NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
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 Company’s 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 Finder’s Fee Agreement between the Company and SORC (the “Finder’s 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
SORC’s 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 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 Company’s operating costs and expenses, which SORC, in its sole and absolute discretion,
determined whether or not to fund.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS - continued
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 Company’s 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 Company’s 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, or December 31, 2027. 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 Company’s Chief
Executive Officer and Chairman, and Chris Lindsey, the Company’s 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 and, except for the payments to the Company in 2021
under the Alleghany Consulting Agreement, the Company no longer receives 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 Company’s revenues
prior to the closing of the SORC Purchase Transaction.
During
the period from June 14, 2011 through December 31, 2020, Company management gained specialized know-how and operational experience in
evaluating, acquiring, operating and developing oil and gas properties while implementing UGD projects, as well as gaining expertise
designing, drilling and producing conventional oil wells. Based upon the knowledge gained, the Company has identified and acquired 31,303
gross acres and 28,497 net acres of mineral property interests in Montana. The Company has received a reserve report from an independent
petroleum engineering firm estimating the interests of proved undeveloped, probable undeveloped and contingent reserves, and forecasts
of economics attributable to 27 wells in the initial target area. Within the area encompassed by the reserve report, 10 drilling locations
have been identified with the intention to drill an initial development well early in calendar year 2022 and, if that well yields anticipated
results, the Company plans to continue to develop the field thereafter. Each well is planned to have an 80-acre footprint, so the first
10 wells would affect only 800 acres, or less than 2 percent of the leased acreage. The success of the first development well and the
ability to secure further funding will drive future plans and at this point there is nothing concrete that can be planned out.
In
connection with securing this acreage in Montana, Lustre Oil Company LLC, a wholly-owned subsidiary of the Company (“Lustre”),
entered into an Acquisition and Participation Agreement (“Erehwon APA”) with Erehwon Oil & Gas, LLC (“Erehwon”)
to acquire oil and gas interests and drill, complete, re-enter, re-complete, sidetrack, and equip wells in Valley County, Daniels County
and Roosevelt County, Montana. The Erehwon APA specifies calculations for royalty interests and working interests for the first 10 well
completions and first 10 well recompletions and for all additional wells and recompletions thereafter. Lustre will acquire initial mineral
leases and pay 100% of the costs with a cap of $500,000. When the cap is exceeded, Erehwon will have the option to acquire a 10% working
interest (“WI”) in a lease by paying 10% of any lease acquisition cost, resulting in Lustre paying 90% of the lease costs,
on a lease by lease basis. Until amounts paid to complete the first 10 new wells and first 10 recompletions are repaid (“Payback”),
the WI split between Erehwon and Lustre is 10%/90%. Thereafter, the split between Erehwon and Lustre is 20%/80%. Additional wells and
recompletions will have a WI split equal to their respective working interest in the leases. This will be 10% Erehwon and 90% Lustre
unless Erehwon exercises its option to increase its WI by 10 percent points to 20%/80%, as described above. Under the Erehwon APA, Lustre
will fund 100% of the construction costs of the first 10 wells and first 10 completions. Additional wells will be funded 80% by Lustre
and 20% by Erehwon; provided, that Erehwon has the option to pay 10% of the cost to increase its WI to 20%. Royalty expense will consist
of the sum of royalty interest to the land owner and an overriding royalty interest to two individuals (“Prospect Generators”)
not to exceed 6% nor be less than 3%. For the first 10 new wells and first 10 recompletions, the Prospect Generators will receive an
amount equal to 5% of the cost of each completed producing well.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS - continued
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 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
Company’s basic earnings per share (“EPS”) amounts have been computed based on the weighted-average number of shares
of common stock outstanding for the period. As the Company realized a net loss for the three and nine month periods ended February 28,
2022 and the three and nine month periods ended February 28, 2021, 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 February 28, 2022 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 made to Laredo in 2021 under the
Alleghany Consulting Agreement, Alleghany no longer funds operations or provides working capital to the Company or SORC. There is no
assurance that in the future such financing will be available to meet the Company’s needs. This situation raises substantial doubt
about the Company’s 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 Company’s 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 Company’s proportional share of investee’s 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 Company’s 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 December 31, 2021. No impairments were recognized for the Company’s equity method
investment during the quarter ended February 28, 2022. See Note 14.
Related
Party Receivables – Receivables include amounts due from Cat Creek Holdings represent related party balances arising from employee
expense reports incurred by Laredo for work performed solely on the Company’s equity investment in Cat Creek Holdings, but not
paid at February 28, 2022 period end.
Property
and Equipment – The carrying value of the Company’s 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
$604,599 and $389,480 during the nine months ended February 28, 2022 and the year ended May 31, 2021, respectively.
NOTE
4 – CASH AND CASH EQUIVALENTS
Laredo
has entered a Net Profits Interest Agreement in exchange for funding for well development costs. The contracts require that participants
pay Lustre the contract price upon execution of the agreement. The funds received in advance of the drilling of a well from
a working interest participant are held for the expressed purpose of drilling, completing and equipping a well. If something changes,
the Company may designate these funds for a substitute well. Under certain conditions, a portion of these funds may be required to be
returned to a participant. The funds are used to satisfy the well development costs. Laredo classifies these funds prior to commencement
of well development as restricted cash based on guidance codified as under the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 230-10-50-8. In the event that progress payments are made from these funds, they
are recorded as Oil and Gas Acquisition Costs.
The
following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheet
that sum to the total of the same amounts shown in the statement of cash flows.
| |
February 28, 2022 | | |
May 31, 2021 | |
Cash and cash equivalents | |
$ | 145,770 | | |
$ | 1,196,650 | |
Restricted cash | |
| 849,053 | | |
| - | |
Cash and cash equivalents, net | |
$ | 994,823 | | |
$ | 1,196,650 | |
Restricted
cash is recorded with respect to the advance funding for well development in accordance with the Net Profits Agreement. See Note 11.
These funds are restricted for use for the development of the first well in the Lustre field.
NOTE
5 – 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 $1,046,390 and $3,694,931 were
recognized for the three months and nine months ended February 28, 2021, respectively. The last monthly management fee payment from SORC
was paid in February 2021, thus no monthly management fee revenues were recorded in fiscal year 2022.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
NOTE
5 – REVENUE RECOGNITION - continued
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 the three and nine months ended February 28, 2021, respectively were $45,833 and $320,833. 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 for the three and nine months ended February 28, 2022. As a result, the Company has not recorded quarterly
management fee deferred revenue as of February 28, 2022 and May 31, 2021.
Other
Revenue
The
Company and Alleghany entered into the Alleghany Consulting Agreement (see Note 1), where Alleghany was 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 Alleghany’s
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 Company’s management believes that any work necessary under this obligation
will in fact be completed by December 31, 2021 and recognized revenue on a monthly basis over the calendar year ended December 31, 2021.
Accordingly, $95,372 and $667,608 is recorded as other revenue for the three and nine month periods ended February 28, 2022. Deferred
revenue recorded in calendar year 2021 related to amounts received but not yet earned under this contract. As of February 28, 2022, there
are no remaining deferred amounts under this contract. In addition, Alleghany paid the Company $100,000 on January 1, 2021, to be paid
to an individual, with no further performance obligations. Other Revenue for both the three and nine months ended February 28, 2021 was
$290,745.
NOTE
6 – 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
7 – 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 purchase price allocation was preliminary and was subject to revision through the end of the measurement period on December 31, 2021.
The original purchase price allocation is final and no further adjustments are necessary.
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.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
NOTE
7 – ACQUISITION OF SORC - continued
In
accordance with the SORC Purchase Agreement, Laredo agreed to pay to Alleghany a revenue royalty of 5.0% of the Company’s 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 Seller’s 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 February 28, 2022, SORC recognized no revenues and $17,629 interest expense recorded related to the debt discount amortization,
included in the Consolidated Statement of Operations.
NOTE
8 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The
Company’s 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 February 28, 2022.
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.
NOTE
9 – 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:
| ● | Affiliates
of the entity; |
| ● | Entities
for which investments in their equity securities is typically accounted for under the equity method by the investing entity; |
| ● | Trusts
for the benefit of employees; |
| ● | Principal
owners of the entity and members of their immediate families; |
| ● | Management
of the entity and members of their immediate families. |
| ● | 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. |
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 year ended May 31, 2020 and the following seven months through December
31, 2020 is generated from charges to SORC.
Subsequent
to the Company’s purchase of 100% of SORC’s stock on December 31, 2020, Alleghany and its subsidiaries are no longer a related
party.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
NOTE
10 – 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 $9,865 and $23,019, respectively is recorded in general, selling and administrative
expense during the three and nine months ended February 28, 2022. No share based compensation costs were recorded during the three and
nine months ended February 28, 2021.
Stock
Options
No
option grants were made during the second or third quarter of fiscal year 2022. 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 nine months of fiscal year 2021.
Restricted
Stock
No
restricted stock was granted during the first nine months of fiscal years 2022 or 2021.
Warrants
No
warrants were issued during the first nine months of fiscal years 2022 or 2021. The 5,374,501 warrants previously outstanding expired
June 14, 2021 and are no longer exercisable.
NOTE
11 – NET PROFITS INTEREST AGREEMENT
In
January 2022, the Company and Lustre executed a Net Profits Interest Agreement effective as of October 2021 (“NPI Agreement”)
with Erehwon and Olfert No. 11-4 Holdings, LLC (“Olfert Holdings”) for the purpose of funding the first well, Olfert #11-4,
(the “Well”) under the Erehwon Acquisition and Participation Agreement (“APA”). The NPI Agreement grants Olfert
Holdings a flow of an Applicable Percentage of available funds from the Well in exchange for Olfert Holdings funding its development.
The “Applicable Percentage” under the NPI Agreement is 90% prior to Payout and 50% after Payout, where “Payout”
means the point in time when the aggregate of all Net Profits Interest payments made to Olfert Holdings under the NPI Agreement equals
105% of the well development costs. In January 2022, the Company entered into an Amended and Restated Limited Liability Company Operating
Agreement of Olfert Holdings dated effective as of November 2021 (the “Olfert Holdings Operating Agreement”). Pursuant to
the Olfert Holdings Operating Agreement, the Company has agreed to make a capital contribution to Olfert Holdings in the amount of $500,000
out of the aggregate $1,500,000 of capital raised by Olfert Holdings. During October and November 2021, through the Company’s wholly
owned subsidiary, Lustre Holdings, Laredo received advance payments totaling $1.0 million from four investors pursuant to the NPI agreement.
Pursuant to the Olfert Holdings Operating Agreement, the Company was credited an amount equal to $59,935 of well development costs as
part of its capital contribution. The Company has not yet determined the source of its funds for the balance of its capital contribution,
and it is possible that another investor may invest all or a part of such funds instead of the Company. The Company has also been appointed
as the Manager of Olfert Holdings. Through February 28, 2022, the Company has incurred approximately $220,000 related to the development
of the first well. The expected well development cost for the first well to be developed under the NPI Agreement is $1.5 million.
In
connection with the NPI Agreement, the Company was credited a contribution totaling $59,935 of well development costs as determined per
agreement with Olfert on behalf of Olfert Holding representing a 5.5% interest in the entity as of February 28, 2022 based on the carrying
value of assets contributed to Olfert. The total investment recorded by Laredo was $19,435 as of February 28, 2022. The difference between
the $59,935 contribution recorded at the Olfert level and the investment recorded by Laredo is due to the investment at Laredo being
recorded at the carrying value of the assets contributed. As Laredo also currently serves as the manager of Olfert, the Company exercises
significant influence. Accordingly, the amount paid is recorded as an equity method investment as of February 28, 2022.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
NOTE
12 – NOTES PAYABLE
Convertible
Debt
In
October, November and December 2021, Laredo entered into Securities Purchase Agreements with two accredited investors, pursuant to which
the Company issued three convertible promissory notes in the principal amount of $240,625, receiving $207,500 in net cash proceeds (the
“Convertible Notes”). The Convertible Notes had an original issue discount of $21,875. Further $11,250 debt issue costs were
deducted from the gross proceeds. The total of $33,125 recorded as debt discount are being amortized using the effective interest method
through the maturity dates of the Convertible Notes. The Convertible Notes are due in one year from the date of issuance, accrue interest
at 8% per annum (22% upon the occurrence of an event of default) and are convertible after 180 days into shares of the Company’s
common stock at a discount of 25% of the average of the three lowest trading prices during the 15 trading days immediately preceding
the conversion.
The
Company has the right to prepay the Convertible Notes 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 Convertible Notes
may not be prepaid after the 180th day following the issuance date, unless the note holders agree to such repayment and
such terms.
The
Company agreed to reserve a number of shares of its common stock which may be issuable upon conversion of the Convertible Notes at all
times.
The
Convertible Notes provide for standard and customary events of default such as failing to timely make payments under the Convertible
Notes 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 Convertible Notes also contains customary positive and negative covenants.
The Convertible Notes include penalties and damages payable to the noteholders 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 the noteholders upon conversion of the notes within the time periods
set forth therein. Additionally, upon the occurrence of certain defaults, as described in the Convertible Notes, we are required to pay
the noteholders liquidated damages in addition to the amount owed under the Convertible Notes (including in some cases up to 300% of
the amount of the note).
At
no time may the Convertible Notes be converted into shares of Laredo common stock if such conversion would result in the note holders
and their affiliates owning an aggregate of in excess of 4.99% of the then outstanding shares of Laredo common stock.
The
proceeds from the Convertible Notes can be used by the Company for general corporate purposes.
See
Note 16 – Subsequent Events for Convertible Debt activity after period end.
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.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
NOTE
12 – NOTES PAYABLE - continued
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. Accrued interest totaling $4,994 has been recorded as of February 28, 2022. 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 $617,934 is recorded as a current note payable as of February 28, 2022. The debt discount has been
fully amortized as of December 31, 2021.
Paycheck
Protection Program Loan
| |
February 28, | | |
May 31, | |
| |
2022 | | |
2021 | |
Total PPP Loan | |
$ | 1,254,260 | | |
$ | 2,467,311 | |
Less amounts classified as current | |
| 242,062 | | |
| 1,220,825 | |
| |
| | | |
| | |
PPP loan, excluding current portion | |
$ | 1,012,198 | | |
$ | 1,246,486 | |
On
April 28, 2020, the Company entered into a Note (the “Note”) with IBERIA BANK 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 IBERIA BANK 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.
No
interest or principal will be due during the deferral period, although interest will continue to accrue over this period. As of February
28, 2022, interest totaling $13,303 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.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
NOTE
12 – NOTES PAYABLE - continued
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 nine months ended February 28, 2022, 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.
In
April 2022, the Company applied for partial 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
13 – 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 nine months ending February 28, 2021, 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 and $284,113 during the third quarter
2021. As of February 28, 2022 and May 31, 2021, the Company has no remaining severance accrual included in accrued payroll liabilities.
NOTE
14 – EQUITY METHOD INVESTMENTS
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.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
NOTE
14 – EQUITY METHOD INVESTMENTS - continued
Summarized
Financial Information
The
following table provides summarized financial information for the Company’s ownership interest in Cat Creek accounted for under
the equity method for the February 28, 2022 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
Balance Sheet: | |
As of February 28, 2022 | |
Current Assets | |
$ | 229,679 | |
Non-current Assets | |
| 601,769 | |
Total Assets | |
$ | 831,448 | |
| |
| | |
Current Liabilities | |
$ | 128,202 | |
Non-current Liabilities | |
| 68,355 | |
Shareholders’ equity | |
| 634,891 | |
Total Liabilities and Shareholders’ Equity | |
$ | 831,448 | |
Results of Operations: | |
Three Months Ended February 28, 2022 | | |
Three Months Ended February 28, 2021 | | |
Nine Months Ended February 28, 2022 | | |
Nine Months Ended February 28, 2021 | |
Revenue | |
$ | 175,319 | | |
$ | 474,044 | | |
$ | 504,629 | | |
$ | 774,929 | |
Gross Profit (Loss) | |
| (5,946 | ) | |
| 236,258 | | |
| 163,905 | | |
| 383,319 | |
Net Loss | |
$ | (7,987 | ) | |
$ | (91,319 | ) | |
$ | (23,676 | ) | |
$ | (218,566 | ) |
NOTE
15 – COMMITMENTS AND CONTINGENCIES
On
February 4, 2021, a case captioned Lustre Oil Company LLC and Erehwon 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 Lustre’s
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. On January 14, 2022, the court
dismissed this action on the motion of the defendant. This decision is being appealed by the Company to the Montana Supreme Court.
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
16 – SUBSEQUENT EVENTS
In
March 2022, Laredo entered into a Securities Purchase Agreement with an accredited investor, pursuant to which the Company issued a convertible
promissory note in the principal amount of $53,625, receiving $45,000 in net cash proceeds. The convertible promissory note had an original
issue discount of $4,875. Further $3,750 debt issue costs were deducted from the gross proceeds. The total of $8,625 recorded as debt
discount is being amortized using the effective interest method through the maturity dates of the convertible promissory note. The convertible
promissory note is due in one year from the date of issuance, accrue interest at 8% per annum (22% upon the occurrence of an event of
default) and are convertible after 180 days into shares of the Company’s common stock at a discount of 25% of the average of the
three lowest trading prices during the 15 trading days immediately preceding the conversion.
Further,
on April 4, 2022 the Company repaid the Convertible Note entered into in October 2021. The repayment totaled $136,479 comprised of $114,125
principal and $22,354 related accrued interest. The Company borrowed $136,479 from Cat Creek to repay the Convertible Note.