Laredo Oil, Inc 10-K for FY2023
Laredo Oil, Inc. (LRDC)
About this 10-K
Laredo Oil, Inc filed this 10-K on September 13, 2023, covering the fiscal year ended May 31, 2023 (FY2023).
Headline figures
Fiscal year ended May 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $0
- compared with $667.61K a year earlier
- Net loss
- $3.11M
- compared with a net loss of $895.85K a year earlier
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the fiscal year ended
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to _________
Commission
file number:
| (Exact name of Registrant as Specified in its Charter) |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
| (Address of principal executive offices) (Zip Code) |
| (Registrant’s telephone number, including area code) |
| Securities registered pursuant to Section 12(b) of the Act: |
| None |
| Securities registered pursuant to Section 12(g) of the Act: |
| None |
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12-b of the Act). Yes o
On
November 30, 2022, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market
value of the registrant’s outstanding shares of common equity held by non-affiliates of the registrant was $
As of September 13, 2023, there were shares of the registrant’s common stock outstanding.
Documents Incorporated by Reference: None.
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LAREDO OIL, INC.
TABLE OF CONTENTS
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Except as otherwise required by the context, references to “Laredo Oil,” “Laredo Oil, Inc.,” “the Company,” “we,” “us” and “our” are to Laredo Oil, Inc., a Delaware corporation, and its subsidiaries.
Forward-Looking Statements
From time to time, we may provide information, whether orally or in writing, including certain statements in this Annual Report on Form 10-K, which are deemed to be “forward-looking” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Litigation Reform Act”). These forward- looking statements and other information are based on our beliefs as well as assumptions made by us using information currently available.
The words “believe,” “plan,” “expect,” “intend,” “anticipate,” “estimate,” “may,” “will,” “should” and similar expressions are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended or using other similar expressions. We do not intend to update these forward-looking statements, except as required by law.
In accordance with the provisions of the Litigation Reform Act, we are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this Annual Report on Form 10-K, any exhibits to this Annual Report on Form 10-K and other public statements we make. Such factors are discussed in the “Risk Factors” section of this Annual Report on Form 10-K.
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PART I
Item 1. Business
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 from SORC of our employee related expenses. 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% 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 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 monthly expenses 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 gaining expertise 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 has not yet been completed or put into production. We are continuing our efforts to complete the drilling of the well and begin commercial production. Simultaneously, we are attempting to raise additional funds to continue development of the other mineral property interests we purchased. We plan to have each additional well have an 80-acre footprint, so that the first ten wells would cover approximately 800 acres, or less than two percent of our leased acreage. Our ability to secure further funding will determine the extent of future production for the acreage, and the pace of field development.
In connection with our securing the acreage in Montana described above, our wholly owned subsidiary, Lustre Oil Company LLC, or Lustre, entered into an Acquisition and Participation Agreement with Erehwon Oil & Gas, LLC, or Erehwon. Our agreement with Erehwon allows us to acquire oil and gas interests, and drill, complete and equip wells in Valley County, Daniels County and Roosevelt County, Montana. Our agreement with Erehwon also specifies calculations for royalty interests and working interests that we will receive for the first ten well completions, and first ten well recompletions, which is defined as the completion of a well for production from an existing well bore in another formation. Under our agreement with Erehwon, we will acquire the initial mineral leases, and pay 100% of the initial acquisition costs, up to $500,000. When the total costs exceed $500,000, Erehwon has the option to acquire a 10% working interest in any lease we acquired by paying us 10% of our acquisition cost of that lease, resulting in our paying 90% of the applicable lease’s acquisition costs. Until we are repaid the full amount of the acquisition costs we paid to complete the first ten wells and first ten recompletions of older wells, the working interest split will remain 10% to Erehwon and 90% to us. After we have recovered our acquisition costs, Erehwon’s working interest will increase to a 20% working interest. Additional wells and recompletions will have a working interest split of 10% to Erehwon and 90% to us, unless Erehwon exercises its option to increase its working interest by 10%, as described above.
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Under our agreement with Erehwon, we will fund 100% of the construction costs of the first ten wells and first ten recompletions. The lease acquisition costs of any additional wells will be funded 80% by us and 20% by Erehwon; provided, however, that Erehwon will have the option to increase its working interest to 20% only by reimbursing us for 10% of our acquisition costs. Royalty expenses for these wells will consist of a royalty interest to the landowner and an overriding royalty interest of between 3% and 6% for two individuals who generated the prospects, who 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.
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 under the Acquisition and Participation Agreement described above, named Olfert #11-4. In exchange for Olfert Holdings’ funding of the development of the first well, 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.
In January 2022, 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 May 31, 2022, we were credited with a contribution of $59,935 in market value of well development costs, representing a 5.5% 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.
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 that agreement, 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.
Competition
Our operating results are largely impacted by competition from other exploration and production companies in all areas of operation, including the acquisition of mature fields. Our competitors include large, well-established, companies with substantially more capital resources than us.
Oil and Gas Price Volatility
Market prices for oil and gas declined significantly in the first six months of calendar year 2020, as the combination of the COVID-19 global pandemic and geopolitical tensions among the world’s energy producers resulted in the simultaneous reduction of demand and increase in supply of crude oil. Since then, oil and gas prices have recovered and have remained in the $70-80 per barrel range. However, oil and gas prices still remain volatile.
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Operating Hazards and Uninsured Risks
Oil and gas drilling activities are subject to many risks, including, but not limited to, the risk that those activities will not produce commercially viable oil and gas reserves. The cost and timing of drilling, completing and operating wells is often uncertain and drilling operations may be curtailed, delayed or canceled as a result of numerous factors, including low oil and gas prices, title problems, reservoir characteristics, weather conditions, equipment failures, delays imposed by project participants, compliance with governmental requirements, shortages or delays in the delivery of equipment and services and increases in the cost for such equipment and services. Our future oil recovery activities may not be successful. If so, such failure may have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our operations are subject to hazards and risks inherent in drilling for and producing and transporting petroleum products, including fires, natural disasters, explosions, encountering formations with abnormal pressures, blowouts, craterings, and pipeline ruptures and spills. Any of these events may result in the loss of hydrocarbons, environmental pollution, personal injury claims and other damage to our properties and those of others. We maintain insurance against some, but not all, of the risks described above. In particular, the insurance we maintain does not cover claims relating to failure of title to oil leases, loss of surface equipment at well locations, business interruption, loss of revenue due to low commodity prices or loss of revenues due to well failure. The occurrence of any such event that is not covered, or not fully covered, by insurance that we maintain or may acquire, could have a material adverse effect on our operations.
Governmental Regulation
Oil and natural gas exploration, production, transportation and marketing activities are subject to extensive laws, rules and regulations promulgated by federal and state legislatures and agencies, including but not limited to the Mine Safety and Health Administration, or MSHA, the Federal Energy Regulatory Commission, or FERC, the Environmental Protection Agency, or EPA, the Bureau of Land Management, BLM, and various other federal or state regulatory agencies. Our failure to comply with any such laws, rules and regulations may result in substantial penalties, including the delay or prohibition of our operations. The legislative and regulatory burden on the oil industry described above increases our cost of doing business.
State regulatory agencies, as well as the federal government when we operate on federal or Indian lands, require permits for drilling operations, drilling bonds and reports, and impose other requirements relating to the exploration and production of oil and gas. There are also statutes or regulations addressing conservation matters, including provisions for the unitization or pooling of oil and natural gas properties, the establishment of maximum rates of production from wells and the regulation of spacing, plugging and abandonment of such wells. In each jurisdiction, we may need exceptions to some applicable regulations requiring regulatory approval. All of these matters could affect our operations.
Environmental Matters
The oil industry is subject to extensive and changing federal, state and local laws and regulations relating to environmental protection, including the generation, storage, handling, emission, transportation and discharge of materials into the environment, as well as safety and health. The recent trend in environmental legislation and regulation is generally toward stricter standards, and this trend is likely to continue. These laws and regulations may require a permit or other authorization before construction or drilling commences, and for certain other activities, limit or prohibit access, seismic acquisition, construction, drilling and other activities on certain lands lying within wilderness and other protected areas, impose substantial liabilities for pollution resulting from its operations, and require the reclamation of certain lands.
The permits that are required for oil and gas operations are subject to revocation, modification and renewal by issuing authorities.
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Federal regulations require certain owners or operators of facilities that store or otherwise handle petroleum products to prepare and implement spill prevention, control countermeasures and response plans relating to the possible discharge of oil into surface waters. The Oil Pollution Act of 1990, or OPA, contains numerous requirements relating to the prevention of and response to oil spills into waters of the United States. For onshore and offshore facilities that may affect waters of the United States, the OPA requires the operator to demonstrate the financial ability to respond to discharges. Regulations are currently being developed under federal and state laws concerning oil pollution prevention and other matters that may impose additional regulatory burdens on participants in the oil and gas industry. In addition, the Clean Water Act and analogous state laws require permits to be obtained to authorize discharge into surface waters or to construct facilities in wetland areas. The Clean Air Act of 1970 and its subsequent amendments impose permit requirements and necessitate certain restrictions on point source emissions of volatile organic carbons (nitrogen oxides and sulfur dioxide) and particulates with respect to certain of our operations. The EPA and designated state agencies have in place regulations concerning discharges of storm water runoff and stationary sources of air emissions. These programs require covered facilities to obtain individual permits, participate in a covered group or seek coverage under an EPA general permit. A number of agencies, including but not limited to MSHA, the EPA, the BLM, and similar state commissions, have adopted regulatory guidance in consideration of the operational limitations on oil and gas facilities and their potential to emit pollutants.
Facilities
Our principal executive office is located at 2021 Guadalupe Street, Ste. 260, Austin, Texas 78705.
Personnel
As of May 31, 2023, we had 10 full-time employees and no part time employees.
Website Access
We make available on our web site our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and all amendments to those reports, as soon as reasonably practicable after we file such reports electronically with the Securities and Exchange Commission. Information on our website is not included as part of this report.
Item 1A. Risk Factors
Not Applicable
Item 1B. Unresolved Staff Comments
Not Applicable
Item 2. Properties
In May 2022, Lustre began drilling an exploratory well, named Olfert #11-4, in the Lustre oil field located in northeastern Montana. As of the filing of this report, the Olfert #11-4 well has not been completed and put into production. As a result of the uncertainty surrounding successful well completion and the availability of future funding to develop our acquired mineral rights, we are not providing disclosures of proved reserves until we have updated reserve reports.
Item 3. Legal Proceedings
On February 4, 2021, Lustre filed a case 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, we filed a First Amended Complaint with the District Court reopening the original suit with a different judge.
On March 20, 2023, Capex Oilfield Services, Inc. filed a lawsuit against Lustre in the Montana Tenth Judicial District Court, Petroleum County, demanding payment of $377,189.55 plus interest and collection costs for services provided by Capex to drill the Olfert 11-4 well. On May 18, 2023, Capstar Drilling, Inc. filed a lawsuit against Lustre in the Montana Seventeenth Judicial District Court, Valley County, demanding payment of $298,049.76 plus interest and collection costs for services provided by Capstar to drill the same well. Lustre intends to bring that well into production as soon as possible, and reimburse unpaid vendors from proceeds from such production.
Except as set forth above, we are not currently involved in any other legal proceedings and we are not aware of any other pending or potential legal actions.
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Item 4. Mine Safety Disclosures
Not Applicable
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is currently traded under the symbol LRDC on the over-the-counter market and is quoted on the Pink Sheets, which is not recognized by the Securities and Exchange Commission, or SEC, as a stock exchange for reporting purposes.
Since our stock began trading on the Pink Sheets on November 5, 2009, there has been a limited trading market for our common stock. The following table presents the range of high and low bid information for our common equity for each full quarterly period within the two most recent fiscal years.
Laredo Oil, Inc. High/Low Market Bid Prices ($)
| Fiscal
Q1: Jun 2022 — Aug 2022 |
Fiscal
Q2: Sep 2022 — Nov 2022 |
Fiscal
Q3: Dec 2022 — Feb 2023 |
Fiscal
Q4: Mar 2023 — May 2023 |
|||||
| High Bid | 0.229 | 0.1711 | 0.19 | 0.162 | ||||
| Low Bid | 0.1361 | 0.081 | 0.11 | 0.044 | ||||
| Fiscal
Q1: Jun 2021 — Aug 2021 |
Fiscal
Q2: Sep 2021 — Nov 2021 |
Fiscal
Q3: Dec 2021 — Feb 2022 |
Fiscal
Q4: Mar 2022 — May 2022 |
|||||
| High Bid | 0.08 | 0.105 | 0.09 | 0.181 | ||||
| Low Bid | 0.04 | 0.043 | 0.045 | 0.07 | ||||
Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or quotation system. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the SEC, that: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker’s or dealer’s duties to the customer and of the rights and remedies available to the customer with respect to a violation to such duties or other requirements of securities laws; (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains such other information and is in such form, including language, type, size and format, as the SEC shall require by rule or regulation. The broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with: (a) bid and offer quotations for the penny stock; (b) the compensation of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a suitably written statement.
These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our stock if it becomes subject to these penny stock rules. Therefore, if our common stock becomes subject to the penny stock rules, stockholders may have difficulty selling those securities.
Holders
As of September 13, 2023, we had 66,220,508 shares of common stock issued and outstanding, and there were 27 holders of record, and more than 700 beneficial holders, of our common stock, including those who own their shares through their brokers in “street name.”
Dividends
Since our inception, we have not paid any dividends on our common stock. Our board of directors does not anticipate that it will declare dividends on our common stock in the foreseeable future.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Prior to December 31, 2020, we managed several projects for Stranded Oil Resources Corporation, or SORC, a subsidiary of Alleghany Corporation, or Alleghany. Also prior to December 31, 2020, SORC sold the assets of those projects and transferred the funds it received from those sales to Alleghany. On December 31, 2020, we purchased 100% of the outstanding stock of SORC from Alleghany. At that time, SORC only owned vehicles and oil field assets that were not included in the previous sale of assets to Alleghany.
During the period from June 14, 2011 through December 31, 2020, we gained specialized know-how and operational experience implementing underground gravity drainage, or UGD, projects, as well as experience developing conventional oil wells. As of August 15, 2023, based upon this knowledge we gained, we acquired approximately 45,766 gross acres and 38,153 net acres of mineral properties in northeastern Montana. We are currently drilling an exploratory well, Olfert #11-4, in that property. As of the date of this report, the Olfert 11-4 exploratory well has not yet been completed and put into production. We have discovered what we believe are economic levels of oil in the well, but have encountered saltwater intrusion into the well, which requires us to access a proximate saltwater injection well to economically dispose of the saltwater in the well. We are currently making efforts to gain access to a disposal well to complete the well and begin economical production.
Effective July 18, 2023, our subsidiary, Lustre Oil Company, LLC, or Lustre, and Erehwon Oil & Gas, LLC, or Erehwon, entered into an Exploration and Development Agreement, or the Development Agreement, with Texakoma Exploration & Production Company, or Texakoma, for the exploration and development of the “Lustre Field Prospect,” described in the Development Agreement. Lustre and Erehwon are parties to an existing Acquisition and Participation Agreement, under which they 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 the Development Agreement, Texakoma agreed to pay Lustre and Erehwon, jointly, the following amounts: (i) $175,000 on or before July 21, 2023, which amount was paid; and (ii) another $175,000 upon the beginning of the drilling of the initial test well under the agreement, which is scheduled to occur prior to October 1, 2023, subject to rig availability. Upon the drilling of that test well, Lustre and Erehwon are required to deliver to Texakoma a partial assignment of an 85% working interest in the applicable oil leases.
Texakoma will pay 100% of the costs associated with the drilling and completion of two initial test wells. Lustre and Erehwon will have an undivided 15% working interest in the two initial wells. Texakoma will have the option, but not the obligation, to participate in the development of the remainder of the Lustre Field Prospect, which option may be exercised by Texakoma by giving written notice of its intent to participate within 90 days after the completion rig is removed from the second test well location.
If Texakoma exercises its option described above, Texakoma will have the obligation to drill eight additional wells, with Lustre and Erehwon having a combined 15% working interest in those wells, and Texakoma will pay Lustre and Erehwon $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 after the first ten wells will be shared by Texakoma, on one hand, and Lustre and Erehwon, on the other hand, on a 50:50 basis.
Not including our interest in the Texakoma transactions described above, we also 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.
Liquidity and Capital Resources
Currently, we have no producing oil wells on our Montana leases. The agreement with Texakoma described above is expected to produce revenue sufficient to cover our ongoing operating expenses beginning later in calendar year 2024. Until we receive adequate funding from the Texakoma agreement described above, any cash needed for operations and oil field expansion and development will most likely come from the sale of our debt and equity securities.
An independent petroleum engineering firm has provided us with a reserve report estimating that interests of 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 $67 million in cash flow, discounted at a rate of 10%. We are currently attempting to raise sufficient funds to drill and produce the properties identified in that reserve report. We are in the process of raising up to $7.5 million from the sale of our secured convertible promissory notes. We will use the proceeds from the sale of these notes for operating capital, and to fund the drilling of up to three production wells and a saltwater disposal well, on the selected acreage described above. The secured convertible notes are secured by interests in our wholly owned subsidiary, Hell Creek Crude, LLC. The notes are also convertible into shares of our common stock at a conversion rate of $1.00 per share. As of the filing date, we have issued $620,000 in principal amount of the notes.
We have also recently received $267,319 in proceeds from the sale of 6,062,886 shares of our common stock to an individual investor who previously purchased one of our secured convertible promissory notes described above.
Lustre and Erehwon have filed an action for quiet title in the State of Montana against Anadarko Minerals, Inc. and A&S Mineral Development Co, LLC. We are asking for damages in excess of $2 million in that action. However, we cannot assure you that we will prevail in that action and, if we do prevail, the timing of the resolution of the action, or the amount of any damages that we may receive.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued
Our cash and cash equivalents at May 31, 2023 was $13,754. Our total debt outstanding as of May 31, 2023 was $3,669,429, including (i) $617,934 owed to Alleghany, which is classified as a current note payable, and (ii) $986,598 pursuant to notes under the Paycheck Protection Program, or PPP, of which we have classified $536,974 as long-term debt, net of the current portion totaling $449,624, which is classified as a current note payable, (iii) $839,798 short term convertible notes, net of deferred debt discount, (iv) a $183,000 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
During the fiscal year ending May 31, 2022, we recorded other revenue and direct costs totaling $667,608 and $1,286,244, respectively, for continued consulting services we provided to Alleghany after the termination of the Management Services Agreement. We did not record any similar revenues and direct costs during the fiscal year ending May 31, 2023, as the consulting services were completed effective December 31, 2021.
During the fiscal years ended May 31, 2023 and May 31, 2022, we incurred operating expenses of $2,770,285 and $1,580,069, 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. In addition, commencing on January 1, 2022, our payroll related expenses are now included in our general operating expenses as we no longer provide any direct management services to Alleghany. The increase in our expenses for fiscal 2023, as compared to the same period in fiscal 2022, is primarily attributable to these payroll costs, increased accounting and other professional fees, including public relations, advisory services and stock-based compensation. We also experienced increases in other general and administrative expenses, including insurance and SEC filing fees.
During fiscal 2023, we recognized other income and expenses comprised of the $122,682 employee retention credit, $84,290 equity method loss related to our July 2020 equity investment, and $74,225 of other income upon the settlement of debt.
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 purchase price allocation. 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.
10
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are not required to provide the information required by this Item as we are a “smaller reporting company,” as defined in Rule 229.10(f)(1)
Item 8. Consolidated Financial Statements and Supplementary Data
Our consolidated financial statements required by this item are included on the pages immediately following the Index to Consolidated Financial Statements appearing on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
11
Item 9A. Controls and Procedures
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.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal controls over financial reporting based on the framework in Internal Controls – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control – Integrated Framework, our management concluded that our internal controls over financial reporting were not effective as of May 31, 2023. As we grow, we are working on further improving our segregation of duties and level of supervision.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to SEC rules adopted in conformity with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Exchange Rules 13a-15(f) and 15d-15(f)) that occurred during the year ended May 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
12
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The following table sets forth as of September 13, 2023, the name, age, and position of each of our executive officers and directors, and the term of office of each of our executive officers and directors.
| Name | Age | Position Held | Term
as Director or Officer Since | |||
| Donald Beckham | 63 | Independent Director | March 1, 2011 | |||
| Michael H. Price | 75 | Independent Director | August 3, 2012 | |||
| Mark See | 62 | Chief Executive Officer and Chairman | October 16, 2009 | |||
| Bradley E. Sparks | 76 | Chief Financial Officer, Treasurer and Director | March 1, 2011 | |||
Each of our directors serves for a term of three years, until his successor is elected at our annual stockholders’ meeting, and is qualified, subject to removal by our stockholders. Each officer serves at the pleasure of the Board of Directors.
Set forth below is certain biographical information regarding each of our executive officers and directors.
DONALD BECKHAM has served as a director since March 1, 2011. Since July 2015, he has been a Partner with Copestone Energy Partners, LLC. In 1993 he founded Beckham Resources, Inc. (“BRI”) which for the past 20 years has been a licensed, bonded and insured operator in good standing with the Railroad Commission of Texas. Through BRI, Mr. Beckham has drilled and operated fields for his own account. His expertise is in the acquisition, exploitation, exploration and production enhancement of mature oil and gas fields through which he has been able to enhance production by compressor optimization, pump design, work-over programs, stimulation techniques and identifying new pay zones. BRI has operated wells in the following fields: Hull, Liberty, Aransas Pass, McCampbell, Mission River, Garcitas Creek, Sour Lake, Batson, Barton Ranch and Dayton. Prior to BRI, Mr. Beckham was the chief operations manager for Houston Oil Fields Corporation (“HOFCO”) where he began his career. There he was responsible for drilling, production and field operations and managed approximately 100 people including engineers, geologists, land men, pumpers, and other contract personnel, as well as state and federal environmental and regulatory functions. He managed an annual capital budget of approximately $30 million and operated approximately 100 wells. HOFCO drilled about 20 wells per annum and performed approximately 30 recompletions and work over operations each year. HOFCO owned interests in about 10 key fields principally in Texas, and company-managed production was approximately 1,000 bpd of crude oil and 10 mm cfd of natural gas. Fields that he managed were as follows: Manvell, Cold Springs, Shepherd, Turtle Bay, Red Fish Bay, Dickinson, Refugio, Lost Lake, Liberty and Abbeville. Mr. Beckham is a petroleum engineer and 1984 graduate of Mississippi State University.
MICHAEL H. PRICE, has served as a director since August 1, 2012 and has over 40 years of senior financial and petroleum experience in the global oil and gas industry. He has been a principal in Octagon Energy Advisors, a Houston based energy investment advisory firm, from 2002 to the present. The firm advises financial institutions and institutional investors participating in energy investments. Since 2008, he has been a Managing Director at ING Capital which provides debt financing to domestic exploration and production companies. From 1998 through 2002, Mr. Price was the Chief Financial Officer of Forman Petroleum Corporation. Before that, Mr. Price was Managing Director at Chase Manhattan Bank for fifteen years where he was in charge of technical support for Chase’s worldwide energy merchant banking activities. In his early career, he worked as a consulting principal on domestic petroleum engineering and landowner matters, and gained extensive international experience working with major oil companies in a variety of operating positions. He holds a BS and MS from Illinois Institute of Technology, an MBA from the University of Chicago, a M.Sc. from the London School of Economics, and a MS in Petroleum Engineering from Tulane University.
13
Item 10. Directors, Executive Officers and Corporate Governance - continued
MARK SEE has been our Chief Executive Officer and Chairman of the Board of Directors since October 16, 2009. He has over 25 years of experience in tunneling, natural resources and the petroleum industries. He was the founder and founding CEO of Rock Well Petroleum, a private oil & gas company from January 2005 until December 2008 and worked from then until October 2009 forming Laredo Oil. He was employed with Albian Sands as the Manager for the Alberta Oil Sands Projects at Fort McMurray, Alberta, Canada, a joint venture between Shell Canada and Chevron. Mr. See was also President of Oil Recovery Enhancement LLC in Bozeman, Montana, a private oil company. He was selected as one of the top 25 Engineers in North America by the Engineering News Record for his innovations in the petroleum industry. He is a member of the Society of Mining Engineers and the Society of Petroleum Engineers.
BRADLEY E. SPARKS is our Chief Financial Officer and Treasurer and has been a director since March 1, 2011. Before joining us in October 2009, Mr. Sparks was the Chief Executive Officer, President and a Director of Visualant, Inc. Prior to joining Visualant, he was the Chief Financial Officer of WatchGuard Technologies, Inc. from 2005 to 2006. Before joining WatchGuard, he was the founder and managing director of Sunburst Growth Ventures, LLC, a private investment firm specializing in emerging-growth companies. Previously, he founded Pointer Communications and served as Chief Financial Officer for several telecommunications and internet companies, including eSpire Communications, Inc., Digex, Inc., Omnipoint Corporation, and WAM!NET. He also served as Vice President and Treasurer of MCI Communications from 1988-1993 and as Vice President and Controller from 1993-1995. Before his tenure at MCI, Mr. Sparks held various financial management positions at Ryder System, Inc. Mr. Sparks currently serves on the Board of Directors of Comrise. Mr. Sparks graduated from the United States Military Academy at West Point in 1969 and is a former Army Captain in the Signal Corps. He received a Master of Science in Management degree from the Sloan School of Management at the Massachusetts Institute of Technology in 1975 and is a licensed CPA in Florida.
To the knowledge of our management, except as noted below, during the past ten years, no present or former director, executive officer or person nominated to become a director or an executive officer of the Company has:
| (1) | filed a petition under the federal bankruptcy laws or any state insolvency law, nor had a receiver, fiscal agent or similar officer appointed by the court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filings; |
| (2) | was convicted in a criminal proceeding or named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses); |
| (3) | was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from or otherwise limiting, the following activities: |
| (i) | acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity; |
| (ii) | engaging in any type of business practice; or |
| (iii) | engaging in any activities in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state securities laws or federal commodities laws; |
| (4) | was the subject of any order, judgment, or decree, not subsequently reversed, suspended, or vacated, of any federal or state authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described above under this Item, or to be associated with persons engaged in any such activities; |
| (5) | was found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission to have violated any federal or state securities law, and the judgment in such civil action or finding by the Securities and Exchange Commission has not been subsequently reversed, suspended, or vacated; |
14
Item 10. Directors, Executive Officers and Corporate Governance - continued
| (6) | was found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated; |
| (7) | was the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: |
| (i) | Any federal or state securities or commodities law or regulation; or |
| (ii) | Any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or |
| (iii) | Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or |
| (8) | was the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
In calendar year 2014, Mr. Beckham served as an executive officer of Mining Oil, Inc., which filed for bankruptcy in January 2015. Four months prior to that filing, Mr. Beckham resigned his position due to policy differences with members of that company’s management team.
Section 16(a) Beneficial Ownership Reporting Compliance
During the fiscal year ended May 31, 2023, we had no class of equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934. Accordingly, no reports were required to be filed pursuant to Section 16(a) with respect to our officers, directors, and beneficial holders of more than ten percent of any class of equity securities.
Code of Ethics
Our Code of Ethics is included herein by reference to Exhibit 14.1 to this Annual Report on Form 10-K and can be found on our web site at www.laredo-oil.com.
15
Item 11. Executive Compensation
Compensation Summary for Executive Officers
The following table sets forth compensation paid or accrued by us for the last two years ended May 31, 2023 and 2022 with regard to individuals who served as the Principal Executive Officer, the Principal Financial Officer and for executive officers receiving compensation in excess of $100,000 during these fiscal periods.
| Name and Principal Position | Fiscal Year | Salary($) | Bonus($) | Option Awards($) |
All
Other Compensation($) |
Total($) | ||||||||||||||||
| Mark See (1) | 2023 | 525,000 | - | - | - | 525,000 | ||||||||||||||||
| Chief Executive Officer and Chairman of the Board | 2022 | 422,936 | - | - | - | 422,936 | ||||||||||||||||
| Bradley E. Sparks (2) | 2023 | 415,000 | - | - | - | 415,000 | ||||||||||||||||
| Chief Financial Officer, Treasurer and Director | 2022 | 415,000 | - | 119,987 | - | 534,987 | ||||||||||||||||
| Christopher E. Lindsey (3) | 2023 | - | - | - | - | - | ||||||||||||||||
| General Counsel and Secretary | 2022 | 169,195 | - | - | - | 169,195 | ||||||||||||||||
| (1) | In fiscal year 2023, Mr. See’s salary included $212,888 in cash payments. Mr. See also received equipment valued at $97,760 and $214,352 for deferred compensation. In fiscal year 2022, Mr. See’s salary includes $326,105 in cash payments and $98,895 of deferred compensation. As of May 31, 2023, Mr. See has cumulative deferred compensation of $553,840. |
| (2) | In fiscal 2023, Mr. Sparks’ salary includes $167,019 of cash payments and $247,981 of deferred compensation. The amounts shown in 2022 include $295,288 of salary paid in cash and $119,712 in deferred compensation. As of May 31, 2023, Mr. Sparks has cumulative deferred compensation of $1,550,183. |
| (3) | Mr. Lindsey resigned effective December 31, 2021. |
Named Executive Officers Compensation and Termination of Employment Provisions
Pursuant to a letter agreement dated October 16, 2009, and subsequently amended, between us and Mr. See, we pay Mr. See an annual base salary of $495,000 (which, together with previously approved allowances for Mr. See equaling $30,000, is an aggregate of $525,000 per year). If Mr. See is terminated by us without “Cause” (as such term is defined in the letter agreement) or if Mr. See terminates his employment with us for “Good Reason” (as such term is defined in his change in control agreement), we will pay severance to Mr. See equal to 100% of his then-current annualized base salary, and any bonuses earned, paid out on a pro rata basis over our regular payroll schedule over the two-year period following the effective date of such termination, provided that if such termination occurs within 12 months after a Change of Control, such two-year period shall be increased to a three-year period. In addition, Mr. See will continue to receive all applicable benefits under our standard benefits plans currently available to other senior executives, for a period not to exceed 24 months following the termination of his employment.
Beginning January 1, 2020, the annual cash salary compensation payable to Mr. See was increased from $485,000 to $498,580 per year (which, together with previously approved allowances for Mr. See equaling $30,000, is an aggregate of $528,580 per year). Amounts received above Mr. See’s $495,000 contract salary reduces his cumulative deferred compensation, and amounts received below the $495,000 contract salary increase deferred compensation.
16
Item 11. Executive Compensation - continued
For calendar year 2021, we paid Mr. See as follows: (a) $100,000 in cash on or before January 7, 2021, less applicable withholding taxes; and (b) four (4) equal cash installments of $99,645, less applicable withholding taxes, with the first payment made on or before January 15, 2021, the second payment made on or before April 8, 2021, the third payment payable on or before July 8, 2021 and the fourth payment on or before October 8, 2021. In consideration of the payments described above, Mr. See waived any obligations we had to pay for any severance benefits included in the letter agreement dated October 16, 2009 referenced above, and such letter was terminated effective December 31, 2021. Effective January 1, 2022, our Board of Directors reinstated the terms of the letter agreement with Mr. See that was in place on December 30, 2020.
As of May 31, 2023, Mr. See has $553,840 of deferred compensation owed to him under his contract, which is the cumulative difference between his contract salary and the actual cash compensation he has received thereunder through May 31, 2023.
Pursuant to a letter agreement dated October 20, 2009, as amended, we pay Mr. Sparks an annual base salary of $385,000 (which, together with previously approved annual payments for Mr. Sparks equaling $30,000, is an aggregate of $415,000 per year). If Mr. Sparks is terminated by us without “Cause” (as such term is defined in the letter agreement) or if Mr. Sparks terminates his employment with us for “Good Reason” (as such term is defined in the change in letter agreement),, we will pay Mr. Sparks severance equal to 100% of his then-current annualized base salary, and any bonuses earned, paid out on a pro rata basis over our regular payroll schedule over the two-year period following the effective date of such termination; provided, however, that if such termination occurs within 12 months after a Change of Control, such two-year period is increased to a three-year period. In addition, Mr. Sparks will continue to receive all applicable benefits under our standard benefits plans currently available to other senior executives, for a period not to exceed 24 months following the termination of employment.
For calendar year 2021, we paid Mr. Sparks as follows: four (4) equal cash installments of $96,250, less applicable withholding taxes, with the first payment made on or before January 15, 2021; the second payment made on or before April 8, 2021, the third payment made on or before July 8, 2021 and the fourth payment made on or before October 8, 2021. In consideration of the payments above, Mr. Sparks waived our obligations to pay for any severance benefits included in his letter agreement referenced above, and terminated the letter agreement effective December 31, 2021. Effective January 1, 2022, our Board of Directors reinstated the terms of the letter agreement that was in place on December 30, 2020.
On May 28, 2022, our Board of Directors awarded Mr. Sparks fully vested options to purchase 1,500,000 shares of our common stock at $0.12 per share, which options replaced 1,500,000 options previously granted to Mr. Sparks, which expired in April 2022.
As of May 31, 2023, we owe Mr. Sparks $1,550,183 of cumulative deferred compensation under his letter agreement with us with respect to his compensation. The amount owed under the letter agreement is the cumulative difference between the amount of compensation we owe Mr. Spark under the agreement and the actual cash compensation he has received under his agreement with us.
17
Item 11. Executive Compensation - continued
Outstanding equity awards as of May 31, 2023:
| (a) Name and Principle Position |
(b) Number of Securities Underlying Unexercised Options Exercisable |
(e) Option Exercise Price ($) |
(f) Option Expiration Date | |||||||
| Bradley
E. Sparks CFO, Treasurer & Director |
1,500,000 | 0.12 | May 28, 2032 | |||||||
In February 2011, we approved the Laredo Oil, Inc. 2011 Equity Incentive Plan. The Equity Incentive Plan was filed with the Securities and Exchange Commission on Form S-8 on November 8, 2011, and was amended in December 2014 to increase the number of shares available for issuance thereunder to an aggregate of 15,000,000 shares.
Director Compensation
| (a) Name |
(b) Fees Earned or Paid in Cash ($) |
(c) Stock Awards ($) |
(d) Option Awards ($) |
(j) Total ($) |
||||||||||||
| Donald Beckham | 50,000 | - | - | 50,000 | ||||||||||||
| Michael H. Price | 50,000 | - | - | 50,000 | ||||||||||||
Historically, the compensation for each non-employee member of our Board of Directors has been as follows: quarterly cash payment of $12,500 payable mid-quarter in arrears, 500,000 shares of restricted common stock vesting in three equal installments over three years, and fully vested in fiscal 2016. We also reimburse directors for all reasonable expenses associated with attendance at meetings of our Board of Directors. During the last quarter of fiscal year 2022, we suspended cash payments to directors indefinitely. However, such payments were accrued for future payment. During fiscal year 2023, no cash payments to directors were made, but were accrued for future payment. On May 28, 2022, we granted fully vested options to purchase 500,000 shares of our common stock to each of Mr. Beckham and Mr. Price. Since they are executive officers, Messrs. See and Sparks receive no additional compensation for serving on the Board of Directors.
18
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of the date of the filing of this Form 10-K, the name and address and the number of shares of the Company’s common stock, with a par value of $0.0001 per share, held of record or beneficially by each person who held of record, or was known by the Company to own beneficially, more than 5% of the issued and outstanding shares of the Company’s common stock, and the name and shareholdings of each executive officer, director and of all officers and directors as a group.
| Name
and Address of Beneficial Owner |
Nature
of Ownership (1) |
Amount
of Beneficial Ownership (1) |
Percent of Class | |||||||
| Bedford
Holdings, LLC 44 Polo Drive Big Horn, WY 82833 |
Direct | 12,829,269 | 15.8 | % | ||||||
| Darlington,
LLC (2) P.O. Box 723 Big Horn, WY 82833 |
Direct | 5,423,138 | 6.7 | % | ||||||
| Mark
See (3) 2021 Guadalupe Street, Suite 260 Austin, Texas 78705 |
Direct | 31,096,676 |
38.3 |
% | ||||||
| Bradley
E. Sparks (4) 2021 Guadalupe Street, Suite 260 Austin, Texas 78705 |
Direct | 9,324,857 | 11.5 | % | ||||||
| Robert
Adamo 2021 Guadalupe Street, Suite 260 Austin, Texas 78705 |
Direct | 6,662,886 | 8.2 | % | ||||||
| Donald
Beckham (5) 2021 Guadalupe Street, Suite 260 Austin, Texas 78705 |
Direct | 3,150,000 | 3.9 | % | ||||||
| Michael
H. Price (6) 2021 Guadalupe Street, Suite 260 Austin, Texas 78705 |
Direct | 2,050,000 | 2.5 | % | ||||||
| All Directors and Officers as a Group (4 persons) | Direct | 45,621,533 | 56.2 | % | ||||||
| (1) | All shares owned directly are owned beneficially and of record, and such stockholder has sole voting, investment and dispositive power, unless otherwise noted. Amounts of beneficial ownership include all options to purchase common stock expected to be vested within 60 days after the filing date of this Annual Report on Form 10-K. |
| (2) | These shares are owned by the spouse of Mr. See, and Mr. See has a proxy from Mrs. See to vote the shares. |
| (3) | Includes 12,829,269 shares owned by Mr. See through Bedford Holdings, LLC and 5,423,138 shares owned by Mrs. See through Darlington, LLC. |
| (4) | Includes fully vested options to purchase 6,500,000 shares of common stock at $0.06 per share. |
| (5) | Includes fully vested options to purchase 1,100,000 shares of common stock at $0.38 per share and 1,500,000 shares of common stock at $0.06 per share. |
| (6) | Includes fully vested options to purchase 1,500,000 shares of common stock at $0.06 per share. |
19
Item 12. Security Ownership of Certain Beneficial Owners and Management - continued
Securities authorized for issuance under equity compensation plans
The following table provides information as of May 31, 2023 concerning the issuance of equity securities with respect to compensation plans under which our equity securities are authorized for issuance.
Equity Compensation Plan Information
| Plan category | Number
of securities to be issued upon exercise of outstanding options, warrants and rights (a) |
Weighted
–average exercise price of outstanding options, warrants and rights ($) (b) |
Number
of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) |
|||||||||
| Equity compensation plans approved by security holders (1) | 5,925,000 | 0.16 | 7,499,000 | (2) | ||||||||
| Total | 5,925,000 | 0.16 | 7,499,000 | |||||||||
| (1) | Effective November 6, 2011, the holders of a majority of the shares of our common stock took action by written consent to approve our 2011 Equity Incentive Plan, or the “2011 Plan.” Stockholders then owning an aggregate of 31,096,676 shares, or 59.8% of the then issued and outstanding shares of our Common Stock, approved the matter. The 2011 Plan and corresponding agreements are exhibits to our Registration Statement on Form S-8 filed with the Securities and Exchange Commission on November 8, 2011. The 2011 Plan reserved 10,000,000 shares of our common stock for issuance to eligible recipients. In December 2014, the holders of a majority of the shares of our Common Stock took action by written consent to amend the Plan by reserving an additional 5,000,000 shares of our common stock for issuance to eligible recipients. We filed a Registration Statement on Form S-8 with the Securities and Exchange Commission on December 19, 2014 registering the additional shares. |
| (2) | During fiscal year 2012, we issued 500,000 shares of restricted stock to each of our two non-employee directors, for a total of one million shares. During fiscal year 2013, we issued 500,000 restricted shares to our third non-employee director. In fiscal year 2014, we issued to our non-employee directors 150,000 restricted shares of which 50,000 restricted shares were later forfeited. In total, a net 1,550,000 restricted shares have been issued to our non-employee directors under the Plan. Since restricted shares were issued to directors, they are not available for issuance under the Plan and thus reduce the number of securities remaining available in this column. In addition, we granted options to purchase 6,010,000 shares of common stock to employees and contractors during fiscal year 2012, none in fiscal year 2013, 2,990,000 in fiscal year 2014, 1,700,000 in fiscal year 2015, 925,000 in fiscal year 2016, none in fiscal years 2017 through 2021, 4,175,000 in fiscal year 2022 including 1,000,000 options granted to directors, and 650,000 in fiscal year 2023. Net of option forfeitures, expired grants, restricted stock grants and option exercises, there are 7,499,000 shares of common stock reserved for issuance to eligible recipients. Since Plan inception, 26,000 common shares have been issued pursuant to option exercises and are not available for issuance under the Plan. The aforementioned restricted stock and options were issued under the 2011 Equity Incentive Plan, which authorized 15,000,000 shares of our common stock reserved for issuance for directors, employees and contractors. |
20
Item 13. Certain Relationships and Related Transactions, and Director Independence
Transactions with Management and Others
On June 22, 2022, we assigned to our Chief Financial Officer, or CFO, the right to purchase up to 356,243 of the 500,000 membership interests in Olfert #11-4 in exchange for our CFO’s payment of $356,243 of our capital commitment to Olfert #11-4. On August 15, 2022, our CFO purchased an additional 109,590 membership interests in Olfert #11-4 for a payment of $109,590.
On October 26, 2022, we borrowed $150,000 from our CFO pursuant to a demand note bearing an annual interest rate of 10%. The note is secured by a pledge of all of the interests in our wholly-owned subsidiary Lustre Oil Company LLC.
In February 2023, our Chief Financial Officer made several advances to us, totaling $50,000. The advances were not made pursuant to a promissory note, and are not secured. On March 15, 2023, we received a loan of $30,000 from our Chief Financial Officer. During April and May of 2023, our Chief Financial Officer advanced another $62,099. The total amount of these advances aggregate to $292,099. We expect that these amounts will be incorporated into the October 26, 2022 demand note described above.
Director Independence.
Both Mr. Price and Mr. Beckham serve as “independent” directors based on the definition of independence in the listing standards of NASDAQ Marketplace Rule 4200(a)(15).
Item 14. Principal Accounting Fees and Services
(1) Audit Fees
The aggregate fees billed by the independent accountants for each of the last two fiscal years for professional services for the audit of the Company’s annual consolidated financial statements and the review of consolidated financial statements included in the Company’s Form 10-Q and services that are normally provided by the accountants in connection with statutory and regulatory filings or engagements for those fiscal years were $134,970 for the fiscal year ended May 31, 2023 and $110,270 for the fiscal year ended May 31, 2022. Weaver and Tidwell, L.L.P. provided our audit for the year ended 2022 and BF Borgers CPA PC provided our audit for the year ended 2023. The firms engaged during 2023 and 2022, respectively, provided no other services, other than those listed above for their respective years.
(2) Audit-Related Fees
The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountants that are reasonably related to the performance of the audit or review of the Company’s consolidated financial statements and are not reported under paragraph (1) above was $0.
(3) Tax Fees
The aggregate fees billed in each of the last two fiscal years ending May 31, 2023 and 2022 for professional services rendered by the principal accountants for tax compliance, tax advice, and tax planning was $9,476 and $19,418, respectively.
(4) All Other Fees
During the last two fiscal years ending May 31, 2023 and 2022, respectively there were $0 fees charged by the principal accountants other than those disclosed in (1), (2) and (3) above.
(5) Audit Committee’s Pre-approval Policies and Procedures
The Audit Committee pre-approves the engagement with the independent auditor. It meets four times annually and reviews consolidated financial statements with the independent auditor. Additionally, the Audit Committee meets in executive session with the independent auditor at the conclusion of those meetings.
21
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) (1) Consolidated Financial Statements. See Index to Consolidated Financial Statements on page F-1.
(a) (2) Financial Statement Schedules
The following financial statement schedules are included as part of this report:
None.
(a) (3) 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:
22
Item 15. Exhibits, Financial Statement Schedules - continued
23
Item 15. Exhibits, Financial Statement Schedules - continued
| 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document) |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
24
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| LAREDO OIL, INC. | ||||
| (the “Registrant”) | ||||
| Date: September 13, 2023 | By: | /s/ Mark See | ||
| Mark See | ||||
| Chief Executive Officer and Chairman of the Board | ||||
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Date: September 13, 2023 | By: | /s/ Mark See | |
| Mark See | |||
| Chief Executive Officer and Chairman of the Board | |||
| (Principal Executive Officer) | |||
| Date: September 13, 2023 | By: | /s/ Bradley E. Sparks | |
| Bradley E. Sparks | |||
| Chief
Financial Officer, Treasurer and Director (Principal Financial and Accounting Officer) |
|||
| Date: September 13, 2023 | By: | /s/ Donald Beckham | |
| Donald Beckham | |||
| Director | |||
| Date: September 13, 2023 | By: | /s/ Michael H. Price | |
| Michael H. Price | |||
| Director |
25
LAREDO OIL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
Report of Independent Registered Public Accounting Firm
To the shareholders and the board of directors of Laredo Oil, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Laredo Oil, Inc. (the "Company") as of May 31, 2023, the related statement of operations, stockholders' equity (deficit), and cash flows for the year then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of May 31, 2023, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States.
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company’s significant operating losses raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or are required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments.
We determined that there are no critical audit matters.
/s/ BF Borgers CPA PC
We have served as the Company's auditor since 2022
September 13, 2023
F-2
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Laredo Oil, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Laredo Oil, Inc. and it’s subsidiary (the Company) as of May 31, 2022 and 2021, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the two years in the period ended May 31, 2022, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of May 31, 2022 and 2021, and the consolidated results of its operations and cash flows for each of the two years in the period ended May 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the entity has routinely incurred losses since inception, resulting in an accumulated deficit, and is dependent upon one customer for its revenue. These factors raise substantial doubt that the Company will be able to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion of the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits include performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgements. We determined that there are no critical audit matters.
WEAVER AND TIDWELL, L.L.P.
We have served as the Laredo Oil, Inc.’s auditor since 2011.
Dallas, Texas
September 13, 2022
F-3
| Laredo Oil, Inc. |
| Consolidated Balance Sheets |
| May 31, | May 31, | |||||||
| 2023 | 2022 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Receivables | ||||||||
| 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 | ||||||||
| 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 15) | ||||||||
| Stockholders’ Deficit | ||||||||
| Preferred stock: $ par value; shares authorized; issued and outstanding | ||||||||
| Common stock: $ par value; and shares authorized; and issued and outstanding as of May 31, 2023 and 2022 | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( |
) | ( |
) | ||||
| Total Stockholders’ Deficit | ( |
) | ( |
) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
| Laredo Oil, Inc. |
| Consolidated Statements of Operations |
| Year Ended | Year Ended | |||||||
| May 31, 2023 | May 31, 2022 | |||||||
| Revenue – related party and other | $ | $ | ||||||
| Direct costs | ||||||||
| Gross profit (loss) | ( |
) | ||||||
| General, selling and administrative expenses | ||||||||
| Consulting and professional services | ||||||||
| Total Operating Expense | ||||||||
| Operating loss | ( |
) | ( |
) | ||||
| Other income/(expense) | ||||||||
| Other non-operating income | ||||||||
| Income from PPP loan forgiveness and employee retention | ||||||||
| Equity method gain (loss) | ( |
) | ||||||
| Interest expense | ( |
) | ( |
) | ||||
| Net loss | $ | ( |
) | $ | ( |
) | ||
| Net loss per share, basic and diluted | $ | ( |
) | $ | ( |
) | ||
| Weighted average number of basic and diluted common shares outstanding | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
| Laredo Oil, Inc. |
| Consolidated Statement of Stockholders’ Deficit |
| For the Years Ended May 31, 2023 and 2022 |
| Common Stock | Preferred Stock | Additional Paid | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | In Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance at May 31, 2021 | $ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||||||
| Share based compensation | - | - | ||||||||||||||||||||||||||
| Beneficial conversion feature of convertible debt | - | - | ||||||||||||||||||||||||||
| Net Loss | - | - | ( |
) | ( |
) | ||||||||||||||||||||||
| Balance at May 31, 2022 | $ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||||||
| Common Stock | Preferred Stock | Additional Paid | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | In Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance at May 31, 2022 | $ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||||||
| Cumulative effect of accounting changes | - | - | ( |
) | ( |
) | ||||||||||||||||||||||
| Share based compensation | - | - | ||||||||||||||||||||||||||
| Restricted stock issued to consultants | - | |||||||||||||||||||||||||||
| Issuance of shares upon debt conversion | - | |||||||||||||||||||||||||||
| Proceeds from issuance of shares | - | |||||||||||||||||||||||||||
| Net Loss | - | - | ( |
) | ( |
) | ||||||||||||||||||||||
| Balance at May 31, 2023 | $ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
| Laredo Oil, Inc. |
| Consolidated Statements of Cash Flows |
| Year Ended | Year Ended | |||||||
| May 31, 2023 | May 31, 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( |
) | $ | ( |
) | ||
| Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities: | ||||||||
| Stock based compensation expense | ||||||||
| Restricted stock expense | ||||||||
| Income from PPP loan forgiveness | ( |
) | ||||||
| Amortization of debt discount | ||||||||
| Equity method (income)/loss | ( |
) | ||||||
| Depreciation | ||||||||
| Accretion expense | ||||||||
| Gain on sale of assets | ( |
) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Receivables | ||||||||
| Receivables from related party | ( |
) | ||||||
| Prepaid expenses and other current assets | ( |
) | ||||||
| Accounts payable and accrued liabilities | ||||||||
| Accrued payroll liabilities | ||||||||
| Accrued interest | ||||||||
| Deferred revenue | ( |
) | ||||||
| NET CASH USED IN OPERATING ACTIVITIES | ( |
) | ( |
) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Investment in property, plant and equipment | ( |
) | ( |
) | ||||
| Investment in oil and gas field acquisition and drilling costs | ( |
) | ( |
) | ||||
| Investment in equity method investment | ( |
) | ||||||
| NET CASH USED IN INVESTING ACTIVITIES | ( |
) | ( |
) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from convertible debt | ||||||||
| Repayment of convertible debt | ( |
) | ( |
) | ||||
| Proceeds from note payable – related party | ||||||||
| Proceeds from revolving note | ||||||||
| Repayment of revolving note | ( |
) | ||||||
| Proceeds from prefunded billing costs | ||||||||
| PPP loan repayments | ( |
) | ( |
) | ||||
| Proceeds from sale of common stock | ||||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | ||||||||
| Net change in cash and cash equivalents | ( |
) | ( |
) | ||||
| Cash and cash equivalents at beginning of period | ||||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash paid for interest expense | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES | ||||||||
| Oil and gas acquisition costs in accounts payable | $ | $ | ||||||
| Long-lived assets in exchange for reduction in deferred compensation | $ | |||||||
| Sale of assets in exchange for note payable repayment | $ | |||||||
| Conversion of convertible debt to common stock | $ | |||||||
| Asset retirement obligation | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
The accompanying consolidated financial statements have been prepared by 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.” with authorized common stock of shares at $ par value and authorized preferred stock of shares at $ par value. On October 21, 2009 the name was changed to “Laredo Oil, Inc.” During May 2023, the Company board of directors voted to increase the authorized common stock to shares at $ which was confirmed by a majority of the shares then outstanding.
Laredo Oil, Inc. (“the Company”) is an oil exploration and production (“E&P”) company primarily engaged in acquisition and exploration efforts for mineral properties. From its inception through October 2009, the Company was primarily engaged in acquisition and exploration efforts for mineral properties. After a change in control in October 2009, the Company shifted its focus to locating mature oil fields, with the intention of acquiring those oil fields and recovering stranded oil using enhanced oil recovery (“EOR”) methods. However, the Company was unable to raise the capital required to purchase any suitable oil fields. On June 14, 2011, the Company entered into several agreements with Stranded Oil Resources Corporation (“SORC”), a wholly owned subsidiary of Alleghany Corporation (“Alleghany”), (collectively, the “2011 SORC Agreements”), to seek recovery of stranded crude oil from mature, declining oil fields by using the EOR method known as Underground Gravity Drainage, or UGD. Operating under the 2011 SORC Agreements until December 31, 2020, the Company was a management services company managing the acquisition and conventional operation of mature oil fields and the further recovery of stranded oil from those fields using EOR methods for its sole customer, SORC.
Pursuant to a Securities Purchase Agreement, by and among the Company, Alleghany, SORC, and SORC Holdings LLC, a wholly-owned subsidiary of the Company (“SORC Holdings”), SORC Holdings purchased all of the issued and outstanding shares of SORC stock (the “SORC Shares”) in a transaction that closed on December 31, 2020 (the “SORC Purchase Transaction”). In connection with the SORC Purchase Transaction, the 2011 SORC Agreements were terminated effective as of December 31, 2020.
Further, pursuant to the SORC Purchase Agreement, the Company and Alleghany entered into a Consulting Agreement dated as of December 31, 2020 (the “Alleghany Consulting Agreement”), pursuant to which Alleghany agreed to pay an aggregate of approximately $1.245 million during calendar year 2021 in consideration of the Company causing certain individuals, including Mark See, the Company’s Chief Executive Officer and Chairman, and Chris Lindsey, the Company’s General Counsel and Secretary, to provide consulting services to Alleghany (for a period of three years for Mr. See and one year for Mr. Lindsey).
The Company believes that the SORC Purchase Transaction was advantageous as it simplified in a timely manner the unwinding of the 2011 SORC Agreements and allowed the Company to acquire vehicles and oil field assets that can be utilized in future oil recovery projects.
During the period from June 14, 2011 through December 31, 2020 when the 2011 SORC Agreements were in effect, Company management gained specialized know-how and operational experience in evaluating, acquiring, operating and developing oil and gas properties while implementing UGD projects, as well as gaining expertise designing, drilling and producing conventional oil wells. Based upon the knowledge gained, as of May 31, 2023, 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 salt water disposal well allowing economically feasible water disposal. The Company plans to continue to develop the field as funding allows.
In connection with securing this acreage in Montana, Lustre Oil Company LLC, a wholly-owned subsidiary of the Company (“Lustre”), entered into an Acquisition and Participation Agreement (“Erehwon APA”) with Erehwon Oil & Gas, LLC (“Erehwon”) to acquire oil and gas interests and drill, complete, re-enter, re-complete, sidetrack, and equip wells in Valley County, Daniels County and Roosevelt County, Montana. The Erehwon APA specifies calculations for royalty interests and working interests for the first 10 well completions and first 10 well recompletions and for all additional wells and recompletions thereafter. Lustre will acquire initial mineral leases and pay 100% of the costs with a cap of $500,000. When the cap is exceeded, Erehwon will have the option to acquire a 10% working interest (“WI”) in a lease by paying 10% of any lease acquisition cost, resulting in Lustre paying 90% of the lease costs, on a lease by lease basis. Until amounts paid to complete the first 10 new wells and first 10 recompletions are repaid (“Payback”), the WI split between Erehwon and Lustre is 10%/90%. Thereafter, the split between Erehwon and Lustre is 20%/80%. Additional wells and recompletions will have a WI split equal to their respective working interest in the leases. This will be 10% Erehwon and 90% Lustre unless Erehwon exercises its option to increase its WI by 10 percent points to 20%/80%, as described above. Under the Erehwon APA, Lustre will fund 100% of the construction costs of the first ten wells and first ten completions. Additional wells will be funded 80% by Lustre and 20% by Erehwon; provided, that Erehwon has the option to pay 10% of the cost to increase its WI to 20%. Royalty expense will consist of the sum of royalty interest to the land owner and an overriding royalty interest to two individuals (“Prospect Generators”) not to exceed 6% nor be less than 3%. For the first 10 new wells and first 10 recompletions, the Prospect Generators will receive an amount equal to 5% of the cost of each completed producing well.
On June 30, 2020, the Company entered into the Limited Liability Company Agreement (the “LLC Agreement”) of Cat Creek Holdings LLC (“Cat Creek”), a Montana limited liability company formed as a joint venture with Lipson Investments LLC (“Lipson”) and Viper Oil & Gas, LLC (“Viper”) for the purchase of certain oil and gas properties in the Cat Creek Field in Petroleum and Garfield Counties in the State of Montana (the “Cat Creek Properties”). In accordance with the LLC Agreement, the Company invested $448,900 in Cat Creek for 50% of the ownership interests in Cat Creek using cash on hand. Each of Lipson Investments LLC and Viper Oil & Gas, LLC, the other two members of Cat Creek, have ownership interests in Cat Creek of 25% in consideration of their respective investments of $224,450. Cat Creek is managed by a Board of Directors consisting of four directors, two of which shall be designated by the Company.
F-8
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS - continued
In January 2022, the Company and Lustre executed a Net Profits Interest Agreement effective as of October 2021 (“NPI Agreement”) with Erehwon and Olfert No. 11-4 Holdings, LLC (“Olfert Holdings”) for the purpose of funding the first well, Olfert #11-4, (the “Well”) under the Erehwon Acquisition and Participation Agreement (“APA”). In connection with the NPI Agreement, the Company was credited a contribution totaling $59,935 of well development costs as determined per agreement with Olfert on behalf of Olfert Holding representing a 5.5% interest in the entity as of May 31, 2022 based on the carrying value of assets contributed to Olfert. The total investment recorded by Laredo was $19,435 as of May 31, 2022. The difference between the $59,935 contribution recorded at the Olfert level and the investment recorded by Laredo is due to the investment at Laredo being recorded at the carrying value of the assets contributed. As Laredo also currently serves as the manager of Olfert, the Company exercises significant influence. Accordingly, the amount paid is recorded as an equity method investment as of May 31, 2023. See further disclosures in Note 9.
NOTE 2 – GOING CONCERN
These consolidated financial statements have been prepared on a going concern basis. The Company has routinely incurred losses since inception, resulting in an accumulated deficit, and historically has been dependent on one customer for its revenue. The Company entered into the Agreements with SORC to fund operations and to provide working capital. However, as a result of the SORC Purchase Transaction, except for payments to be made in calendar year 2021 to Laredo under the Consulting Agreement, Alleghany will no longer fund operations or provide working capital to the Company or SORC. There is no assurance that in the future such financing will be available to meet the Company’s needs. This situation raises substantial doubt about the Company’s ability to continue as a going concern within one year of the issuance date of the consolidated financial statements.
Management has undertaken steps as part of a plan to improve operations with the goal of sustaining operations for the next twelve months and beyond. These steps include 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, in an effort to control costs, the Company has required a number of its personnel to multi-task and cover a wider range of responsibilities in an effort to restrict the growth of the Company’s headcount. There can be no assurance that the Company can successfully accomplish these steps and it is uncertain that the Company will achieve a profitable level of operations and obtain additional financing. There can be no assurance that any additional financing will be available to the Company on satisfactory terms and conditions, if at all.
The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.
NOTE 3 – SUMMARY OF 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 consolidated financial statements have been prepared in conformity with United States generally accepted accounting principles. The accompanying financial statements have been prepared on a consolidated basis and reflect the accounts of Laredo Oil and its subsidiaries after elimination of intercompany balances and transactions.
The Company’s basic earnings per share (“EPS”) amounts have been computed based on the weighted-average number of shares of common stock outstanding for the period. For the years ended May 31, 2023 and 2022, all options and warrants potentially convertible into common equivalent shares are considered antidilutive and have been excluded in the calculation of diluted earnings per share.
EQUITY METHOD INVESTMENT
Investments classified as equity method consist of investments in companies in which the Company is able to exercise significant influence but not control. Under the equity method of accounting, the investment is initially recorded at cost, then the Company’s proportional share of investee’s underlying net income or loss is recorded as a component of “other income” with a corresponding increase or decrease to the carrying value of the investment. Distributions received from the investee reduce the Company’s carrying value of the investment. These investments are evaluated for impairment if events or circumstances arise that indicate that the carrying amount of such assets may not be recoverable. The Company has elected to record its portion of the equity method income with a two-month lag. Accordingly, the financial results for the equity investment are reported through March 31, 2023. No impairments were recognized for the Company’s equity method investment during the year ended May 31, 2023. See Note 16.
F-9
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
REVENUE RECOGNITION
Related Party Revenue
The
Company and Alleghany entered into a Consulting agreement (see Note 1), where Alleghany is obligated to pay the Company a total of $1,144,471,
in quarterly payments beginning January 1, 2021, in consideration for making certain individuals available for their advice, assistance
and support in connection with the oil and gas industry and any questions, issues or matters arising from Alleghany’s previous
ownership of SORC. Two individuals are committed for a one-year period ending December 31, 2021, and one individual is committed for
a three-year period ending December 31, 2023. The Company’s management believes that any work necessary under this obligation was
completed by December 31, 2021, and is recognizing revenue on a monthly basis over the year ended December 31, 2021. The Company does
not have any revenue sources and has not earned and recorded revenue during the fiscal year ending May 31, 2023. Other revenue fees of
$
CASH AND CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less are considered to be cash equivalents. There were no cash equivalents as of May 31, 2023 and 2022. At times, the Company maintains cash balances deposited at its financial institution that exceed FDIC insured limits.
RECEIVABLES
Receivables as of May 31, 2022 and 2023 represent balances arising from employee expense reports.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets are primarily comprised of prepaid audit fees which are recorded on a quarterly basis and amortized to expense upon work performance each quarter and prepaid directors’ and officers’ insurance which is recorded and amortized to expense over the 12-month contract life.
OIL AND GAS ACQUISITION AND DRILLING 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 $
Schedule of Oil and Gas Acquisition and Drilling Cost
| May 31, | May 31, | |||||||
| 2023 | 2022 | |||||||
| Intangible and tangible drilling costs | $ | $ | ||||||
| Acquisition costs | ||||||||
| Oil and gas acquisition and drilling costs | $ | $ | ||||||
F-10
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
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. Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives of five to seven years are used for vehicles and machinery. Realization of the carrying value of property and equipment is reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Assets are determined to be impaired if a forecast of undiscounted estimated future net operating cash flows directly related to the asset, including disposal value, if any, is less than the carrying amount of the asset. If any asset is determined to be impaired, the loss is measured as the amount by which the carrying amount of the asset exceeds its fair value. Repairs and maintenance costs are expensed in the period incurred.
Schedule of Property and Equipment
| May 31, | May 31, | |||||||
| 2023 | 2022 | |||||||
| Vehicles and equipment | $ | $ | ||||||
| Less: Accumulated depreciation | ||||||||
| Property and equipment, net | $ | $ | ||||||
CONVERTIBLE NOTES
The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance ASC Topic 470, “Accounting for Convertible Securities with Beneficial Conversion Features”, as those professional standards pertain to “Certain Convertible Instruments”. Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their earliest date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. ASC Topic 815 provides that generally, if an event that is not within the entity’s control could or require net cash settlement, then the contract shall be classified as an asset or a liability.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is defined as the amount that would be received from the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are classified and disclosed in one of the following categories:
| ● | Level 1 – Unadjusted quoted prices in active markets for identical assets and liabilities in active markets and have the highest priority. |
|
● | Level 2 – Inputs other than quoted prices included within Level I that are observable for the asset or liability, either directly or indirectly. |
| ● | Level 3 – Unobservable inputs for the financial asset or liability and have the lowest priority. |
FASB ASC 718, Compensation - Stock Compensation prescribes accounting and reporting standards for all stock-based payment awards to employees, including employee stock options, restricted stock, employee stock purchase plans and stock appreciation rights. Stock-based payment awards may be classified as either equity or liabilities. The Company should determine if a present obligation to settle the share-based payment transaction in cash or other assets exists. A present obligation to settle in cash or other assets exists if: (a) the option to settle by issuing equity instruments lacks commercial substance or (b) the present obligation is implied because of an entity’s past practices or stated policies. If a present obligation exists, the transaction should be recognized as a liability; otherwise, the transaction should be recognized as equity.
The Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of FASB ASC 505-50, Equity - Based Payments to Non-Employees. Measurement of share-based payment transactions with non-employees shall be based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair value of the share-based payment transaction should be determined at the earlier of performance commitment date or performance completion date.
F-11
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
INCOME TAXES
The Company accounts for income taxes by the asset and liability method in accordance with FASB ASC 740, Income Taxes. Under this method, current income taxes are recognized for the estimated income taxes payable for the current year. Deferred income tax assets and liabilities are recognized in the current year for temporary differences between the tax and accounting bases of assets and liabilities as well as for the benefit of losses available to be carried forward to future years for tax purposes that are likely to be realized. In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determined that it is more likely than not that some portion of the deferred tax asset will not be realized.
In addition, the Company utilizes the two-step approach to recognizing and measuring uncertain tax positions taken or expected to be taken in a tax return. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained in an audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company recognizes interest and penalties accrued on unrecognized tax benefits within general and administrative expense. To the extent that accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction in general and administrative expenses in the period that such determination is made.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In August 2020, the FASB issued ASU 2020-06–Debt - Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. Reporting companies 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 the Company adopted effective June 1, 2022, impacts the ongoing accounting of the Convertible Notes.
Reporting companies are allowed to adopt this standard by either a modified retrospective method of transition or a fully retrospective method of transition. Under the modified retrospective method, entities should apply the guidance to transactions outstanding as of the beginning of the fiscal year in which the standard was adopted. Transactions that were settled (or expired) during prior reporting periods are unaffected. The cumulative effect of the change should be 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 for the Company 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 described in Note 11. 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 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 4 – ACQUISITION OF SORC
Effective December 31, 2020, the Company acquired a 100% equity interest in SORC (see Note 1). We have accounted for the acquisition of SORC as a business combination using the acquisition method.
In accordance with the Securities Purchase Agreement, Laredo agreed to pay to Alleghany a revenue royalty of 5.0% of the Company’s future revenues and net profits relating to oil, gas, gas liquids and all other hydrocarbons, subject to certain adjustments, for a period of seven years after the closing. The Company has not attributed a value to this potential liability in the preliminary purchase price allocation as eligible revenues or net profits do not currently exist and are not estimable. The contingent consideration continues to have no estimated value as of May 31, 2023. If circumstances change within the seven-year period ending December 31, 2027, the amount will be adjusted with gains and losses recorded as other income/expense.
For
the years ended May 31, 2023 and 2022, respectively, SORC recognized no revenues and $
F-12
NOTE 5 – 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 our 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. At May 31, 2023 and May 31, 2022, the asset retirement obligation totaled $
The Company’s 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’s accretion expense totaling $
NOTE 6 – 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.
Laredo 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 Laredo’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.
Basic and diluted earnings/(loss) per share is computed by dividing net income/(loss) available to common shareholders 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. For the years ended May 31, 2023 and 2022, respectively, options to purchase and shares of common stock, and and shares underlying convertible debt outstanding, were not included in the computation of diluted earnings/(loss) per share because they were anti-dilutive.
| For the Year Ended | ||||||||
| May 31, | ||||||||
| 2023 | 2022 | |||||||
| Numerator - net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | ||
| Denominator - weighted average number of common shares outstanding | ||||||||
| Basic and diluted earnings/(loss) per common share | $ | ( | ) | $ | ( | ) | ||
F-13
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 to the Company’s Chief Financial Officer the right to purchase up to 356,243 of the 500,000 membership interests in Olfert #11-4 in exchange for the Company’s Chief Financial Officer’s payment of $356,243 of the Company’s capital commitment to Olfert #11-4.
On October 26, 2022, the Company borrowed $150,000 from the Company’s Chief Financial Officer pursuant to a demand note bearing an annual interest rate of 10%. The demand note is secured by all of the Company’s interests in Lustre, pursuant to the terms of a Membership Interest Pledge Agreement.
In February 2023, the Company’s Chief Financial Officer made several advances to the Company, totaling $50,000. The advances were not made pursuant to a promissory note, and the advances are not secured. On March 15, 2023, the Company received a loan of $30,000 from the Company’s Chief Financial Officer. During April and May 2023, the Company’s Chief Financial Officer advanced another $62,099.10. Total advances aggregate to $292,099.10.
F-14
NOTE 9 – STOCKHOLDERS’ DEFICIT
Share Based Compensation
The Company made grants of options for the purchase of 650,000 shares of its common stock, at a strike price of $0.19 per share, during the first quarter of fiscal year 2023. These options vested immediately and expire on June 2, 2032. The Company made grants for the purchase of 1,600,000 shares of its common stock at a strike price of $0.074 per share, during the first quarter of fiscal year 2022. These options vest monthly over three years, beginning on August 1, 2021, and expire on August 1, 2031. The Company used the Black-Scholes option pricing model to estimate the fair value of options granted under its stock incentive plan.
Schedule of Fair Value Assumptions
| 2023 | 2022 | |||||||
| Risk-free interest rate | % | % | ||||||
| Expected dividend yield | % | % | ||||||
| Expected volatility | % | % | ||||||
| Expected life of options | ||||||||
The risk-free interest rate is based upon the U.S. Treasury interest rate 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 stock options. The Company uses the simplified method for determining the expected term of its stock options.
The Company recorded share-based compensation for stock option grants totaling $ and $ in general, selling and administrative expense during the year ended May 31, 2023 and 2022, respectively.
Stock Options
As of May 31, 2023 and 2022, there were 618,776 and 1,143,761 unvested and unrecognized shares. As of May 31, 2023, unrecognized compensation cost related to nonvested stock options amounted to $45,287 which is expected to be recognized over the next two years.
Schedule of Stock Option Outstanding
| Number of Shares | Weighted Average Exercise Price | |||||||
| Balance, May 31, 2021 | $ | |||||||
| Options granted and assumed | ||||||||
| Options expired | ( | ) | ||||||
| Options cancelled, forfeited | ( | ) | ||||||
| Options exercised | ||||||||
| Balance, May 31, 2022 | $ | |||||||
| Options granted and assumed | ||||||||
| Options expired | ||||||||
| Options cancelled, forfeited | ||||||||
| Options exercised | ||||||||
| Balance, May 31, 2023 | $ | |||||||
All stock options are exercisable upon vesting. As of May 31, 2023, there were vested options outstanding.
As of May 31, 2023 and 2022, and options are outstanding at a weighted average exercise price of $and $, respectively.
F-15
NOTE 9 – STOCKHOLDERS’ DEFICIT - continued
Restricted Stock
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 execution, 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.
If during the term of the Advisory Agreement, the Company decides to (i) finance or refinance any indebtedness using a manager or an agent, or (ii) raise funds by means of a public offering or private placement of equity or debt securities, Dawson will have the right to act as lead manager, placement agent or agent (or have any affiliate act in such role) for such financing, provided that Dawson has then secured at least $5,000,000 in equity financing for the Company. As of the date of this filing, Dawson has not secured any equity financing for the Company.
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, 2023, 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 during fiscal year 2023.
NOTE 10 – NET PROFITS INTEREST AGREEMENT
The Company and Lustre executed the NPI Agreement with Erehwon and Olfert Holdings in January 2022, to be effective as of October 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 has 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 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 the NPI Agreement. As of May 31, 2023, the investors had paid $358,747 of that capital call. As of May 31, 2023, Lustre had incurred approximately $3,300,000 in expenses 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 did 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. One creditor has 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, complete the Olfert Well, and pay all amounts owed to contractors.
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 total investment in Olfert Holdings recorded by the Company was $19,435 as of May 31, 2022. 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 May 31, 2023. As the Company currently serves as the initial 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 May 31, 2023.
F-16
NOTE 11 – NOTES PAYABLE
Convertible Debt
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 $
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 $
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.
F-17
NOTE 11 – NOTES PAYABLE - continued
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.
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.
In May 2023, the Company repaid $140,250 in principal and $27,410 in related accrued interest and prepayment penalty interest pursuant to two separate Convertible Notes entered into on November 7, and November 22, 2022.
During April and May of 2023, the Company repaid the $55,000 in principal and $10,372 in related accrued interest and prepayment penalty interest pursuant to a Convertible Note entered into on October 13, 2022. To satisfy the obligation, in addition to the interest payments, the Company repaid $23,360 principal in cash and issued to the note holder 1,000,000 shares of the Company’s common stock at an average price of $0.03164 per share.
During March and April of 2023, the Company repaid the $97,625 in principal and $4,279 in accrued interest pursuant to a Convertible Note entered into on September 6, 2022. To satisfy the obligation, the Company issued to the note holder 1,902,039 shares of the Company’s common stock, at an average price of $0.05358 per share.
During October and November 2022, the Company exchanged $114,125 of principal and $4,150 of accrued interest of the single Convertible Note entered into on April 14, 2022 for 1,468,042 shares of the Company’s common stock, at an average price of $0.0806 per share.
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 the $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.
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, dated March 23, 2023, in the aggregate principal amount of $100,000 (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.
F-18
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.
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 Holdings, LLC.
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. Pursuant to this Note Purchase Agreement, during September, October and November 2022, the Company issued three 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. 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.
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 $
F-19
NOTE 11 – NOTES PAYABLE - continued
Alleghany Notes
Schedule of Notes Payable - Related Party
| May 31, | May 31, | |||||||
| 2023 | 2022 | |||||||
| 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 $
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 bears no interest until January 1, 2022 whereupon the interest rate increases to 5% per annum through maturity. Principal with all accrued and unpaid interest is due at maturity. In connection with the SORC acquisition purchase price allocation, the Company recorded a debt discount totaling $30,068 in recognition of imputed interest on the Senior Consolidated Note, to be amortized over the first year of the note term. The 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, if the loan is not paid prior to December 31, 2022, the revenue royalty as defined in the Purchase Agreement will be increased from 5% to 6%. As of May 31, 2023 and 2022, the Senior Consolidated Note is recorded as current.
Paycheck Protection Program Loan
Schedule of Notes Payable
| May 31, | May 31, | |||||||
| 2023 | 2022 | |||||||
| 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 $
In
February 2021, the Company drew an additional $
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 taking into account any loan forgiveness applicable to the Note, any remaining principal and accrued interest will be payable in substantially equal monthly installments over the remaining term of the Note.
F-20
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 $
In
April 2022, the Company applied for partial forgiveness of the PPP Second Draw Loan and received notice that $
NOTE 12 – PROVISION FOR INCOME TAXES
We did not provide any current or deferred U.S. federal income tax provision or benefit for any of the periods presented because we have experienced operating losses since inception. Per the authoritative literature when it is more likely than not that a tax asset cannot be realized through future income the Company must allow for this future tax benefit. We provided a full valuation allowance on the net deferred tax asset, consisting of net operating loss carryforwards, because management has determined that it is more likely than not that we will not earn income sufficient to realize the deferred tax assets during the carryforward period.
The Company has not taken any tax positions that, if challenged, would have a material effect on the consolidated financial statements for the twelve-months ended May 31, 2023 and 2022. The Company’s tax returns for the fiscal years ended May 31, 2015 through 2022 remain subject to examination by the tax authorities.
The components of the Company’s deferred tax asset as of May 31, 2023 and 2022 are as follows:
Schedule of Company Deferred Tax Assets
| 2023 | 2022 | |||||||
| Net operating loss | $ | $ | ||||||
| Stock compensation | ||||||||
| Deferred compensation | ||||||||
| Other | ( | ) | ( | ) | ||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Net deferred tax asset | $ | $ | ||||||
A reconciliation of income taxes computed at the statutory rate to the income tax amount recorded is as follows:
Schedule of Income Tax Reconciliation
| 2023 | 2022 | |||||||
| Tax at statutory rate (21%) | $ | ( | ) | $ | ( | ) | ||
| Effect of non-taxable and non-deductible permanent differences | ( | ) | ||||||
| Effect of change in statutory tax rate | ||||||||
| Other | ( | ) | ||||||
| Increase/(decrease) in valuation allowance | ||||||||
| Net deferred tax asset | $ | $ | ||||||
The net federal operating loss carry forward will expire between 2030 and 2043. This carry forward may be limited upon the consummation of a business combination under IRC Section 381.
F-21
NOTE 13 – COMMITMENTS AND CONTINGENCIES
Leases
No
office leases currently extend beyond one year. Rent expense amounted to $
Revenue Royalty
In accordance with the Securities Purchase Agreement, Laredo agreed to pay to Alleghany a revenue royalty of 5.0% of the Company’s future revenues and net profits relating to oil, gas, gas liquids and all other hydrocarbons, subject to certain adjustments, for a period of seven years after the closing, December 31, 2020.
NOTE 14 – EQUITY METHOD INVESTMENTS
Cat Creek Holdings
On
June 30, 2020, Laredo Oil, Inc. (“Laredo”) entered into a Limited Liability Company Agreement (the “LLC Agreement”)
of Cat Creek Holdings LLC (“Cat Creek”), a Montana limited liability company formed as a joint venture for the purchase of
certain oil and gas properties in the Cat Creek Field in Petroleum and Garfield Counties in the State of Montana (the “Cat Creek
Properties”).
Cat Creek entered into an Asset Purchase and Sale Agreement (the “Purchase Agreement”) with Carrell Oil Company (“Seller”) on July 1, 2020 for the purchase of the Cat Creek Properties from Seller. On September 21, 2020, upon resolving the purchase contingency under the Purchase Agreement, the Seller received consideration of $400,000, taking into effect certain adjustments resulting from pre- and post-effective date revenue, expense, and allocations.
F-22
NOTE 14 – EQUITY METHOD INVESTMENT - continued
Summarized Financial Information
The following table provides summarized financial information for the Company’s ownership interest in Cat Creek accounted for under the equity method for the May 31, 2023 period presented and has been compiled from respective company financial statements, reflects certain historical adjustments, and is reported on a two-month lag. Results of operations are excluded for periods prior to acquisition.
Summarized Financial Information
| Balance Sheet: | As of May 31, 2023 | As of May 31, 2022 | ||||||
| Current Assets | $ | $ | ||||||
| Non-current Assets | ||||||||
| Total Assets | $ | $ | ||||||
| Current Liabilities | $ | $ | ||||||
| Non-current Liabilities | ||||||||
| Shareholders’ equity | ||||||||
| Total Liabilities and Shareholders’ Equity | $ | $ | ||||||
| Results of Operations: | Year Ended May 31, 2023 | Year Ended May 31, 2022 | ||||||
| Revenue | $ | $ | ||||||
| Gross Profit | ||||||||
| Net Loss/Income | $ | ( | ) | $ | ||||
Olfert 11-4 Holdings
The following table provides summarized financial information for the Company’s ownership interest in Olfert #11-4 Holding accounted for under the equity method for the May 31, 2023 period presented and has been compiled from respective company financial statements and reflects certain historical adjustments. Results of operations are excluded for periods prior to acquisition. See Note 9 for further information.
Summarized Financial Information
| Balance Sheet: | As of May 31, 2023 | As of May 31, 2022 | ||||
| Current Assets | $ | $ | ||||
| Non-current Assets | ||||||
| Total Assets | $ | $ | ||||
| Accounts Payable | ||||||
| Shareholders’ equity | ||||||
| Total Liabilities and Shareholders’ Equity | $ | $ | ||||
| Results of Operations: | Year Ended May 31, 2023 | Year Ended May 31, 2022 | ||||||
| Revenue | $ | $ | ||||||
| Gross Profit | ||||||||
| Net Loss | $ | ( | ) | $ | ( |
) | ||
F-23
NOTE 15 – SUBSEQUENT EVENTS
During June and July, 2023, the individual accredited investor holding the Secured Promissory Note, dated March 23, 2023 described in NOTE 11—NOTES PAYABLE, contributed an additional $87,061 under the Note, bringing the aggregate principal amount to $270,061.
During June 2023, the Company entered into an additional $80,000 of secured convertible promissory notes increasing the aggregate principal issued to $620,000 under the $7.5 million Note Purchase Agreement dated September 23, 2022.
On June 1, 2023, The Company filed a First Amended Complaint in the Montana Seventeenth Judicial District Court. See NOTE 13 – COMMITMENTS AND CONTINGENCIES.
F-24
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation in this Registration Statement on Form S-8 of our report dated September 13, 2023, relating to the financial statements of Laredo Oil, Inc. as of May 31, 2023 and to all references to our firm included in this Annual report.
/s/ BF Borgers CPA PC
Certified Public Accountants
Lakewood, CO
September 13, 2023
EXHIBIT 23.2
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-153168) of Laredo Oil, Inc. (the “Company”), of our report dated September 13, 2022, relating to the consolidated financial statements of the Company as of May 31, 2022 and May 31, 2021 and for the years then ended, appearing in this Annual Report on Form 10-K of the Company for the year ended May 31, 2023.
/S/ WEAVER AND TIDWELL, L.L.P.
Dallas, Texas
September 13, 2023
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 annual report on Form 10-K for the 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 consolidated 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 consolidated 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: September 13, 2023 | |
| /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 annual report on Form 10-K for the 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 consolidated 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 consolidated 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: September 13, 2023 | |
| /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 Annual Report of Laredo Oil, Inc. on Form 10-K for the, 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: September 13, 2023 | |
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 Annual Report of Laredo Oil, Inc. on Form 10-K for the year ended May 31, 2022, 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: September 13, 2023 | |