NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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(UNAUDITED)
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NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
The
accompanying condensed consolidated financial statements have been prepared by management of Laredo Oil, Inc. (the Company). In the
opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows as of and for the periods presented have been made.
The
Company was incorporated under the laws of the State of Delaware on March 31, 2008 under the name of Laredo Mining, Inc.
with authorized common stock of 90,000,000 shares at $0.0001 par value and authorized preferred stock of 10,000,000 shares at $0.0001
par value. On October 21, 2009 the name was changed to Laredo Oil, Inc.
Laredo
Oil, Inc. (the Company) is an oil exploration and production (E&P) company primarily engaged in acquisition
and exploration efforts for mineral properties. From June 14, 2011 to December 31, 2020, the Company was a management services company
managing the acquisition and conventional operation of mature oil fields and the further recovery of stranded oil from those fields using
enhanced oil recovery (EOR) methods for its sole customer, Stranded Oil Resources Corporation (SORC), a wholly
owned subsidiary of Alleghany Corporation (Alleghany).
From
its inception through October 2009, the Company was primarily engaged in acquisition and exploration efforts for mineral properties.
After a change in control in October 2009, the Company shifted its focus to locating mature oil fields with the intention of acquiring
those oil fields and recovering stranded oil using EOR methods. The Company was unable to raise the capital required to purchase any
suitable oil fields. On June 14, 2011, the Company entered into several agreements with SORC to seek recovery of stranded crude oil from
mature, declining oil fields by using the EOR method known as Underground Gravity Drainage (UGD). Such agreements consisted
of a license agreement between the Company and SORC (the SORC License Agreement), a license agreement between the Company
and Mark See, the Companys Chairman and Chief Executive Officer (CEO) (the MS-Company License Agreement),
an Additional Interests Grant Agreement between the Company and SORC, a Management Services Agreement between the Company and SORC (the
MSA), a Finders Fee Agreement between the Company and SORC (the Finders Fee Agreement), and a Stockholders
Agreement (the Stockholders Agreement) among the Company, SORC and Alleghany Capital Corporation, a subsidiary of Alleghany
(Alleghany Capital), each of which were dated June 14, 2011 (collectively, the 2011 SORC Agreements).
The
2011 SORC Agreements stipulated that the Company and Mark See will provide to SORC, management services and expertise through exclusive,
perpetual license agreements and the MSA with SORC. As consideration for the licenses to SORC, the Company will receive an interest in
SORCs net profits as defined in the Agreements (the Royalty). The MSA outlines that the Company will provide the
services of various employees (Service Employees), including Mark See, in exchange for monthly and quarterly management
service fees. The monthly management service fees provide funding for the salaries, benefit costs, and FICA taxes for the Service
Employees identified in the MSA. SORC remits payment for the monthly management fees in advance and is payable on the first day of each
calendar month. The quarterly management fee totals $137,500 and was paid on the first day of each calendar quarter, with the last payment
being received October 1, 2020. In addition, prior to December 31, 2020, SORC reimbursed the Company for monthly
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS - continued
expenses
incurred by Service Employees in connection with their rendition of services under the MSA. The Company could also submit written requests
to SORC for additional funding for payment of the Companys operating costs and expenses, which SORC, in its sole and absolute discretion,
determined whether or not to fund.
As
consideration for the licenses to SORC, the Company was to receive an interest in SORC net profits as defined in the SORC License Agreement
(the SORC License Agreement). Under the SORC License Agreement, the Company agreed that a portion of the Royalty equal to
at least 2.25% of the net profits (Incentive Royalty) be used to fund a long-term incentive plan for the benefit of its employees,
as determined by the Companys board of directors. On October 11, 2012, the Laredo Royalty Incentive Plan (the Plan)
was approved and adopted by the Board and the Incentive Royalty was assigned to the Plan. As a result of the Securities Purchase Agreement
dated December 31, 2020, (the SORC Purchase Agreement), there are no longer any Incentive Royalties payable pursuant to the
Plan and no Royalties will be paid to the Company by SORC in the future.
Pursuant
to the SORC Purchase Agreement, by and among the Company, Alleghany, SORC, and SORC Holdings LLC, a wholly-owned subsidiary of the Company
(SORC Holdings), SORC Holdings purchased all of the issued and outstanding shares of SORC stock (the SORC Shares)
in a transaction that closed on December 31, 2020 (the SORC Purchase Transaction). As consideration for the SORC Shares,
SORC Holdings paid Alleghany $72,678 (comprised of $55,000 purchase price plus a $17,678 working capital adjustment calculated in accordance
with the SORC Purchase Agreement), and the Company agreed to pay Alleghany a revenue royalty of 5.0% of the Companys future revenues
and net profits relating to oil, gas, gas liquids and all other hydrocarbons, subject to certain adjustments, for a period of seven years
after the closing. The SORC Purchase Agreement provides for customary adjustments to the purchase price based on the effective date of
December 31, 2020. In connection with the SORC Purchase Transaction, the 2011 SORC Agreements were terminated effective as of December
31, 2020.
Further,
pursuant to the SORC Purchase Agreement, the Company and Alleghany entered into a Consulting Agreement dated as of December 31, 2020
(the Alleghany Consulting Agreement), pursuant to which Alleghany agreed to pay an aggregate of approximately $1.245 million
during calendar year 2021 in consideration of the Company causing certain individuals, including Mark See, the Companys Chief Executive
Officer and Chairman, and Chris Lindsey, the Companys General Counsel and Secretary, to provide consulting services to Alleghany
(for a period of three years for Mr. See and one year for Mr. Lindsey).
The
Company believes that the SORC Purchase Transaction was advantageous as it simplified in a timely manner the unwinding of the 2011 SORC
Agreements and allowed the Company to acquire vehicles and oil field assets that can be utilized in future oil recovery projects.
As
the Company now owns SORC and the 2011 SORC Agreements have been terminated, the Company no longer receives any payments from SORC (including
any Royalty payable by SORC to the Company) outlined in the 2011 SORC Agreements. As a result, except for the payments to be made in
calendar year 2021 to the Company under the Alleghany Consulting Agreement, the Company will no longer receive management fee revenue
from Alleghany or reimbursement from Alleghany for the monthly expenses of its employees, which fees and reimbursements were effectively
all of the Companys revenues prior to the closing of the SORC Purchase Transaction.
On
June 30, 2020, the Company entered into the Limited Liability Company Agreement (the LLC Agreement) of Cat Creek Holdings
LLC (Cat Creek), a Montana limited liability company formed as a joint venture with Lipson Investments LLC (Lipson)
and Viper Oil & Gas, LLC (Viper) for the purchase of certain oil and gas properties in the Cat Creek Field in Petroleum
and Garfield Counties in the State of Montana (the Cat Creek Properties). Cat Creek entered into an Asset Purchase and Sale
Agreement (the Cat Creek Purchase Agreement) with Carrell Oil Company (Carrell Oil) on July 1, 2020 for the purchase
of the Cat Creek Properties from Seller. Upon closing under the Cat Creek Purchase Agreement, Carrell received consideration of $400,000,
subject to certain adjustments resulting from pre- and post-effective date revenue, expense and tax allocations. In accordance with the
LLC
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS - continued
Agreement,
the Company invested $448,900 in Cat Creek Holdings, LLC (Cat Creek) for 50% of the ownership interests in Cat Creek using
cash on hand. Each of Lipson Investments LLC and Viper Oil & Gas, LLC, the other two members of Cat Creek, have ownership interests
in Cat Creek of 25% in consideration of their respective investments of $224,450. Cat Creek will be managed by a Board of Directors consisting
of four directors, two of which shall be designated by the Company.
Basic
and Diluted Loss per Share
The
Companys basic earnings per share (EPS) amounts have been computed based on the weighted-average number of shares of
common stock outstanding for the period. For the three-month period ended August 31, 2021, all options and warrants potentially convertible
into common equivalent shares are considered antidilutive and have been excluded in the calculation of diluted earnings per share. As
the Company realized a net loss for the three-month period ended August 31, 2020, no potentially dilutive securities were included in
the calculation of diluted loss per share as their impact would have been anti-dilutive. Diluted net income (loss) per share is computed
by dividing the net income (loss) by the weighted-average number of common and dilutive common equivalent shares outstanding during the
period.
NOTE
2 – GOING CONCERN
These
consolidated financial statements have been prepared on a going concern basis. The Company has routinely incurred losses since inception,
resulting in an accumulated deficit, and historically has been dependent on one customer for its revenue. Further the Company has negative working capital as of August 31, 2021 and May 31, 2021. The Company entered into the
2011 SORC Agreements to fund operations and to provide working capital. However, as a result of the SORC Purchase Transaction, except
for payments to be made in calendar year 2021 to Laredo under the Alleghany Consulting Agreement, Alleghany will no longer fund operations
or provide working capital to the Company or SORC. There is no assurance that in the future such financing will be available to meet
the Companys needs. This situation raises substantial doubt about the Companys ability to continue as a going concern within
one year of the issuance date of the consolidated financial statements.
Management
has undertaken steps as part of a plan to improve operations with the goal of sustaining operations for the next twelve months and beyond.
These steps include controlling overhead and expenses. In that regard, the Company has worked to attract and retain key personnel with
significant experience in the industry to enhance the quality and breadth of the services it provides. At the same time, in an effort
to control costs, the Company has required a number of its personnel to multi-task and cover a wider range of responsibilities in an
effort to restrict the growth of the Companys headcount. There can be no assurance that the Company can successfully accomplish
these steps and it is uncertain that the Company will achieve a profitable level of operations and obtain additional financing. There
can be no assurance that any additional financing will be available to the Company on satisfactory terms and conditions, if at all.
The
accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company
to continue as a going concern.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
|
NOTE
3 – SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation – The accompanying consolidated financial statements include the accounts of Laredo Oil and its subsidiaries
after elimination of intercompany balances and transactions.
Equity
Method Investment – Investments classified as equity
method consist of investments in companies in which the Company is able to exercise significant influence but not control. Under the equity
method of accounting, the investment is initially recorded at cost, then the Companys proportional share of investees
underlying net income or loss is recorded as a component of other income with a corresponding increase or decrease to the
carrying value of the investment. Distributions received from the investee reduce the Companys carrying value of the investment.
These investments are evaluated for impairment if events or circumstances arise that indicate that the carrying amount of such assets
may not be recoverable. The Company has elected to record its portion of the equity method income (loss) with a two-month lag. Accordingly,
the financial results for the equity method investment are reported through June 30, 2021. No impairments were recognized for the Companys equity
method investment during the quarter ended August 31, 2021. See Note 11.
Property
and Equipment – The carrying value of the Companys property and equipment represents the cost incurred to acquire the
property and equipment, net of any impairments. For business combinations, property and equipment cost is based on the fair values at
the acquisition date.
Oil
and Gas Acquisition Costs – Oil and gas acquisition costs include expenditures representing investments in unproved and
unevaluated properties and include non-producing leasehold, geological and geophysical costs associated with leasehold or drilling interests.
Costs are reviewed to determine if impairment has occurred. The Company has incurred oil and gas acquisition costs totaling $115,920
and $389,480 during the quarter ended August 31, 2021 and the year ended May 31, 2021, respectively.
NOTE
4 – REVENUE RECOGNITION
Monthly
Management Fee
The
Company generated monthly management revenues from fees for labor and benefit costs in accordance with the 2011 SORC Agreements. The
Company recognizes revenue for these services in the month the labor and benefits are received by the customer. As a result, the Company
records deferred revenue for services that have not been provided. Monthly management fee revenues of $1,538,487 were recognized for the
three months ended August 31, 2020. The last monthly management fee payment from SORC was paid in February 2021.
Quarterly
Management Fee
While
the 2011 SORC Agreements were in place with Alleghany during calendar year 2020, the Company generated management fee revenue of $137,500
each quarter, payable in advance. The Company recognized that revenue over the applicable quarter on a straight-line basis. Quarterly
management fees recognized for three months ended August 31, 2021 and 2020, respectively were $0 and $137,500. Pursuant to the SORC Purchase
Agreement, the quarterly management fee has been terminated effective December 31, 2020 and no additional quarterly fees have been recognized.
As a result, the Company has not recorded quarterly management fee deferred revenue as of August 31, 2021 and May 31, 2021.
Other
Revenue
The
Company and Alleghany have entered into the Alleghany Consulting Agreement (see Note 1), where Alleghany is obligated to pay the Company
a total of $1,144,471, in quarterly payments beginning January 1, 2021, in consideration for making certain individuals available for
their advice, assistance and support in connection with the oil and gas industry and any questions, issues or matters arising from Alleghanys
previous ownership of SORC. Two individuals are committed for a one-year period ending December 31, 2021, and one individual is committed
for a three year period ending December 31, 2023. The Companys management believes that any work necessary under this obligation
will in fact be completed by December 31, 2021 and is recognizing revenue on a monthly basis over the year ended December 31, 2021. Accordingly, $286,118 is recorded as other revenue for the quarter ended August 31, 2021. Unearned
revenue related to amounts received but not yet earned under this contract at August 31, 2021 totaled $95,373.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
NOTE
5 – RECENT AND ADOPTED ACCOUNTING STANDARDS
The
Company has reviewed recently issued accounting standards and plans to adopt those that are applicable to it. It does not expect the
adoption of those standards to have a material impact on its financial position, results of operations, or cash flows.
NOTE
6 – ACQUISITION OF SORC
Purchase
Price Allocation
Effective
December 31, 2020, the Company acquired a 100% equity interest in SORC (see Note 1). We have accounted for the acquisition of SORC as
a business combination using the acquisition method. The preliminary allocations of the purchase
price with less than a year of ownership are subject to revisions as additional information is obtained about the facts and circumstances
that existed as of the acquisition date. The revisions may have a significant impact on our consolidated financial statements.
The allocations of the purchase price will be finalized once all the information is obtained, but not to exceed one year from
the acquisition date. The primary areas of the purchase price allocation that are not yet finalized relate to prepaid
expenses and current liabilities.
Financial
Information
Pursuant
to Topic 2, section 2010 of the SEC financial reporting manual, the Company evaluated the business combination. Prior to the acquisition
by the Company, SORC sold all operating assets, terminated all employees and no longer maintained any of the business processes that
previously existed. As a result, historical consolidated financial statements are not considered relevant to the ongoing operations and
are not required.
In
accordance with the SORC Purchase Agreement, Laredo agreed to pay to Alleghany a revenue royalty of 5.0% of the Companys future
revenues and net profits relating to oil, gas, gas liquids and all other hydrocarbons, subject to certain adjustments, for a period of
seven years after the closing. The Company has not attributed a value to this potential liability in the preliminary purchase price allocation
as eligible revenues or net profits do not currently exist and are not estimable.
In
connection with the acquisition, the Company received tangible assets which had previously been written off by the Seller. This previous
reduction in asset values in combination with the Sellers desire to close the transaction on an accelerated basis enabled the Company
to obtain the assets at a lower price resulting in the recognition of a bargain purchase gain.
For
the quarter ended August 31, 2021, SORC recognized no revenues and $7,579 interest expense recorded related to the debt discount amortization,
included in the Consolidated Statement of Operations.
NOTE
7 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The
Companys financial instruments as defined by Financial Accounting Standards Board (FASB) Accounting Standards Codification
(ASC) 825-10-50, Financial Instruments, include cash and cash equivalents, equity method investments, accounts payable,
accrued liabilities and notes payable. The equity method investments approximate fair value as a result of limited activity by the investee
since formation. All other instruments are accounted for on a historical cost basis, which, due to the short maturity of these financial
instruments, approximates fair value at August 31, 2021.
Based
on the borrowing rates currently available to the Company for loans with similar terms and maturities, the fair value of long-term notes
payable approximates the carrying value.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
|
NOTE
8 – RELATED PARTY TRANSACTIONS
Transactions
between related parties are considered to be related party transactions even though they may not be given accounting recognition. FASB
ASC 850, Related Party Disclosures (FASB ASC 850) requires that transactions with related parties that would make
a difference in decision making shall be disclosed so that users of the financial statements can evaluate their significance. Related
party transactions typically occur within the context of the following relationships:
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●
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Affiliates
of the entity;
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●
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Entities
for which investments in their equity securities is typically accounted for under the equity method by the investing entity;
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●
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Trusts
for the benefit of employees;
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●
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Principal
owners of the entity and members of their immediate families;
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●
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Management
of the entity and members of their immediate families.
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●
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Other
parties that can significantly influence the management or operating policies of the transacting parties and can significantly influence
the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
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Prior
to the SORC Purchase Transaction on December 31, 2020, SORC and Alleghany were considered related parties under FASB ASC 850. See Note
1. All management fee revenue reported by the Company for the years ended May 31, 2021 and 2020 is generated from charges to SORC. The
Company also recorded an approximate $0 and $32,000 receivable from SORC as of May 31, 2021 and 2020, respectively, comprised of employee
expense reports covered by SORC pursuant to the management services agreements. Outstanding notes payable totaling $350,000 and related
accrued interest at May 31, 2020 were held by Alleghany. See Note 7.
Subsequent
to the Companys purchase of 100% of SORCs stock on December 31, 2020, Alleghany and its subsidiaries are no longer a related
party.
NOTE
9 – STOCKHOLDERS DEFICIT
Share
Based Compensation
The
Black-Scholes option pricing model is used to estimate the fair value of options granted under our stock incentive plan.
Share
based compensation for stock option grants totaling $3,288 and zero is recorded in general, selling and administrative expense during the
three months ended August 31, 2021 and 2020, respectively.
Stock
Options
Option
grants for the purchase of 1,600,000 shares of common stock at a price of $0.074 per share were made during the first quarter of fiscal
year 2022. The options vest monthly over three years beginning August 1, 2021 and expire on August 1, 2031. The grant date fair value
of these stock option grants amounted to approximately $118,387. The assumptions used in calculating these values were based on an expected
term of 6.0 years, volatility of 315% and a 0.95% risk free interest rate at the date of grant. No option grants were made during the
first quarter of fiscal year 2021.
Restricted
Stock
No
restricted stock was granted during the first quarters of fiscal years 2022 or 2021.
Warrants
No
warrants were issued during the first quarters of fiscal years 2022 or 2021. The 5,374,501 warrants previously outstanding expired June
14, 2021 and are no longer exercisable.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
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|
NOTE
10 – NOTES PAYABLE
Alleghany
Notes
During
the fiscal year ended May 31, 2011, the Company entered into two Loan Agreements with Alleghany Capital for a combined available borrowing
limit of $350,000. The notes accrued interest on the outstanding principal of $350,000 at the rate of 6% per annum, with a due date of
December 31, 2020.
In
connection with the SORC Purchase Transaction, the notes were amended, restated and consolidated into one note including all accrued
interest through December 31, 2020, the date of the transaction, for a total of $631,434 (the Senior Consolidated Note) with
a maturity date of June 30, 2022. The Senior Consolidated Note requires any stock issuances for cash be utilized to pay down the outstanding
loan balance unless written consent is obtained from Alleghany. As part of the SORC Purchase Transaction, the Company agreed to secure
repayment of the Senior Consolidated Note with certain equipment and to reduce the note balance with any proceeds received from any sales
of such equipment. The note bears no interest until January 1, 2022 whereupon the interest rate increases to 5% per annum through maturity.
Principal with all accrued and unpaid interest is due at maturity. In connection with the SORC acquisition purchase price allocation,
the Company recorded a debt discount totaling $30,068 in recognition of imputed interest on the Senior Consolidated Note, to be amortized
over the first year of the note term. The Senior Consolidated Note totaling $607,884 is recorded as a current note payable, net of debt
discount as of August 31, 2021.
Paycheck
Protection Program Loan
On
April 28, 2020, the Company entered into a Note (the Note) with IBERIABANK for $1,233,656 pursuant to the terms of the Paycheck
Protection Program (PPP) authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act (CARES Act)
In June 2020, the Flexibility Act which amended the CARES Act was signed into law. Pursuant to the Flexibility Act, the Note continues
to accrue interest on the outstanding principal sum at the rate of 1% per annum. In addition, the initial two-year Note term has been
extended to five years through mutual agreement with IBERIABANK as allowed under Flexibility Act provisions.
In
February, 2021, the Company drew an additional $1,233,655 under the PPP Second Draw Loans, bringing the total principal borrowed to $2,467,311.
The additional draw is under the same terms and conditions as the first PPP loan.
The
Flexibility Act also provides that if a borrower does not apply for forgiveness of a loan within 10 months after the last day
of the measurement period (covered period), the PPP loan is no longer deferred and the borrower must begin paying
principal and interest. In addition, the Flexibility Act extended the length of the covered period from eight weeks to 24 weeks from
receipt of proceeds, while allowing borrowers that received PPP loans before June 5, 2020 to determine, at their sole discretion, a
covered period of either 8 weeks or 24 weeks.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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(UNAUDITED)
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NOTE
10 – NOTES PAYABLE (continued)
No
interest or principal will be due during the deferral period, although interest will continue to accrue over this period. As of August
31, 2021, interest totaling $7,186 is recorded in accrued interest on the accompanying balance sheets. After the deferral period and
after taking into account any loan forgiveness applicable to the Note, any remaining principal and accrued interest will be payable in
substantially equal monthly installments over the remaining term of the Note.
The
Company did not provide any collateral or guarantees for the loan, nor did the Company pay any facility charge to obtain the loan. The
Note provides for customary events of default, including, among others, those relating to failure to make payment, bankruptcy, breaches
of representations and material adverse effects. The Company may prepay the Note at any time without payment of any penalty or premium.
The Company applied for forgiveness of the first PPP note and in July
2021 received notice that $1,209,809 of the $1,233,656 note payable balance has been forgiven along with the $15,099 related accrued
interest through that date. As of May 31, 2021 both PPP Notes have been recorded as debt. During the quarter ended August 31, 2021, the
portion of the loan forgiven has been recorded as income from PPP loan forgiveness as the Company has been legally released from being
the primary obligor in accordance with ASC 405-20-40-1. Monthly payments commence on September 1, 2021 with respect to the remaining
$23,847 balance on the first Note.
At
this time, the Company has not yet applied for or received loan forgiveness on the PPP Second Draw Loan. No assurance can be given that
the Company will obtain forgiveness of the loan, in whole or in part. Similar to the first PPP Note, any forgiveness on the PPP Second
Draw Loan will be treated as income from the extinguishment of its loan obligation when it is legally released from being the primary
obligor in accordance with ASC 405-20-40-1.
NOTE
11 – EMPLOYEE SEPARATIONS
The
Company establishes obligations for expected termination benefits provided under existing agreements with a former or inactive employee
after employment but before retirement. These benefits generally include severance payments and medical continuation coverage. During
the quarter ending August 31, 2020, the Company continued to reduce expenses in response to the impact of the COVID-19 pandemic. The
Company incurred severance and related charges totaling $222,023 during the first quarter 2021. As of August 31, 2021, the Company has
no remaining severance accrual included in accrued payroll liabilities.
NOTE
12 – EQUITY METHOD INVESTMENT
On
June 30, 2020, Laredo entered into a Limited Liability Company Agreement (the LLC Agreement)
of Cat Creek, a Montana limited liability company formed as a joint venture for the purchase of
certain oil and gas properties in the Cat Creek Field in Petroleum and Garfield Counties in the State of Montana (the Cat Creek
Properties). In accordance with the LLC Agreement, Laredo invested $448,900 in Cat Creek for 50% of the ownership interests in
Cat Creek using cash on hand. Each of Lipson Investments LLC and Viper Oil & Gas, LLC, the other two members of Cat Creek, have ownership
interests in Cat Creek of 25% in consideration of their respective investments of $224,450. Cat Creek will be managed by a Board of Directors
consisting of four directors, two of which shall be designated by Laredo.
Cat
Creek entered into an Asset Purchase and Sale Agreement (the Purchase Agreement) with Carrell Oil Company (Seller)
on July 1, 2020 for the purchase of the Cat Creek Properties from Seller. On September 21, 2020, upon resolving the purchase contingency
under the Purchase Agreement, the Seller received consideration of $400,000, taking into effect certain adjustments resulting from pre-
and post-effective date revenue, expense, and allocations.
NOTE
12 – EQUITY METHOD INVESTMENT (continued)
Summarized
Financial Information
The
following table provides summarized financial information for the Companys ownership interest in Cat Creek accounted for under
the equity method for the August 31, 2021 period presented and has been compiled from respective company financial statements, reflects
certain historical adjustments, and is reported on a two-month lag. Results of operations are excluded for periods prior to acquisition.
Summarized Financial Information
Results of Operations:
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|
Three Months
Ended
August 31, 2021
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|
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Two Months
Ended
August 31, 2020
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Revenue
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$
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147,681
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$
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-
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Gross Profit
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88,633
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|
|
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-
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Net Income
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$
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21,693
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$
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-
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NOTE
13 – COMMITMENTS AND CONTINGENCIES
On
February 4, 2021, a case captioned Lustre Oil Company LLC and Erewhon Oil & Gas, LLC v. Anadarko Minerals, Inc. and A&S
Mineral Development Co., LLC was filed in the Montana Seventeenth Judicial District Court for Valley County by Lustre Oil Company
LLC, a subsidiary of the Company (Lustre), to initiate a quiet title action confirming Lustres
rights under certain mineral leases in Valley County, Montana. Lustre is also seeking damages with respect to actions taken by A&S
Mineral Development Co., LLC to improperly produce oil on the property subject to such mineral leases.
Except
as set forth above, we are not currently involved in any other legal proceedings and we are not aware of any other pending or potential
legal actions.
NOTE
14 – SUBSEQUENT EVENTS
On
October 1, 2021, Laredo entered into a Securities Purchase Agreement (the Securities Purchase Agreement) with Geneva Roth
Remark Holdings, Inc., an accredited investor (Geneva Roth), pursuant to which the Company sold Geneva Roth a convertible
promissory note in the principal amount of $114,125 (the Geneva Roth Note). The Geneva Roth Note accrues interest at a rate
of 8% per annum (22% upon the occurrence of an event of default) and has a maturity date of October 1, 2022. The Company has received
net proceeds of $100,000 in cash from Geneva Roth pursuant to the note.
The
Company has the right to prepay the Geneva Roth Note at any time during the first six months the note is outstanding at the rate of (a)
110% of the unpaid principal amount of the note plus interest, during the first 120 days the note is outstanding, and (b) 115% of the
unpaid principal amount of the note plus interest between days 121 and 180 after the issuance date of the note. The Geneva Roth Note
may not be prepaid after the 180th day following the issuance date, unless Geneva Roth agrees to such repayment and such
terms.
NOTE
14 – SUBSEQUENT EVENTS (continued)
Geneva
Roth may in its option, at any time beginning 180 days after the date of the note, convert the outstanding principal and interest on
the Geneva Roth Note into shares of Laredo common stock at a conversion price per share equal to 75% of the average of the three lowest
closing bid prices on the applicable electronic quotation system or applicable trading market as reported by a reliable reporting service
of Laredo common stock during the 15 days trading days prior to the date of conversion. The Company agreed to reserve a number of shares
of its common stock which may be issuable upon conversion of the Geneva Roth Note at all times.
The
Geneva Roth Note provides for standard and customary events of default such as failing to timely make payments under the Geneva Roth
Note when due, the failure of the Company to timely comply with the Securities Exchange Act of 1934, as amended, reporting requirements
and the failure to maintain a listing on the OTC Markets. The Geneva Roth Note also contains customary positive and negative covenants.
The Geneva Roth Note includes penalties and damages payable to Geneva Roth in the event we do not comply with the terms of such note,
including in the event we do not issue shares of common stock to Geneva Roth upon conversion of the note within the time periods set
forth therein. Additionally, upon the occurrence of certain defaults, as described in the Geneva Roth Note, we are required to pay Geneva
Roth liquidated damages in addition to the amount owed under the Geneva Roth Note (including in some cases up to 300% of the amount of
the note).
At
no time may the Geneva Roth Note be converted into shares of Laredo common stock if such conversion would result in Geneva Roth and its
affiliates owning an aggregate of in excess of 4.99% of the then outstanding shares of Laredo common stock.
The
proceeds from the Geneva Roth Note can be used by the Company for general corporate purposes.