Laredo Oil, Inc 10-Q for FY2024 Q3
Laredo Oil, Inc. (LRDC)
About this 10-Q
Laredo Oil, Inc filed this 10-Q on April 19, 2024, covering the quarter ended February 29, 2024 (FY2024 Q3).
Headline figures
Quarter ended February 29, 2024, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $12.7K
- compared with $0 a year earlier
- Net loss
- $336.41K
- compared with a net loss of $699.02K a year earlier
U.S. SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM
ACT OF 1934
FOR
THE QUARTERLY PERIOD ENDED
Commission
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whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
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Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | o | Accelerated filer | o |
| x | Smaller reporting company | ||
| 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. o
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by check mark whether the registrant is a shell company (as defined in Rule 12b-2 or the Exchange Act). Yes o
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:
As of April 19, 2024, the registrant had shares of common stock issued and outstanding.
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ITEM 1. FINANCIAL STATEMENTS
The following unaudited condensed consolidated financial statements (“financial statements”) have been prepared by Laredo Oil, Inc. (the “Company”), pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented not misleading. However, except as disclosed herein, there have been no material changes in the information disclosed in the notes to the financial statements for the fiscal year ended May 31, 2023. These financial statements and the notes attached hereto should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on September 13, 2023. In the opinion of management of the Company, all adjustments, including normal recurring adjustments necessary to present fairly the financial position of the Company as of February 29, 2024, and the results of its operations and cash flows for the three and nine-month periods then ended, have been included. The results of operations for the three and nine-month periods ended February 29, 2024 are not necessarily indicative of the results for the full year ending May 31, 2024.
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| Laredo Oil, Inc. |
| Condensed Consolidated Balance Sheets |
| February 29, | May 31, | |||||||
| 2024 (unaudited) | 2023 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents ($1.9 million and $0 restricted from use at February 29, 2024 and May 31, 2023) | $ | $ | ||||||
| Receivables – other | ||||||||
| Receivables – related party | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| Property and Equipment | ||||||||
| Oil and gas acquisition and drilling costs | ||||||||
| Property and equipment, net | ||||||||
| Total Property and Equipment, net | ||||||||
| Other assets | ||||||||
| Equity method investment – Olfert | ||||||||
| Equity method investment – Cat Creek | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued payroll liabilities | ||||||||
| Accrued interest | ||||||||
| Other payables | ||||||||
| Deferred well development costs | ||||||||
| Convertible debt, net of debt discount and debt issuance costs | ||||||||
| Revolving note | ||||||||
| Note payable – related party | ||||||||
| Note payable – Alleghany, net of debt discount | ||||||||
| Note payable, current portion | ||||||||
| Total Current Liabilities | ||||||||
| Asset retirement obligation | ||||||||
| Long-term note, net of current portion | ||||||||
| Total Noncurrent Liabilities | ||||||||
| TOTAL LIABILITIES | ||||||||
| Commitments and Contingencies (Note 13) | ||||||||
| Stockholders’ Deficit | ||||||||
| Preferred stock: $ par value; shares authorized; issued and outstanding | ||||||||
| Common stock: $ par value; shares authorized; and issued and outstanding as of February 29, 2024 and May 31, 2023 | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Deficit | ( | ) | ( | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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| Laredo Oil, Inc. |
| Condensed Consolidated Statements of Operations |
| (Unaudited) |
| Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||
| February 29, 2024 | February 28, 2023 | February 29, 2024 | February 28, 2023 | |||||||||||||
| Revenue – related party and other | $ | $ | $ | $ | ||||||||||||
| Direct costs | ||||||||||||||||
| Gross profit (loss) | ||||||||||||||||
| General, selling and administrative expenses | ||||||||||||||||
| Consulting and professional services | ||||||||||||||||
| Total Operating Expense | ||||||||||||||||
| Operating income (loss) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income/(expense) | ||||||||||||||||
| Other non-operating income | ||||||||||||||||
| Income from employee retention credit | ||||||||||||||||
| Gain on sale of asset | ||||||||||||||||
| Equity method income (loss) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net income (loss) per share, basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of common shares outstanding | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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| Laredo Oil, Inc. |
Condensed Consolidated Statements of Changes in Stockholders’ Deficit (Unaudited)
For the three and nine months ended February 29, 2024 |
| Additional | Total | |||||||||||||||||||||||||||
| Common Stock | Preferred Stock | Paid | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | in Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance as of May 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||
| Stock based compensation | - | - | ||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance as of August 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||
| Stock based compensation | - | - | ||||||||||||||||||||||||||
| Issuance of shares upon debt conversion | - | |||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance as of November 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||
| Stock based compensation | - | - | ||||||||||||||||||||||||||
| Issuance of shares upon debt conversion | - | |||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance as of February 29, 2024 | ( | ) | ( | ) | ||||||||||||||||||||||||
| For the three and nine months ended February 28, 2023 | ||||||||||||||||||||||||||||
| Balance as of May 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||
| Restricted stock issued to consultants | - | |||||||||||||||||||||||||||
| Stock based compensation | - | - | ||||||||||||||||||||||||||
| Cumulative effect of accounting changes (See Note 5) | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance as of August 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||
| Stock based compensation | - | - | ||||||||||||||||||||||||||
| Issuance of shares upon debt conversion | - | |||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance as of November 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||
| Stock based compensation | - | - | ||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance as of February 28, 2023 | $ | ( | ) | ( | ) | |||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
| Laredo Oil, Inc. |
| Condensed
Consolidated Statements of Cash Flows (Unaudited) |
| Nine Months Ended | Nine Months Ended | |||||||
| February 29, 2024 | February 28, 2023 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income (loss) | $ | ( | ) | $ | ( | ) | ||
| Adjustments to Reconcile Net Income (Loss) to Net Cash used in Operating Activities | ||||||||
| Stock based compensation expense | ||||||||
| Restricted stock expense | ||||||||
| Depreciation expense | ||||||||
| Accretion expense | ||||||||
| Amortization of debt discount | ||||||||
| Equity method loss (income) | ||||||||
| Gain on sale of assets | ( | ) | ( | ) | ||||
| Change in operating assets and liabilities | ||||||||
| Receivables | ( | ) | ||||||
| Receivables from related party | ||||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Accounts payable and accrued liabilities | ||||||||
| Accrued payroll | ||||||||
| Accrued interest | ||||||||
| NET CASH USED IN OPERATING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS USED IN INVESTING ACTIVITIES | ||||||||
| Proceeds from sale of assets | ||||||||
| Investment in equity method investment | ( | ) | ||||||
| Investment in property, plant and equipment | ( | ) | ||||||
| Investment in oil and gas acquisition and drilling costs | ( | ) | ( | ) | ||||
| NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Issuance of convertible debt | ||||||||
| Repayment of convertible debt | ( | ) | ( | ) | ||||
| Proceeds from related party note payable | ||||||||
| Proceeds from notes payable and revolving note | ||||||||
| Proceeds from prefunded drilling costs | ||||||||
| PPP loan repayments | ( | ) | ( | ) | ||||
| CASH FLOWS PROVIDED BY FINANCING ACTIVITIES | ||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ||||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | ||||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD | $ | $ | ||||||
| NONCASH INVESTING ACTIVITIES | ||||||||
| Oil and gas acquisition and drilling costs in accounts payable | ( | ) | ||||||
| Interest paid | ||||||||
| Conversion of convertible debt | ||||||||
| Sale of assets in exchange for note payable repayment | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
The accompanying consolidated financial statements have been prepared by the management of Laredo Oil, Inc. (“the Company”).
The Company was incorporated under the laws of the State of Delaware on March 31, 2008 under the name of “Laredo Mining, Inc.” On October 21, 2009, the Company changed its name to “Laredo Oil, Inc.”
The Company is an oil exploration and production company, primarily engaged in acquisition and exploration efforts to find mineral reserves on various properties. From its inception in March 2008 through October 2009, the Company was primarily engaged in acquisition and exploration efforts for mineral properties. Beginning 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 enhanced recovery methods. From June 14, 2011 to December 31, 2020, the Company was a management services company, managing the acquisition and operation of mature oil fields, focused on the recovery of “stranded” oil from those mature fields using enhanced oil recovery methods for its then sole customer, Stranded Oil Resources Corporation, or SORC, then a wholly owned subsidiary of Alleghany Corporation. The Company performed those services in exchange for a quarterly management fee and the reimbursement of its employee related expenses from SORC, which fees and reimbursements were effectively all of the Company’s revenues prior to the closing of the Securities Purchase Agreement with Alleghany described below. Alleghany no longer pays the Company any management fees or reimbursement payments for the monthly expenses of its employees.
On December 31, 2020, the Company entered into a Securities Purchase Agreement with Alleghany Corporation. Under that agreement, the Company purchased all the issued and outstanding shares of SORC. Currently, there are no ongoing operations being conducted by SORC.
Under the Securities Purchase Agreement with Alleghany, the Company also entered into a Consulting Agreement, under which Alleghany paid the Company an aggregate of approximately $1.245 million during calendar year 2021 in exchange for providing Alleghany with one to three years of consulting services from certain of the Company’s employees, including Mark See, its Chief Executive Officer.
During the period from June 14, 2011 through December 31, 2020, when the 2011 SORC Agreements were in effect, the Company’s management gained specialized know-how and operational experience in evaluating, acquiring, operating and developing oil and gas properties while implementing underground gravity drainage projects, or UGD. The Company also gained expertise designing, drilling and producing conventional oil wells. Based upon that gained knowledge, as of February 29, 2024, the Company has identified and acquired 45,766 gross acres and 38,153 net acres of mineral property interests in Montana. The Company drilled one exploratory well during May 2022, which has been shut-in pending gaining access to a saltwater disposal well allowing economically feasible water disposal. The Company plans to continue to develop the field, depending on funding.
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 (the “Erehwon APA”), and subsequent amendments, with Erehwon Oil & Gas, LLC and Laris Oil & Gas, LLC (collectively, “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 amended Erehwon APA specifies calculations for royalty interests and working interests for the first ten well completions and first ten well recompletions and for all additional wells and recompletions thereafter. Lustre, as the Operator named in the Erehwon APA, will acquire initial mineral leases and pay 100% of the costs and the split between Erehwon and Lustre will be 20%/80%. Under the Erehwon APA, Lustre will fund 100% of the construction costs of the first ten wells and first ten completions. Until payout, as defined, is attained, the split between Erehwon and Lustre will be 10% to Erehwon and 90% to Lustre. After payout, the split will be 20% to Erehwon and 80% to Lustre. Any additional wells will be funded 100% by Lustre, with a 20% undivided working interest to Erehwon;. Royalty expense will consist of the sum of royalty interest to the landowner and an overriding royalty interest to two individuals (“Prospect Generators”), not to exceed 6% nor be less than 3%. For the first ten new wells and first ten recompletions, Prospect Generators will receive an amount equal to 5% of the cost of each completed and producing well.
8
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS - continued
The Company and Lustre executed a Net Profits Interest Agreement, dated November 24, 2021 (the “NPI Agreement”), with Erehwon and Olfert No. 11-4 Holdings, LLC (“Olfert”) for the purpose of funding the first well, Olfert #11-4 (the “Well”), under the Erehwon APA. In connection with the NPI Agreement, the Company was credited with a contribution totaling $59,935 of well development costs, representing a 5.5% interest in Olfert as of May 31, 2022, based on the carrying value of assets contributed by the Company to Olfert. The total investment recorded by the Company was $19,435. The difference between the $59,935 contribution recorded at the Olfert level and the Investment recorded by the Company is due to the Company’s investment being recorded at the carrying value of the assets contributed. As the Company also currently serves as the manager of Olfert, it exercises significant influence. Accordingly, the amount paid by the Company was recorded as an equity method investment as of February 29, 2024. See further disclosures in Note 8.
On June 30, 2020, the Company entered into the Limited Liability Company Agreement (the “Cat Creek 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, located in Petroleum and Garfield Counties in the State of Montana (the “Cat Creek Properties”). In accordance with the Cat Creek Agreement, the Company invested $448,900 of cash in Cat Creek in exchange for 50% of the ownership interests in Cat Creek. Lipson and Viper each have a 25% ownership interest in Cat Creek in consideration of their respective investments of $224,450. Cat Creek is managed by a board of directors consisting of four directors, two of whom are designated by the Company.
Lustre and Erehwon entered into an Exploration and Development Agreement, dated July 18, 2023 (the “Development Agreement”), with Texakoma Exploration & Production Company (“Texakoma”), for the exploration and development of the “Lustre Field Prospect,” as described in the Development Agreement. Lustre and Erehwon are parties to an existing Acquisition and Participation Agreement, under which those parties agreed to acquire certain oil and gas interests, and drill, complete, re-enter, re-complete, sidetrack, and equip wells, in certain counties in Montana.
Under the terms of a Development Agreement, Texakoma agreed to pay Lustre and Erehwon (jointly, “LOC”), the following amounts: (i) $175,000 on or before July 21, 2023; and (ii) another $175,000 upon the “spudding” of the initial test well subject to rig availability. Upon the spudding of that test well, LOC was required to deliver to Texakoma a partial assignment of an 85% working interest in the oil and gas leases covering the first two initial drilling and spacing units. Under the Development Agreement the first payment was paid by Texakoma in August 2023 and the Company received the second payment of $175,000 in September 2023.
The two test wells have been successfully drilled and Texakoma is obligated to pay 100% of the costs associated with the drilling and completion of the wells. LOC jointly holds an undivided 15% working interest, carried through the tanks, in the wells. Texakoma has the option, but not the obligation, to participate in the development of the remainder of the Lustre Field Prospect, which may be exercised by Texakoma by giving Lustre and Erehwon written notice of its intent to participate within 90 days after the completion rig moves off the second test well location.
If Texakoma duly exercises its option, Texakoma agrees to drill eight additional wells, with LOC having a 15% working interest carried through the tanks and pay LOC $706,603 for an 85% leasehold interest in the next eight drill sites and a 50% leasehold interest in the balance of the Lustre Field Prospect acreage. The working and net revenue interest in any wells drilled subsequent to the first ten wells will be shared by Texakoma and LOC on a 50:50 basis. Assuming the option exercise, the Company will retain a 100% leasehold interest and full control of an additional 30,556 net mineral acres in northeastern Montana at the western edge of the Williston Basin.
9
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS - continued
In December 2023, we entered into a Participation Agreement, through Hell Creek Crude LLC, our wholly owned subsidiary, Erehwon, and various accredited investors. The Participation Agreement provided us with $2,034,000 to acquire certain leases and to drill a development well in the Midfork Field in Montana. Several of the investors also hold $575,000 of our convertible debt, plus accrued interest of $73,317, which indebtedness is included as investments under the Participation Agreement.
Until the total of the $2,682,317 in cash, notes and accrued interest is repaid to the various investors under the terms of the Participation Agreement, the net working interest payments from the Participation Agreement will be split between the various investors and HCC and Erehwon, collectively on a 90%/10% basis. After the repayment to the investors, the split between the investors, on one hand, and HCC and Erehwon, on the other hand, will be on a 50%/50% basis. After the development well is drilled under the Participation Agreement, the investors will have the option to invest in up to two additional wells in the field.
Basic and Diluted Loss per Share
Basic and diluted earnings/(loss) per share is computed by dividing net income/(loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings/(loss) per share gives effect to all dilutive potential common shares outstanding during the period. Dilutive earnings/(loss) per share excludes all potential common shares if their effect is anti-dilutive. As the Company realized a net loss for the three- and nine-month periods ended February 29, 2024 and February 28, 2023, it did not include potentially dilutive securities in the calculation of diluted loss per share as their impact would have been anti-dilutive. Diluted earnings/(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 was dependent on one customer for its revenue. There is no assurance that in the future any 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 these consolidated financial statements.
The Company’s 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 an ongoing effort to (a) controlling overhead and expenses; (b) raising funds connected with specific well development; and (b) raising funds through notes payable and convertible debt to expand and fund property acquisitions exploration and development as well as maintaining operations. The Company has worked to attract and retain key personnel with significant experience in the industry. At the same time, to control costs, the Company has required several of its personnel to multi-task and cover a wider range of responsibilities to manage 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.
10
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates – Management uses estimates and assumptions in preparing these consolidated financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates.
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 can 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 investment are reported through December 31, 2023. No impairments were recognized for the Company’s equity method investment during the quarter ended February 29, 2024. See Note 11.
Revenue recognition – The Company recognized revenue in accordance with ASC 606, Revenue from Contracts with Customers. The Company’s current revenue is from sales of oil and gas production. Revenue from oil and gas production is recognized based on sales date as reported to the Company by the operators or oil and gas production facilities in which the company has an interest.
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 and drilling costs include expenditures representing investments in unproved and unevaluated properties and include non-producing leasehold, leasehold or drilling interest costs, and costs to drill one exploratory well. Exploratory drilling costs are deferred until the outcome of the well is known. If an exploratory well finds proved reserves, the deferred costs are transferred to the company’s Wells and Related Equipment and Facilities accounts. Absent proved reserves, the deferred costs of the well, net of salvage, are charged to expense. All costs of wells drilled to develop proved reserves, along with all costs of equipment necessary to produce and handle the hydrocarbons, are capitalized even if a development well proves dry. Costs are reviewed to determine if impairment has occurred. The Company has incurred oil and gas acquisition and drilling costs totaling $4,518,896 and $4,547,740 as of February 29, 2024 and May 31, 2023, respectively.
Schedule of Oil and Gas Acquisition and Drilling Cost
| February 29, | May 31, | |||||||
| 2024 | 2023 | |||||||
| Intangible and tangible drilling costs | $ | $ | ||||||
| Acquisition costs | ||||||||
| Oil and gas acquisition and drilling costs | $ | $ | ||||||
NOTE 4 – CASH AND CASH EQUIVALENTS
Laredo entered a Participation Agreement in exchange for funding for well development costs. The contract requires that participants pay Hell Creek Crude LLC 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 condensed consolidated balance sheet that sum to the total of the same amounts shown in the statement of cash flows.
| February 29, 2024 | May 31, 2023 | |||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Total | $ | $ | ||||||
Restricted cash is recorded with respect to the advance funding for well development in accordance with the Participation Agreement. See Note 1. These funds are restricted for use for the development of the first well in the Midfork field.
11
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 5 – RECENT AND ADOPTED ACCOUNTING STANDARDS
The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the consolidated financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
NOTE 6 – ACCOUNTING FOR ASSET RETIREMENT AND ENVIRONMENTAL OBLIGATIONS
The Company accounts for its asset retirement obligations in accordance with Accounting for Asset Retirement and Environmental Obligations. This requires that legal obligations associated with the retirement of long-lived assets be recognized at fair value when incurred and capitalized as part of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized asset is depreciated over the useful life of the long-lived asset.
In the absence of quoted market prices, the Company estimates the fair value of its asset retirement obligations using present value techniques, in which estimates of future cash flows associated with retirement activities are discounted using a credit-adjusted risk-free rate. The Company’s estimated liability could change significantly if actual costs vary from assumptions or if governmental regulations change significantly.
The
Company’s asset retirement obligation was established in May 2022 when it commenced drilling the Olfert#11-4 well in
the Lustre oil field. On February 29, 2024 and May 31, 2023 the asset retirement obligation totaled $
The cash flow estimate for the asset retirement obligation is based upon the assumption of a 25-year expected life of the well, discounted using a credit-adjusted risk-free interest rate of 10%.
The
Company has recorded accretion expense totaling $
NOTE 7 – FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, accounts and other receivables, accounts payable and accrued current liabilities approximate their fair values due to the short-term nature of the instruments.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The estimated fair value of oil and gas properties and the asset retirement obligation incurred in the drilling of oil and gas wells or assumed in the acquisitions of additional oil and gas working interests are based on an estimated discount cash flow model and market assumptions. The significant Level 3 assumptions used in the calculation of estimated discounted cash flow model include future commodity prices, projections of estimated quantities of oil and gas reserves, expectations for timing and amount of future development, operating and asset retirement costs, projections of future rates of production, expected recovery rates and risk adjusted discount rates. See Note 3 for additional information regarding oil and gas property acquisitions.
The Company estimates the fair value of asset retirement obligations based on the projected discounted future cash outflows required to settle abandonment and restoration liabilities. Such an estimate requires assumptions and judgments regarding the existence of liabilities, the amount and timing of cash outflows required to settle the liability, what constitutes adequate restoration, inflation factors, credit adjusted discount rates, and consideration of changes in legal, regulatory, environmental, and political environments. Abandonment and restoration cost estimates are determined in conjunction with the Company’s reserve engineers based on historical information regarding costs incurred to abandon and restore similar well sites, information regarding current market conditions and costs, and knowledge of subject well sites and properties. Asset retirement obligation fair value measurements in the current period were Level 3 fair value measurements. As further described in Note 5, the Company recognizes the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. Asset retirement obligations are not measured at fair value subsequent to initial recognition.
12
| 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 consolidated 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. |
On
April 4, 2022, Cat Creek, in which the Company has an equity investment, loaned the Company $
In accordance with the NPI Agreement, between October 2021 and August 2022, Olfert #11-4 Holdings transferred funds totaling $1,859,195 to Lustre, the Company’s wholly owned subsidiary, to provide funds for drilling expenses incurred by Lustre with respect to the development of one well.
On June 22, 2022, the Company assigned the right to purchase up to 356,243 of the 500,000 membership interests in Olfert #11-4 to the Company’s Chief Financial Officer (CFO”) in exchange for his payment of $356,243 of the Company’s capital commitment to Olfert #11-4. On August 15, 2022, the CFO purchased another 109,590 membership interests in the Olfert #11-4 well for $109,590 associated with a capital call to pay additional development costs.
On November 27, 2023, the Company entered into an Amended and Restated Demand Promissory Note, (the “Demand Note”), and an Amended and Restated Membership Interest Pledge Agreement, (the “Lustre Pledge Agreement”) with the Company’s Chief Financial Officer. Under the Demand Note, the Company promises to pay on demand the principal sum of all disbursements made to the Company up to $400,000 plus interest accrued at an annual rate of 10%. As of February 29, 2024, the aggregate amount of advances, excluding accrued interest, was $292,099. The Demand Note is secured by all of the Company’s interests in Lustre, pursuant to the terms of the Lustre Pledge Agreement.
NOTE 9 – NET PROFITS INTEREST AGREEMENT
In January 2022, the Company and Lustre executed the NPI Agreement with Erehwon and Olfert Holdings, to be effective as of November 24, 2021. The NPI Agreement was executed for the purpose of funding the Olfert Well under the Erehwon APA. The NPI Agreement grants Olfert Holdings an “Applicable Percentage” of available funds from the Olfert Well in exchange for Olfert Holdings funding development of the Olfert Well. The “Applicable Percentage” is defined in the NPI Agreement as 90% prior to Payout and 50% after Payout, with “Payout” being defined as 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 to be effective as of November 2021 (the “Olfert Holdings Operating Agreement”). Pursuant to the Olfert Holdings Operating Agreement, the Company agreed to make a $500,000 capital contribution, out of a total of $1,500,000 to be raised by Olfert Holdings. During October and November of 2021, the Company received advance payments totaling $1.0 million from four investors, through Lustre, pursuant to the NPI Agreement. The Company was credited with $59,935 of well development costs as part of its capital contribution under the Olfert Holding Operating Agreement. In May 2022, a vendor made an in-kind capital contribution of $83,822 to Olfert Holdings in the form of services rendered. In June 2022, the Company’s Chief Financial Officer invested $356,243 in Olfert Holdings pursuant to the NPI Agreement. These three contributions fulfilled the Company’s initial capital contribution commitment under the Olfert Holdings Operating Agreement. On August 3, 2022, the Company, as Manager of Olfert Holdings, issued a capital call to the investors in Olfert Holdings for payment of an additional $461,440 to cover expenses that Lustre is obligated to pay pursuant to the NPI Agreement. As of February 29, 2024, the investors had paid $358,747 of that capital call. As of February 29, 2024, Lustre had incurred approximately $3,300,000 related to the development of the Olfert Well. The Olfert Well has exceeded its original budget, and there are certain construction costs that have not been satisfied. To pay the amounts owed, the Company issued another capital call to the investors in Olfert Holdings to pay an additional $1.7 million. The investors do not have an obligation to make further investments, and Olfert Holdings did not raise the requested additional amount from that capital call. Subsequently, several unpaid contractors have attached mechanic liens on the Olfert Well. Three creditors have filed a lawsuit for payment against Lustre, the operator of the Olfert Well in Montana. The Company believes that the Olfert Well is still economically viable, and it intends to attempt to raise sufficient additional capital for Olfert Holdings, complete the Olfert Well, and pay all amounts owed to contractors.
13
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 9 – NET PROFITS INTEREST AGREEMENT - continued
In connection with the NPI Agreement, the Company was credited with a contribution totaling $59,935 of well development costs under an agreement with Olfert Holdings. The initial investment in Olfert Holdings recorded by the Company was $19,435. The difference between the $59,935 contribution recorded by Olfert Holdings and the $19,435 investment recorded by the Company is due to the Company’s investment being recorded at the carrying value of the assets contributed by the Company. In connection with the August 2022 capital call, the Company contributed an additional $18,438 to Olfert Holdings resulting in a 4.2% interest in Olfert Holdings as of February 29, 2024. As the Company currently serves as the manager of Olfert Holdings, the Company exercises significant influence over Olfert Holdings. Accordingly, the amount the Company paid to Olfert Holdings is recorded as an equity method investment as of February 29, 2024.
NOTE 10 – STOCKHOLDERS’ DEFICIT
Share Based Compensation
The Company made two option grants to the Chief Executive Officer. One grant for the purchase of 1,000,000 shares of Company’s common stock at a price of $0.066 per share was made on December 13, 2023 and the second option grant for the purchase of 3,925,000 shares of Company’s common stock at a price of $0.06 per share was made on November 27, 2023. The options vested completely at time of grant.
The Company made grants of options for the purchase of 15,075,000 shares of the Company’s common stock, at a price of $0.06 per share, during the first quarter of fiscal year 2024. The grants were issued under the Laredo Oil, Inc. 2023 Equity Incentive Plan, which became effective with the filing of a Registration Statement on Form S-8 on June 14, 2023. Except for an option to purchase 1,100,000 shares of common stock, at a price of $0.38 per share, all options previously granted under the Laredo Oil, Inc. 2011 Equity Incentive Plan, totaling 4,825,000 shares, were terminated and replaced by grants under the new incentive plan.
Options to purchase 650,000 shares of common stock at a price of $0.19 per share were granted during the first quarter of fiscal year 2023. The options vested immediately and expire on June 2, 2032. 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. These options were canceled on June 29, 2023.
The Black-Scholes option pricing model is used to estimate the fair value of options granted under our stock incentive plan.
The grant date fair value of the stock option grants during the nine months ending February 29, 2024 and February 28, 2023 totaled $1,006,156 and $123,487, respectively. The weighted average assumptions used in calculating these values were based on the following:
| 2024 | 2023 | |||||||
| Risk-free interest rate | % | % | ||||||
| Expected dividend yield | % | % | ||||||
| Expected volatility | % | % | ||||||
| Expected life of options | 5.0 years | 6.0 years | ||||||
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for a bond with a similar term. The Company does not anticipate declaring dividends in the foreseeable future. Volatility is estimated based on the historical share prices over the same period as the expected life of the option. The Company uses the simplified method for determining the expected term of its stock options.
Share based compensation for stock option grants totaling $ and $ was recorded in general, selling and administrative expense during the three-months ended February 29, 2024 and February 28, 2023 and $ and $ was recorded during the nine-months ended February 29, 2024 and February 28, 2023, respectively.
14
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 10 – STOCKHOLDERS’ DEFICIT - continued
Restricted Stock
In May 2023 the Company received funds pursuant to a Stock Purchase Agreement with an accredited investor to purchase 6,062,886 restricted shares of the Company’s common stock at a purchase price of $0.0441 per share, totaling $267,319. The shares have not been registered under the Securities Act of 1933, as amended, or the securities laws of any state, and were issued to the investor in reliance upon exemptions from such registration. The investor is aware of the provisions of Rule 144 promulgated under the Securities Act.
The Company entered into a financial advisory agreement, dated July 21, 2022 (the “Advisory Agreement”), pursuant to which the Company engaged Dawson James Securities, Inc. (“Dawson”) to render services as a corporate finance consultant. The term of the Advisory Agreement is twelve months from the date of the Advisory Agreement, unless terminated by either party with 30 days prior written notice to the other party, beginning 60 days following the date of the Advisory Agreement. Under the terms of the Advisory Agreement, Dawson will provide advice to the Company concerning business and financial planning, corporate organization and structure, private and public equity and debt financing, and such other matters as the parties may mutually agree.
As compensation to Dawson for the services provided under the Advisory Agreement, the Company is obligated to pay Dawson $30,000 per calendar quarter, with the first such payment being paid one day after the date of the execution of the Advisory Agreement, and each subsequent payment being due three months after the previous payment. The Company made the first $30,000 payment in July 2022. The Company also agreed to issue to Dawson 2,600,000 shares of the Company’s common stock, payable in four installments of (i) 1,000,000 shares issued within three business days after the date of the Advisory Agreement, (ii) 550,000 shares for the subsequent quarter, and (iii) 525,000 shares for each of the remaining two quarters of the term of the Advisory Agreement. The first 1,000,000 restricted shares were issued in July 2022. During the twelve months ending May 31, 2023, the Company recorded advisory service fees totaling $160,000 with respect to the 1,000,000 shares of the Company’s common stock issued pursuant to the Advisory Agreement. After the first $30,000 payment and issuance of 1,000,000 shares of common stock, the Advisory Agreement has been suspended indefinitely.
In April 2022, the Company entered into a consulting agreement with an individual for corporate structuring and strategic planning and compliance services. Pursuant to this agreement, the Company agreed to compensate the consultant with cash and restricted shares of the Company’s common stock, which shares vest equally over the 12-month term of the consulting agreement. During the twelve months ending May 31, 2022, the Company recorded $27,257 in professional fees with respect to the issuance of the first two tranches of 272,474 restricted shares. The consulting agreement was terminated in July 2022.
The Company granted no shares of restricted stock as compensation during the first half of fiscal year 2024.
Warrants
During the third fiscal quarter ended on February 29, 2024, the Company issued 1,000,000 warrants to purchase common stock at a strike price of $0.06 per share and 260,870 warrants to purchase common stock at a strike price of $0.23 per share. No warrants were issued during the first and second quarters of fiscal year 2024 or during the first three fiscal quarters of 2023. The grant date fair value of the stock warrants during the nine months ending February 29, 2024 totaled $96,768. The Black-Scholes option pricing model is used to estimate the fair value of warrants granted. The weighted average assumptions used in calculating these values included a risk free interest rate, a expected dividend yield, a expected volatility and a expected life.
NOTE 11 – NOTES PAYABLE
Convertible Debt
On
December 29, 2023, the Company entered into a Securities Purchase Agreements with an accredited investor, pursuant to which the Company
issued a convertible promissory note in the principal amount of $
On
November 27, 2023, the Company 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 $
15
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 11 – NOTES PAYABLE - continued
On
September 14, 2023, the Company 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 $
In
March, April and May of 2023, the Company entered into Securities Purchase Agreements with an accredited investor, pursuant to which
the Company issued three convertible promissory notes in the aggregate principal amount of $
In
November of 2022, the Company entered into Securities Purchase Agreements with two accredited investors, pursuant to which the Company
issued two convertible promissory notes in the aggregate principal amount of $
In
October 2022, the Company 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 $
On
September 6, 2022, the Company 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 $
16
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 11 – NOTES PAYABLE - continued
In
October, November, December of 2021, and March, April and May of 2022, the Company entered into Securities Purchase Agreements with three
accredited investors, pursuant to which the Company issued six convertible promissory notes in the aggregate principal amount of $
On September 2, 2022 the Company repaid the single Convertible Note entered into on March 1, 2022. The repayment totaled $64,088, comprised of $53,625 principal and $10,463 in related accrued interest and prepayment penalty interest. The Company recorded the related deferred debt discount and debt issue costs, totaling $4,371, as interest expense.
On June 27, 2022, the Company repaid the single Convertible Note entered into in December 2021. The repayment totaled $65,745, comprised of $55,000 in principal and $10,745 in related accrued interest and prepayment penalty interest. The Company recorded the related deferred debt discount and debt issue costs, totaling $4,435, as interest expense.
During April and May 2022, the Company repaid the Convertible Notes entered into in October and November 2021. The repayment for the remaining Convertible Notes totaled $136,479, comprised of $114,125 in principal and $22,354 in related accrued interest and prepayment penalty interest. The Company borrowed $136,479 from Cat Creek to repay these Convertible Notes.
The Convertible Note issued in November 2021 was repaid in an amount that totaled $85,469, comprised of $71,500 in principal and $13,969 in related accrued interest and prepayment penalty interest.
Upon the repayment of the October 2021 and November 2021 Convertible Notes, the Company recorded the related remaining outstanding debt discount and debt issue costs, totaling $12,388, as interest expense.
In August 2020, the FASB issued ASU 2020-06, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. Entities should adopt the guidance as of the beginning of the fiscal year of adoption and cannot adopt the guidance in an interim reporting period. This accounting standard update, which was adopted by the Company effective June 1, 2022, impacts the ongoing accounting of the convertible notes.
The Company adopted this standard using the modified retrospective method of transition and applied the guidance to transactions outstanding as of the beginning of the current fiscal year on June 1, 2022. Transactions that were settled (or expired) during prior reporting periods are unaffected. The cumulative effect of the change is recognized as an adjustment to the opening balance of retained earnings at the date of adoption. Due to the adoption of this accounting standard update under the modified retrospective method, prior periods were not restated. Upon adoption, the Company recorded a $16,200 cumulative-effect adjustment that increased the opening balance of retained earnings on the consolidated balance sheet due to the reduction in non-cash interest expense associated with the historical separation of debt and equity components for the Company’s Convertible Notes. The Company also recorded a $39,718 increase to convertible debt and a decrease to additional paid-in capital of $55,918 due to no longer separating the embedded conversion feature of the Convertible Notes. This adoption did not have a material impact on the Company’s consolidated statement of cash flows.
The Company has the right to prepay the Convertible Notes at any time during the first six months the Convertible Notes are outstanding at the rate of (a) 110% of the unpaid principal amount of such note plus interest, during the first 120 days the note is outstanding, and (b) 115% of the unpaid principal amount of such 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 applicable note holders agree to such repayment and such terms.
The Company agreed to reserve the number of shares of its common stock that may be issuable upon conversion of the Convertible Notes while the Convertible Notes are outstanding.
17
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 11 – NOTES PAYABLE - continued
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 reporting requirements and the failure to maintain a listing on the OTC Markets. The Convertible Notes also contain customary positive and negative covenants. The Convertible Notes include penalties and damages payable to the noteholders in the event the Company does not comply with the terms of the Convertible Notes, including in the event the Company does not issue shares of common stock to the noteholders upon conversion of the Convertible Notes within the time periods set forth therein. Additionally, upon the occurrence of certain defaults, as described in the Convertible Notes, the Company is 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 applicable Convertible Note).
At no time may the Convertible Notes be converted into shares of the Company’s common stock if such conversion would result in the noteholders and their affiliates owning shares representing in excess of 4.99% of the then outstanding shares of the Company’s common stock.
The proceeds from the Convertible Notes could be used by the Company for general corporate purposes.
12% Secured Promissory Note
On March 23, 2023, an individual accredited investor paid the Company the aggregate amount of $100,000 for a Secured Promissory Note, (the “Note”). The Note will accrue interest on the outstanding principal sum at the rate of 12.0% per annum and has a maturity date of March 23, 2024. Interest will be due and payable monthly in arrears. The Note is secured by certain equipment owned by the Company pursuant to a Security Agreement with the Lender. On May 23, 2023, the Note was increased by $83,000 to an aggregate principal amount of $183,000. During June, July and August, 2023, the investor contributed an additional $102,061 under the Note, bringing the aggregate principal amount to $285,061. On November 24, 2023, the investor added another $25,000 to the Note bringing the total principal outstanding to $310,061.
12% Nine Month Promissory Note
On February 22, 2024, the Company entered into a Securities Purchase Agreement with an accredited investor pursuant to which the Company issued a 12% promissory note in the principal amount of $66,000 receiving $50,000 in net cash proceeds. The promissory note had an original issue discount of $11,000. In addition, $5,000 of debt issue costs were deducted from the gross proceeds to the Company. The promissory note is due November 30, 2024 and is repaid with the first installment of $36,960 due August 30, 2024 and three equal installments of $12,320 starting September 30, 2024. In the event of default (including a missed payment), the note is convertible at the option of the investor into shares of the Company’s common stock at a discount of 35% from the lowest closing bid price during the ten trading days immediately preceding the conversion date.
13% Nine Month Promissory Note
On December 11, 2023, the Company entered into a Securities Purchase Agreement with an accredited investor pursuant to which the Company issued a 13% promissory note in the principal amount of $74,750 receiving $60,000 in net cash proceeds. The promissory note had an original issue discount of $9,750. In addition, $5,000 of debt issue costs were deducted from the gross proceeds to the Company. The promissory note is due September 15, 2024 and is repaid in nine equal installments of $9,385.23 with the first payment due January 15, 2024. In the event of default (including a missed payment), the note is convertible at the option of the investor into shares of the Company’s common stock at a discount of 35% from the lowest closing bid price during the ten trading days immediately preceding the conversion date.
15% Nine Month Promissory Note
On October 26, 2023, the Company entered into a Securities Purchase Agreement with an accredited investor, pursuant to which the Company issued a promissory note in the principal amount of $97,750 and received $80,000 in net cash proceeds. The promissory note had an original issue discount of $12,750 and $5,000 in debt issue costs were deducted from the gross proceeds. The Company is amortizing the total of $17,750 recorded as debt discount using the effective interest method through the maturity dates of the convertible promissory note. The note is due nine months following the date of issuance and accrues interest at 15% per annum (22% upon the occurrence of an event of default). Accrued, unpaid interest and outstanding principal is due in nine equal monthly payments of $12,490.23, starting on November 30, 2023. In the event of default (including a missed payment), the note is convertible at the option of the investor into shares of the Company’s common stock at a discount of 35% from the lowest closing bid price during the ten trading days immediately preceding the conversion date.
18
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 11 – NOTES PAYABLE - continued
12% One Year Promissory Notes
On May 20, 2022, the Company entered into a Securities Purchase Agreement with an accredited investor, pursuant to which the Company issued a promissory note in the principal amount of $200,200 and received $175,000 in net cash proceeds. On January 5, 2023, the note was satisfied in full with a final payment of $67,266. The promissory note had an original issue discount of $21,450 and $3,750 in debt issue costs were deducted from the gross proceeds. The Company was amortizing the total of $25,200 recorded as debt discount using the effective interest method through the maturity dates of the convertible promissory note. The note was due one year following the date of issuance and accrued interest at 12% per annum (22% upon the occurrence of an event of default). Accrued, unpaid interest and outstanding principal was due in ten equal monthly payments of $22,422.40, starting on July 15, 2022. In the event of default (including a missed payment), the note was convertible at the option of the investor into shares of the Company’s common stock at a discount of 25% from the lowest closing bid price during the ten trading days immediately preceding the conversion date.
On January 5, 2023, the Company entered into a Securities Purchase Agreement with an accredited investor, pursuant to which the Company issued a promissory note in the principal amount of $197,313, receiving $150,000 in net cash proceeds. The convertible promissory note had an original issue discount of $21,450, and an additional $3,750 in debt issue costs were deducted from the gross proceeds. The total of $25,200 recorded as debt discount is being amortized using the effective interest method through the maturity date of the convertible promissory note. The note is due one year following the date of issuance and accrues interest at 12% per annum (22% upon the occurrence of an event of default). Accrued, unpaid interest and outstanding principal is due in ten equal monthly payments of $22,099.10, starting on February 15, 2023. In the event of default (including a missed payment), the note is convertible at the option of the investor into shares of the Company’s common stock at a discount of 25% from the lowest closing bid price during the ten trading days immediately preceding the conversion date. The note and accrued interest were repaid in full and the note canceled with the last and final payment made November 2023.
Promissory Note
The Company entered into a Secured Promissory Note, dated June 28, 2022 (the “Secured Note”), with the initial principal amount of $750,000. The Secured Note is payable to Cali Fields LLC (the “Lender”). The Secured Note accrues interest on the outstanding principal sum at the rate of 15.0% per annum. The Company may prepay the Secured Note in whole or in part, without penalty, with any such payment being applied first to any accrued and unpaid interest, and then to the principal amount. The Secured Note has a maturity date of December 31, 2023.
As partial consideration for the Lender’s advance of the principal amount of the Secured Note, the Company agreed to pay the Lender a quarterly revenue royalty equal to 0.5% of the consolidated revenue of the Company and its consolidated subsidiaries from the production of oil, gas, gas liquids and all other hydrocarbons, recognized by the Company during the most recent calendar quarter during the “Royalty Period,” from June 1, 2022 through May 31, 2027.
The Secured Note is secured by the Company’s fifty percent (50%) interest in Cat Creek.
Secured Convertible Debt
The Company entered into a Note Purchase Agreement dated September 23, 2022 (the “Note Purchase Agreement”), for the issuance of secured convertible promissory notes in the aggregate principal amount of up to $7,500,000. The notes are secured by the membership interest in Hell Creek Crude, LLC, a wholly owned subsidiary of the Company. Pursuant to this Note Purchase Agreement, during September, October and November 2022, the Company issued four promissory notes in the aggregate principal amount of $290,000 and accrued interest at 10% per annum, later increased to 12% per annum. In December 2022, January 2023 and February 2023, the Company issued three additional promissory notes totaling $250,000. During June 2023 and August 2023, the Company entered into an additional $85,000 of secured convertible promissory notes increasing the aggregate principal issued to $625,000. Under the Note Purchase Agreement, the Company may issue additional promissory notes, up to the $7,500,000 total principal amount. The promissory notes accrue interest on the outstanding principal sum at the rate of 12.0% per annum, payable quarterly starting September 30, 2023, and are convertible into the Company’s common stock at a conversion price of $1.00 per share. The notes issued under the Note Purchase Agreement have a maturity date of September 30, 2025. In January 2024, noteholders contributed $575,000 of their notes plus accrued interest of $73,204 to the Participation Agreement pertaining to the three well drilling program in the Midfork Field in Montana (See Footnote 1). The notes will be repaid from funds produced by the first well drilled. In the event of a dry hole, the notes will be reinstated at $648,204 and accrue interest on that amount thereafter.
Revolving Note
On May 25, 2022, the Company entered into a Revolving Credit Note (the “Revolving Note”) with AEI Management, Inc. (“AEI”), with a maximum draw amount of $1,500,000.00. In May 2022 and June 2022, the Company borrowed $62,858 and $48,000, respectively, under the Revolving Note. The Revolving Note had a maturity date of May 1, 2023, or such later date as requested by the Company and agreed in writing by AEI in its sole discretion. On May 22, 2023, the Revolving Note principal of $110,858 and accrued interest of $19,510 was paid and the Revolving Note canceled.
19
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 11 – NOTES PAYABLE - continued
Alleghany Notes
Schedule of Notes Payable – Related Party
| August 31, | May 31, | |||||||
| 2023 | 2023 | |||||||
| Total note payable – Alleghany | $ | $ | ||||||
| Less amounts classified as current | ||||||||
| Note payable – Alleghany, net of current portion | $ | $ | ||||||
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 an amended 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, 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 Agreement, 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. During the five months ending May 31, 2021, the Company repaid $13,500 of the Senior Consolidated Note upon the sale of certain equipment. The note bore no interest until January 1, 2022 whereupon the interest rate increased 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 debt discount has been fully amortized as of December 31, 2021. In August 2022, the Company entered an amendment to the Senior Consolidated Note whereby the maturity date of the loan was extended to December 31, 2023 in exchange for an interest rate to 8% per annum commencing July 1, 2022. Further, the revenue royalty as defined in the Purchase Agreement increased from 5% to 6% as the loan was not paid prior to December 31, 2022. As of February 29, 2024 and May 31, 2023, the Senior Consolidated Note is recorded as current and remains outstanding.
Paycheck Protection Program Loan
Schedule of Paycheck Protection Program
| February 29, | May 31, | |||||||
| 2024 | 2023 | |||||||
| Total PPP Loan | $ | $ | ||||||
| Less amounts classified as current | ||||||||
| PPP loan, excluding current portion | $ | $ | ||||||
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.
No interest or principal will be due during the deferral period, although interest will continue to accrue over this period. As of May 31, 2022, interest totaling $15,353 is recorded in accrued interest on the accompanying consolidated balance sheets. After the deferral period and after considering 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.
20
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 11 – NOTES PAYABLE - continued
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. The portion of the loan forgiven has been recorded as income from the extinguishment of its loan obligation as of the date when the Company is legally released from being the primary obligor in accordance with ASC 405-20-40-1. Monthly payments commenced on September 1, 2021 and as of February 29, 2024, the Company owes $6,925 with respect to the remaining balance on the first Note.
In April 2022, the Company applied for partial forgiveness of the PPP Second Draw Loan and received notice that $67,487 of the principal and related interest balance has been forgiven and is recorded as income from the extinguishment of the loan obligation. Monthly payments of $26,752 commenced on June 3, 2022. The Company was in arrears on payments on the second PPP Note and on December 5, 2023 entered into a Payment Plan arrangement for the PPP Second Draw Loan. Under the terms of the Plan, the Company agreed to pay the SBA the principal amount of $979,178 and 180 monthly payments of $5,860.32 which includes interest. The Company made the first payment under the Plan in December 2023. If the Company does not make the payments described in the Plan pursuant to the terms of the Plan, the entire remaining amount will be subject to collection activities by the Department of Treasury. The Company may also be subject to additional accrued interest and collection fees of 30% or more if it does not make the payments pursuant to the Plan. As of February 29, 2024, the Company is current and compliant with the restructured payment plan. As of February 29, 2024, the Company owes $964,032 with respect to the remaining balance on the Second Note.
NOTE 12 – EQUITY METHOD INVESTMENT
Cat Creek Holdings
On
June 30, 2020, Laredo Oil, Inc. 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 the Cat Creek Properties. In accordance with the LLC
Agreement, the Company invested $
On July 1, 2020, Cat Creek entered into an Asset Purchase and Sale Agreement (the “Purchase Agreement”) with Carrell Oil Company (“Seller”) for the purchase of the Cat Creek Properties. On September 21, 2020, upon resolving a purchase contingency under the Cat Creek Purchase Agreement, Seller received consideration of $400,000, taking into effect certain adjustments resulting from pre- and post-effective date revenue, expense, and allocations.
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 29, 2024 and February 29, 2023 periods presented and has been compiled from respective company financial statements, reflects certain historical adjustments, and is reported on a two-month lag.
Summarized Financial Information
| Balance Sheet: | As of February 29, 2024 | As of May 31, 2023 | ||||||
| Current Assets | $ | $ | ||||||
| Non-current Assets | ||||||||
| Total Assets | $ | $ | ||||||
| Current Liabilities | $ | $ | ||||||
| Non-current Liabilities | ||||||||
| Shareholders’ equity | ||||||||
| Total Liabilities and Shareholders’ Equity | $ | $ | ||||||
| Results of Operations: | Nine Months Ended February 29, 2024 | Nine Months Ended February 28, 2023 | ||||||
| Revenue | $ | $ | ||||||
| Gross Profit | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
21
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 12 – EQUITY METHOD INVESTMENT - continued
Olfert 11-4 Holdings
The following table provides summarized financial information for the Company’s ownership interest in Olfert #11-4 Holding, which is accounted for under the equity method for the February 29, 2024 period presented and has been compiled from respective financial statements and reflects certain historical adjustments. Results of operations are excluded for periods prior to the acquisition. See Note 8 for further information.
Summarized Financial Information
| Balance Sheet: | As of February 29, 2024 | |||
| Current Assets | $ | |||
| Non-current Assets | ||||
| Total Assets | $ | |||
| Accounts payable | ||||
| Shareholders’ equity | ||||
| Total Liabilities and Shareholders’ Equity | $ | |||
| Results of Operations: | Nine Months Ended February 29, 2024 | |||
| Revenue | $ | |||
| Gross Profit | ||||
| Net Loss | $ | ( | ) | |
NOTE 13 – COMMITMENTS AND CONTINGENCIES
On February 4, 2021, Lustre filed a lawsuit captioned Lustre Oil Company LLC and Erehwon Oil & Gas, LLC v. Anadarko Minerals, Inc. and A&S Mineral Development Co., LLC in the Montana Seventeenth Judicial District Court for Valley County 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 Lustre’s mineral leases. On January 14, 2022, the District Court granted the defendants’ Motion to Dismiss without addressing the merits of Lustre’s quiet title action. Lustre appealed the decision to the Montana Supreme Court. On April 6, 2023, in a unanimous decision, the Montana Supreme Court reversed the District Court’s decision related to Lustre’s quiet title action and remanded the case to the District Court for further proceedings. On June 1, 2023, Lustre filed a First Amended Complaint with the District Court reopening the original suit with a different judge. On February 27, 2024, the Company announced that Lustre entered into a mutually agreeable Settlement Agreement between Lustre, Erehwon Oil & Gas, LLC (“Erehwon”), and A&S Minerals Development Company, LLC (“ASMD”), (the “Settlement Agreement”). The confidential Settlement Agreement contains an undisclosed cash amount and settles the quiet title dispute between the parties. On March 20, 2023, Capex Oilfield Services, Inc. (“Capex”) filed a lawsuit against Lustre in the Montana Tenth Judicial District Court, Petroleum County, demanding payment of $377,190 plus interest and collection costs for services provided by Capex to drill the Olfert 11-4 well. On May 18, 2023, Capstar Drilling, Inc.(“Capstar”) filed a lawsuit against Lustre in the Montana Seventeenth Judicial District Court, Valley County, demanding payment of $298,050 plus interest and collection costs for services provided by Capstar to drill the same well. On August 29, 2023, Warren Well Service, Inc. (“Warren Well”) filed a lawsuit against Lustre in the Montana Seventeenth Judicial District Court, Valley County, demanding payment of $164,235 plus interest and collection costs for services provided by Warren Well to drill the same well. Lustre intends to bring the Olfert 11 well into production as soon as possible and reimburse all unpaid vendors from proceeds from such production.
Except as set forth above, the Company is not currently involved in any other legal proceedings, and it is not aware of any other pending or potential legal actions.
Revenue Royalty - In accordance with the Securities Purchase Agreement with Alleghany described above, the Company 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 ending December 31, 2027. Further, due to the Company’s loan nonpayment prior to December 31, 2022, the revenue royalty, as defined in the Securities Purchase Agreement, increased from 5% to 6%.
In accordance with the Secured Note, the Company agreed to pay the Lender a revenue royalty of 0.5% on consolidated revenue of the Company arising from the direct production of oil and gas. The royalty period extends from June 1, 2022 through May 31, 2027.
22
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 14 – SUBSEQUENT EVENTS
None.
23
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains forward-looking statements that involve risk and uncertainties. We use words such as “anticipate”, “believe”, “plan”, “expect”, “future”, “intend”, and similar expressions to identify such forward-looking statements. Investors should be aware that all forward-looking statements contained within this filing are good faith estimates of our management as of the date of this filing. Our actual results could differ materially from those anticipated in these forward-looking statements.
Impact of COVID-19 to our Business
The long-term impacts of the global emergence of novel coronavirus 2019 (“COVID-19”) variants on our business are currently unknown. In an effort to protect the health and safety of our employees, we took proactive, aggressive action from the earliest signs of the outbreak in China to adopt social distancing policies at our locations, including working from home, limiting the number of employees attending meetings, reducing the number of people in our sites at any one time, and suspending employee travel. We anticipate that the global health crisis caused by COVID-19 variants will continue to negatively impact business activity.
We will continue to actively monitor the situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, partners, suppliers, and stakeholders, or as required by federal, state, or local authorities. It is not clear what potential effects any such alterations or modifications may have on our business, including the effects on our customers, employees, and prospects, or on our financial results for the remainder of fiscal year 2024.
Company Description and Operations
Prior Operations
We are an oil exploration and production company, primarily engaged in acquisition and exploration efforts to find mineral reserves on various properties. From our inception in March 2008 through October 2009, we were primarily engaged in acquisition and exploration efforts for mineral properties. Beginning in October 2009, we shifted our focus to locating mature oil fields with the intention of acquiring those oil fields and recovering stranded oil reserves using enhanced recovery methods. From June 14, 2011 to December 31, 2020, we were a management services company, managing the acquisition and operation of mature oil fields, focused on the recovery of “stranded” oil from those mature fields using enhanced oil recovery methods for our then sole customer, Stranded Oil Resources Corporation, or SORC, a wholly owned subsidiary of Alleghany Corporation, or Alleghany. We performed those services in exchange for a quarterly management fee and reimbursement of our employee related expenses from SORC. Such fees and reimbursements were effectively all of our revenues prior to the closing of the Securities Purchase Agreement with Alleghany described below.
On December 31, 2020, we entered into a Securities Purchase Agreement with Alleghany. Under that agreement, we purchased all of the issued and outstanding shares of SORC. As consideration for the SORC shares, we paid Alleghany $72,678 in cash and agreed to pay Alleghany a seven-year royalty of 5.0%, subsequently adjusted to 6.0%, of our future revenues and net profits from our oil, gas, gas liquids and all other hydrocarbon operations, subject to certain adjustments. Currently, SORC is not conducting any ongoing operations.
Under the Securities Purchase Agreement with Alleghany, we also entered into a Consulting Agreement, under which Alleghany paid us an aggregate amount of approximately $1.245 million during calendar year 2021 in exchange for our providing Alleghany with one to three years of consulting services from certain of our employees, including Mark See, our Chief Executive Officer. We no longer receive any management fees or reimbursement payments from Alleghany for the compensation of any of our employees.
Current Operations
Prior to December 31, 2020, while implementing underground gravity drainage, or UGD, projects for Allegheny, we gained specialized know-how and operational experience in evaluating, acquiring, operating and developing oil and gas properties, as well as expertise in designing, drilling and producing conventional oil wells. Based upon that know-how, we identified and acquired 45,246 gross acres, and 37,932 net acres, of mineral property interests in the State of Montana. We began drilling an exploratory well in Montana during May 2022. That well, named the Olfert 11-4 well, has not yet been completed or put into production. More recently, we are continuing our efforts to complete the Olfert 11-4well and begin commercial production. We have also developed relationships with Texakoma Exploration and Production, LLC, or Texakoma, and Erehwon Oil & Gas, LLC, or Erehwon. designed to develop our acquired mineral property acreage. We also have raised $2,034,000 from accredited investors pursuant to a participation agreement to fund the development of up to three wells in the Midfork oil field in Montana. We are continually attempting to raise additional funds to develop our other mineral property interests we have purchased. We also have a 50% interest in the Cat Creek oil field, located in Montana. Our various projects and relationships are described in more detail below. Our ability to secure additional funding will determine whether we can achieve any future production for the acreage, and if we can secure such financing, the pace of field development.
24
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
Relationship with Erehwon Oil & Gas, LLC
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 (the “Erehwon APA”) and subsequent amendments 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 amended Erehwon APA specifies calculations for royalty interests and working interests for the first ten well completions and first ten well recompletions and for all additional wells and recompletions thereafter. Lustre will acquire mineral leases and pay 100% of the costs and the split between Erehwon and Lustre will be 20%/80%. Under the amended Erehwon APA, Lustre will fund 100% of the construction costs of the first ten wells and first ten completions. Until payout as defined is attained, the distribution split between Erehwon and Lustre will be 10%/90%, thereafter, 20%/80%. Any additional wells will be funded 80% by Lustre and 20% by Erehwon.
Royalty expenses for these wells will consist of a royalty interest to the landowner and an overriding royalty interest of between 3% and 6% to two individuals who generated the prospects. Those individuals will also receive an amount equal to 5% of the cost of the first ten new wells we complete and the first ten completed recompletions.
Hell Creek Crude, LLC Midfork Field Production Well
In December 2023, we entered into a Participation Agreement, through Hell Creek Crude, LLC, our wholly owned subsidiary, Erehwon, and various accredited investors. The Participation Agreement provided us with $2,034,000 to acquire certain leases and to drill a development well in the Midfork Field in Montana. Several of the investors also hold $575,000 of our convertible debt, plus accrued interest of $73,204, which indebtedness is included as investments under the Participation Agreement.
Until the total of the $2,682,204 in cash, notes and accrued interest is repaid to the various investors under the terms of the Participation Agreement, the net working interest payments from the Participation Agreement will be split between the various investors and HCC and Erehwon, collectively on a 90%/10% basis. After the repayment to the investors, the split between the investors, on one hand, and HCC and Erehwon, on the other hand, will be on a 50%/50% basis. After the development well is drilled under the Participation Agreement, the investors will have the option to invest in up to two additional wells in the field.
Olfert 11-4 Montana Well
In January 2022, we executed a Net Profits Interest Agreement with Erehwon and Olfert No. 11-4 Holdings, LLC, or Olfert Holdings, for the purpose of funding the first well, named Olfert #11-4, under the Acquisition and Participation Agreement described above. In exchange for Olfert Holdings’ funding of the development of Olfert #11-4, Olfert Holdings receives 90% of amounts resulting from Olfert #11-4 prior to “Payout” and 50% after “Payout.” The Net Profits Interest Agreement defines “Payout” as the point in time when the aggregate of all ‘Net Profits Interest’ payments made to Olfert Holdings under the agreement equals 105% of the total well development costs.
We also entered into the Olfert Holdings operating agreement, under which we agreed to make a capital contribution to Olfert Holdings in the amount of $500,000, out of a total of $1,500,000 of capital to be raised by Olfert Holdings. As of February 29, 2024, we were credited with a contribution of $78,373 in market value of well development costs, representing a 4.4% interest in Olfert Holdings. Since then, other investors, including our chief financial officer, assumed and funded our remaining capital commitment under the Olfert Holdings operating agreement.
Development Agreement with Texakoma Exploration and Production, LLC
Effective July 18, 2023, Lustre and Erehwon entered into an Exploration and Development Agreement (the “Development Agreement”), with Texakoma. The Development Agreement provides for the exploration and development of the “Lustre Field Prospect” described in the Development Agreement. Lustre and Erehwon are also parties to an existing Acquisition and Participation Agreement, under which those parties agreed to acquire certain oil and gas interests, and drill, complete, re-enter, re-complete, sidetrack, and equip wells, in certain counties in Montana.
Under the terms of a Development Agreement, Texakoma agreed to pay Lustre and Erehwon, jointly, the following amounts: (i) $175,000 on or before July 21, 2023; and (ii) another $175,000 upon the “spudding” of the initial test well subject to rig availability. Upon the spudding of that test well, Lustre and Erehwon were required to deliver to Texakoma a partial assignment of an 85% working interest in the oil and gas leases covering the first two initial drilling and spacing units. The first payment under the Development Agreement was paid by Texakoma at the end of August 2023, and the $175,000 second payment on September 29, 2023.
The two test wells have been successfully drilled and Texakoma is obligated to pay 100% of the costs associated with the drilling and completion of the wells. Lustre and Erehwon jointly have an undivided 15% working interest, carried through the tanks, in the wells. In March 2024, Texakoma exercised its option to participate in the development of the remainder of the Lustre Field Prospect. By exercising its option, Texakoma has agreed to drill eight additional wells, with Lustre and Erehwon having a 15% working interest carried through the tanks, and to pay Lustre $706,603 spread over four months, for an 85% leasehold interest in the next eight drill sites and a 50% leasehold interest in the balance of the Lustre Field Prospect acreage. The working and net revenue interest in any wells drilled subsequent to the first ten wells will be shared by Texakoma and Lustre and Erehwon, jointly, on a 50:50 basis. Following the Texakoma transaction, we will retain a 100% leasehold interest and full control of an additional 30,556 net mineral acres in northeastern Montana at the western edge of the Williston Basin.
25
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
Liquidity and Capital Resources
Cat Creek Holdings LLC Investment
On June 30, 2020, we entered into the Limited Liability Company Agreement of Cat Creek Holdings LLC, a Montana limited liability company, with Lipson Investments LLC and Viper Oil & Gas, LLC. The limited liability company was formed to purchase certain oil and gas properties in the Cat Creek Field in Petroleum County and Garfield County in the State of Montana. On July 1, 2020, Cat Creek Holdings entered into an Asset Purchase and Sale Agreement with Carrell Oil Company, under which Cat Creek Holdings agreed to pay Carrell Oil $400,000 in cash, subject to certain revenue adjustments and expense and tax allocations, in exchange for the Cat Creek Field properties. We invested $448,900 in Cat Creek Holdings in exchange for a 50% ownership interest. Lipson Investments LLC and Viper Oil & Gas, LLC, the other two members of Cat Creek Holdings, have ownership interests of 25% each, which they received for their respective investments of $224,450 in cash. We designate two of the four managers of Cat Creek Holdings.
We anticipate that our agreement with Texakoma described above will produce revenue sufficient to cover our ongoing operating expenses, beginning later in the calendar year 2024. The two exploratory wells drilled by Texakoma have encountered promising levels of oil and have been put into production. Any sales of oil from those wells will be distributed in accordance with the Texakoma agreement on a monthly basis. Until we receive adequate funding from the Texakoma agreement described above, any cash needed for our operations and oil field expansion and development will most likely have to come from the sale of our debt and equity securities.
As an indicator of value for our Montana mineral assets, an independent petroleum engineering firm has provided us with a reserve report estimating proved undeveloped, probable undeveloped and contingent reserves, and forecasts of economics attributable to certain properties in the Western Williston Basin of Montana for oil interests acquired by Lustre. The report estimates that the Lustre reserves may generate cash flow with as much as $67 million in present value, discounted at a rate of 10%.
Currently, there is minimal financial activity at Hell Creek Crude as we await permitting and drilling rig availability.
In 2021, Lustre and Erehwon filed an action for quiet title in the State of Montana against Anadarko Minerals, Inc. and A&S Mineral Development Co, LLC. That action has been settled pursuant to a mutually acceptable settlement agreement.
Our cash and cash equivalents as of February 29, 2024 was $1,894,962. Our total debt outstanding as of February 29, 2024 was $3,890,209, including: (i) $617,934 owed to Alleghany, which is classified as a current note payable, and (ii) $970,956 pursuant to notes under the Paycheck Protection Program, or PPP, of which we have classified $903,883 as long-term debt, net of the current portion totaling $67,073, which is classified as a current note payable, (iii) $949,159 bridge financing and short term convertible notes, net of deferred debt discount, (iv) a $310,061 revolving note classified as short-term, (v) a $750,000 note payable due to Cali Fields LLC, classified as short-term, and (vi) a $292,099 note payable due to our Chief Financial Officer, classified as short-term.
Results of Operations
The Company recognized revenues totaling $12,701 through their interest in oil and gas sales for the three- and nine-month periods ended February 29, 2024. There are no similar revenues during the three- and nine-month periods ending February 28, 2023. During the nine months ended February 29, 2024 and February 28, 2023, we incurred operating expenses of $2,687,031 and $2,142,823, respectively. These expenses consisted of general operating expenses incurred in connection with the day-to-day operation of our business, the preparation and filing of our required public reports and stock option compensation expense. The increase in expenses for the nine months ended February 29, 2024, as compared to the same period in 2023, is primarily attributable to these payroll costs and stock-based compensation, offset by a decrease in other professional fees including public relations and advisory services.
26
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
During the nine months ended February 29, 2024, we recognized other income and expenses of $175,000 related to the sale of drilling equipment, $350,000 related to the first two payments required under the Texakoma Development Agreement, and a $92,309 equity method loss related to our Cat Creek equity investment. During the nine months ended February 29, 2023, we recognized other income and expenses comprised of (i) the $122,682 we received from the Employee Retention Credit established by the CARES Act, (ii) $47,506 in equity method loss related to our Cat Creek equity investment, and (iii) $23,885 in other income.
Recently Issued Accounting Pronouncements
Refer to Note 3 of the Notes to Consolidated financial statements for a discussion of recently issued accounting pronouncements.
Critical Accounting Policies and Estimates
The process of preparing consolidated financial statements requires that we make estimates and assumptions that affect the reported amounts of liabilities and stockholders’ equity/(deficit) at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates in these consolidated financial statements include estimates related to the valuation of stock-based compensation and asset retirement obligation. Changes in the status of certain facts or circumstances could result in a material change to the estimates used in the preparation of the consolidated financial statements and actual results could differ from the estimates and assumptions.
Going Concern
These consolidated financial statements have been prepared on a going concern basis. We have routinely incurred losses since inception, resulting in an accumulated deficit. We have recently received loans from accredited investors to fund our operations. There is no assurance that such financing will be available in the future to meet our operating needs. This situation raises substantial doubt about our ability to continue as a going concern within the one-year period after the issuance date of the consolidated financial statements included in this report.
Our management has undertaken steps to improve operations, with the goal of sustaining operations for the next twelve months and beyond. These steps include an ongoing effort to raise funds through the issuance of debt to fund our well development program and maintain operations. We have attracted and retained key personnel with significant experience in the industry. At the same time, in an effort to control costs, we have required a number of our personnel to multi-task and cover a wider range of responsibilities in an effort to restrict the growth of our headcount. There can be no assurance that we can successfully accomplish these steps and it is uncertain that we will achieve a profitable level of operations and obtain additional financing. We cannot assure you that any additional financing will be available to us 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 us to continue as a going concern.
OFF-BALANCE SHEET ARRANGEMENTS
We do not currently have any off-balance sheet arrangements or other such unrecorded obligations, and we have not guaranteed the debt of any other party.
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is confined to our cash equivalents. We invest in high-quality financial instruments and believe we are subject to limited credit risk. Due to the short-term nature of our cash, we do not believe that we have any material exposure to interest rate risk arising from our investments.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, or the SEC. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives, and management necessarily is required to use its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are not effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow for timely decisions regarding required disclosure.
Our small size and limited resources have prevented us from being able to employ sufficient resources to enable us to have an adequate level of supervision and segregation of duties. Further we have limited specific oil and gas accounting personnel in our accounting department due to our small size, lack of resources and limited technical accountants on staff. Therefore, it is difficult for us to effectively segregate accounting duties and have proper financial reporting, which creates a material weakness in internal controls. This lack of segregation of duties and limited personnel leads management to conclude that our financial reporting disclosure controls and procedures are not effective to give reasonable assurance that the information required to be disclosed in reports that we file under the Exchange Act is recorded, processed, summarized and reported as and when required.
(b) Changes in Internal Control Over Financial Reporting
None.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
None.
28
ITEM 6. EXHIBITS
The exhibits required to be filed herewith by Item 601 of Regulation S-K, as described in the following index of exhibits, are attached hereto unless otherwise indicated as being incorporated herein by reference, as follows:
29
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LAREDO OIL, INC.
(Registrant)
| Date: April 19, 2024 | By: | /s/ Mark See | |
| Mark See | |||
| Chief Executive Officer and Chairman of the Board | |||
| Date: April 22, 2024 | By: | /s/ Bradley E. Sparks | |
| Bradley E. Sparks | |||
| Chief Financial Officer, Treasurer and Director |
30
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECURITIES EXCHANGE ACT OF 1934
RULE 13a-14(a) OR 15d-14(a)
I, Mark See, Chief Executive Officer of Laredo Oil, Inc., certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q for the period ended February 29, 2024 of Laredo Oil, Inc., the registrant; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: April 19, 2024 | |
| /s/ Mark See | |
| Mark See | |
| Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECURITIES EXCHANGE ACT OF 1934
RULE 13a-14(a) OR 15d-14(a)
I, Bradley E. Sparks, Chief Financial Officer and Treasurer of Laredo Oil, Inc., certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q for the period ended February 29, 2024 of Laredo Oil, Inc., the registrant; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: April 19, 2024 | |
| /s/ Bradley E. Sparks | |
| Bradley E. Sparks | |
| Chief Financial Officer and Treasurer | |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Laredo Oil, Inc. on Form 10-Q for the period ended February 29, 2024, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark See, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief:
| (1) | the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| /s/ Mark See | |
| Mark See | |
| Chief Executive Officer | |
| Date: April 19, 2024 | |
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Laredo Oil, Inc. on Form 10-Q for the period ended February 29, 2024, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Bradley E. Sparks, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief:
| (1) | the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| /s/ Bradley E. Sparks | |
| Bradley E. Sparks | |
| Chief Financial Officer and Treasurer | |
| Date: April 19, 2024 | |