DBRM Daybreak Oil and Gas Inc (CE)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 8-K/A

 

Current Report

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

 

Date of Report (Date of Earliest Event Reported): July 11, 2023 (May 26, 2022)

 

DAYBREAK OIL AND GAS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Washington	000-50107	91-0626366
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

 

1414 S. Friendswood Drive, Suite 212 Friendswood, TX		77546
(Address of principal executive offices)		(Zip Code)

 

Registrant's telephone number, including area code: (281) 996-4176

 

(Former Name or Former Address if Changed Since Last Report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

	o	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
	o	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
	o	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
	o	Pre-commencement communication pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
n/a	n/a	n/a

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company ☐

If an emerging growth company indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Introductory Note.

 

This Amendment No. 1 on Form 8-K/A amends the Current Report on Form 8-K of Daybreak Oil and Gas, Inc. (the “Company” or “Daybreak”) filed with the U.S. Securities and Exchange Commission (“the SEC”) on May 26, 2022 (the “Original Form 8-K”). The Original Form 8-K reported under Item 2.01 the completion of the previously disclosed acquisition of Reabold California, LLC (“Reabold”) contemplated by that certain Equity Exchange Agreement, dated as of October 20, 2021 (8-K filed on October 26, 2021) and Amended on February 14, 2022 (8-K filed on February 22, 2022). This Amendment No. 1 is being filed by the Company to amend the Original Form 8-K, solely to provide the disclosures required by Item 9.01 of this Form 8-K that were not previously filed with the original report. Except as provided herein, the disclosures made in the Original Form 8-K remain unchanged.

 

Item 9.01      Financial Statements and Exhibits.

 

The Company is filing this amendment to the Original Form 8-K for the purpose of filing (i) the audited financial statements of Reabold as of and for the years ended December 31, 2021 and 2020, and (ii) the unaudited financial statements of Reabold as of and for the two months ended February 28, 2022 and 2021, and (iii) the unaudited pro forma condensed combined financial information of Daybreak as of and for the year ended February 28, 2022, after giving effect to the Acquisition. This amendment should be read in conjunction with the Original Form 8-K and Daybreak’s other filings with the SEC. Except as provided herein, the disclosures made in the Original Form 8-K remain unchanged.

 

(a)

Financial Statements of business acquired

 

The audited financial statements of Reabold as of and for the years ended December 31, 2021 and 2020 are attached hereto as Exhibit 99.1 to this Amendment No. 1 and incorporated herein by reference.

 

The unaudited financial statements of Reabold as of and for the two months ended February 28, 2022 and 2021 are attached hereto as Exhibit 99.2 to this Amendment No. 1 and incorporated herein by reference.

 

(b)

Pro Forma Financial Information

 

The unaudited Pro Forma Condensed Combined Financial Information of Daybreak and Reabold as of and for the year ended February 28, 2022 are attached herewith as Exhibit 99.3 to this Amendment No. 1 and incorporated herein by reference.

 

(d)

Exhibits

 

Exhibit

 

Exhibit 99.1	Audited financial statements of Reabold California, LLC. as of and for the years ended December 31, 2021 and 2020
Exhibit 99.2	Unaudited financial statements of Reabold California, LLC. as of and for the two months ended February 28, 2022 and 2021
Exhibit 99.3	Unaudited Pro Forma Combined Financial Information of Daybreak Oil and Gas, Inc. and Reabold California, LLC. as of February 28, 2022
Exhibit 104	The cover page from this Current Report on Form 8-K/A, formatted in Inline XBRL.

 

 

 

 

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

DAYBREAK OIL AND GAS, INC.

 

By: /s/ JAMES F. WESTMORELAND

James F. Westmoreland, President and Chief Executive Officer

 

Date: July 11, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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REABOLD CALIFORNIA, LLC.

TABLE OF CONTENTS

 

 

	Page No.
Report of Independent Auditors	2
Balance Sheets at December 31, 2021 and December 31, 2020	3
Statements of Operations and Comprehensive Loss for the years ended December 31, 2021 and December 31, 2020	4
Statements of Changes in Members’ Equity for the years ended December 31, 2021 and December 31, 2020	5
Statements of Cash Flows for the years ended December 31, 2021 and December 31, 2020	6
Notes to Financial Statements	7

 

 

 

 

  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Members of

Reabold California, LLC

 

Opinion on the Financial Statements

 

We have audited the accompanying balance sheets of Reabold California, LLC (the “Company”) as of December 31, 2021 and December 31, 2020, and the related statements of operations, changes in stockholders’ deficit, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and December 31, 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Going Concern Matter

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

 

Critical audit matters, are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.

 

/s/ MaloneBailey, LLP

www.malonebailey.com

We have served as the Company’s auditors since 2022.

Houston, Texas

July 11, 2023

 

 

REABOLD CALIFORNIA, LLC

Balance Sheets

As of December 31, 2021 and December 31, 2020

		As of December 31, 2021				As of December 31, 2020
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	350,962			$	106,900
Restricted cash			250,000				250,000
Accounts receivable:
Crude oil sales			84,387				20,287
Joint interest participants			76,731				151,351
Prepaid expenses and other current assets			—				2,648
Oil inventory			27,462				46,305
Total current assets			789,542				577,491
OIL AND GAS PROPERTIES, successful efforts method, net
Proved properties			6,535,632				6,936,080
Unproved properties			141,942				61,569
Total long-term assets			6,677,574				6,997,649
Total assets		$	7,467,116			$	7,575,140
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and other accrued liabilities		$	193,325			$	165,786
Revenue payable			207,712				71,491
Accrued expenses			—				13,129
Notes payable - related party			6,455,606				8,587,487
Total current liabilities			6,856,643				8,837,893
LONG TERM LIABILITIES:
Asset retirement obligation			56,100				51,800
Total long-term liabilities			56,100				51,800
Total liabilities			6,912,743				8,889,693
COMMITMENTS AND CONTINGENCIES
MEMBERS’ EQUITY (DEFICIT):
Member’s capital			2,208,939				4,680
Accumulated deficit			(1,654,566	)			(1,319,233	)
Total members’ equity (deficit)			554,373				(1,314,553	)
Total liabilities and members’ equity (deficit)		$	7,467,116			$	7,575,140

 

 

The accompanying notes are an integral part of these financial statements.

 

 

REABOLD CALIFORNIA, LLC

Statements of Operations

For the Twelve Months Ended December 31, 2021 and December 31, 2020

		Twelve Months Ended
		December 31, 2021				December 31, 2020
REVENUE:
Crude oil sales		$	1,254,447			$	1,033,826
Natural gas sales			22,090				29,061
Total crude oil and natural gas sales revenue		$	1,276,537			$	1,062,887
OPERATING EXPENSES:
Production			991,032				652,465
Exploration and drilling			—				(13,004	)
Depreciation, depletion and amortization			492,330				418,211
Impairment			—				386,559
General and administrative			116,130				149,434
Total operating expenses			1,599,492				1,593,665
OPERATING LOSS			(322,955	)			(530,778	)
OTHER INCOME (EXPENSE):
Interest expense, net			(12,378	)			(47,311	)
NET LOSS			(335,333	)			(578,089	)

 

 

The accompanying notes are an integral part of these financial statements.

 

 

REABOLD CALIFORNIA, LLC

Statements of Changes in Members’ Equity

For the Twelve Months Ended December 31, 2021 and December 31, 2020

		Member’s Capital				Accumulated Deficit				Total
BALANCE, DECEMBER 31, 2019		$	4,680			$	(741,144	)		$	(736,464	)
Net Loss		$	—			$	(578,089	)		$	(578,089	)
BALANCE, DECEMBER 13, 2020		$	4,680			$	(1,319,233	)		$	(1,314,553	)
Conversion of related party debt		$	2,204,259			$	—			$	2,204,259
Net Loss		$	—			$	(335,333	)		$	(335,333	)
BALANCE, DECEMBER 31, 2021		$	2,208,939			$	(1,654,566	)		$	554,373

 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

 

 

 

 

 

 

REABOLD CALIFORNIA, LLC

Statements of Cash Flows

For the Twelve Months Ended December 31, 2021 and December 31, 2020

		Twelve Months Ended
		December 31, 2021				December 31, 2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(335,333	)		$	(578,089	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation, depletion and amortization			496,630				427,180
Impairment of unproved crude oil and natural gas properties			—				332,390
Changes in assets and liabilities:
Accounts receivable – crude oil and natural gas sales			(64,100	)			443,876
Accounts receivable - joint interest participants			74,620				207,382
Prepaid expenses and other current assets			2,648				(2,648	)
Oil inventory			18,843				(20,459	)
Accounts payable and other accrued liabilities			27,539				(631,881	)
Revenue payable			136,221				(224,024	)
Accrued expenses			(13,129	)			(69,907	)
Net cash used in operating activities			343,939				(116,180	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to crude oil and natural gas properties			(172,225	)			(643,856	)
Net cash used in investing activities			(172,225	)			(643,856	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from related party debt			72,378				623,500
Net cash provided by financing activities			72,378				623,500
NET INCREASE (DECREASE) IN CASH, AND RESTRICTED CASH			244,062				(136,536	)
CASH AND RESTRICTED CASH AT BEGINNING OF PERIOD			356,900				493,436
CASH AND RESTRICTED CASH AT END OF PERIOD		$	600,962			$	356,900
SUPPLEMENTAL CASH FLOW INFORMATION:
Conversion of related party debt to member equity		$	2,204,259			$	—

  

The accompanying notes are an integral part of these financial statements.

 

 

 

 

REABOLD CALIFORNIA, LLC

NOTES TO FINANCIAL STATEMENTS

 

NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION:

 

Reabold California, LLC a California limited liability company (“Reabold”), operated in California as a wholly owned subsidiary of Gaelic Resources Ltd., a private company incorporated in the Isle of Man and the 100% owner of Reabold (“Gaelic”), before being acquired by Daybreak Oil and Gas, Inc. (“Daybreak”) on May 25, 2022.

 

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

 

Reabold’s financial statements for the twelve months ended December 31, 2021 and December 31, 2020 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. Reabold has incurred net losses since inception, has accumulated deficit in retained earnings of approximately $1.65 million and a working capital deficit of approximately $6.07 million, which raises substantial doubt about the Company’s ability to continue as a going concern.

 

 

NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

Basis of Accounting

 

The Company maintains its accounts on the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America (“U.S.”).

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principle generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

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. Under Topic 606, each unit of commodity product (crude oil Bbl or natural gas MMBTU) represents a separate performance obligation which is sold at variable prices, determinable on a monthly basis. The pricing provisions of our crude oil and natural gas 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 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. Control of our produced natural gas volumes passes to our customers when the natural gas is measured at the purchaser’s gas line meter. The Company has no control over the natural gas after this point and the measurement at this point dictates the amount on which the customer’s payment is based. Our crude oil and natural gas revenue streams include 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 and natural gas. Revenue is recorded in the month our crude oil and natural gas production is delivered to the purchaser.

 

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.

 

Restricted Cash

 

Restricted cash balances include amounts posted with regulatory authorities for reclamation bonds related to the Company’s crude oil and natural gas operations.

 

Major Customers

 

The Company had two major customers at December 31, 2021 and 2020, one each for crude oil sales and natural gas sales. These same two customers made up 100% of our total revenue for the periods ended December 31, 2021 and 2020.

 

Accounts Receivable

 

Substantially all of the Company’s accounts receivable balances consist of uncollateralized accrued crude oil and natural gas revenues due under normal trade terms and joint interest billings consist of uncollateralized joint interest owner obligations due under terms established with the joint interest partners. This concentration of customers and joint interest owner 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. The Company routinely assesses the recoverability of all revenue and joint interest 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. There were no allowances for doubtful accounts for the Company’s trade accounts receivable at December 31, 2021 and December 31, 2020.

 

Related Party Transactions

 

The Company’s related party transaction policy identifies a related party as any person or entity that is related to the reporting entity. This may include, but is not limited to a person who has control, joint control, or significant influence over the entity or is a key member of management. This may also include any parent, subsidiary, fellow subsidiary, associate or joint venture entity of the Company. A related party transaction is a transfer of resources, services or obligations between the Company and a related party, regardless of whether a price is charged. For the year ended December 31, 2021, the Company repaid net advances (advances less repayments) of $2,131,881 to a related party. For the year ended December 31, 2020, the Company received net advances of $624,133 from a related party.

 

Crude Oil and Natural Gas Properties

 

The Company follows the successful efforts method to account for its crude oil and natural gas property acquisition, exploration, development, and production activities. Under this method, 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, delay rentals and administrative costs associated with unproved properties are expensed as incurred. Costs to operate and maintain wells and field equipment are expensed as incurred.

 

Depletion is determined on a units-of-production basis over the remaining life of proved reserves. Capitalized exploratory 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. Under the units-of-production method, crude oil and natural gas volumes are considered produced once they have been measured through meters at custody transfer or sales transaction points at the outlet valve on the lease or field storage tank.

 

Proved crude oil and natural gas properties are evaluated for impairment annually or when facts or circumstances indicate a possible decline in the recoverability of the carrying amount of such property. 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 and charged to impairment expense.

 

For the twelve months ended December 31, 2021, the Company did not recognize any impairment of properties in California. For the twelve months ended December 31, 2020, the Company recognized an impairment of crude oil properties in California of $386,559.

 

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

 

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.

 

Leases

 

The Company determines if a contract is a lease at inception. A contract is a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The lease term begins on the commencement date, which is the date the Company takes possession of the asset, and may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Lease are classified as either operating or finance lease based on factors such as the lease term, lease payments, and the economic life, fair value and estimated residual value of the asset. Where leases include options to purchase the leased asset at the end of the lease term, this is assessed as a part of the Company’s lease classification determination.

 

Under ASC 842, the Company recognizes a right-of-use (“ROU”) asset and lease liability to account for its leases. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease labilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized on the commencement date based on the present value of lease payments over the lease term. ROU assets are based on the lease liability and are increased by prepaid lease payments and decreased by lease incentives received. Lease incentives are amortized through the lease asset as reductions of expense over the lease term. For the years ended December 31, 2021 and December 31, 2020, the Company had no leases.

 

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.

 

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.

 

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 December 31, 2021 and December 31, 2020, 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 and natural gas 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.

 

At the Company’s projects in California, we deal with only one buyer for the purchase of all crude oil production and one buyer of natural gas production. At December 31, 2021 and December 31, 2020, these single individual customers represented 100.0% of crude oil and natural gas sales receivable from operations. If these buyers are unable to resell its products or if they lose a significant sales contract, then the Company may incur difficulties in selling its crude oil and natural gas production.

 

The Company’s accounts receivable in California for crude oil and natural gas sales at December 31, 2021 and 2020, respectively are set forth in the table below.

 

		December 31, 2021				December 31, 2020
Crude oil sales		$	81,314			$	20,287
Natural gas sales			3,073				—
Total crude oil and natural gas revenue receivable		$	84,387			$	20,287

 

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.

 

Risks and Uncertainties

As a crude oil and natural gas producer, the Company’s revenue, profitability, and future growth are substantially dependent upon the prevailing and future prices of crude oil and natural gas, which are dependent upon numerous factors beyond its control such as economic, political and regulatory developments and competition from other energy sources. The energy markets have historically been very volatile and there can be no assurance that crude oil and natural gas price will not be subject to wide fluctuations in the future. A substantial or extended decline in crude oil and natural gas prices could have a material adverse effect on the Company’s financial position, results of operation, cash flows and quantities of crude oil and natural gas reserves that may be economically produced. Other risks and uncertainties that could affect the Company in the current price environment include, but are not limited to, counterparty credit risk for our receivables, access to credit and financial markets and the ability to meet financial ratios and covenants in any future financing agreements.

 

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.

 

NOTE 4 — ACCOUNTS RECEIVABLE:

 

Accounts receivable consists primarily of receivables from the sale of crude oil and natural gas 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 and natural gas sales receivables balances of $84,387 and $20,287 at December 31, 2021 and 2020, represent crude oil and natural gas sales that occurred in December 2021 and 2020, respectively.

 

Joint interest participant receivables balances of $76,731 and $151,351 at December 31, 2021 and 2020, respectively, represent amounts due from working interest partner in California.

 

There were no allowances for doubtful accounts for the Company’s trade accounts receivable at December 31, 2021 and 2020.

 

 

NOTE 5 — CRUDE OIL AND NATURAL GAS PROPERTIES:

 

Crude oil and natural gas property balances at December 31, 2021 and 2020 are set forth in the table below:

 

		December 31, 2021				December 31, 2020
Unproved leasehold costs		$	141,942			$	61,569
Costs of wells and development			8,301,524				8,209,642
Total cost of oil and gas properties			8,443,466				8,271,211
Accumulated depletion, depreciation amortization and impairment			(1,765,892	)			(1,273,562	)
Oil and gas properties, net		$	6,677,574			$	6,997,649

 

For the twelve months ended December 31, 2021 and 2020, the Company recognized depletion expense of $492,330 and $418,211, respectively which is included in DD&A in the statement of operations. Impairment expense for the twelve months ended December 31, 2021 and 2020 was $-0- and $386,559, 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 December 31, 2021 and 2020, ARO obligations were considered to be long-term based on the estimated timing of the anticipated cash flows. For the twelve months ended December 31, 2021 and 2020, the Company recognized accretion expense of $4,300 and ($36,900), respectively which is included in DD&A in the statements of operations.

 

Changes in the asset retirement obligations for the twelve months ended December 31, 2021 and December 31, 2020 are set forth in the table below.

 

		December 31, 2021				December 31, 2020
Asset retirement obligation, beginning of period		$	51,800			$	88,700
Accretion expense			4,300				—
Revisions to asset retirement obligation			—				(36,900	)
Asset retirement obligation, end of period		$	56,100			$	51,800

 

NOTE 7 — ACCOUNTS PAYABLE AND REVENUE PAYABLE:

 

At December 31, 2021 and 2020, the combined balances owed for accounts payable and revenue payable were $401,037 and $237,277, respectively.  

 

 

NOTE 8 — SHORT-TERM AND LONG-TERM BORROWINGS:

 

Note Payable – Related Party

 

The Notes payable – related party balances at December 31, 2021 and 2020 were $6,455,606 and $8,587,487, respectively, and represent net advances made to the Company from its parent company, Gaelic Resources Ltd., a private company incorporated in the Isle of Man and the 100% owner of Reabold.

 

 

NOTE 9 — MEMBERS’ EQUITY:

 

The Members’ Equity as of December 31, 2021 and 2020 are shown in the table below.

 

		Members Equity Balance
Members’ Equity, December 31, 2019		4,680
Member equity increase during the twelve months ended December 31, 2020		—
Members’ Equity, December 31, 2020		4,680
Conversion of related party debt to equity during the twelve months ended December 31, 2021		2,204,259
Members’ equity, December 31, 2021		2,208,939

 

During the twelve months ended December 31, 2021, there was a conversion of related party debt to member’s equity in the amount of $2,204,259 as a part of the Company’s restructuring of its balance sheet to reduce related party debt.

 

 

NOTE 10 — INCOME TAXES:

 

For federal income tax purposes, prior to August 28, 2021, Reabold California, LLC was considered to be a disregarded entity by the Internal Revenue Service (IRS) as it was registered as a single-member limited liability company. On August 28, 2021, Reabold California, LLC filed a Water Edge Election with the IRS and was considered to be a US corporation for federal income tax return purposes. All required returns have been filed with the IRS.

 

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%.

 

At December 31, 2021, the Company had a net operating loss (“NOL”) carryforwards for federal and state income tax purposes. The Company has recorded an allowance for the NOL carryforwards.

 

Any 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.

 

 

NOTE 11 — 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.

 

Sunflower Lawsuit

 

Sunflower Alliance v. California Department of Conservation, Geologic Energy Management Division.  This case challenges the state agency’s compliance with the California Environmental Quality Act (CEQA) with respect to the PAL Reabold 072-00-0001 Project, for wastewater injection into an existing well.  The Petition was filed on December 29, 2021 in the Alameda County Superior Court.  The Petitioner seeks an order setting aside the state agency’s approval of a wastewater injection permit; damages are not sought in the lawsuit.  On February 22, 2022, Real Party in Interest Reabold California, LLC filed a motion to transfer the case to the Contra Costa County Superior Court.  On March 22, 2022, the Alameda County Superior Court ordered the case transferred to the Contra Costa County Superior Court.  On August 15, 2022, the Contra Costa County Superior Court provided notice that the transfer had been completed and the case filed in that court. If successful, the lawsuit would prevent Reabold from injecting wastewater into an existing well until any CEQA deficiencies are addressed.  The California Attorney General is defending the state agency, which disputes Petitioner’s claims.  On December 22, 2022, the Superior Court issued an order finding CEQA deficiencies, and directing the state agency to rescind its approval of the project. Reabold filed a notice of appeal of the Superior Court’s order. At this time, it is unclear when the litigation will be resolved.

 

The Company is not aware of any environmental claims existing as of December 31, 2021. 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 12 — SUBSEQUENT EVENTS:

 

On May 25, 2022, Reabold California, LLC (“Reabold”) a wholly owned subsidiary of Gaelic Resources Ltd. was acquired by Daybreak Oil and Gas, Inc. (“Daybreak”), a publicly traded crude oil company with operations in Kern County, California for an aggregate purchase price consisting of (i) 160,964,489 shares of Daybreak common stock valued at $6,599,544 and (ii) reimbursement to Reabold Resources Plc of $263,619 which had previously been expended in well workover projects by Reabold.

 

 

 

 

 

14

 

 

 

 

 

 

---

REABOLD CALIFORNIA, LLC.

TABLE OF CONTENTS

 

 

	Page No.
Balance Sheets at as of February 28, 2022 and December 31, 2021	2
Statements of Operations (Unaudited) for the two months ended February 28, 2022 and 2021	3
Statements of Changes in Members’ Equity for (Unaudited) for the two months ended February 28, 2022	4
Statements of Cash Flows for the (Unaudited) For the Two Months Ended February 28, 2022 and 2021	5
Notes to Unaudited Financial Statements for the two months ended February 28, 2022	6

 

 

 

 

 

 

 

 

REABOLD CALIFORNIA, LLC

Balance Sheets (Unaudited)

As of February 28, 2022 and December 31, 2021

		As of
		February 28, 2022				December 31, 2021
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	324,484			$	350,962
Restricted cash			250,000				250,000
Accounts receivable:
Crude oil sales			93,469				84,387
Joint interest participants			—				76,731
Prepaid expenses and other current assets			2,800				—
Oil inventory			27,462				27,462
Total current assets			698,215				789,542
OIL AND GAS PROPERTIES, successful efforts method, net
Proved properties			6,549,078				6,535,632
Unproved properties			153,052				141,942
Total long-term assets			6,702,130				6,677,574
Total assets		$	7,400,345			$	7,467,116
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable and other accrued liabilities		$	152,992			$	193,325
Revenue payable			103,465				207,712
Accrued expenses			1,708				—
Notes payable - related party			6,455,606				6,455,606
Total current liabilities			6,713,771				6,856,643
LONG TERM LIABILITIES:
Asset retirement obligation			56,100				56,100
Total long-term liabilities			56,100				56,100
Total liabilities			6,769,871				6,912,743
COMMITMENTS AND CONTINGENCIES
MEMBERS’ EQUITY (DEFICIT):
Member’s capital			2,208,939				2,208,939
Accumulated deficit			(1,578,465	)			(1,654,566	)
Total members’ equity			630,474				554,373
Total liabilities and members’ equity		$	7,400,345			$	7,467,116

 

 

The accompanying notes are an integral part of these financial statements.

 

 

REABOLD CALIFORNIA, LLC

Statements of Operations (Unaudited)

For the Two Months Ended February 28, 2022 and 2021

		Two Months Ended
		February 28, 2022				February 28, 2021
REVENUE:
Crude oil sales		$	209,888			$	177,776
Natural gas sales			3,436				1,092
Total crude oil and natural gas sales		$	213,324			$	178,868
OPERATING EXPENSES:
Production			138,953				146,420
General and administrative			(1,730	)			3,721
Total operating expenses			137,223				150,141
OPERATING INCOME			76,101				28,727
NET INCOME		$	76,101			$	28,727

 

 

The accompanying notes are an integral part of these financial statements.

 

 

REABOLD CALIFORNIA, LLC

Statements of Changes in Members’ Equity (Unaudited)

For the Two Months Ended February 28, 2022

		Member’s Capital			Accumulated Deficit				Total
BALANCE, DECEMBER 31, 2019		$	4,680		$	(741,144	)		$	(736,464	)
Net Loss		$	—		$	(578,089	)		$	(578,089	)
BALANCE, DECEMBER 31, 2020		$	4,680		$	(1,319,233	)		$	(1,314,553	)
Conversion of related party debt		$	2,204,259		$	—			$	2,204,259
Net Loss		$	—		$	(335,333	)		$	(335,333	)
BALANCE, DECEMBER 31, 2021		$	2,208,939		$	(1,654,566	)		$	554,373
Net Income		$	—		$	76,101			$	76,101
BALANCE, FEBRUARY 28, 2022		$	2,208,939		$	(1,5588,465	)		$	630,474

 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

 

REABOLD CALIFORNIA, LLC

Statements of Cash Flows (Unaudited)

For the Two Months Ended February 28, 2022 and 2021

		Two Months Ended
		February 28, 2022				February 28, 2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	76,101			$	28,727
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Changes in assets and liabilities:
Accounts receivable – crude oil and natural gas sales			(9,082	)			20,287
Accounts receivable – joint interest participants			76,731				21,590
Prepaid expenses and other current assets			(2,800	)			304
Accounts payable and other accrued liabilities			(40,333	)			16,884
Revenue payable			(104,247	)			(46,103	)
Accrued expenses			1,708				(3,598	)
Net cash used in operating activities			(1,922	)			38,091
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to crude oil and natural gas properties			(24,556	)			(55,197	)
Net cash used in investing activities			(24,556	)			(55,197	)
NET INCREASE (DECREASE) IN CASH, AND RESTRICTED CASH			(26,478	)			(17,106	)
CASH AND RESTRICTED CASH AT BEGINNING OF PERIOD			600,962				356,900
CASH AND RESTRICTED CASH AT END OF PERIOD		$	574,484			$	339,794

 

 

The accompanying notes are an integral part of these financial statements.

 

 

REABOLD CALIFORNIA, LLC

NOTES TO UNAUDITED FINANCIAL STATEMENTS

For the two Months Ended February 28, 2022

 

NOTE 1 — BASIS OF PRESENTATION:

 

The unaudited financial statements were prepared by Reabold California, LLC (“we”, “our”, “Reabold”, the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (‘SEC”). The information furnished herein reflects all adjustments which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) were omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited financial statements and footnotes included within the 8K/A. The results for the two months ended February 28, 2022, are not necessarily indicative of the results to be expected for the year ended February 28, 2023.

 

 

NOTE 2 — GOING CONCERN:

 

Financial Condition

 

Reabold’s financial statements for the two months ended February 28, 2022 and 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. Reabold has incurred net losses since inception, and at February 28, 2022, has accumulated a deficit of approximately $1.58 million and a working capital deficit of approximately $6.02 million, which raises substantial doubt about the Company’s ability to continue as a going concern.

 

 

NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

Basis of Accounting

 

The Company maintains its accounts on the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America (“U.S.”).

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principle generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

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. Under Topic 606, each unit of commodity product (crude oil Bbl or natural gas MMBTU) represents a separate performance obligation which is sold at variable prices, determinable on a monthly basis. The pricing provisions of our crude oil and natural gas 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 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. Control of our produced natural gas volumes passes to our customers when the natural gas is measured at the purchaser’s gas line meter. The Company has no control over the natural gas after this point and the measurement at this point dictates the amount on which the customer’s payment is based. Our crude oil and

 

 

natural gas revenue streams include 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 and natural gas. Revenue is recorded in the month our crude oil and natural gas production is delivered to the purchaser.

 

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.

 

Restricted Cash

 

Restricted cash balances include amounts posted with regulatory authorities for reclamation bonds related to the Company’s crude oil and natural gas operations.

 

Accounts Receivable

 

Substantially all of the Company’s accounts receivable balances consist of uncollateralized accrued crude oil and natural gas revenues due under normal trade terms and joint interest billings consist of uncollateralized joint interest owner obligations due under terms established with the joint interest partners. This concentration of customers and joint interest owner 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. The Company routinely assesses the recoverability of all revenue and joint interest 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. There were no allowances for doubtful accounts for the Company’s trade accounts receivable at February 28, 2022 and December 31, 2021.

 

Concentration of Credit Risk

 

Substantially all of the Company’s accounts receivable result from crude oil and natural gas 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.

 

At the Company’s projects in California we deal with only one buyer for the purchase of all crude oil production and one buyer of natural gas production. At February 28, 2022 and December 31, 2021, these single individual customers represented 100.0% of crude oil and natural gas sales receivable from operations. If these buyers are unable to resell its products or if they lose a significant sales contract then the Company may incur difficulties in selling its crude oil and natural gas production.

 

Related Party Transactions

 

The Company’s related party transaction policy identifies a related party as any person or entity that is related to the reporting entity. This may include, but is not limited to a person who has control, joint control, or significant influence over the entity or is a key member of management. This may also include any parent, subsidiary, fellow subsidiary, associate or joint venture entity of the Company. A related party transaction is a transfer of resources, services or obligations between the Company and a related party, regardless of whether a price is charged. For the two months ended February 28, 2022, the Company did not receive any advances nor did the Company repay any advances from any related parties. For the year ended December 31, 2021, the Company repaid net advances (advances less repayments) of $400,448 to a related party.

 

Leases

 

For the two months ended February 28, 2022 and 2021, the Company had no leases.

 

 

Risks and Uncertainties

 

As a crude oil and natural gas producer, the Company’s revenue, profitability, and future growth are substantially dependent upon the prevailing and future prices of crude oil and natural gas, which are dependent upon numerous factors beyond its control such as economic, political and regulatory developments and competition from other energy sources. The energy markets have historically been very volatile and there can be no assurance that crude oil and natural gas price will not be subject to wide fluctuations in the future. A substantial or extended decline in crude oil and natural gas prices could have a material adverse effect on the Company’s financial position, results of operation, cash flows and quantities of crude oil and natural gas reserves that may be economically produced. Other risks and uncertainties that could affect the Company in the current price environment include, but are not limited to, counterparty credit risk for our receivables, access to credit and financial markets and the ability to meet financial ratios and covenants in any future financing agreements.

 

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.

 

 

NOTE 4 — ACCOUNTS RECEIVABLE:

 

Accounts receivable consists primarily of receivables from the sale of crude oil and natural gas 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 and natural gas sales receivables balances of $93,469 and $84,387 at February 28, 2022 and December 31, 2021, represent crude oil and natural gas sales that occurred in February 2022 and 2021, respectively.

 

Joint interest participant receivables balances of $-0- and $76,731 at February 28, 2022 and December 31, 2021, respectively, represent amounts due from working interest partner in California.

 

There were no allowances for doubtful accounts for the Company’s trade accounts receivable at February 28, 2022 and December 31, 2021.

 

 

NOTE 5 — ACCOUNTS PAYABLE AND REVENUE PAYABLE:

 

At February 28, 2022 and December 31, 2021, the combined balances owed for accounts payable and revenue payable were $256,457 and $401,037, respectively.  

 

 

 

NOTE 6 — CRUDE OIL AND NATURAL GAS PROPERTIES:

 

Crude oil and natural gas property balances at February 28, 2022 and December 31, 2021 are set forth in the table below:

 

		February 28, 2022				December 31, 2021
Unproved leasehold costs		$	153,052			$	141,942
Costs of wells and development			8,314,970				8,301,524
Total cost of oil and gas properties			8,468,022				8,443,466
Accumulated depletion, depreciation amortization and impairment			(1,765,892	)			(1,765,892	)
Oil and gas properties, net		$	6,702,130			$	6,677,574

 

For the two months ended February 28, 2022, the Company did not recognize and depletion or impairment expense. For the twelve months ended December 31, 2021, the Company recognized depletion expense of $492,330 which is included in DD&A in the statement of operations. Impairment expense for the twelve months ended December 31, 2021, was $-0-.

 

 

NOTE 7 — SHORT-TERM AND LONG-TERM BORROWINGS:

 

Note Payable – Related Party

 

The Notes payable – related party balances at February 28, 2022 and December 31, 2021 remained unchanged at $6,455,606, respectively, and represent net advances made to the Company from its parent company, Gaelic Resources Ltd., a private company incorporated in the Isle of Man and the 100% owner of Reabold.

 

 

NOTE 8 — MEMBERS’ EQUITY:

 

The Members’ Equity as of February 28, 2022 and December 31, 2021 are shown in the table below.

 

			Members Equity Balance
Members’ equity, December 31, 2019			4,680
Change sin members’ equity during the twelve months ended December 31, 2020			—
Members’ equity, December 31, 2020			4,680
Conversion of related party debt to equity during the twelve months ended December 31, 2021			2,204,259
Members’ equity, December 31, 2021			2,208,939
Changes in members’ equity during the two months ended February 28, 2022			—
Members’ equity, February 28, 2022			2,208,939

 

During the twelve months ended December 31, 2021, there was a conversion of related party debt to members’ equity in the amount of $2,204,259 as a part of the Company’s restructuring of its balance sheet to reduce related party debt.

 

 

NOTE 9 — 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.

 

Sunflower Lawsuit

 

Sunflower Alliance v. California Department of Conservation, Geologic Energy Management Division.  This case challenges the state agency’s compliance with the California Environmental Quality Act (CEQA) with respect to the PAL Reabold 072-00-0001 Project, for wastewater injection into an existing well.  The Petition was filed on December 29, 2021 in the Alameda County Superior Court.  The Petitioner seeks an order setting aside the state agency’s approval of a wastewater injection permit; damages are not sought in the lawsuit.  On February 22, 2022, Real Party in Interest Reabold California, LLC filed a motion to transfer the case to the Contra Costa County Superior Court.  On March 22, 2022, the Alameda County Superior Court ordered the case transferred to the Contra Costa County Superior Court.  On August 15, 2022, the Contra Costa County Superior Court provided notice that the transfer had been completed and the case filed in that court. If successful, the lawsuit would prevent Reabold from injecting wastewater into an existing well until any CEQA deficiencies are addressed.  The California Attorney General is defending the state agency, which disputes Petitioner’s claims.  On December 22, 2022, the Superior Court issued an order finding CEQA deficiencies, and directing the state agency to rescind its approval of the project. Reabold filed a notice of appeal of the Superior Court’s order. At this time, it is unclear when the litigation will be resolved.

 

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 10 — SUBSEQUENT EVENTS:

 

On May 25, 2022, Reabold California, LLC (“Reabold”) a wholly owned subsidiary of Gaelic Resources Ltd. was acquired by Daybreak Oil and Gas, Inc. (“Daybreak”), a publicly traded crude oil company with operations in Kern County, California for an aggregate purchase price consisting of (i) 160,964,489 shares of Daybreak common stock valued at $6,599,544 and (ii) reimbursement to Reabold Resources Plc of $263,619 which had previously been expended in well workover projects by Reabold.

 

 

 

 

 

10

 

 

 

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TABLE OF CONTENTS

 

 

	Page No.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET as of FEBRUARY 28, 2022	2
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE TWO MONTHS ENDED FEBRUARY 28, 2022	4
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED FEBRUARY 28, 2022	5
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	6

 

 

 

 

 

 

 

(b)

Pro forma financial information

 

DAYBREAK OIL AND GAS, INC. AND REABOLD CALIFORNIA, LLC

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

FEBRUARY 28, 2022

 

		Daybreak				Reabold				Pro Forma Adjustment				Notes		Combined
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	139,573			$	324,484			$	—					$	464,057
Restricted cash			—				250,000				—						250,000
Accounts receivable:			203,066				93,469				—						296,535
Prepaid expenses and other current assets			74,012				30,262				(27,462	)		(1)			76,812
Total current assets			416,651				698,215				(27,462	)					1,087,404
LONG-TERM ASSETS:
Crude oil & natural gas properties			536,032				6,702,130				(2,007,567	)		(2)			5,230,595
Goodwill crude oil and natural gas properties			—				—				2,168,600			(3)			2,168,000
Other long-term assets			23,021				—				—						23,021
Total long-term assets			559,053				6,702,130				161,033						7,422,216
Total assets		$	975,704			$	7,400,345			$	133,571					$	8,509,620
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and other accrued liabilities		$	1,874,576			$	258,165				263,619			(4)			2,396,360
Notes payable			721,977				—				—						721,977
Notes payable – related party			—				6,455,606				(6,455,606	)		(5)			—
Line of credit			808,182				—				(808,182			(6)			—
Total current liabilities			3,404,735				6,713,771				(7,000,169	)					3,118,337
LONG TERM LIABILITIES:
Notes payable			865,608				—				—						865,608
Asset retirement obligation			52,565				56,100				98,033			(7)			206,698
Total long-term liabilities			918,173				56,100				98,033						1,072,306
Total liabilities			4,322,908				6,769,871				(6,902,136	)					4,190,643
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER’S / MEMBERS’ EQUITY (DEFICIT):
Common stock			67,802				—				289,089			(8)			356,891
Additional paid-in capital			26,115,450				—				8,938,580			(9)			35,054,030
Member’s Equity			—				2,208,939				(2,208,939	)		(10)			—
Accumulated deficit (retained earnings)			(29,530,456	)			(1,578,465	)			16,977			(11)			(31,091,944	)
Total stockholders’ / member’s equity (deficit)			(3,347,204	)			630,474				7,035,707						4,318,977
Total liabilities and stockholders’ equity		$	975,704			$	7,400,345			$	133,571					$	8,509,620

 

  

The accompanying notes are an integral part of these unaudited pro forma financial statements.

 

  

(1)

Adjustment represents value of oil inventory that will no longer be presented in keeping with standard industry practices.

(2)

Adjustment represents the change in valuation of O&G properties acquired in the transaction (see Note 2).

(3)

Adjustment represents the goodwill in O&G properties from the transaction (see Note 2).

(4)

Adjustment represents the reimbursement ($263,619) owed to Reabold per terms of the acquisition (see Note 2).

(5)

Adjustment represents the elimination of the Reabold related party debt ($6,455,606) from the sale of O&G properties.

(6)

Adjustment represents the payoff of the Daybreak line of credit balance ($808,182) with proceeds from the stock sale.

(7)

Adjustment represents recognition of increase in ARO liability ($98,033) from the acquisition of O&G properties.

(8)

Adjustment represents the par value of the common stock issued for the acquisition of O&G properties and sale of stock for funding (see Note 5).

(9)

Adjustment represents the excess of capital received over the par value of the common stock issued for the acquisition of O&G properties and sale of stock for funding (see Note 5).

(10)

Adjustment represents elimination of the acquired company’s member’s equity ($2,208,939) through the acquisition.

(11)

Adjustment represents the recognition of the elimination of the acquired company’s accumulated deficit ($1,578,465) and the change in oil inventory reporting ($27,462) and the net valuation adjustment ($1,622,904) and change in valuation of O&G properties.

 

 

 

 

 

 

 

 

 

DAYBREAK OIL AND GAS, INC. AND REABOLD CALIFORNIA, LLC

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE TWO MONTHS ENDED FEBRUARY 28, 2022

 

		Daybreak				Reabold				Pro Forma Adjustment				Notes				Combined
REVENUE:
Crude oil sales		$	150,883			$	209,888			$	—							$	360,771
Natural gas sales			—				3,436				—								3,436
Total crude oil and natural gas sales			150,883				213,324				—								364,207
OPERATING EXPENSES:
Production			44,000				138,953				—								182,953
Exploration and drilling			55,978				—				—								55,978
Depreciation, depletion and amortization			5,327				—				—								5,327
General and administrative			100,100				(1,730	)			—								98,370
Total operating expenses			205,405				137,223				—								342,628
OPERATING LOSS			(54,522	)			76,101				—								21,579
OTHER INCOME (EXPENSE):
Total other expenses			(28,398	)			—				—								(28,398	)
NET LOSS			(82,920	)			76,101				—								(6,819	)
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS		$	(82,920	)		$	76,101			$	—							$	(6,819	)
NET LOSS PER COMMON SHARE
Basic and diluted		$	(0.001	)		$	—			$	—							$	(0.0001	)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic and diluted			64,956,636				—				4,899,821				(1)				69,856,457

 

 

The accompanying notes are an integral part of these unaudited pro forma financial statements.

 

 

(1)

Adjustment represents the increase in the weighted average shares outstanding because of the 289,089,489 common stock shares issued related to the acquisition and stock sale for the acquisition.

 

 

 

DAYBREAK OIL AND GAS, INC. AND REABOLD CALIFORNIA, LLC

UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE TWELVE MONTHS ENDED FEBRUARY 28, 2022

 

		Daybreak				Reabold				Pro Forma Adjustment				Notes			Combined
REVENUE:
Crude oil sales		$	680,107			$	1,286,559			$	—						$	1,966,666
Natural gas sales			—				24,434				—							24,434
Total crude oil and natural gas sales			680,107				1,310,993				—							1,991,100
OPERATING EXPENSES:
Production			231,275				983,565				—							1,214,840
Exploration and drilling			56,213				—				—							56,213
Depreciation, depletion and amortization			49,590				492,330				—							541,920
General and administrative			603,808				110,679				—							714,487
Total operating expenses			940,886				1,586,574				—							2,527,460
OPERATING LOSS			(260,779	)			(275,581	)			—							(536,360	)
OTHER INCOME (EXPENSE):
Interest expense, net			(220,085	)			(12,378	)			—							(232,463	)
Gain on asset disposal and debt forgiveness			82,414				—				—							82,414
Total other expenses			(137,671	)			(12,378	)			—							(150,049	)
NET LOSS			(398,450	)			(287,959	)			—							(686,409	)
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS		$	(398,450	)		$	—			$	—						$	(686,409	)
NET LOSS PER COMMON SHARE
Basic and diluted		$	(0.01	)		$	—			$	—						$	(0.011	)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic and diluted			61,548,414				—				792,100			(1)				62,340,514

 

 

The accompanying notes are an integral part of these unaudited pro forma statements.

 

 

(1)

Adjustment represents the increase in the weighted average shares outstanding because of the 289,089,489 common stock shares issued related to the acquisition and stock sale for the acquisition.

 

  

DAYBREAK OIL AND GAS, INC. AND REABOLD CALIFORNIA, LLC

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 1 — BASIS OF PRESENTATION:

 

The unaudited pro forma condensed consolidated balance sheet has been prepared by applying pro forma adjustments to Daybreak Oil and Gas, Inc. (the “Company”) and Reabold California, LLC (“Reabold”) unaudited consolidated balance sheets as of February 28, 2022.

 

The unaudited pro forma condensed consolidated statement of operations for the two months ended February 28, 2022 has been prepared from the Company’s and Reabold’s unaudited consolidated statement of operations for the two months ended February 28, 2022.

 

The Company’s audited consolidated financial statements and Reabold’s audited financial statements have been used in the preparation of the unaudited pro forma consolidated statement of operations for the twelve months ended February 28, 2022.

 

 

NOTE 2 — BUSINESS ACQUISITION:

 

On October 20, 2021, the Company entered into an Equity Exchange Agreement and Amended on February 14, 2022 for the acquisition of Reabold, a wholly owned subsidiary of Gaelic Resources Ltd. The acquisition was finalized by the Company on May 25, 2022. The aggregate purchase price consisted of (i) 160,964,489 shares of Daybreak common stock valued at $6,599,544 and (ii) reimbursement to Reabold Resources Plc of $263,619 which had previously been expended in well workover projects by Reabold.

 

Recognized Amount of Identifiable Assets to be Acquired and Liabilities Assumed

 

The Company has performed a preliminary valuation analysis of the fair market value of the Reabold assets to be acquired and the liabilities to be assumed. Using the total consideration for the acquisition, the Company has estimated the allocation to such assets and liabilities. The following table summarizes the allocation of the preliminary purchase price as if the acquisition closed on February 28, 2022.

 

Identifiable Assets:

 

Valuation of proved developed crude oil and natural gas properties		$	4,144,828
Valuation of proved undeveloped crude oil and natural gas properties			549,735
Total valuation of proved crude oil and natural gas properties			4,694,563
Intangible asset – Goodwill O&G properties			2,168,600
Total Identifiable Assets Acquired			6,863,163
Notes payable			263,619
Total Liabilities Assumed			263,619
Total Identifiable Net Assets		$	6,599,544

 

This preliminary purchase price allocation has been used to prepare pro forma adjustments in the pro forma condensed consolidated balance sheet and pro forma condensed consolidated statement of operations. The pro forma condensed consolidated balance sheet includes the impact of the transaction cost of $6,599,544, but is not included in the pro forma condensed consolidated statement of operations as this is a non-recurring charge. The final purchase price allocation will be determined when the Company has completed the detailed valuations and necessary calculations. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments. The final allocation may include (1) changes in fair value of property and equipment, (2) changes in allocations to intangible assets such as permits and/or goodwill and (3) other changes to assets and liabilities.

 

Depreciation, amortization and abandonment costs have been provided for property and equipment and finite tangible assets based on the preliminary purchase price allocation.

 

All significant intercompany balances have been eliminated in consolidation.

 

 

NOTE 3 — RESERVES ACQUIRED:

 

The table below contains our estimates of the net quantities of proved developed reserves, and estimates of future net cash flows covering the interests that were acquired. Additionally, we did acquire undeveloped locations that are believed to have reserves that are not shown below in accordance with following the guidance provided by Rule 4-10 of Regulation S-K. The estimates below are derived from a reserve report dated May 31, 2022 that was prepared for the Company by a third party.

 

		Net Oil, Bbl		Net Gas, Mcf		Future Net Revenue		Present Worth 10%
Proved developed		269,530		46,970		$12,078,990		$7,650,080

 

 

NOTE 4 — CASH TRANSACTION EXPENSES RELATED TO ACQUISITION:

 

Purpose		Amount
Acquisition consulting		$	384,916
Funding fees			640,625
Total cash transaction fees		$	1,025,541

 

 

NOTE 5 — COMMON STOCK ISSUANCES RELATED TO ACQUISITION:

 

The table below shows the purpose and number of shares issued for the acquisition of oil and gas properties and the related funding received in regards to the acquisition transaction from the sale of common stock.

 

		Approximate				Common Stock								Additional				Total
Purpose		Price per Share				Shares				Par Value				Paid-In Capital				Valuation
Acquisition of O&G properties		$	0.04				160,964,489			$	160,964			$	6,438,580			$	6,599,544
Sale of common stock			0.02				128,125,000				128,125				2,500,000				2,628,125
Total stock issuance for acquisition		$	0.03				289,089,489			$	289,089			$	8,938,580			$	9,227,669

 

The issuance of common stock for the acquisition of oil and gas properties and the sale of common stock for funding purposes as a part of the terms of the acquisition were to different unrelated parties.

 

 

 

 

7

 

 

 

 

 

v3.23.2

Cover	May 26, 2022
Cover [Abstract]
Document Type	8-K/A
Amendment Flag	true
Amendment Description	This Amendment No. 1 on Form 8-K/A amends the Current Report on Form 8-K of Daybreak Oil and Gas, Inc. (the “Company” or “Daybreak”) filed with the U.S. Securities and Exchange Commission (“the SEC”) on May 26, 2022 (the “Original Form 8-K”). The Original Form 8-K reported under Item 2.01 the completion of the previously disclosed acquisition of Reabold California, LLC (“Reabold”) contemplated by that certain Equity Exchange Agreement, dated as of October 20, 2021 (8-K filed on October 26, 2021) and Amended on February 14, 2022 (8-K filed on February 22, 2022). This Amendment No. 1 is being filed by the Company to amend the Original Form 8-K, solely to provide the disclosures required by Item 9.01 of this Form 8-K that were not previously filed with the original report. Except as provided herein, the disclosures made in the Original Form 8-K remain unchanged.
Document Period End Date	May 26, 2022
Entity File Number	000-50107
Entity Registrant Name	DAYBREAK OIL AND GAS, INC.
Entity Central Index Key	0001164256
Entity Tax Identification Number	91-0626366
Entity Incorporation, State or Country Code	WA
Entity Address, Address Line One	1414 S. Friendswood Drive
Entity Address, Address Line Two	Suite 212
Entity Address, City or Town	Friendswood
Entity Address, State or Province	TX
Entity Address, Postal Zip Code	77546
City Area Code	(281)
Local Phone Number	996-4176
Written Communications	false
Soliciting Material	false
Pre-commencement Tender Offer	false
Pre-commencement Issuer Tender Offer	false
Entity Emerging Growth Company	false

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