NOTES
TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
On
June 14, 2011, the Company entered into agreements with Stranded Oil Resources Corporation (SORC) to seek recovery
of stranded crude oil from mature, declining oil fields by using the enhanced oil recovery (EOR) method known as
Underground Gravity Drainage (UGD). Such agreements include license agreements, management services agreements,
and other agreements (collectively the Agreements). SORC is a subsidiary of Alleghany Corporation (Alleghany).
The
Agreements stipulate that the Company and Mark See, the Companys Chairman and Chief Executive Officer (CEO),
will provide to SORC, management services and expertise through exclusive, perpetual license agreements and a management services
agreement (the Management Service Agreement) with SORC. As consideration for the licenses to SORC, the Company will
receive an interest in SORCs net profits as defined in the Agreements (the Royalty). The Management Service
Agreement (MSA) outlines that the Company will provide the services of various employees (Service Employees),
including Mark See, in exchange for monthly and quarterly management service fees. The monthly management service fees provide
funding for the salaries, benefit costs, and FICA taxes for the Service Employees identified in the MSA. SORC remits payment for
the monthly management fees in advance and is payable on the first day of each calendar month. The quarterly management fee is
$137,500 and is paid on the first day of each calendar quarter, and, as such, $45,833 has been recorded as deferred management
fee revenue at August 31, 2020. In addition, SORC will reimburse the Company for monthly expenses incurred by the Service Employees
in connection with their rendition of services under the MSA. The Company may submit written requests to SORC for additional funding
for payment of the Companys operating costs and expenses, which SORC, in its sole and absolute discretion, will determine
whether or not to fund. As of the filing date, no such additional funding requests have been made.
As
consideration for the licenses to SORC, the Company will receive a 19.49% interest in SORC net profits as defined in the SORC
License Agreement (the SORC License Agreement). Under the SORC License Agreement, the Company agreed that a portion
of the Royalty equal to at least 2.25% of the net profits (Incentive Royalty) be used to fund a long-term incentive
plan for the benefit of its employees, as determined by the Companys board of directors. On October 11, 2012, the Laredo
Royalty Incentive Plan (the Plan) was approved and adopted by the Board and the Incentive Royalty was assigned by
the Company to Laredo Royalty Incentive Plan, LLC, a special purpose Delaware limited liability company and wholly owned subsidiary
of Laredo Oil, Inc. formed to carry out the purposes of the Plan (the Plan Entity). Through August 31, 2020 the
subsidiary has received no distributions from SORC. As a result of the assignment of the Incentive Royalty to the Plan Entity,
the Royalty retained by the Company has been reduced from 19.49% to 17.24% subject to reduction to 15% under certain events stipulated
in the SORC License Agreement. Additionally, in the event of a SORC initial public offering or certain other defined corporate
events, the Company will receive 17.24%, subject to reduction to 15% under the SORC License Agreement, of the SORC common equity
or proceeds emanating from the event in exchange for termination of the Royalty. Under certain circumstances regarding termination
of exclusivity and license terminations, the Royalty could be reduced to 7.25%. If any Incentive Royalty is funded as a result
of those conditions being met, the Company may record compensation expense for the fair value of the Incentive Royalty, once all
pertinent factors are known and considered probable.
Prior
to the Company receiving any Royalty cash distributions from SORC, all SORC preferred share accrued dividends must be paid (in
excess of $200 million as of June 30, 2020), preferred shares redeemed ($271.5 million as of June 30, 2020), and debt retired
to comply with any loan agreements. Additionally, when SORC acquires additional oil fields, any Alleghany funds invested in SORC
to finance their acquisition and development must be repaid prior to the distribution of any Royalty cash distributions to Laredo.
Basic
and Diluted Loss per Share
The
Companys basic earnings per share (EPS) amounts have been computed based on the weighted-average number of
shares of common stock outstanding for the period. As the Company realized a net loss for the three-month periods ended August
31, 2020 and 2019, no potentially dilutive securities were included in the calculation of diluted loss per share as their impact
would have been anti-dilutive. Diluted net income (loss) per share is computed by dividing the net income (loss) by the weighted-average
number of common and dilutive common equivalent shares outstanding during the period.
NOTE
2 – GOING CONCERN
These
financial statements have been prepared on a going concern basis. The Company has routinely incurred losses since inception, resulting
in an accumulated deficit and is dependent upon one customer for its revenue. The Company entered into the Agreements with SORC
to fund operations and to provide working capital. However, there is no assurance that in the future such financing will be available
to meet the Companys needs.
NOTES
TO FINANCIAL STATEMENTS
(UNAUDITED)
Management has undertaken steps as part
of a plan to improve operations with the goal of sustaining our operations for the next twelve months and beyond. These steps include
(a) providing services and expertise to optimize operations; and (b) controlling overhead and expenses. In that regard, the Company
has worked to attract and retain key personnel with significant experience in the industry to enhance the quality and breadth of
the services it provides. At the same time, in an effort to control costs, the Company has required a number of its personnel to
multi-task and cover a wider range of responsibilities in an effort to minimize 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 financial statements do not include any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of
the Company to continue as a going concern.
NOTE
3 – SIGNIFICANT ACCOUNTING POLICIES
Equity
Method Investment - Investments classified as equity method consist of investments in companies in which the Company
is able to exercise significant influence but not control. Under the equity method of accounting, the investment is
initially recorded at cost, then the Companys proportional share of investees underlying net income or loss is recorded
as a component of other income with a corresponding increase or decrease to the carrying value of the investment.
Distributions received from the investee reduce the Companys carrying value of the investment. These investments are
evaluated for impairment if events or circumstances arise that indicate that the carrying amount of such assets may not be recoverable.
No changes in carrying value or impairments were recognized for the Companys equity method investment during
the quarter ended August 31, 2020. See Note 11.
NOTE
4 – REVENUE RECOGNITION
Monthly
Management Fee
The
Company generates monthly management revenues from fees for labor and benefit costs. The Company recognizes revenue for these
services in the month the labor and benefits are received by the customer. Monthly management fee revenues of $1,538,487 and $1,947,682
were recognized for the three months ended August 31, 2020 and 2019, respectively.
Quarterly
Management Fee
The
Company generates management fee revenue each quarter. The Company recognizes revenue over the applicable quarter on a straight-line
basis. The management fee is billed quarterly in advance. As a result, we have recorded deferred revenue for services that have
not been provided of $45,833 as of August 31, 2020 and 2019. Quarterly management fees recognized for the three months ended August
31, 2020 and 2019 were $137,500.
NOTE
5 – RECENT AND ADOPTED ACCOUNTING STANDARDS
The
Company has reviewed recently issued accounting standards and plans to adopt those that are applicable to it. It does not expect
the adoption of those standards to have a material impact on its financial position, results of operations, or cash flows.
NOTE
6 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The Companys financial instruments
as defined by Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 825-10-50,
Financial Instruments, include cash and cash equivalents, equity method investments, accounts payable, accrued liabilities
and notes payable. The equity method investments approximates fair value as a result of limited activity by the investee since
formation. All other instruments are accounted for on a historical cost basis, which, due to the short maturity of these financial
instruments, approximates fair value at August 31, 2020.
Based
on the borrowing rates currently available to the Company for loans with similar terms and maturities, the fair value of long-term
notes payable approximates the carrying value.
NOTES
TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
7 – RELATED PARTY TRANSACTIONS
Transactions
between related parties are considered to be related party transactions even though they may not be given accounting recognition.
FASB ASC 850, Related Party Disclosures (FASB ASC 850) requires that transactions with related parties that
would make a difference in decision making shall be disclosed so that users of the financial statements can evaluate their significance.
Related party transactions typically occur within the context of the following relationships:
|
●
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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.
|
|
●
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Other
parties that can significantly influence the management or operating policies of the transacting parties and can significantly
influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate
interests.
|
SORC
and Alleghany are considered related parties under FASB ASC 850. All management fee revenue reported by the Company for the three
months ended August 31, 2020 and 2019 is generated from charges to SORC. All outstanding notes payable at August 31, 2020 and
May 31, 2020 are held by Alleghany Capital Corporation (Alleghany Capital), a wholly owned subsidiary of Alleghany.
See Note 8.
NOTE
8 – STOCKHOLDERS DEFICIT
Share
Based Compensation
The
Black-Scholes option pricing model is used to estimate the fair value of options granted under our stock incentive plan.
Share
based compensation expense is fully recorded with respect to stock option awards outstanding. No share based compensation expense
was recorded for the three months ended August 31, 2020 or 2019.
Stock
Options
No
option grants were made during the first quarter of fiscal years 2021 and 2020.
Restricted
Stock
No
restricted stock was granted during the first quarter of fiscal years 2021 or 2020.
Warrants
No
warrants were issued during the first quarter of fiscal years 2021 or 2020 As of August 31, 2020, there were 5,374,501 warrants
remaining to be exercised at a price of $0.70 per share to Sunrise Securities Corporation to satisfy the finders fee obligation
associated with the Alleghany transaction. The warrants will expire June 14, 2021 and are currently exercisable.
NOTE
9 – NOTES PAYABLE
Alleghany
Notes
During
the fiscal year ended May 31, 2011, the Company entered into two Loan Agreements with Alleghany Capital for a combined available
borrowing limit of $350,000. The notes accrue interest on the outstanding principal of $350,000 at the rate of 6% per annum. As
of August 31, 2020, accrued interest totaling $267,140 is recorded in accrued interest. The interest is payable in either cash
or in kind. The notes have been amended and restated and now have a maturity date of December 31, 2020 and are classified as current
notes payable. The loan agreements require any stock issuances for cash be utilized to pay down the outstanding loan balance unless
written consent is obtained from Alleghany Capital.
NOTE
9 – NOTES PAYABLE (continued)
Paycheck
Protection Program Loan
|
|
August 31,
|
|
|
May 31,
|
|
|
|
2020
|
|
|
2020
|
|
PPP Loan
|
|
$
|
1,233,656
|
|
|
$
|
1,233,656
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term Notes
|
|
|
1,233,656
|
|
|
|
1,233,656
|
|
Less amounts classified as current
|
|
|
680,327
|
|
|
|
473,778
|
|
|
|
|
|
|
|
|
|
|
Long-term note, excluding current portion
|
|
$
|
553,329
|
|
|
$
|
759,878
|
|
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 (Program). The Note will accrue interest on the outstanding principal sum at the rate of 1% per annum, and is
due two years from the date of the Note, at which time all unpaid principal, accrued interest and any other amounts will be due
and payable. No interest or principal will be due during the first six months after April 28, 2020, although interest will continue
to accrue over this six-month deferral period. As of August 31, 2020, accrued interest totaling $4,191 is recorded in accrued
interest on the accompanying balance sheets. After such six-month deferral period and after taking into account any loan forgiveness
applicable to the Note pursuant to the Program, as approved by the Small Business Administration, an agency of the United States
of America, any remaining principal and accrued interest will be payable in substantially equal monthly installments on the first
day of each month over the remaining 18-month term of the Note.
The
Company did not provide any collateral or guarantees for the loan, nor did the Company pay any facility charge to obtain the loan.
The Note provides for customary events of default, including, among others, those relating to failure to make payment, bankruptcy,
breaches of representations and material adverse effects. The Company may prepay the Note at any time without payment of any penalty
or premium.
On
June 5, 2020, the PPP Flexibility Act of 2020 was signed into law and amended the CARES Act and eased rules on how and when recipients
can use loans and still be eligible for forgiveness. As noted above, under the terms of the Program and PPP Flexibility Act, PPP
loan recipients can apply for and be granted forgiveness for all or a portion of the loan granted under the PPP. Such forgiveness
will be determined, subject to limitations, based on the use of loan proceeds for eligible purposes, including payroll, benefits,
rent and utilities, and the maintenance of the Companys payroll levels. No assurance can be given that the Company will
obtain forgiveness of the loan, in whole or in part. If all or a portion of a loan is ultimately forgiven, the Company plans to
record income from the extinguishment of its loan obligation when it is legally released from being the primary obligor in accordance
with ASC 405-20-40-1.
NOTE
10 – EMPLOYEE SEPARATIONS
The
Company establishes obligations for expected termination benefits provided under existing agreements with a former or inactive
employee after employment but before retirement. These benefits generally include severance payments and medical continuation
coverage. During the first quarter of 2021, the Company continued to reduce expenses in response to the impact of the COVID-19
pandemic. These activities included further reductions in its workforce. The Company incurred severance and related charges totaling
$222,023 during the first quarter 2021. As of August 31, 2020, the Company had a remaining severance accrual of $48,223 included
in accrued payroll liabilities. There were no similar accruals as of May 31, 2020.
NOTE
11 – EQUITY METHOD INVESTMENT
On
June 30, 2020, Laredo Oil, Inc. (Laredo) entered into a Limited Liability Company Agreement (the LLC Agreement)
of Cat Creek Holdings LLC (Cat Creek), a Montana limited liability company formed as a joint venture for the purchase
of certain oil and gas properties in the Cat Creek Field in Petroleum and Garfield Counties in the State of Montana (the Cat
Creek Properties). In accordance with the LLC Agreement, Laredo invested $448,900 in Cat Creek for 50% of the ownership
interests in Cat Creek using cash on hand. Each of Lipson Investments LLC and Viper Oil & Gas, LLC, the other two members
of Cat Creek, have ownership interests in Cat Creek of 25% in consideration of their respective investments of $224,450. Cat Creek
will be managed by a Board of Directors consisting of four directors, two of which shall be designated by Laredo.
Cat
Creek entered into an Asset Purchase and Sale Agreement (the Purchase Agreement) with Carrell Oil Company (Seller)
on July 1, 2020 for the purchase of the Cat Creek Properties from Seller. On September 21, 2020, upon resolving the purchase contingency
under the Purchase Agreement, the Seller received consideration of $400,000, taking into effect certain adjustments resulting
from pre- and post-effective date revenue, expense, and allocations.