Laredo Oil, Inc 10-Q for FY2025 Q1
Laredo Oil, Inc. (LRDC)
About this 10-Q
Laredo Oil, Inc filed this 10-Q on October 21, 2024, covering the quarter ended August 31, 2024 (FY2025 Q1).
Headline figures
Quarter ended August 31, 2024, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $6048
- Net loss
- $469.25K
- compared with a net loss of $1.12M a year earlier
U.S. SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM
ACT OF 1934
FOR
THE QUARTERLY PERIOD ENDED
Commission
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whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
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preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x
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 |
| o | 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 12b-2 or the Exchange Act). Yes o
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: shares of common stock issued and outstanding as of October 15, 2024.
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ITEM 1. FINANCIAL STATEMENTS
The following unaudited condensed consolidated financial statements (“financial statements”) have been prepared by Laredo Oil, Inc. (the “Company”), pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented not misleading. However, except as disclosed herein, there have been no material changes in the information disclosed in the notes to the financial statements for the year ended May 31, 2024. These financial statements and the notes attached hereto should be read in conjunction with the financial statements and notes included in the Company’s Form 10-K, which was filed with the SEC on September 30, 2024. In the opinion of management of the Company, all adjustments, including normal recurring adjustments necessary to present fairly the financial position of Laredo Oil, Inc. as of August 31, 2024 and the results of its operations and cash flows for the three-month period then ended, have been included. The results of operations for the three-month period ended August 31, 2024 are not necessarily indicative of the results for the full year ending May 31, 2025.
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Laredo Oil, Inc. |
| Condensed Consolidated Balance Sheets |
| August 31, | May 31, | |||||||
| 2024 (unaudited) | 2024 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents and restricted cash | $ | $ | ||||||
| Receivables | ||||||||
| 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 | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued payroll liabilities | ||||||||
| Accrued interest | ||||||||
| Deposit for well development | ||||||||
| Deferred well development costs | ||||||||
| Convertible debt, net of debt discount and debt issuance costs | ||||||||
| Revolving note | ||||||||
| Note payable – related party | ||||||||
| Note payable – Alleghany, net of debt discount | ||||||||
| Note payable, current portion | ||||||||
| Total Current Liabilities | ||||||||
| Asset retirement obligation | ||||||||
| Long-term note, net of current portion | ||||||||
| Total Noncurrent Liabilities | ||||||||
| TOTAL LIABILITIES | ||||||||
| Commitments and Contingencies (Note 13) | ||||||||
| Stockholders’ Deficit | ||||||||
| Preferred stock: $ par value; shares authorized; issued and outstanding | ||||||||
| Common stock: $ par value; shares authorized; and issued and outstanding as of August 31, 2024 and May 31, 2024 | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Deficit | ( | ) | ( | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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| Laredo Oil, Inc. |
| Condensed Consolidated Statements of Operations |
| (Unaudited) |
| Three Months Ended | Three Months Ended | |||||||
| August 31, 2024 | August 31, 2023 (Restated) | |||||||
| Revenue | $ | $ | ||||||
| Direct costs | ||||||||
| Gross profit (loss) | ||||||||
| Lease operating expense | ||||||||
| General, selling and administrative expenses | ||||||||
| Consulting and professional services | ||||||||
| Total Operating expenses | ||||||||
| Operating loss | ( | ) | ( | ) | ||||
| Other income (expense) | ||||||||
| Other non-operating income | ||||||||
| Gain on sale of assets | ||||||||
| Interest expense, net | ( | ) | ( | ) | ||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Net loss per share, basic and diluted | $ | ( | ) | ( | ) | |||
| Weighted average number of basic and common shares outstanding | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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| Laredo Oil, Inc. |
| Condensed Consolidated Statements of Changes in Stockholders’ Deficit (Unaudited) |
| For the three months ended August 31, 2024 and 2023 |
| Additional | Total | |||||||||||||||||||||||||||
| Common Stock | Preferred Stock | Paid | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | in Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance as of May 31, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||
| Sale and issuance of common stock | - | |||||||||||||||||||||||||||
| Net Loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance as of August 31, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||
| Additional | Total | |||||||||||||||||||||||||||
| Common Stock | Preferred Stock | Paid | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | in Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance as of May 31, 2023 (Restated) | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||
| Stock based compensation | - | - | ||||||||||||||||||||||||||
| Net Loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance as of August 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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| Laredo Oil, Inc. |
| Condensed Consolidated Statements of Cash Flows |
| (Unaudited) |
| Three Months Ended | Three Months Ended | |||||||
| August 31, 2024 | August 31, 2023 (Restated) | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to Reconcile Net Income (Loss) to Net Cash used in Operating Activities | ||||||||
| Stock based compensation expense | ||||||||
| Depreciation expense | ||||||||
| Accretion expense | ||||||||
| Amortization of debt discount | ||||||||
| Gain on sale of assets | ( | ) | ||||||
| Change in operating assets and liabilities | ||||||||
| Receivables | ||||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Accounts payable and accrued liabilities | ( | ) | ||||||
| Accrued payroll | ||||||||
| Accrued interest | ||||||||
| NET CASH USED IN OPERATING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS USED IN INVESTING ACTIVITIES | ||||||||
| Acquisition of oil and gas assets | ( | ) | ( | ) | ||||
| NET CASH USED IN INVESTING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from sale of common stock | ||||||||
| Repayment of convertible debt | ( | ) | ( | ) | ||||
| Proceeds from notes payable and revolving note | ||||||||
| Repayment of bridge notes | ( | ) | ||||||
| Proceeds from prefunded drilling costs | ||||||||
| Proceeds from well development deposit | ||||||||
| PPP loan repayments | ( | ) | ( | ) | ||||
| CASH FLOWS PROVIDED BY FINANCING ACTIVITIES | ||||||||
| Net decrease in cash and cash equivalents and restricted cash | ( | ) | ( | ) | ||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD | ||||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD | $ | $ | ||||||
| NONCASH INVESTING ACTIVITIES | ||||||||
| Oil and gas acquisition costs in accounts payable | ||||||||
| Initial asset retirement obligation asset and liability | ||||||||
| Issuance of common stock in exchange for note payable | ||||||||
| Cash to be received for sale of fixed assets | ||||||||
| Interest paid | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
The accompanying consolidated financial statements have been prepared by the management of Laredo Oil, Inc. (“the Company”).
The Company was incorporated under the laws of the State of Delaware on March 31, 2008 under the name of “Laredo Mining, Inc.” with authorized common stock of 90,000,000 shares at $0.0001 par value and authorized preferred stock of 10,000,000 shares at $0.0001 par value. On October 21, 2009 the name was changed to “Laredo Oil, Inc.” During May 2023, the Company board of directors voted to increase the authorized common stock to 120,000,000 shares at $0.0001 which was confirmed by a majority of the shares then outstanding.
The Company is an oil exploration and production (“E&P”) company primarily engaged in acquisition and exploration efforts for mineral properties. From its inception in March 2008 through October 2009, the Company was primarily engaged in acquisition and exploration efforts for mineral properties. Beginning in October 2009, the Company shifted its focus to locating mature oil fields with the intention of acquiring those oil fields and recovering stranded oil using enhanced recovery methods. From June 14, 2011 to December 31, 2020, the Company was a management services company, managing the acquisition and operation of mature oil fields, focused on the recovery of “stranded” oil from those mature fields using enhanced oil recovery methods for its then sole customer, Stranded Oil Resources Corporation, or SORC, then a wholly owned subsidiary of Alleghany Corporation. The Company performed those services in exchange for a quarterly management fee and the reimbursement of its employee related expenses from SORC, which fees and reimbursements were effectively all of the Company’s revenues prior to the closing of the Securities Purchase Agreement with Alleghany described below.
On December 31, 2020, the Company entered into a Securities Purchase Agreement with Alleghany Corporation. Under that agreement, the Company purchased all the issued and outstanding shares of SORC. Currently, there are no ongoing operations being conducted by SORC.
Under the Securities Purchase Agreement with Alleghany, the Company also entered into a Consulting Agreement, under which Alleghany paid the Company an aggregate of approximately $1.245 million during calendar year 2021 in exchange for providing Alleghany with one to three years of consulting services from certain of the Company’s employees, including Mark See, its Chief Executive Officer.
As of August 31, 2024, the Company has acquired 45,766 gross acres and 38,153 net acres of mineral property interests in Montana. The Company drilled one exploratory well during May 2022, which has been shut-in pending gaining access to a saltwater disposal well allowing economically feasible water disposal. The Company plans to continue to develop the field, depending on funding.
In connection with securing this acreage in Montana, Lustre Oil Company LLC, a wholly owned subsidiary of the Company (“Lustre”), entered into an Acquisition and Participation Agreement (the “Erehwon APA”), and subsequent amendments, with Erehwon Oil & Gas, LLC and Laris Oil & Gas, LLC (collectively, “Erehwon”) to acquire oil and gas interests and drill, complete, re-enter, re-complete, sidetrack, and equip wells in Valley County, Daniels County and Roosevelt County, Montana. The amended Erehwon APA specifies calculations for royalty interests and working interests for the first ten well completions and first ten well recompletions and for all additional wells and recompletions thereafter. Lustre, as the Operator named in the Erehwon APA, will acquire initial mineral leases and pay 100% of the costs and the split between Erehwon and Lustre will be 20%/80%. Under the Erehwon APA, Lustre will fund 100% of the construction costs of the first ten wells and first ten completions. Until payout, as defined, is attained, the split between Erehwon and Lustre will be 10% to Erehwon and 90% to Lustre. After payout, the split will be 20% to Erehwon and 80% to Lustre. Any additional wells will be funded 100% by Lustre, with a 20% undivided working interest to Erehwon;. Royalty expense will consist of the sum of royalty interest to the landowner and an overriding royalty interest to two individuals (“Prospect Generators”), not to exceed 6% nor be less than 3%. For the first ten new wells and first ten recompletions, Prospect Generators will receive an amount equal to 5% of the cost of each completed and producing well.
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| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS - continued
Lustre and Erehwon entered into an Exploration and Development Agreement, dated July 18, 2023 (the “Development Agreement”), with Texakoma Exploration & Production Company (“Texakoma”), for the exploration and development of the “Lustre Field Prospect,” as described in the Development Agreement. Lustre and Erehwon are parties to an existing Acquisition and Participation Agreement, under which those parties agreed to acquire certain oil and gas interests, and drill, complete, re-enter, re-complete, sidetrack, and equip wells, in certain counties in Montana.
Under the terms of a Development Agreement, Texakoma agreed to pay Lustre and Erehwon (jointly, “LOC”), the following amounts: (i) $175,000 on or before July 21, 2023; and (ii) another $175,000 upon the “spudding” of the initial test well subject to rig availability. Upon the spudding of that test well, LOC was required to deliver to Texakoma a partial assignment of an 85% working interest in the oil and gas leases covering the first two initial drilling and spacing units. Under the Development Agreement the first payment was paid by Texakoma in August 2023 and the Company received the second payment of $175,000 in September 2023.
The two test wells were successfully drilled and Texakoma paid 100% of the costs associated with the drilling and completion of the wells. Lustre and Erehwon jointly have an undivided 15% working interest, carried through the tanks, in those two wells. In March 2024, Texakoma exercised its option to participate in the development of the remainder of the Lustre Field Prospect. By exercising its option, Texakoma agreed to drill eight additional wells, with Lustre and Erehwon having a 15% working interest carried through the tanks, and to pay Lustre $706,603 spread over four months, for an 85% leasehold interest in the next eight drill sites and a 50% leasehold interest in the balance of the Lustre Field Prospect acreage. As of May 31, 2024, Texakoma paid an additional $328,681 in accordance with the contract. The remaining amounts due were paid by the end of first quarter 2025. The working and net revenue interest in any wells drilled subsequent to the first ten wells will be shared by Texakoma and Lustre and Erehwon, jointly, on a 50:50 basis.
Following the Texakoma transaction, we 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.
In December 2023, we entered into a Participation Agreement, through Hell Creek Crude, LLC, our wholly owned subsidiary, Erehwon, and various accredited investors. The Participation Agreement provided us with $2,034,000 to acquire certain leases and to drill a development well in the Midfork Field in Montana. Several of the investors also hold $575,000 of our convertible debt, plus accrued interest of $73,317, which indebtedness is included as investments under the Participation Agreement.
Until the total of the $2,682,317 in cash, notes and accrued interest is repaid to the various investors under the terms of the Participation Agreement, the net working interest payments from the Participation Agreement will be split between the various investors and HCC and Erehwon, collectively on a 90%/10% basis. After the repayment to the investors, the split between the investors, on one hand, and HCC and Erehwon, on the other hand, will be on a 50%/50% basis. After the development well is drilled under the Participation Agreement, the investors will have the option to invest in up to two additional wells in the field.
NOTE 2 – RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
Subsequent to the initial issuance of the Company’s 2023 financial statements on September 23, 2023, management reconsidered the estimate previously applied in its valuation of the Olfert 11-4 exploratory well drilled in the spring and summer of 2022. The well encountered salt-water in amounts making it uneconomical to operate due to the lack of a proximate salt-water disposal well and was shut-in during September 2022 pending gaining access to a closer disposal well. Two years later, the well remains shut-in as the Company has yet to economically solve the water disposal issue. Until a solution is found, the well is unevaluated and written down, although the Company continues to plan on developing the well if feasible. After experiencing continued losses in its equity method investment in Cat Creek Holdings, LLC, the Company has reconsidered its valuation of the entity and written it down to zero.
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| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 2 – RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS - continued
The following table summarizes the impacts of the changes in estimates on the Company’s financial statements for the period ended August 31, 2023:
| Condensed Consolidated Balance Sheet | ||||||||||||
| Impact of change of estimates | ||||||||||||
| As previously reported | Adjustments | As Restated August 31, 2023 | ||||||||||
| Cash and cash equivalents and restricted cash | $ | $ | $ | |||||||||
| Receivables | ||||||||||||
| 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 | ||||||||||||
| Stockholders’ Deficit | ||||||||||||
| Preferred stock: $0.0001 par value; 10,000,000 shares authorized; none issued and outstanding | ||||||||||||
| Common stock: $0.0001 par value; 120,000,000 shares authorized; 66,220,206 issued and outstanding as of August 31 and May 31, 2023 | $ | $ | ||||||||||
| Additional paid in capital | ||||||||||||
| Accumulated deficit | ( | ) | ( | ) | ( | ) | ||||||
| Total Stockholders’ Deficit | ( | ) | ( | ) | ( | ) | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | $ | ( | ) | $ | |||||||
10
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 2 – RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS - continued
| Condensed Consolidated Statements of Operations |
| As previously reported | Adjustments | Quarter ended August 31, 2023 (Restated) | ||||||||||
| Revenue | $ | $ | $ | |||||||||
| 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 | ||||||||||||
| Gain on sale of assets | ||||||||||||
| Equity method loss/impairment | ( | ) | ||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ||||||
| Net loss | $ | ( | ) | ( | ) | $ | ( | ) | ||||
| Net loss per share, basic and diluted | $ | ( | ) | $ | ( | ) | ||||||
| Weighted average number of basic and diluted common shares outstanding | ||||||||||||
11
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 2 – RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS - continued
Condensed Consolidated Statement of Cash Flows
| Quarter ended | ||||||||||||
| As previously reported | Adjustment | August 31, 2023 (Restated) | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
| Net loss | $ | ( | ) | ( | ) | $ | ( | ) | ||||
| Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities: | ||||||||||||
| Stock based compensation expense | ||||||||||||
| Amortization of debt discount | ||||||||||||
| Equity method investment loss/impairment | ( | ) | ||||||||||
| Depreciation | ( | ) | ||||||||||
| Accretion expense | ( | ) | ||||||||||
| Gain on sale of assets | ( | ) | ( | ) | ||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable – related party | ||||||||||||
| Prepaid expenses and other current assets | ||||||||||||
| Accounts payable and accrued liabilities | ( | ) | ||||||||||
| Accrued payroll liabilities | ||||||||||||
| Accrued interest | ||||||||||||
| NET CASH USED IN OPERATING ACTIVITIES | ( | ) | ( | ) | ( | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
| Investment in oil and gas field acquisition and drilling costs | ( | ) | ( | ) | ||||||||
| NET CASH USED IN INVESTING ACTIVITIES | ( | ) | ( | ) | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
| Repayment of convertible debt | ( | ) | ( | ) | ||||||||
| Proceeds from notes payable and revolving note | ||||||||||||
| PPP loan repayments | ( | ) | ( | ) | ||||||||
| 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 AND RESTRICTED CASH 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 | $ | $ | ( | ) | $ | |||||||
| Cash to be received for sale of fixed assets | $ | $ | $ | |||||||||
12
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 2 – RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS - continued
| Condensed Consolidated Statement of Stockholders’ Deficit | ||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||
| Common Stock | Preferred Stock | Additional | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Paid In Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance at August 31, 2023 -as previously reported | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Gain on sale of related party asset | - | - | ||||||||||||||||||||||||||
| Net Loss adjustments | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance at August 31, 2023 (Restated) | $ | - | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||
NOTE 3 – GOING CONCERN
These consolidated financial statements have been prepared on a going concern basis. The Company has routinely incurred losses since inception, resulting in an accumulated deficit, and historically was dependent on one customer for its revenue. There is no assurance that in the future any financing will be available to meet the Company’s needs. This situation raises substantial doubt about the Company’s ability to continue as a going concern within one year of the issuance date of these consolidated financial statements.
The Company’s management has undertaken steps as part of a plan to improve operations with the goal of sustaining operations for the next twelve months and beyond. These steps include an ongoing effort to (a) controlling overhead and expenses; (b) raising funds connected with specific well development; and (c) raising funds through notes payable and convertible debt to expand and fund property acquisitions exploration and development as well as maintaining operations. The Company has worked to attract and retain key personnel with significant experience in the industry. At the same time, to control costs, the Company has required several of its personnel to multi-task and cover a wider range of responsibilities to manage the Company’s headcount. There can be no assurance that the Company can successfully accomplish these steps and it is uncertain that the Company will achieve a profitable level of operations and obtain additional financing. There can be no assurance that any additional financing will be available to the Company on satisfactory terms and conditions, if at all.
The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.
13
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 4 – SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates - Management uses estimates and assumptions in preparing these consolidated financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates.
Principles of Consolidation – The accompanying consolidated financial statements include the accounts of Laredo Oil and its subsidiaries after elimination of intercompany balances and transactions.
Equity Method Investment - Investments classified as equity method consist of investments in companies in which the Company can exercise significant influence but not control. Under the equity method of accounting, the investment is initially recorded at cost, then the Company’s proportional share of investee’s underlying net income or loss is recorded as a component of “other income” with a corresponding increase or decrease to the carrying value of the investment. Distributions received from the investee reduce the Company’s carrying value of the investment. These investments are evaluated for impairment if events or circumstances arise that indicate that the carrying amount of such assets may not be recoverable. Based on uncertain economic benefits in the future as evidenced by several years of non-profitable results, the Company impaired its investments in Cat Creek Holdings, LLC and Olfert No. 11-4 Holdings, LLC as of May 31, 2023 to reflect no current value.
Revenue recognition - The Company recognized revenue in accordance with ASC 606, Revenue from Contracts with Customers. Crude oil revenue is recognized when we have transferred control of crude oil production to the purchaser. We consider the transfer of control to have occurred when the purchaser has the ability to direct the use of and obtain substantially all of the remaining benefits from the crude oil production. We record revenues based on an estimate of the volumes delivered at estimated prices as determined by the applicable sales agreement. We estimate our sales volumes based on company-measured volume readings. We then adjust our crude oil sales in subsequent periods based on the data received from our purchasers that reflects actual volumes delivered and prices received. We receive payment for sales one to two months after actual delivery has occurred. The differences in sales estimates and actual sales are recorded one to two months later. Where the Company is not the operator, revenue from oil and gas production is recognized based on sales date as reported to the Company by the operators of oil production facilities in which the company has an interest.
Cash and cash equivalents and restricted cash - 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 August 31, 2024 and May 31, 2024. At times, the Company maintains cash balances deposited at its financial institution that exceed FDIC insured limits.
Laredo entered a Participation Agreement in exchange for funding for well development costs. The contract requires that participants pay Hell Creek Crude LLC the contract price upon execution of the agreement. The funds received in advance of the drilling of a well from a working interest participant are held for the expressed purpose of drilling, completing and equipping a well. If something changes, the Company may designate these funds for a substitute well. Under certain conditions, a portion of these funds may be required to be returned to a participant. The funds are used to satisfy the well development costs. Laredo classifies these funds prior to commencement of well development as restricted cash based on guidance codified as under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 230-10-50-8. In the event that progress payments are made from these funds, they are recorded as Oil and Gas Acquisition Costs.
Also included in Restricted cash is $1,500,000 of investments from accredited investors in our wholly-owned subsidiary West Fork Resources, LLC (“West Fork”) which was formed to develop and find oil reserves in portions of our over 30,000 acres of mineral rights located north of the Fort Peck Reservation at the western edge of the Williston Basin. The Company is in the process of raising $7.5 million to drill three exploratory wells by selling units of West Fork. If the Company is unsuccessful in raising the funds, monies will be returned to the investors.
14
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 4 – SIGNIFICANT ACCOUNTING POLICIES - continued
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheet that sum to the total of the same amounts shown in the statement of cash flows.
Schedule of Cash, Cash Equivalent and Restricted Cash
| August 31, 2024 | May 31, 2024 | |||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Total | $ | $ | ||||||
Prepaid expenses and other current assets - Prepaid expenses and other current assets are primarily comprised of prepaid legal fees which are recorded as expense upon work performance, prepaid directors’ and officers’ insurance which is recorded and amortized to expense over the 12-month contract life and advance payments prior to work being performed.
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. During 2024, the Company disposed drilling equipment for $175,000 which had been previously impaired to $0.
The depreciation recorded for the quarters ended August 31, 2024 and 2023 was $6,802 and $4,482.
Schedule of Property and equipment, net
| August 31, | May 31, | |||||||
| 2024 | 2024 | |||||||
| Vehicles and equipment | $ | $ | ||||||
| Less: Accumulated depreciation | ||||||||
| Property and equipment, net | $ | $ | ||||||
Asset retirement obligations - The Company records a liability for Asset Retirement Obligations (“AROs”) associated with its oil and gas wells when the legal obligation arises. The corresponding cost is capitalized as an asset and included in the carrying amount of oil and gas properties and is depleted over the useful life of the properties. Subsequently, the ARO liability is accreted to its then-present value.
Inherent in the fair value calculation of an ARO are numerous assumptions and judgments including the ultimate settlement amounts, inflation factors, credit adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental, and political environments. To the extent future revisions to these assumptions impact the fair value of the existing ARO liability, a corresponding adjustment is made to the oil and gas property balance. Settlements greater than or less than amounts accrued as ARO are recorded as a gain or loss upon settlement.
Oil and Gas Acquisition Costs – Oil and gas acquisition and drilling costs include expenditures representing investments in unproved and unevaluated properties and include non-producing leasehold, leasehold or drilling interest costs, and costs to drill one exploratory well. Exploratory drilling costs are deferred until the outcome of the well is known. If an exploratory well finds proved reserves, the deferred costs are transferred to the company’s Wells and Related Equipment and Facilities accounts. Costs are reviewed annually to determine if impairment has occurred. 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 until we have proved reserves requiring such disclosures. Unevaluated properties lease and bonus costs are capitalized while landman and legal cost of acquiring properties are expensed as incurred.
The
Company has recorded oil and gas acquisition and drilling costs totaling $
Schedule of Oil and Gas acquisition and drilling costs
| August 31, | May 31, | |||||||
| 2024 | 2024 | |||||||
| Intangible and tangible drilling costs | $ | $ | ||||||
| Lease acquisition costs | ||||||||
| Oil and gas acquisition and drilling costs | $ | $ | ||||||
Debt issue costs - Costs incurred in connection with the issuance of long-term debt are presented as a direct deduction from the carrying value of the related debt and amortized over the term of the related debt.
15
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 4 – SIGNIFICANT ACCOUNTING POLICIES - continued
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. |
The carrying value of cash, accounts receivable, other current assets, accounts payable, accrued liabilities, as reflected in the consolidated balance sheets, approximate fair value, due to the short-term maturity of these instruments. The carrying value of notes payable approximates their fair value due to immaterial changes in market interest rates and the Company’s credit risk since issuance of the instruments or due to their short-term nature.
NOTE 5 – RECENT AND ADOPTED ACCOUNTING STANDARDS
The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the consolidated financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
NOTE 6 – CASH AND CASH EQUIVALENTS
Included in Cash and Cash Equivalents is $1,500,000 of investments from accredited investors in our wholly-owned subsidiary West Fork Resources, LLC (“West Fork”) which was formed to develop and find oil reserves in portions of our over 30,000 acres of mineral rights located north of the Fort Peck Reservation at the western edge of the Williston Basin. The Company is in the process of raising $7.5 million to drill three exploratory wells by selling units of West Fork. If the Company is unsuccessful in raising the funds, monies will be returned to the investors.
NOTE 7—ACCOUNTING FOR ASSET RETIREMENT AND ENVIRONMENTAL OBLIGATIONS
We account for our 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, we estimate 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. Our estimated liability could change significantly if actual costs vary from assumptions or if governmental regulations change significantly.
The cash flow estimate for the asset retirement obligation is based upon the assumption of a 25-year expected life of the well, discounted using a credit-adjusted risk-free interest rate of 10%.
The Company’s asset retirement obligation was established in July 2024, when it commenced drilling the Reddig well in the Hell Creek Crude oil field. The asset retirement obligation totaled $88,883 and $0 as of August 31, 2024 and May 31, 2024, respectively.
NOTE 8 – PAYROLL LIABILITIES
The Company has accrued payroll liabilities to record amounts owed under employee contracts but not paid when due. The Company has been cash constrained for most of its existence and has asked key officers to defer portions of salary until Company cash flows improve or there is a liquidity event. Cash amounts paid are subtracted from contractual obligations and the remaining amounts due are recorded as payroll liabilities. Both the Company’s CEO and CFO have agreed to defer salaries owed under their contracts and are recorded as payroll liabilities.
NOTE 9 – DEFERRED WELL DEVELOPMENT COSTS AND DEPOSIT FOR WELL DEVELOPMENT
The Company records investor investments in individual oil wells as a liability totaling $4,789,327 and $4,551,577 at August 31, 2024 and May 31, 2024, respectively. Several agreements involving net working interests stipulate that a high percentage of oil revenue is distributed to investors until the original investment is recovered. As well related cash is distributed to investors, the liability balance declines proportionally until the original investment is recovered. Thereafter, most contracts specify that the distribution ratio reverts to a 50/50 split. The balance recorded shows amounts invested in the Reddig 11-21 well located in Valley County, Montana.
16
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 9 – DEFERRED WELL DEVELOPMENT COSTS AND DEPOSIT FOR WELL DEVELOPMENT - continued
The Company has recorded $1,500,000 advanced by accredited investors to West Fork as a Deposit for Well Development. These amounts will be returned to investors if the project is not funded in its entirety.
NOTE 10 – 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.
NOTE 11 – 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 November 27, 2023, the Company entered into an Amended and Restated Demand Promissory Note, (the “Demand Note”), and an Amended and Restated Membership Interest Pledge Agreement, (the “Lustre Pledge Agreement”) with the Company’s Chief Financial Officer. Under the Demand Note, the Company promises to pay on demand the principal sum of all disbursements made to the Company up to $400,000 plus interest accrued at an annual rate of 10%. As of August 31, 2024, the aggregate amount of advances, excluding accrued interest, was $292,099. The Demand Note is secured by all of the Company’s interests in Lustre, pursuant to the terms of the Lustre Pledge Agreement.
On July 22, 2024, Mr. Robert Adamo advanced $50,000 to Lustre. The transaction is undocumented, but the funds were to ensure that Lustre had monies available to secure a SWD well to support drilling activity in the Lustre oil field. The repayment terms are subject to negotiation.
Accrued payables contain $125,000 for each of our two outside board members who have not been receiving current board stipends.
17
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 12 – STOCKHOLDERS’ DEFICIT
Share Based Compensation
No option grants were made in the first quarter of fiscal year 2025, ended August 31, 2024. There were 21,100,000 shares underlying option grants as of August 31, 2024 and May 31, 2024 at a weighted average exercise price of $0.08 per share.
Option grants for the purchase of 15,075,000 shares of common stock at a price of $0.06 per share were made during the first quarter of fiscal year 2024. The grants were issued under the Laredo Oil, Inc. 2023 Equity Incentive Plan once the plan became effective with the filing on Form S-8 dated June 14, 2023. Except for an option grant for the purchase of 1,100,000 shares of common stock at a price of $.38 per share, all previously granted options to purchase common stock under the Laredo Oil, Inc. 2011 Equity Incentive Plan totaling 4,825,000 shares were canceled and reissued under the new incentive plan.
The Black-Scholes option pricing model is used to estimate the fair value of options granted under our stock incentive plan.
Schedule of Fair Value Assumptions
| 2023 | |||
| Risk-free interest rate | |||
| Expected dividend yield | |||
| Expected volatility | |||
| Expected life of options | 5.0 years |
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for a bond with a similar term. The Company does not anticipate declaring dividends in the foreseeable future. Volatility is estimated based on the historical share prices over the same period as the expected life of the option. The Company uses the simplified method for determining the expected term of its stock options.
Share based compensation for stock option grants totaling $0 and $721,110 is recorded in general, selling and administrative expense during the three months ended August 31, 2024 and 2023, respectively.
Restricted Stock
During the first fiscal quarter of 2025, the Company sold 939,535 shares of common stock (the “Shares”) to accredited investors at an average price of $0.4524 per share for gross proceeds of $425,000. There were no finder’s fees related to the sales of the shares. The Shares have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements under the Securities Act.
The Company granted no shares of restricted stock as compensation during the first quarter of fiscal year 2024.
Warrants
No warrants were issued during the first quarters of fiscal years 2025 or 2024. At August 31, 2024 and May 31, 2024, the Company had 1,000,000 warrants to purchase common stock at $0.06 per share and 260,870 warrants to purchase common stock at $0.23 per share.
18
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 13 – NOTES PAYABLE
Convertible Debt
On
December 29, 2023, the Company entered into a Securities Purchase Agreements with an accredited investor, pursuant to which the Company
issued a convertible promissory note in the principal amount of $
On
November 27, 2023, the Company entered into a Securities Purchase Agreement with an accredited investor, pursuant to which the Company
issued a convertible promissory note in the principal amount of $
On
September 6, 2023, the Company entered into a Securities Purchase Agreement with an accredited investor, pursuant to which the Company
issued a convertible promissory note in the principal amount of $
In
March, April and May of 2023, the Company entered into Securities Purchase Agreements with an accredited investor, pursuant to which
the Company issued three convertible promissory notes in the aggregate principal amount of $
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.
19
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 13 – NOTES PAYABLE - continued
The Convertible Notes provide for standard and customary events of default, such as failing to timely make payments under the Convertible Notes when due, the failure of the Company to timely comply with the Securities Exchange Act of 1934 reporting requirements and the failure to maintain a listing on the OTC Markets. The Convertible Notes also contain customary positive and negative covenants. The Convertible Notes include penalties and damages payable to the noteholders in the event the Company does not comply with the terms of the Convertible Notes, including in the event the Company does not issue shares of common stock to the noteholders upon conversion of the Convertible Notes within the time periods set forth therein. Additionally, upon the occurrence of certain defaults, as described in the Convertible Notes, the Company is required to pay the noteholders liquidated damages in addition to the amount owed under the Convertible Notes (including in some cases up to 300% of the amount of the applicable Convertible Note).
At no time may the Convertible Notes be converted into shares of the Company’s common stock if such conversion would result in the noteholders and their affiliates owning shares representing in excess of 4.99% of the then outstanding shares of the Company’s common stock.
The proceeds from the Convertible Notes could be used by the Company for general corporate purposes.
12% Secured Promissory Note
On March 23, 2023, an individual accredited investor paid the Company the aggregate amount of $100,000 for a Secured Promissory Note, (the “Note”). The Note will accrue interest on the outstanding principal sum at the rate of 12.0% per annum and has a maturity date of March 23, 2024. Interest will be due and payable monthly in arrears. The Note is secured by certain equipment owned by the Company pursuant to a Security Agreement with the Lender. On May 23, 2023, the Note was increased by $83,000 to an aggregate principal amount of $183,000. During June, July and August, 2023, the investor contributed an additional $102,061 under the Note, bringing the aggregate principal amount to $285,061. On November 24, 2023, the investor added another $25,000 to the Note bringing the total principal outstanding to $310,061. Interest on the Note is paid monthly.
12% Nine Month Promissory Note
On May 22, 2024, the Company entered into a Securities Purchase Agreement with an accredited investor pursuant to which the Company issued a 12% promissory note in the principal amount of $94,580 receiving $75,000 in net cash proceeds. The promissory note had an original issue discount of $14,580. In addition, $5,000 of debt issue costs were deducted from the gross proceeds to the Company. The promissory note is due February 28, 2025 and is repaid with the first installment of $52,964.50 due November 30, 2024 and three equal monthly installments of $17,655 starting December 30, 2024. In the event of default (including a missed payment), the note is convertible at the option of the investor into shares of the Company’s common stock at a discount of 39% from the lowest closing bid price during the ten trading days immediately preceding the conversion date. As of August 31, 2024, the principal balance of the note was $94,580.
On February 22, 2024, the Company entered into a Securities Purchase Agreement with an accredited investor pursuant to which the Company issued a 12% promissory note in the principal amount of $66,000 receiving $50,000 in net cash proceeds. The promissory note had an original issue discount of $11,000. In addition, $5,000 of debt issue costs were deducted from the gross proceeds to the Company. The promissory note is due November 30, 2024 and is repaid with the first installment of $36,960 due August 30, 2024 and three equal monthly installments of $12,320 starting September 30, 2024. In the event of default (including a missed payment), the note is convertible at the option of the investor into shares of the Company’s common stock at a discount of 39% from the lowest closing bid price during the ten trading days immediately preceding the conversion date. As of August 31, 2024 $36,960 was outstanding.
13% Nine Month Promissory Note
On December 11, 2023, the Company entered into a Securities Purchase Agreement with an accredited investor pursuant to which the Company issued a 13% promissory note in the principal amount of $74,750 receiving $60,000 in net cash proceeds. The promissory note had an original issue discount of $9,750. In addition, $5,000 of debt issue costs were deducted from the gross proceeds to the Company. The promissory note is due September 15, 2024 and is repaid in nine equal installments of $9,385.23 with the first payment due January 15, 2024. In the event of default (including a missed payment), the note is convertible at the option of the investor into shares of the Company’s common stock at a discount of 35% from the lowest closing bid price during the ten trading days immediately preceding the conversion date. The balance owed on May 31, 2024 was $37,540 and $46,926 was repaid during fiscal year 2024. On August 31, 2024, the last payment of $9,385 was outstanding.
15% Nine Month Promissory Note
On October 26, 2023, the Company entered into a Securities Purchase Agreement with an accredited investor, pursuant to which the Company issued a promissory note in the principal amount of $97,750 and received $80,000 in net cash proceeds. The promissory note had an original issue discount of $12,750 and $5,000 in debt issue costs were deducted from the gross proceeds. The Company is amortizing the total of $17,750 recorded as debt discount using the effective interest method through the maturity dates of the convertible promissory note. The note is due nine months following the date of issuance and accrues interest at 15% per annum (22% upon the occurrence of an event of default). Accrued, unpaid interest and outstanding principal is due in nine equal monthly payments of $12,490.23, starting on November 30, 2023. In the event of default (including a missed payment), the note is convertible at the option of the investor into shares of the Company’s common stock at a discount of 35% from the lowest closing bid price during the ten trading days immediately preceding the conversion date. On August 31, 2024, the note was fully repaid.
20
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 13 – NOTES PAYABLE - continued
12% One Year Promissory Notes
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) and upon event of default are convertible at 75% of the lowest closing bid price during the 10 trading days immediately preceding the conversion. Accrued, unpaid interest and outstanding principal is due in ten equal monthly payments of $22,099.10, starting on February 15, 2023. The note and accrued interest were repaid in full and the note canceled with the last and final payment made November 2023.
Promissory Note
The Company entered into a Secured Promissory Note, dated June 28, 2022 (the “Secured Note”), with the initial principal amount of $750,000. The Secured Note is payable to Cali Fields LLC (the “Lender”). The Secured Note accrues interest on the outstanding principal sum at the rate of 15.0% per annum. The Company may prepay the Secured Note in whole or in part, without penalty, with any such payment being applied first to any accrued and unpaid interest, and then to the principal amount. The Secured Note has a maturity date of December 31, 2023. As of August 31, 2024 and 2023 the $750,000 note is recorded as current and outstanding. Starting on January 1, 2024, the Company is accruing interest at the rate of 18.0% per annum.
As partial consideration for the Lender’s advance of the principal amount of the Secured Note, the Company agreed to pay the Lender a quarterly revenue royalty equal to 0.5% of the consolidated revenue of the Company and its consolidated subsidiaries from the production of oil, gas, gas liquids and all other hydrocarbons, recognized by the Company during the most recent calendar quarter during the “Royalty Period,” from June 1, 2022 through May 31, 2027.
The Secured Note is secured by the Company’s fifty percent (50%) interest in Cat Creek.
Secured Convertible Debt
The Company entered into a Note Purchase Agreement dated September 23, 2022 (the “Note Purchase Agreement”), for the issuance of secured convertible promissory notes in the aggregate principal amount of up to $7,500,000. The notes are secured by the membership interest in Hell Creek Crude, LLC, a wholly owned subsidiary of the Company. Pursuant to this Note Purchase Agreement, during September, October and November 2022, the Company issued four promissory notes in the aggregate principal amount of $290,000 and accrued interest at 10% per annum, later increased to 12% per annum. In December 2022, January 2023 and February 2023, the Company issued three additional promissory notes totaling $250,000. During June 2023 and August 2023, the Company entered into an additional $85,000 of secured convertible promissory notes increasing the aggregate principal issued to $625,000. Under the Note Purchase Agreement, the Company may issue additional promissory notes, up to the $7,500,000 total principal amount. The promissory notes accrue interest on the outstanding principal sum at the rate of 12.0% per annum, payable quarterly starting September 30, 2023, and are convertible into the Company’s common stock at a conversion price of $1.00 per share. The notes issued under the Note Purchase Agreement have a maturity date of September 30, 2025. In January 2024, noteholders contributed $575,000 of their notes plus accrued interest of $73,695 to the Participation Agreement pertaining to the three well drilling program in the Midfork Field in Montana (See Footnote 1). The notes were exchanged for a net working interest in the well and will participate in cash flows produced by the first well drilled. In the event of a dry hole, the notes will be reinstated at $648,204 and accrue interest on that amount thereafter. On July 1, 2024, a promissory note totaling $50,000 was extinguished and exchanged for 100,000 shares of Laredo common stock pursuant to a stock purchase agreement. As of August 31, 2024, no notes were outstanding.
21
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 13 – NOTES PAYABLE - continued
Alleghany Notes
Schedule of Notes Payable – Related Party
| August 31, | May 31, | |||||||
| 2024 | 2024 | |||||||
| Total note payable – Alleghany | $ | $ | ||||||
| Less amounts classified as current | ||||||||
| Note payable – Alleghany, net of current portion | $ | $ | ||||||
During the fiscal year ended May 31, 2011, the Company entered into two Loan Agreements with Alleghany Capital for a combined available borrowing limit of $350,000. The notes accrued interest on the outstanding principal of $350,000 at the rate of 6% per annum, with an amended due date of December 31, 2020.
In connection with the SORC Purchase Transaction, the notes were amended, restated and consolidated into one note including all accrued interest through December 31, 2020, for a total of $631,434 (the “Senior Consolidated Note”) with a maturity date of June 30, 2022. The Senior Consolidated Note requires any stock issuances for cash be utilized to pay down the outstanding loan balance unless written consent is obtained from Alleghany. As part of the SORC Purchase Agreement, the Company agreed to secure repayment of the Senior Consolidated Note with certain equipment and to reduce the note balance with any proceeds received from any sales of such equipment. During the five months ending May 31, 2021, the Company repaid $13,500 of the Senior Consolidated Note upon the sale of certain equipment. The note bore no interest until January 1, 2022 whereupon the interest rate increased to 5% per annum through maturity. Principal with all accrued and unpaid interest is due at maturity. In connection with the SORC acquisition purchase price allocation, the Company recorded a debt discount totaling $30,068 in recognition of imputed interest on the Senior Consolidated Note, to be amortized over the first year of the note term. The debt discount has been fully amortized as of December 31, 2021. In August 2022, the Company entered an amendment to the Senior Consolidated Note whereby the maturity date of the loan was extended to December 31, 2023 in exchange for an interest rate to 8% per annum commencing July 1, 2022. Further, the revenue royalty as defined in the Purchase Agreement increased from 5% to 6% as the loan was not paid prior to December 31, 2022. As of August 31, 2024 and May 31, 2024, the Senior Consolidated Note is recorded as current and remains outstanding.
Paycheck Protection Program Loan
Schedule of Paycheck Protection Program
| August 31, | May 31, | |||||||
| 2024 | 2024 | |||||||
| Total PPP Loan | $ | $ | ||||||
| Less amounts classified as current | ||||||||
| PPP loan, excluding current portion | $ | $ | ||||||
On April 28, 2020, the Company entered into a Note (the “Note”) with IBERIABANK for $1,233,656 pursuant to the terms of the Paycheck Protection Program (“PPP”) authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act (“CARES Act”) In June 2020, the Flexibility Act which amended the CARES Act was signed into law. Pursuant to the Flexibility Act, the Note continues to accrue interest on the outstanding principal sum at the rate of 1% per annum. In addition, the initial two-year Note term has been extended to five years through mutual agreement with IBERIABANK as allowed under Flexibility Act provisions.
In February 2021, the Company drew an additional $1,233,655 under the PPP Second Draw Loans, bringing the total principal borrowed to $2,467,311. The additional draw is under the same terms and conditions as the first PPP loan.
The Flexibility Act also provides that if a borrower does not apply for forgiveness of a loan within 10 months after the last day of the measurement period (“covered period”), the PPP loan is no longer deferred and the borrower must begin paying principal and interest. In addition, the Flexibility Act extended the length of the covered period from eight weeks to 24 weeks from receipt of proceeds, while allowing borrowers that received PPP loans before June 5, 2020 to determine, at their sole discretion, a covered period of either 8 weeks or 24 weeks.
No interest or principal will be due during the deferral period, although interest will continue to accrue over this period. As of May 31, 2022, interest totaling $15,353 is recorded in accrued interest on the accompanying consolidated balance sheets. After the deferral period and after considering any loan forgiveness applicable to the Note, any remaining principal and accrued interest will be payable in substantially equal monthly installments over the remaining term of the Note.
22
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 13 – NOTES PAYABLE - continued
The Company did not provide any collateral or guarantees for the loan, nor did the Company pay any facility charge to obtain the loan. The Note provides for customary events of default, including, among others, those relating to failure to make payment, bankruptcy, breaches of representations and material adverse effects. The Company may prepay the Note at any time without payment of any penalty or premium.
The Company applied for forgiveness of the first PPP note and in July 2021 received notice that $1,209,809 of the $1,233,656 note payable balance has been forgiven. The portion of the loan forgiven has been recorded as income from the extinguishment of its loan obligation as of the date when the Company is legally released from being the primary obligor in accordance with ASC 405-20-40-1. Monthly payments commenced on September 1, 2021 and as of May 31, 2024, the Company owes $5,264 with respect to the remaining balance on the first Note.
In April 2022, the Company applied for partial forgiveness of the PPP Second Draw Loan and received notice that $67,487 of the principal and related interest balance has been forgiven and is recorded as income from the extinguishment of the loan obligation. Monthly payments of $26,752 commenced on June 3, 2022. The Company was in arrears on payments on the second PPP Note and on December 5, 2023 entered into a Payment Plan arrangement for the PPP Second Draw Loan. Under the terms of the Plan, the Company agreed to pay the SBA the principal amount of $979,178 and 180 monthly payments of $5,860 which includes interest. The Company made the first payment under the Plan in December 2023. If the Company does not make the payments described in the Plan pursuant to the terms of the Plan, the entire remaining amount will be subject to collection activities by the Department of Treasury. The Company may also be subject to additional accrued interest and collection fees of 30% or more if it does not make the payments pursuant to the Plan. As of August 31, 2024, the Company is current and compliant with the restructured payment plan. As of August 31, 2024, the Company owes $937,224 with respect to the remaining balance on the Second Note.
NOTE 14 – COMMITMENTS AND CONTINGENCIES
Litigation
On March 20, 2023, Capex Oilfield Services, Inc. (“Capex”) filed a lawsuit against Lustre in the Montana Tenth Judicial District Court, Petroleum County, demanding payment of $377,190 plus interest and collection costs for services provided by Capex to drill the Olfert 11-4 well. On January 29, 2024, the court issued a Stipulated Judgment and Order in favor of Capex for $354,267.29 plus interest in the amount of $79,224.89 plus future accruing costs and interest of 18% per annum. The same day, Lustre entered into a Payment Arrangement Plan to pay $5,000 per month until the judgement is satisfied. As of August 31, 2024 and May 31, 2024, respectively, the estimated amounts due to Capex totaling $428,952 and $428,019 have been recorded in accounts payable.
On May 18, 2023, Capstar Drilling, Inc.(“Capstar”) filed a lawsuit against Lustre in the Montana Seventeenth Judicial District Court, Valley County, demanding payment of $298,050 plus interest and collection costs for services provided by Capstar to drill the Olfert 11-4 well. On July 18, 2024, the court issued a Order to Adopt Stipulation to Judgment in favor of Capstar in the sum of $276,815 principal balance, plus interest in the amount of $49,675, plus court costs for a total judgment of $326,650 with post judgment interest of 10% per annum. As of August 31, and May 31, 2024, respectively, the estimated amounts due to Capstar totaling $341,994 and $333,354 have been recorded in accounts payable.
On August 29, 2023, Warren Well Service, Inc. (“Warren Well”) filed a lawsuit against Lustre in the Montana Seventeenth Judicial District Court, Valley County, demanding payment of $164,235 plus interest and collection costs for services provided by Warren Well to drill the Olfert 11-4 well. A trial date has been set for November 19, 2024 and Lustre intends to negotiate ongoing payment terms with Warren Well prior to that date. As of August 31, 2024 and May 31, 2024, respectively, the estimated amounts due to Warren Well totaling $201,439 and $196,679 have been recorded in accounts payable.
On September 16, 2024, Lustre has acquired three saltwater disposal wells in Valley County, Montana and will attempt to dewater and bring the Olfert 11-4 well into production as soon as practical and reimburse all unpaid vendors, including Capex, Capstar and Warren Well, from proceeds from such production.
Except as set forth above, the Company is not currently involved in any other legal proceedings, and it is not aware of any other pending or potential legal actions.
Revenue Royalty - In accordance with the Securities Purchase Agreement, 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 ending December 31, 2027. Further, due to the loan nonpayment prior to December 31, 2022, the revenue royalty as defined in the Purchase Agreement increased from 5% to 6%.
In accordance with the Secured Promissory Note, Laredo agreed to pay a revenue royalty of 0.5% on consolidated revenue of Laredo arising from the direct production of oil and gas. The royalty period extends from June 1, 2022 through May 31, 2027.
23
| NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (UNAUDITED) |
NOTE 15 – SUBSEQUENT EVENTS
On September 16, 2024, Lustre Oil Company, LLC acquired the Cranston salt-water disposal well (“SWD”) and two additional shut-in wells that will be converted into SWD wells, all located in Valley County, Montana
Between
August 31, 2024 and October 15, 2024, the Company has raised $
24
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXPLANATORY NOTE
This Quarterly Report on Form 10-Q (this “Form 10-Q”) of Laredo Oil, Inc., a Delaware corporation, (the “Company,” “we,” “our,” or “us”) for the quarter ended August 31, 2024, includes consolidated comparative financial statements and disclosures for the quarter ended August 31, 2023 which have been restated from the Form 10-Q previously filed for the quarter ended August 31, 2023 with the Securities and Exchange Commission (the “SEC”) on October 23, 2023 (the “2023 Original Filing”).
Reference Note 2 in the accompanying Notes to Financial Statements for detailed disclosure of items amended by this restatement.
Restatement of the Financial Statement for Fiscal Quarter Ended August 31, 2023
This Form 10-Q restates the 2023 Original Filing and related disclosures arising from an impairment analysis during the 2024 audit and the related reaudit of the Company’s fiscal year 2023 financial statements.
The reaudit requirement was authorized by the Company during the audit engagement for the year ended May 31, 2024. For the year ended May 31, 2024, a new auditing firm was engaged to replace the previous auditing firm, BF Borgers CPA PC (“Borgers”), who performed the audit in connection with the financial statements for the fiscal year ended May 31, 2023 included in the 2023 Original Filing.
During the 2024 audit that was in progress, on May 3, 2024 the SEC entered, and the Company became aware of, an order instituting settled administrative and cease-and-desist proceedings against Borgers, which order includes denying Borgers the privilege of appearing or practicing before the SEC as an accountant. The Company and its new auditing firm determined that the 2023 audit performed by Borgers should not be included in the 2024 filing, and the Company expanded its engagement with the new auditing firm to include a reaudit of the 2023 financial statements.
In the course of the 2023 reaudit, procedures were applied that led the Company and the new auditors to believe sufficient audit procedures were not performed by Borgers when auditing the 2023 financial statements.
For the year ended May 31, 2024, management applied accounting procedures to examine the need for an impairment adjustment to the carrying value of its unevaluated oil and natural gas properties. A triggering event related to the evaluation of the economic viability related to the Company’s Olfert 11-4 well on May 31, 2024 was noted. Although negotiation discussions with salt-water disposal well operators in the area have been in progress for over two years, there was no assurance that access would, in fact, be attained in a timely manner. Additionally, the value of the Company’s Cat Creek Holdings, LLC (“Cat Creek”) equity method investment was determined to have no continuing value. The conclusion reached was to impair 100% of the carrying value of the Company’s oil assets associated with the well and the remaining Cat Creek investment balance as of May 31, 2023. The new auditing firm recommends that this higher impairment is more in line with the standard practices within the oil and gas exploration industry during periods in which unevaluated oil wells and loss producing investments are recorded.
Given the combined auditing engagement for 2023 with the audit for 2024, the Company recorded an impairment adjustment as of May 31, 2023 and at May 31, 2024. As a result, our previously issued 2024 financial statements included in the Original Filing should no longer be relied upon.
Except for the changes relating to this impairment adjustment for 2023 and changes relating to asset adjustments, no other changes have been made to the consolidated financial statements for the year ended May 31, 2023. Reference Note 2 to the consolidated financial statements.
References to our website throughout this Form 10-Q are provided for convenience only and the content on our website does not constitute a part of, and shall not be deemed incorporated by reference into, this filing.
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.
25
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Business
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.
Prior to December 31, 2020, while implementing underground gravity drainage, or UGD, projects for Allegheny, we gained specialized know-how and operational experience in evaluating, acquiring, operating and developing oil and gas properties, as well as expertise in designing, drilling and producing conventional oil wells. Based upon that know-how, we identified and acquired 45,246 gross acres, and 37,932 net acres, of mineral property interests in the State of Montana. We began drilling an exploratory well in Montana during May 2022. That well, named the Olfert 11-4 well, has not yet been completed or put into production. More recently, we are continuing our efforts to complete the Olfert 11-4 well and begin commercial production. We have also developed relationships with Texakoma Exploration and Production, LLC, or Texakoma, and Erehwon Oil & Gas, LLC, or Erehwon, designed to develop our acquired mineral property acreage. We also have raised $2,034,000 from accredited investors pursuant to a participation agreement to fund the development of up to three wells in the Midfork oil field in Montana. The first well, Reddig 11-21, has been drilled and is in the process of being put into production. We are continually attempting to raise additional funds to develop our other mineral property interests we have purchased. We also have a 50% interest in the Cat Creek oil field, located in Montana. Our various projects and relationships are described in more detail below. Our ability to secure additional funding will determine whether we can achieve any future production for the acreage, and if we can secure such financing, the pace of field development.
Relationship with Erehwon Oil & Gas, LLC
In connection with securing this acreage in Montana, Lustre Oil Company LLC, a wholly owned subsidiary of the Company (“Lustre”), entered into an Acquisition and Participation Agreement (the “Erehwon APA”) and subsequent amendments with Erehwon Oil & Gas, LLC (“Erehwon”) to acquire oil and gas interests and drill, complete, re-enter, re-complete, sidetrack, and equip wells in Valley County, Daniels County and Roosevelt County, Montana. The amended Erehwon APA specifies calculations for royalty interests and working interests for the first ten well completions and first ten well recompletions and for all additional wells and recompletions thereafter. Lustre will acquire mineral leases and pay 100% of the costs and the split between Erehwon and Lustre will be 20%/80%. Under the amended Erehwon APA, Lustre will fund 100% of the construction costs of the first ten wells and first ten completions. Until payout as defined is attained, the distribution split between Erehwon and Lustre will be 10%/90%, thereafter, 20%/80%. Any additional wells will be funded 80% by Lustre and 20% by Erehwon.
Royalty expenses for these wells will consist of a royalty interest to the landowner and an overriding royalty interest of between 3% and 6% to two individuals who generated the prospects. Those individuals will also receive an amount equal to 5% of the cost of the first ten new wells we complete and the first ten completed recompletions.
Hell Creek Crude, LLC Midfork Field Production Well
In December 2023, we entered into a Participation Agreement, through Hell Creek Crude, LLC, our wholly owned subsidiary (“HCC”), Erehwon, and various accredited investors. The Participation Agreement provided us with $2,034,000 to acquire certain leases and to drill a development well in the Midfork Field in Montana. Several of the investors also hold $575,000 of our convertible debt, plus accrued interest of $73,317, which indebtedness is included as investments under the Participation Agreement.
Until the total of the $2,682,317 in cash, notes and accrued interest is repaid to the various investors under the terms of the Participation Agreement, the net working interest payments from the Participation Agreement will be split between the various investors and HCC and Erehwon, collectively on a 90%/10% basis. After the repayment to the investors, the split between the investors, on one hand, and HCC and Erehwon, on the other hand, will be on a 50%/50% basis. After the development well is drilled under the Participation Agreement, the investors will have the option to invest in up to two additional wells in the field.
26
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
Olfert 11-4 Montana Well
In January 2022, we executed a Net Profits Interest Agreement with Erehwon and Olfert No. 11-4 Holdings, LLC, or Olfert Holdings, for the purpose of funding the first well, named Olfert #11-4, under the Acquisition and Participation Agreement described above. In exchange for Olfert Holdings’ funding of the development of Olfert #11-4, Olfert Holdings receives 90% of amounts resulting from Olfert #11-4 prior to “Payout” and 50% after “Payout.” The Net Profits Interest Agreement defines “Payout” as the point in time when the aggregate of all ‘Net Profits Interest’ payments made to Olfert Holdings under the agreement equals 105% of the total well development costs.
We also entered into the Olfert Holdings operating agreement, under which we agreed to make a capital contribution to Olfert Holdings in the amount of $500,000, out of a total of $1,500,000 of capital to be raised by Olfert Holdings. As of May 31, 2024, we were credited with a contribution of $59,935 in market value of well development costs, representing a 4.4% interest in Olfert Holdings. Since then, other investors, including our Chief Financial Officer, assumed and funded our remaining capital commitment under the Olfert Holdings operating agreement.
As part of our annual impairment analysis and in conjunction with our annual financial audit, we decided to take an accounting impairment charge to reduce the asset value of the Olfert 11-4 well to salvage value. Although we still are working to put the well into production, it has been two years since the well was shut-in pending gaining access to a proximate salt-water disposal well making the well economically viable. Although the asset carrying value of the well has been reduced, we will continue to complete the well and bring it into production.
Development Agreement with Texakoma Exploration and Production, LLC
Effective July 18, 2023, Lustre and Erehwon entered into an Exploration and Development Agreement (the “Development Agreement”), with Texakoma. The Development Agreement provides for the exploration and development of the “Lustre Field Prospect” described in the Development Agreement. Lustre and Erehwon are also parties to an existing Acquisition and Participation Agreement, under which those parties agreed to acquire certain oil and gas interests, and drill, complete, re-enter, re-complete, sidetrack, and equip wells, in certain counties in Montana.
Under the terms of the Development Agreement, Texakoma agreed to pay Lustre and Erehwon, jointly, the following amounts: (i) $175,000 on or before July 21, 2023; and (ii) another $175,000 upon the “spudding” of the initial test well subject to rig availability. Upon the spudding of that test well, Lustre and Erehwon were required to deliver to Texakoma a partial assignment of an 85% working interest in the oil and gas leases covering the first two initial drilling and spacing units. The first payment under the Development Agreement was paid by Texakoma at the end of August 2023, and the second $175,000 payment on September 29, 2023.
The two test wells were successfully drilled and Texakoma paid 100% of the costs associated with the drilling and completion of the wells. Lustre and Erehwon jointly, have an undivided 15% working interest, carried through the tanks, in those two wells. In March 2024, Texakoma exercised its option to participate in the development of the remainder of the Lustre Field Prospect. By exercising its option, Texakoma agreed to drill eight additional wells, with Lustre and Erehwon having a 15% working interest carried through the tanks, and to pay Lustre $706,603 spread over four months, for an 85% leasehold interest in the next eight drill sites and a 50% leasehold interest in the balance of the Lustre Field Prospect acreage. As of May 31, 2024, $377,901 of the contractual amount was settled. The remaining balance was paid as of August 1, 2024. The working and net revenue interest in any wells drilled subsequent to the first ten wells will be shared by Texakoma and Lustre and Erehwon, jointly, on a 50:50 basis.
Additional Acreage North of the Fort Peck Reservation
We are in the process of raising $7.5 million to drill three exploratory wells by selling units of West Fork Resources, LLC. The purpose of the package is to prove up portions of our over 30,000 acres of mineral rights located north of the Fort Peck Reservation at the western edge of the Williston Basin.
27
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
Liquidity and Capital Resources
Wells associated with the Texakoma agreement and the HCC well described above are being put into production pending operational completion of the Cranston saltwater disposal well. Until we receive adequate revenue from those wells, any cash needed for operations and oil field expansion and development will most likely come from the sale of our debt and equity securities. From May 31, 2024 through October 14, 2024, we have raised $800,000 from the sale of 1,811,628 shares of unregistered common stock.
Our cash and cash equivalents and restricted cash at August 31, 2024 was $1,935,310. Our total debt outstanding as of August 31, 2024 was $3,031,212, including (i) $617,934 owed to Alleghany, which is classified as a current note payable, and (ii) $937,224 pursuant to notes under the Paycheck Protection Program, or PPP, of which we have classified $872,358 as long-term debt, net of the current portion totaling $64,866, which is classified as a current note payable, (iii) $123,894 short term convertible notes and bridge security , net of deferred debt discount, (iv) a $310,061 revolving note classified as short-term, (v) a $750,000 note payable due to Cali Fields LLC, classified as short-term, and (vi) a $292,099 note payable due to our Chief Financial Officer, classified as short-term.
Results of Operations
During the first quarter of fiscal year 2025 ended August 31, 2024, the Company recognized $6,048 of revenue from one of the three Texakoma wells being put into production. It is expected that the wells will experience increased production after a proximate SWD well becomes operational.
During the three months ended August 31, 2024 and 2023, we incurred operating expenses of $670,359 and $1,349,579, respectively. These expenses consisted of general operating expenses incurred in connection with the day-to-day operation of our business, the preparation and filing of our required public reports and stock option compensation expense. The decrease in expenses for the three months ended August 31, 2024, as compared to the same period in 2023, is primarily attributable to stock-based compensation expenses, offset by a net increase in other professional fees including IT, legal and accounting services.
During the quarter ended August 31, 2024, we recognized other income related to the final two payments under the Texakoma Development Agreement. During the quarter ended August 31, 2023, we recognized other income and expenses comprised of $175,000 related to the sale of underground drilling equipment that formerly had been used in drilling operations in the Fredonia underground gravity drainage project and $175,000 related to the first payment as required under the Texakoma Development Agreement
Recently Issued Accounting Pronouncements
Refer to Note 3 of the Notes to Consolidated financial statements for a discussion of recently issued accounting pronouncements.
Critical Accounting Policies and Estimates
The process of preparing consolidated financial statements requires that we make estimates and assumptions that affect the reported amounts of liabilities and stockholders’ equity/(deficit) at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates in these consolidated financial statements include estimates related to the valuation of stock-based compensation and asset retirement obligation. Changes in the status of certain facts or circumstances could result in a material change to the estimates used in the preparation of the consolidated financial statements and actual results could differ from the estimates and assumptions.
Going Concern
These consolidated financial statements have been prepared on a going concern basis. We have routinely incurred losses since inception, resulting in an accumulated deficit. We have recently received loans from accredited investors to fund our operations. There is no assurance that such financing will be available in the future to meet our operating needs. This situation raises substantial doubt about our ability to continue as a going concern within the one-year period after the issuance date of the consolidated financial statements included in this report.
Our management has undertaken steps to improve operations, with the goal of sustaining operations for the next twelve months and beyond. These steps include an ongoing effort to raise funds through the issuance of debt to fund our well development program and maintain operations. We have attracted and retained key personnel with significant experience in the industry. At the same time, in an effort to control costs, we have required a number of our personnel to multi-task and cover a wider range of responsibilities in an effort to restrict the growth of our headcount. There can be no assurance that we can successfully accomplish these steps and it is uncertain that we will achieve a profitable level of operations and obtain additional financing. We cannot assure you that any additional financing will be available to us on satisfactory terms and conditions, if at all.
The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of us to continue as a going concern.
28
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is confined to our cash equivalents. We invest in high-quality financial instruments, and we believe we are subject to limited credit risk. Due to the short-term nature of our cash, we do not believe that we have any material exposure to interest rate risk arising from our investments.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, or the SEC. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives, and management necessarily is required to use its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are not effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow for timely decisions regarding required disclosure because of a material weakness in our control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Specifically, the Company’s management has concluded that as of August 31, 2024, we had no full-time employees with the requisite expertise in the key functional areas of finance and accounting. As a result, there is a lack of proper segregation of duties necessary to ensure that all transactions are accounted for accurately and in a timely manner. This material weakness resulted in the restatement of the Company’s financial statements for the fiscal year ended August 31, 2024. In light of this material weakness, we performed additional analysis as deemed necessary to ensure that our financial statements were prepared in accordance with U.S. generally accepted accounting principles. Accordingly, management believes that the financial statements included in this Quarterly Report on Form 10-Q present fairly in all material respects our financial position, results of operations and cash flows for the periods presented.
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. This led to material adjustments to oil and gas investment and asset impairment evaluations. It is difficult for us to effectively segregate accounting duties and have proper financial reporting, which creates a material weakness in internal controls. This lack of segregation of duties and limited personnel leads management to conclude that our financial reporting disclosure controls and procedures are not effective to give reasonable assurance that the information required to be disclosed in reports that we file under the Exchange Act is recorded, processed summarized and reported as and when required.
(b) Changes in Internal Control Over Financial Reporting
None.
29
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See NOTE 12 – COMMITMENTS AND CONTINGENCIES of PART 1, FINANCIAL STATEMENTS.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the first fiscal quarter of 2025 covered by this report, we sold 939,535 shares of common stock for $425,000 at an average price of $0.452 that were not registered under the Securities Act as described in NOTE 10, STOCKHOLDER’S EQUITY of PART 1, FINANCIAL STATEMENTS. Proceeds from the sales were used for general corporate purposes and payment of maturing debt.
ITEM 5. OTHER INFORMATION
None.
30
ITEM 6. EXHIBITS
The exhibits required to be filed herewith by Item 601 of Regulation S-K, as described in the following index of exhibits, are attached hereto unless otherwise indicated as being incorporated herein by reference, as follows:
| 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) |
31
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LAREDO OIL, INC.
(Registrant)
| Date: October 21, 2024 | By: | /s/ Mark See | |
| Mark See | |||
| Chief Executive Officer and Chairman of the Board | |||
| Date: October 21, 2024 | By: | /s/ Bradley E. Sparks | |
| Bradley E. Sparks | |||
| Chief Financial Officer, Treasurer and Director |
32
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECURITIES EXCHANGE ACT OF 1934
RULE 13a-14(a) OR 15d-14(a)
I, Mark See, Chief Executive Officer of Laredo Oil, Inc., certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q for the period ended August 31, 2024 of Laredo Oil, Inc., the registrant; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: October 21, 2024 | |
| /s/ Mark See | |
| Mark See | |
| Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECURITIES EXCHANGE ACT OF 1934
RULE 13a-14(a) OR 15d-14(a)
I, Bradley E. Sparks, Chief Financial Officer and Treasurer of Laredo Oil, Inc., certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q for the period ended August 31, 2021 of Laredo Oil, Inc., the registrant; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: October 21, 2024 | |
| /s/ Bradley E. Sparks | |
| Bradley E. Sparks | |
| Chief Financial Officer and Treasurer | |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Laredo Oil, Inc. on Form 10-Q for the period ended August 31, 2024, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark See, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief:
| (1) | the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| /s/ Mark See | |
| Mark See | |
| Chief Executive Officer | |
| Date: October 21, 2024 | |
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Laredo Oil, Inc. on Form 10-Q for the period ended August 31, 2024, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Bradley E. Sparks, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief:
| (1) | the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| /s/ Bradley E. Sparks | |
| Bradley E. Sparks | |
| Chief Financial Officer and Treasurer | |
| Date: October 21, 2024 | |