rate”) benchmark. The UBSVR is comprised of the compounded 30-day average of the Secured Overnight Financing Rate
(SOFR) plus a fixed spread adjustment of 0.110%. The Company’s new all-on rate will consist of the UBSVR plus its current spread
over LIBOR.
During the twelve months ended February 28, 2022 and
February 28, 2021, we did not receive any advances on the line of credit, respectively. During the twelve months ended February 28, 2022
and February 28, 2021, we made payments to the line of credit of $60,000, respectively. Interest converted to principal for the twelve
months ended February 28, 2022 and February 28, 2021 was $27,278 and $28,503, respectively. At February 28, 2022 and February 28, 2021,
the line of credit had an outstanding balance of $808,182 and $840,904, respectively.
Production Revenue Payable
Since December 2018, the Company has been conducting
a fundraising program to fund the drilling of future wells in California and to settle some of its existing historical debt. The purchasers
of production payment interests receive a production revenue payment on future wells to be drilled in California in exchange for their
purchase. On August 22, 2019, the Company entered into a Note Payoff Agreement with the Company’s Chairman, President and Chief
Executive Officer as payment in full of the $250,100 that had been loaned to the Company during the years ended February 29, 2012 and
February 28, 2013. Pursuant to the Note Payoff Agreement, the Company issued a production payment interest in certain of the Company’s
production revenue from the drilling of future wells in California. The production payment interest was granted for a deemed consideration
amount of the balance of the Notes. The grant was made on the same terms as the Company has sold production payment interests to other
third parties in the 2018-2019 fiscal year pursuant to its previously disclosed program.
The production payment interest entitles the purchasers
to receive production payments equal to twice their original amount paid, payable from a percentage of the Company’s future net
production payments from wells drilled after the date of the purchase and until the Production Payment Target (as described below) is
met. The Company shall pay seventy-five percent (75%) of its net production payments from the relevant wells to the purchasers until each
purchaser has received two times the purchase price (the “Production Payment Target”). Once the Company pays the purchasers
amounts equal to the Production Payment Target, it shall thereafter pay a pro-rated eight percent (8%) of $1.3 million on its net production
payments from the relevant wells to each of the purchasers. However, if the total raised is less than the target $1.3 million, then the
payment will be a proportionate amount of the eight percent (8%). At February 28, 2022, the Production Payment Target has not been met
within the original three years and all future payments will be at the seventy-five percent (75%) rate.
The Company accounted for the amounts received from
these sales in accordance with ASC 470-10-25 and 470-10-35 which require amounts recorded as debt to be amortized under the interest method
as described in ASC 835-30, Interest Method. Consequently, the program balance of $950,100 has been recognized as a production revenue
payable. The Company determined an effective interest rate based on future expected cash flows to be paid to the holders of the production
payment interests. This rate represents the discount rate that equates estimated cash flows with the initial proceeds received from the
sales and is used to compute the amount of interest to be recognized each period. Estimating the future cash outflows under this agreement
requires the Company to make certain estimates and assumptions about future revenues and payments and such estimates are subject to significant
variability. Therefore, the estimates are likely to change which may result in future adjustments to the accretion of the interest expense
and the amortized cost based carrying value of the related payables.
Accordingly, the Company has estimated the cash flows
associated with the production revenue payments and determined a discount of $941,259 as
of February 28, 2022, which is being accounted as interest expense over the estimated period over which payments will be made based on
expected future revenue streams. For the twelve months ended February 28, 2022 and February 28, 2021, amortization of the debt discount
on these payables amounted to $95,974 and $115,151, respectively, which has been included in interest expense in the statements of operations.
As a result of the Company restructuring its balance
sheet through conversions of debt to common stock the related party with the production revenue interest chose to convert the original
principal investment of $550,100 to the Company’s common stock at a rate of approximately $0.45 for every dollar of principal and
interest resulting in 1,222,444 shares of common stock being issued. The outstanding interest discount to debt of $232,170 was treated
as a gain on debt forgiveness by the Company.
As of February 28, 2022 and February 28, 2021, the
production revenue payment program balance was $400,000 and $950,100, respectively. Production revenue payable balances at February 28,
2022 and February 28, 2021 are set forth in the table below:
Short-Term and Long-Term Borrowings - Schedule
of Production Revenue Payable Balances
| |
February 28, 2022 | | |
February 28, 2021 | |
Estimated payments of production revenue payable | |
$ | 941,259 | | |
$ | 2,000,258 | |
Less: unamortized discount | |
| (124,134 | ) | |
| (496,836 | ) |
| |
| 817,125 | | |
| 1,503,422 | |
Less: current portion | |
| (78,877 | ) | |
| (111,753 | ) |
Net production revenue payable – long term | |
$ | 738,248 | | |
$ | 1,391,669 | |
Paycheck Protection Program (PPP) Loan
In March 2020, the Coronavirus Aid, Relief, and Economic
Security Act commonly referred to as the CARES Act became law. One component of the CARES Act was the paycheck protection program (“PPP”)
which provides small business with the resources needed to maintain their payroll and cover applicable overhead. The PPP is implemented
by the Small Business Administration (“SBA”) with support from the Department of the Treasury. The Company applied for, and
was accepted to participate in this program. On May 11, 2020, the Company received funding for approximately $74,355. On February 12,
2021, the Company applied for loan forgiveness under the provisions of Section 1106 of the CARES Act. Loan forgiveness was subject to
the sole approval of the SBA. On February 23, 2021, the SBA notified our lender that the loan was forgiven and repaid the loan in full.
On March 4, 2021, the Company applied for, and was
accepted to participate in the SBA PPP Second Draw program with funding pursuant to the Economic Aid Act that was passed in December,
2020. On March 15, 2021, Daybreak received funding for $72,800. The Company applied for full loan forgiveness for the PPP Second Draw
PPP loan and on October 6, 2021, the SBA notified our lender that the loan was forgiven and repaid the loan in full.
Encumbrances
On October 17, 2018, a working interest partner in
California filed a UCC financing statement in regards to payable amounts owed to the partner by the Company.
NOTE 10 — LEASES:
The Company leases approximately 988 rentable square
feet of office space from an unaffiliated third party for our corporate office located in Spokane Valley, Washington. Additionally, we
lease approximately 416 and 695 rentable square feet from unaffiliated third parties for our regional operations office in Friendswood,
Texas and storage and auxiliary office space in Wallace, Idaho, respectively. The lease in Friendswood is a 12-month lease that expires
in October 2021 and as such is considered a short-term lease. The Company has elected to not apply the recognition requirements of ASC
842 to this short-term lease. The Spokane Valley and Wallace leases are currently on a month-to-month basis. The Company’s lease
agreements do not contain any residual value guarantees, restrictive covenants or variable lease payments. The Company has not entered
into any financing leases.
Rent expense for the twelve months ended February
28, 2022 and February 28, 2021 was $23,489 and $23,589, respectively.
NOTE 11 — RELATED PARTY TRANSACTIONS:
Chief Operating Officer
The Company’s Chief Operating Officer, Bennett
Anderson is fifty percent (50%) owner in Great Earth Power, a company that provides a portion of the electrical service to Daybreak for
its production operations at the East Slopes Project in Bakersfield, California. Great Earth Power began providing solar powered electricity
for the production operations in California in September 2020. For the twelve months ended February 28, 2022 and February 28, 2021, Mr.
Anderson received approximately $11,507 and $9,000, respectively from Great Earth Power.
Mr. Anderson is also a fifty percent (50%) owner in
ABPlus Net Holdings, a company that provides tank rentals to Daybreak for its production operations in Kern County, California. The Company
began renting tanks from ABPlus Net Holdings in November 2020. For the twelve months ended February 28, 2022 and February 28, 2021, Mr.
Anderson received approximately $6,720 and $2,440, respectively from ABPlus Net Holdings.
NOTE 12 — STOCKHOLDERS’ DEFICIT:
Preferred Stock
The Company is authorized to issue up to 10,000,000
shares of preferred stock with a par value of $0.001. The Company’s preferred stock may be entitled to preference over the common
stock with respect to the distribution of assets of the Company in the event of liquidation, dissolution, or winding-up of the Company,
whether voluntarily or involuntarily, or in the event of any other distribution of assets of the Company among its shareholders for the
purpose of winding-up its affairs. The authorized but unissued shares of
preferred stock may be divided into and issued in designated
series from time to time by one or more resolutions adopted by the Board of Directors. The directors in their sole discretion shall have
the power to determine the relative powers, preferences, and rights of each series of preferred stock.
With the filing of the Company’s Second Amended
and Restated Articles of Incorporation with the Washington Secretary of State in May 2022, the Company no longer has any preferred stock
shares. The Company has only one class of stock and that is common stock.
Series A Convertible Preferred Stock
The Company has designated 2,400,000 shares of the
10,000,000 preferred shares as Series A Convertible Preferred Stock (“Series A Preferred”), with a $0.001 par value. In July
2006, the Company completed a private placement of the Series A Preferred that resulted in the issuance of 1,399,765 shares to 100 accredited
investors.
The terms of the Series A Preferred are disclosed
in the Company’s Amended and Restated Articles of Incorporation. Conversion of Series A Preferred to the Company’s Common
Stock by the accredited investors relies upon an exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933
relating to securities exchanged by the issuer with its existing security holders exclusively where no commission or other remuneration
is paid or given directly or indirectly for soliciting such exchange.
During the twelve months ended February 28,
2022, the Company proposed to all 56 remaining Series A shareholders, who had not previously converted to the Company’s common
stock, the conversion of their Series A shares into three shares of the Company’s common stock. Included with this proposal,
the Company offered to pay any accrued Series A dividend, on a pro rata basis, with 1,100,000 shares of common stock. In order for the conversion to occur and the dividend to be paid, a
majority of the Series A shares had to vote to accept the conversion proposal. With a majority of 53.6%, the outstanding shares
voted in favor of the conversion and dividend issuance. There were 46.4% of the outstanding shares who chose to vote no;
not to vote or had their notices of the conversion vote returned to the Company as an invalid address. As a result of the
affirmative vote, 709,568
shares of Series A Preferred stock was converted to 2,128,704
shares of common stock and 1,100,000
shares of common stock were issued to satisfy the accumulated dividend of $2,449,979.
At February 28, 2022, there were no outstanding shares of Series A Preferred stock remaining.
The following is a summary of the rights and preferences
of the Series A Preferred.
Conversion:
At February 28, 2022, there were no shares issued
and outstanding that had not been converted into our Common Stock. As of February 28, 2021, there were 44 accredited investors who had
converted 690,197 Series A Preferred shares into 2,070,591 shares of Daybreak Common Stock.
The conversions of Series A Preferred that have occurred
since the Series A Preferred was first issued in July 2006 are set forth in the table below.
Stockholders’ Deficit - Schedule of
Conversions of Series A Preferred Stock
Fiscal Period | |
Shares of Series A Preferred Converted to Common Stock | |
Shares of Common Stock Issued from Conversion | |
Number of Accredited Investors |
Year Ended February 29, 2008 | |
| 102,300 | |
| 306,900 | |
| 10 |
Year Ended February 28, 2009 | |
| 237,000 | |
| 711,000 | |
| 12 |
Year Ended February 28, 2010 | |
| 51,900 | |
| 155,700 | |
| 4 |
Year Ended February 28, 2011 | |
| 102,000 | |
| 306,000 | |
| 4 |
Year Ended February 29, 2012 | |
| — | |
| — | |
| — |
Year Ended February 28, 2013 | |
| 18,000 | |
| 54,000 | |
| 2 |
Year Ended February 28, 2014 | |
| 151,000 | |
| 453,000 | |
| 9 |
Year Ended February 28, 2015 | |
| 3,000 | |
| 9,000 | |
| 1 |
Year Ended February 29, 2016 | |
| 10,000 | |
| 30,000 | |
| 1 |
Year Ended February 28, 2017 | |
| — | |
| — | |
| — |
Year Ended February 28, 2018 | |
| 14,997 | |
| 44,991 | |
| 1 |
Year Ended February 28, 2019 | |
| — | |
| — | |
| — |
Year Ended February 29, 2020 | |
| — | |
| — | |
| — |
Year Ended February 28, 2021 | |
| — | |
| — | |
| — |
Year Ended February 28, 2022 | |
| 709,568 | |
| 2,128,704 | |
| 56 |
Totals | |
| 1,399,765 | |
| 4,199,295 | |
| 100 |
Dividends:
Holders of Series A Preferred shall be paid dividends,
in the amount of 6% of the original purchase price per annum. Dividends may be paid in cash or Common Stock at the discretion of the
Company. Dividends are cumulative from the date of the final closing of the private placement, whether or not in any dividend period
or periods we have assets legally available for the payment of such dividends. Accumulations of dividends on shares of Series A Preferred
do not bear interest. Dividends are payable upon declaration by the Board of Directors. During the twelve months ended February 28, 2022, all accumulated dividends of $2,449,979
were paid through the issuance of 1,100,000
shares of common stock.
Cumulative dividends earned for each twelve month
period since issuance are set forth in the table below:
Stockholders’ Deficit - Schedule of
Preferred Stock Dividends Earned
Fiscal Year Ended | | |
Shareholders at Period End | | |
Accumulated Dividends | |
February 28, 2007 | | |
| 100 | | |
$ | 155,311 | |
February 29, 2008 | | |
| 90 | | |
| 242,126 | |
February 28, 2009 | | |
| 78 | | |
| 209,973 | |
February 28, 2010 | | |
| 74 | | |
| 189,973 | |
February 28, 2011 | | |
| 70 | | |
| 173,707 | |
February 29, 2012 | | |
| 70 | | |
| 163,624 | |
February 28, 2013 | | |
| 68 | | |
| 161,906 | |
February 28, 2014 | | |
| 59 | | |
| 151,323 | |
February 28, 2015 | | |
| 58 | | |
| 132,634 | |
February 29, 2016 | | |
| 57 | | |
| 130,925 | |
February 28, 2017 | | |
| 57 | | |
| 130,415 | |
February 28, 2018 | | |
| 56 | | |
| 128,231 | |
February 28, 2019 | | |
| 56 | | |
| 127,714 | |
February 29, 2020 | | |
| 56 | | |
| 128,063 | |
February 28, 2021 | | |
| 56 | | |
| 127,714 | |
February 28, 2022 | | |
| — | | |
| 96,340 | |
| | |
| | | |
$ | 2,449,979 | |
At a special meeting of shareholders on May 20, 2022
the Company’s shareholders approved the Second Amended and Restated Articles of Incorporation, which eliminates the classification
of the Series A Preferred.
Common Stock
The Company is authorized to issue up to 200,000,000
shares of $0.001 par value Common Stock of which 67,802,273 and 60,491,122 shares were issued and outstanding as of February 28, 2022
and February 28, 2021, respectively.
| |
Common Stock Balance | | |
Par Value | |
Common stock, Issued and Outstanding, February 28, 2019 | |
| 51,532,364 | | |
| | |
Share issuances during the twelve months ended February 29, 2020 | |
| 2,000,000 | | |
$ | 2,000 | |
Common stock, Issued and Outstanding, February 29, 2020 | |
| 53,532,364 | | |
| | |
Share issuances during the twelve months ended February 28, 2021 | |
| 6,958,758 | | |
$ | 6,959 | |
Common stock, Issued and Outstanding, February 28, 2021 | |
| 60,491,122 | | |
| | |
Shares issued for Series A Preferred conversion | |
| 2,128,704 | | |
$ | 2,129 | |
Shares issued for Series A accumulated dividend | |
| 1,100,000 | | |
$ | 1,100 | |
Shares issued for debt conversion of accrued salaries | |
| 1,397,880 | | |
$ | 1,398 | |
Shares issued for debt conversion of accrued directors fees | |
| 317,708 | | |
$ | 318 | |
Shares issued for conversion of 12% Note principal and interest – related party | |
| 1,144,415 | | |
$ | 1,144 | |
Shares issued for investment principal in production revenue program | |
| 1,222,444 | | |
$ | 1,222 | |
Common stock, Issued and Outstanding, February 28, 2022 | |
| 67,802,273 | | |
| | |
During the twelve months ended February 28, 2022,
there were 7,311,151
shares of common stock issued as a part of the Company’s restructuring of its balance sheet in accordance with the conditions
of the Equity Exchange Agreement between Reabold California, LLC, Gaelic Resources Ltd, and the Company. Of the total 7,311,151
shares issues, there were 4,082,447
shares issued to satisfy related party debt. Another 3,228,704
shares were issued to satisfy the Series A Preferred stock conversion and associated accumulated dividend of $2,449,979.
During the twelve months ended February 28, 2021, there were 6,958,758
shares of common stock shares valued at $27,835
issued to a related party to settle a note payable.
All shares of Common Stock are equal to each other
with respect to voting, liquidation, dividend and other rights. Owners of shares of Common Stock are entitled to one vote for each share
of Common Stock owned at any shareholders’ meeting. Holders of shares of Common Stock are entitled to receive such dividends as
may be declared by the Board of Directors out of funds legally available therefore; and upon liquidation, are entitled to participate
pro rata in a distribution of assets available for such a distribution to shareholders.
There are no conversion, preemptive, or other subscription
rights or privileges with respect to any shares of our Common Stock. Our stock does not have cumulative voting rights, which means that
the holders of more than 50% of the shares voting in an election of directors may elect all of the directors if they choose to do so.
In such event, the holders of the remaining shares aggregating less than 50% would not be able to elect any directors.
At a special meeting of shareholders on May 20, 2022
the Company’s shareholders approved an increase in the number of authorized common stock shares to 500,000,000 rather than the previous
200,000,000 common stock authorization.
NOTE 13 — WARRANTS:
Share Based Payment Arrangement -
Non-Employee
During the twelve months ended February 29, 2020 there
were 2.1 million warrants issued to a third party for investor relations services. The fair value of the warrants was determined by the
Black-Scholes pricing model, was $17,689, and is being amortized over the three year vesting period of the warrants. The Black-Scholes
valuation encompassed the following assumptions: a risk-free interest rate of 1.68%; volatility rate of 260.23%; and a dividend yield
of 0.0%.
The warrant contains a vesting blocking provision
that prevents the vesting of any warrants that such vesting would cause the warrant holder’s beneficial ownership (as such term
is defined in Section 13d-3 of the Securities Exchange Act of 1934, as amended) to exceed more than four and ninety-nine one-hundredths
percent (4.99%) of the Company’s outstanding Common Stock. The foregoing restriction may not be waived by either party. The warrants
vest in equal parts over a three year period beginning on January 2, 2020 and all warrants expire on January 2, 2024.
As of February 28, 2022 and February 28, 2021, there
were 893,333
and 528,507 exercisable warrants. At February
28, 2022, both the outstanding warrants and the exercisable warrants had a weighted average exercise price of $0.01;
a weighted average remaining life of 1.84
years, and an intrinsic value of $20,265.
The recorded amount of warrant expense for the twelve months ended February 28, 2022 and February 28, 2021 was $4,913
and $5,897,
respectively.
Warrant activity for the twelve months ended February
28, 2022 and February 28, 2021 is set forth in the table below:
Warrants - Schedule of Warrant Activity
|
|
Warrants |
|
|
Weighted Average
Exercise Price |
Warrants outstanding, February 29, 2020 |
|
|
2,100,000 |
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
Changes during the twelve months ended February 28,2021: |
|
|
|
|
|
|
|
Issued |
|
|
— |
|
|
|
|
Expired / Cancelled / Forfeited |
|
|
— |
|
|
|
|
Warrants outstanding, February 28. 2021 |
|
|
2,100,000 |
|
|
$ |
0.01 |
Warrants exercisable, February 28, 2021 |
|
|
528,507 |
|
|
|
|
|
|
|
|
|
|
|
|
Changes during the twelve months ended February 28, 2022: |
|
|
|
|
|
|
|
Issued |
|
|
— |
|
|
$ |
|
Expired / Cancelled / Forfeited |
|
|
— |
|
|
|
|
Warrants outstanding, February 28, 2022 |
|
|
2,100,000 |
|
|
$ |
0.01 |
Warrants exercisable, February 28, 2022 |
|
|
893,333 |
|
|
$ |
0.01 |
NOTE 14 — INCOME TAXES:
On December 22, 2017, the federal government enacted
a tax bill H.R.1, an act to provide for reconciliation pursuant to Titles II and V of the concurrent resolution on the budget for fiscal
year 2018, commonly referred to as the Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act contains significant changes to corporate taxation,
including, but not limited to, reducing the U.S. federal corporate income tax rate from 35% to 21% and modifying or limiting many business
deductions. The Company has re-measured its deferred tax liabilities based on rates at which they are expected to be utilized in the future,
which is generally 21%.
Reconciliation between actual tax expense (benefit)
and income taxes computed by applying the U.S. federal income tax rate and state income tax rate to income from continuing operations
before income taxes is as follows:
Income Taxes - Schedule of Reconciliation Between Actual Tax Expense Benefit and Income Taxes Computed by Applying Income Tax Rate
| |
February 28, 2022 | | |
February 28, 2021 | |
Computed at U.S. and state statutory rates | |
$ | (118,897 | ) | |
$ | (152,860 | ) |
Permanent differences | |
| 11,157 | | |
| 15,342 | |
Changes in valuation allowance | |
| 107,740 | | |
| 137,518 | |
Total | |
$ | — | | |
$ | — | |
Tax effects of temporary differences that give rise
to significant portions of the deferred tax assets and deferred liabilities are presented below:
Income Taxes - Schedule of Deferred Tax
Assets and Liabilities
| |
February 28, 2022 | | |
February 28, 2021 | |
Deferred tax assets: | |
| | | |
| | |
Net operating loss carryforwards | |
$ | 5,670,900 | | |
$ | 5,587,416 | |
Oil and gas properties | |
| 87,694 | | |
| 63,438 | |
Stock based compensation | |
| 66,187 | | |
| 66,187 | |
Other | |
| 27,838 | | |
| 27,838 | |
Less valuation allowance | |
| (5,852,619 | ) | |
| (5,744,879 | ) |
Total | |
$ | — | | |
$ | — | |
At February 28, 2022, the Company had a net
operating loss (“NOL”) carryforwards for federal and state income tax purposes of approximately $19,035,827,
which will begin to expire, if unused, beginning in 2024. Under the Tax Cuts and Jobs Act, the NOL portion of the loss incurred in
the 2018, 2020 and 2021 period of $340,749,
$339,299
and $416,898, respectively, and the loss incurred for the year ended February 28, 2022 in the amount of $311,241 will
not expire and will carry over indefinitely. The valuation allowance increased approximately $107,740 for
the year ended February 28, 2022 and increased approximately $137,518 for
the year ended February 28, 2021. Section 382 Rule of the Internal Revenue Code will place annual limitations on the Company’s
NOL carryforward.
The above estimates are based upon management’s
decisions concerning certain elections that could change the relationship between net income and taxable income. Management decisions
are made annually and could cause the estimates to vary significantly. The Company’s files federal income tax returns with the United
States Internal Revenue Service and state income tax returns in various state tax jurisdictions. As a general rule, the Company’s
tax returns for the fiscal years after 2016 currently remain subject to examinations by appropriate tax authorities. None of our tax returns
are under examination at this time.
NOTE 15 — COMMITMENTS AND CONTINGENCIES:
Various lawsuits, claims and other contingencies arise
in the ordinary course of the Company’s business activities. While the ultimate outcome of the aforementioned contingencies are
not determinable at this time, management believes that any liability or loss resulting therefrom will not materially affect the financial
position, results of operations or cash flows of the Company.
The Company, as an owner or lessee and operator of
oil and gas properties, is subject to various federal, state and local laws and regulations relating to discharge of materials into, and
protection of, the environment. These laws and regulations may, among other things, impose liability on the lessee under an oil and gas
lease for the cost of pollution cleanup resulting from operations and subject the lessee to liability for pollution damages. In some instances,
the Company may be directed to suspend or cease operations in the affected area. The Company maintains insurance coverage that is customary
in the industry, although the Company is not fully insured against all environmental risks.
The Company is not aware of any environmental claims
existing as of February 28, 2022. There can be no assurance, however, that current regulatory requirements will not change, or past non-compliance
with environmental issues will not be discovered on the Company’s oil and gas properties.
NOTE 16 — SUBSEQUENT EVENTS:
Short-term Convertible Note Payable
Subsequent Event
During the twelve months ended February 28, 2022,
the Company executed a convertible promissory note with a third party for $200,000. On May 5, 2022, the Company received notice from
the third party of their intent to convert the note principal and interest in the amount of $236,000
at the conversion price of $0.0085.
Consequently, 27,764,706
shares of the Company’s common stock has been issued to the third party to satisfy the obligation.
Results of Special Shareholders Meeting
At a special meeting of shareholders held on May 20,
2022, Daybreak shareholders approved the Equity Exchange Agreement between Daybreak, Reabold California, LLC (“Reabold”) and
Gaelic Resources, Ltd. (“Gaelic”). As a result of this approval, the Company proceeded with the acquisition of Reabold and
its producing crude oil and natural gas properties in California. The acquisition was completed by Daybreak issuing 160,964,489 common
stock shares to Gaelic, and in accordance with the customary closing terms and conditions for acquisitions of this nature.
At the same meeting shareholders adopted the Second
and Amended Articles of Incorporation, including increasing the authorized number of common stock shares from 200,000,000 to 500,000,000
common stock shares. The increase in common stock shares will give the Company enough authorized common stock shares to complete the transaction
with Reabold and Gaelic. Also, the Series A Preferred stock classification has been eliminated, since all Series A Preferred stock has
previously been converted to the Company’s common stock.
In conjunction with the Company’s efforts to
acquire Reabold, and as a condition of closing the acquisition, the Company was to secure a capital raise of $2,500,000 through the issuance
of shares of the Company’s common stock. That commitment for that capital raise was executed on May 5, 2022, and subsequently 128,125,000
shares were issued. The finalization of the raise, was conditional upon receiving shareholder approval of the Reabold acquisition.
Additionally, in a majority vote by shareholders a
fourth person - Mr. Darren Williams, a nominee of Reabold, was added to the Board of Directors as of the date of the closing of the exchange
agreement, May 25, 2022.
NOTE 17 — SUPPLEMENTARY INFORMATION FOR CRUDE
OIL PRODUCING ACTIVITIES (UNAUDITED)
Capitalized Costs Relating to Crude Oil and Natural
Gas Producing Activities
Supplementary Information for Crude Oil
Producing Activities - Capitalized Costs Relating to Crude Oil and Natural Gas Producing Activities
| |
As of February 28, 2022 | | |
As of February 28, 2021 | |
Proved leasehold costs | |
| | | |
| | |
Mineral Interests | |
$ | 115,119 | | |
$ | 115,119 | |
Wells, equipment and facilities | |
| 3,651,122 | | |
| 3,633,418 | |
Total Proved Properties | |
| 3,766,241 | | |
| 3,748,537 | |
| |
| | | |
| | |
Unproved properties | |
| | | |
| | |
Mineral Interests | |
| — | | |
| 55,978 | |
Uncompleted wells, equipment and facilities | |
| — | | |
| — | |
Total unproved properties | |
| — | | |
| 55,978 | |
| |
| | | |
| | |
Less accumulated depreciation, depletion amortization and impairment | |
| (3,230,209 | ) | |
| (3,192,081 | ) |
Net capitalized costs | |
$ | 536,032 | | |
$ | 612,434 | |
Costs Incurred in Oil and Gas Producing Activities
Supplementary Information for Crude Oil
Producing Activities - Costs Incurred in Oil and Gas Producing Activities
| |
12 Months Ended | | |
12 Months Ended | |
| |
February 28, 2022 | | |
February 28, 2021 | |
Acquisition of proved properties | |
$ | — | | |
$ | — | |
Acquisition of unproved properties | |
| — | | |
| — | |
Development costs | |
| 6,773 | | |
| 11,871 | |
Exploration costs | |
| — | | |
| — | |
Total costs incurred | |
$ | 6,773 | | |
$ | 11,871 | |
Results of Operations from Oil and Gas Producing
Activities
Supplementary Information for Crude Oil
Producing Activities - Results of Operations from Oil and Gas Producing Activities
| |
12 Months Ended | | |
12 Months Ended | |
| |
February 28, 2022 | | |
February 28, 2021 | |
Oil and gas revenues | |
$ | 680,107 | | |
$ | 404,901 | |
Production costs | |
| (231,275 | ) | |
| (187,858 | ) |
Exploration expenses | |
| (56,213 | ) | |
| (83 | ) |
Depletion, depreciation and amortization | |
| (49,590 | ) | |
| (60,063 | ) |
Impairment of oil properties | |
| — | | |
| — | |
Result of oil and gas producing operations before income taxes | |
| 343,029 | | |
| 156,897 | |
Provision for income taxes | |
| — | | |
| — | |
Results of oil and gas producing activities | |
$ | 343,029 | | |
$ | 156,897 | |
Proved Reserves
The Company’s proved oil and natural gas
reserves have been estimated by the certified independent engineering firm, PGH Petroleum and Environmental Engineers, LLC. Proved
reserves are the estimated quantities that geologic and engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are the quantities
expected to be recovered through existing wells with existing equipment and operating methods when the estimates were made. Due to
the inherent uncertainties and the limited nature of reservoir data, such
estimates are subject to change as additional information
becomes available. The reserves actually recovered and the timing of production of these reserves may be substantially different
from the original estimate. Revisions result primarily from new information obtained from development drilling and production
history; acquisitions of oil and natural gas properties; and changes in economic factors.
As of February 28, 2022, our total reserves were comprised
of our working interest in East Slopes Project located in Kern County, California.
Our proved reserves are summarized in the table below:
Supplementary Information for Crude Oil
Producing Activities - Schedule of Proved Oil and Gas Reserves
|
|
Oil (Barrels) |
|
|
Natural Gas (Mcf) |
|
|
BOE (Barrels) |
|
Proved reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
February 29, 2020 |
|
|
495,977 |
|
|
|
— |
|
|
|
495,977 |
|
Revisions(1) |
|
|
(50,784 |
) |
|
|
— |
|
|
|
(50,784 |
) |
Discoveries and extensions |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Production |
|
|
(10,970 |
) |
|
|
— |
|
|
|
(10,970 |
) |
February 28, 2021 |
|
|
434,223 |
|
|
|
— |
|
|
|
434,223 |
|
Revisions(2) |
|
|
3,052 |
|
|
|
— |
|
|
|
3,052 |
|
Discoveries and extensions |
|
|
89,493 |
|
|
|
— |
|
|
|
89,493 |
|
Production |
|
|
(9,613 |
) |
|
|
— |
|
|
|
(9,613 |
) |
February 28, 2022 |
|
|
517,155 |
|
|
|
— |
|
|
|
517,155 |
|
|
(1) |
The revisions of previous estimates resulted
from a decrease in the estimated economic life of the reservoirs due to lowest realized crude oil prices in the energy markets. |
|
(2) |
The revisions of previous estimates resulted from higher realized crude oil prices in the energy markets. |
|
(3) |
The discoveries and extensions resulted from additional PUD located
being added due to higher oil prices in the energy markets. |
The Company’s proved reserves are set forth
in the table below.
Supplementary Information for Crude Oil
Producing Activities - Schedule of Proved Developed and Undeveloped Reserves
Oil | |
Developed | |
Undeveloped | |
Total Reserves |
| |
Oil (Bbls) | |
BOE (Bbls) | |
Oil (Bbls) | |
BOE (Bbls) | |
Oil (Bbls) | |
BOE (Bbls) |
February 29, 2020 | |
113,779 | |
113,779 | |
382,198 | |
382,198 | |
495,977 | |
495,977 |
February 28, 2021 | |
95,120 | |
95,120 | |
339,103 | |
339,103 | |
434,223 | |
434,223 |
February 28, 2022 | |
117,844 | |
117,844 | |
399,311 | |
399,311 | |
517,155 | |
517,155 |
Standardized Measure of Discounted Future Net Cash
Flows Relating to Proved Oil and Gas Reserves
The following information is based on the Company’s
best estimate of the required data for the Standardized Measure of Discounted Future Net Cash Flows as of February 28, 2022 and February
28, 2021 in accordance with ASC 932, “Extractive Activities – Oil and Gas” which requires the use of a 10% discount
rate. This information is not the fair market value, nor does it represent the expected present value of future cash flows of the Company’s
proved oil and gas reserves.
Future cash inflows for the years ended February
28, 2022 and February 28, 2021 were estimated as specified by the SEC through calculation of an average price based on the 12-month unweighted
arithmetic average of the first-day-of-the-month price for the period from March through February during each respective fiscal year.
The resulting net cash flow are reduced to present value by applying a 10% discount factor.
Standardized Measure of Discounted Future
Net Cash Flows Relating to Proved Oil and Gas Reserves
Supplementary
Information for Crude Oil Producing Activities - Standardized Measure of Discounted Future Cash Flows Relating to Proved Oil and Gas
Reserves
|
|
|
|
|
|
|
|
|
| |
12 Months Ended | |
| |
February 28, 2022 | | |
February 28, 2021 | |
Future cash inflows | |
$ | 35,580,251 | | |
$ | 15,692,834 | |
Future production costs(1) | |
| (16,217,379 | ) | |
| (8,076,769 | ) |
Future development costs | |
| (3,603,561 | ) | |
| (2,510,625 | ) |
Future income tax expenses(2) | |
| — | | |
| — | |
Future net cash flows | |
| 15,759,311 | | |
| 5,105,440 | |
10% annual discount for estimated timing of cash flows | |
| (9,567,367 | ) | |
| (3,457,022 | ) |
Standardized measure of discounted future net cash flows at the end of the fiscal year | |
$ | 6,191,944 | | |
$ | 1,648,418 | |
|
(1) |
Production costs include crude oil and
natural gas operations expense, production ad valorem taxes, transportation costs and G&A expense supporting the Company’s
crude oil and natural gas operations. |
|
(2) |
The Company has sufficient tax deductions and allowances related to proved crude oil and natural gas reserves to offset future net revenues. |
Average hydrocarbon prices are set forth in the table
below.
Supplementary
Information for Crude Oil Producing Activities - Oil and Gas Net Production, Average Sales Price and Average Production Costs Disclosure
Crude Oil |
Average Price |
|
Natural |
Natural Gas |
Crude Oil (Bbl) |
|
Gas (Mcf) |
Year ended February 29, 2020(1) |
$ |
60.25 |
|
$ |
— |
Year ended February 28, 2021(1) |
$ |
36.91 |
|
$ |
— |
Year ended February 28, 2022(1) |
$ |
70.75 |
|
$ |
— |
|
(1) |
Average prices were based on 12-month unweighted arithmetic average of the first-day-of-the-month prices for the period from March through February during each respective fiscal year. |
Future production and development costs, which include
dismantlement and restoration expense, are computed by estimating the expenditures to be incurred in developing and producing the Company’s
proved crude oil and natural gas reserves at the end of the year, based on year-end costs, and assuming continuation of existing economic
conditions.
Sources of Changes in Discounted Future Net Cash
Flows
Principal changes in the aggregate standardized measure
of discounted future net cash flows attributable to the Company’s proved crude oil and natural gas reserves, as required by ASC
932, at fiscal year-end are set forth in the table below.
Supplementary Information
for Crude Oil Producing Activities - Schedule of Sources of Changes in Discounted Future Net Cash Flows
|
|
|
|
|
|
|
|
|
| |
12 Months Ended | |
| |
February 28, 2022 | | |
February 28, 2021 | |
Standardized measure of discounted future net cash flows at the beginning of the year | |
$ | 1,648,418 | | |
$ | 4,652,142 | |
Extensions, discoveries and improved recovery, less related costs | |
| 906,390 | | |
| — | |
Revisions of previous quantity estimates | |
| 44,898 | | |
| (287,596 | ) |
Net changes in prices and production costs | |
| 3,320,241 | | |
| (1,899,026 | ) |
Accretion of discount | |
| 164,842 | | |
| 465,214 | |
Sales of oil produced, net of production costs | |
| (448,832 | ) | |
| (217,043 | ) |
Changes in future development costs | |
| (267,335 | ) | |
| (9,077 | ) |
Changes in timing of future production | |
| 823,322 | | |
| (1,074,350 | ) |
Net changes in income taxes | |
| — | | |
| — | |
Standardized measure of discounted future net cash flows at the end of the year | |
$ | 6,191,944 | | |
$ | 1,648,418 | |