NOTES
TO FINANCIAL STATEMENTS
|
(UNAUDITED)
|
|
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Subsequent
Event – Company Purchase of Stock of SORC
Subsequent
to the reporting period covered by this report, pursuant to a Securities Purchase Agreement dated December 31, 2020 (the Purchase
Agreement), by and among the Company, Alleghany Corporation (Alleghany), Stranded Oil Resources Corporation,
a wholly-owned subsidiary of Alleghany (SORC), and SORC Holdings LLC, a wholly-owned subsidiary of the Company (Buyer
or SORC Holding), Buyer purchased all of the issued and outstanding shares of SORC stock (the SORC Shares)
in a transaction that closed on December 31, 2020 (the SORC Purchase Transaction). As consideration for the SORC
Shares, Buyer paid to Alleghany $55,000 and the Company agreed to pay to Alleghany a revenue royalty of 5.0% of the Companys
future revenues and net profits relating to oil, gas, gas liquids and all other hydrocarbons, subject to certain adjustments,
for a period of seven years after the closing. The Purchase Agreement provides for customary adjustments to the purchase price
based on the effective date of December 31, 2020. SORC owns the enhancements to UGD 3.0, an improved version of the Companys
enhanced oil recovery technique utilized to produce oil from horizontally developed or mature pressure-depleted oil fields. With
this acquisition of SORC, Laredo now has exclusive rights to utilize and license that technology worldwide and has acquired oilfield
assets and equipment.
Further,
pursuant to the SORC Purchase Agreement, Laredo and Alleghany entered into a Consulting Agreement dated as of December 31, 2020
(the Consulting Agreement), pursuant to which Seller agreed to pay an aggregate of approximately $1.245 million
during calendar year 2021 in consideration of Laredo causing certain individuals, including Mark See, Laredos Chief Executive
Officer and Chairman, and Chris Lindsey, Laredos General Counsel and Secretary, to provide consulting services to Alleghany
(for a period of three years for Mr. See and one year for Mr. Lindsey).
As the Company now owns SORC, the Company will
no longer receive any payments from SORC (including any Royalty payable by SORC to the Company) outlined in the Agreements with
SORC enumerated in the “General” section below. As a result, except for the payments to be made in calendar year 2021
to Laredo under the Consulting Agreement, the Company will no longer receive management fee revenue from Alleghany or reimbursement
from Alleghany for the monthly expenses of its employees, which fees and reimbursements were effectively all of the Company’s
revenues prior to the closing of the SORC Purchase Transaction.
General
– Company Business during the Reporting Period
On
June 14, 2011, the Company entered into agreements with 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).
A description of the Agreements effective during the three- and six-month periods ended November 30, 2020 follows.
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 November 30, 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.
NOTES
TO FINANCIAL STATEMENTS
|
(UNAUDITED)
|
|
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS (continued)
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 the Company formed to carry out the purposes of the Plan (the Plan Entity). Through November 30, 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. As the Royalty is no longer payable by SORC to the Company as a result of the SORC Purchase
Transaction referenced above, there are also no longer any Incentive Royalties payable pursuant to the Plan.
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 September 30, 2020), preferred shares redeemed (in excess of $270 million as of September 30, 2020),
and debt retired to comply with any loan agreements. No Royalties have been received by the Company. As referenced above, as a
result of the SORC Purchase Transaction, no Royalties will be paid to the Company by SORC.
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- and six-month periods ended
November 30, 2020 and the six-month period ended November 30, 2019, no potentially dilutive securities were included in the calculation
of diluted loss per share as their impact would have been anti-dilutive. For the three-month period ended November 30, 2019, all
options and warrants potentially convertible into common equivalent shares are considered antidilutive due to the exercise prices
of the instruments and have been excluded in the calculation of diluted earnings per share. 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.
NOTES
TO FINANCIAL STATEMENTS
|
(UNAUDITED)
|
|
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, as a result of the SORC Purchase Transaction, except for payments
to be made in calendar year 2021 to Laredo under the Consulting Agreement, Alleghany will no longer fund operations or provide
working capital to the Company or SORC. There is no assurance that in the future such financing will be available to meet the
Companys needs.
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 (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.
The Company has elected to record its portion of the equity method loss with a two-month lag. Accordingly, the financial results
for the equity investment are reported through September 30, 2020. No impairments were recognized for the Companys equity
method investment during the quarter ended November 30, 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 $1,110,054 and $2,648,541
were recognized for the three months and six months ended November 30, 2020, respectively. Monthly management fee revenues of
$1,899,223 and $3,846,905 were recognized for the three months and six months ended November 30, 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 November 30, 2020. Quarterly management fees recognized for both the three and six months ended
November 30, 2020 and 2019 were $137,500 and $275,000, respectively.
NOTES
TO FINANCIAL STATEMENTS
|
(UNAUDITED)
|
|
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 approximate fair value as a result of limited
activity by the investee since formation. All other instruments are accounted for on a historical cost basis, which, due to the
short maturity of these financial instruments, approximates fair value at November 30, 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.
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:
● 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.
|
SORC
and Alleghany are considered related parties under FASB ASC 850. All management fee revenue reported by the Company for the three
and six months ended November 30, 2020 and 2019 is generated from charges to SORC. All outstanding notes payable at November 30,
2020 and May 31, 2020 are held by Alleghany Capital Corporation (Alleghany Capital), a wholly owned subsidiary of
Alleghany. See Note 9.
Subsequent
to the Companys purchase of 100% of SORCs stock, Alleghany and its subsidiaries are no longer a related party.
NOTES
TO FINANCIAL STATEMENTS
|
(UNAUDITED)
|
|
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 and six month periods ended November 30, 2020 or 2019.
Stock
Options
No
option grants were made during the first and second quarters of fiscal years 2021 and 2020.
Restricted
Stock
No
restricted stock was granted during the first and second quarters of fiscal years 2021 or 2020.
Warrants
No
warrants were issued during the first two quarters of fiscal years 2021 or 2020. As of November 30, 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 November 30, 2020, accrued interest totaling $278,246 is recorded in accrued interest. The interest is payable in either cash
or in kind. The Loan Agreements as of November 30, 2020 are classified as short-term notes payable.
In
connection with the SORC Purchase Transaction, the notes were amended, restated and consolidated into one note including all accrued
interest through December 31, 2020, the date of the transaction, for a total of $631,434 (the Senior Consolidated Note)
with a maturity date of June 30, 2022. The Senior Consolidated Note requires any stock issuances for cash be utilized to pay down
the outstanding loan balance unless written consent is obtained from Alleghany. As part of the SORC Purchase Transaction, the
Company agreed to secure repayment of the Senior Consolidated Note with certain equipment owned by SORC Holding and to reduce
the note balance with any proceeds received from any sales of such equipment. The note bears no interest until January 1, 2022
whereupon the interest rate increases to 5% per annum through maturity. Principal with all accrued and unpaid interest is due
at maturity.
NOTES
TO FINANCIAL STATEMENTS
|
(UNAUDITED)
|
|
NOTE
9 – NOTES PAYABLE (continued)
Paycheck
Protection Program Loan
|
|
November 30,
|
|
|
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
|
|
|
67,290
|
|
|
|
473,778
|
|
|
|
|
|
|
|
|
|
|
Long-term note, excluding current portion
|
|
$
|
1,166,366
|
|
|
$
|
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 (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.
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
November 30, 2020, interest totaling $7,252 is recorded in accrued interest on the accompanying balance sheets. After the deferral
period and after taking into account any loan forgiveness applicable to the Note, any remaining principal and accrued interest
will be payable in substantially equal monthly installments over the remaining term of the Note.
The
Company did not provide any collateral or guarantees for the loan, nor did the Company pay any facility charge to obtain the loan.
The Note provides for customary events of default, including, among others, those relating to failure to make payment, bankruptcy,
breaches of representations and material adverse effects. The Company may prepay the Note at any time without payment of any penalty
or premium.
No
assurance can be given that the Company will obtain forgiveness of the loan, in whole or in part. At this time, the Company has
not yet applied for or received loan forgiveness and therefore have treated the PPP Note as debt. 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.
NOTES
TO FINANCIAL STATEMENTS
|
(UNAUDITED)
|
|
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 November 30, 2020, the Company had a remaining severance accrual of $13,224 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.
Summarized
Financial Information
The
following table provides summarized financial information for the Companys ownership interest in Cat Creek accounted
for under the equity method for the November 30, 2020 period presented and has been compiled from respective company
financial statements, reflects certain historical adjustments, and is reported on a two-month lag. Results of operations
are excluded for periods prior to acquisition.
Balance Sheet:
|
|
As of November 30, 2020
|
|
Current Assets
|
|
$
|
269,533
|
|
Non-current Assets
|
|
|
620,385
|
|
Total Assets
|
|
$
|
889,918
|
|
Current Liabilities
|
|
$
|
58,440
|
|
Non-current Liabilities
|
|
|
60,925
|
|
Shareholders equity
|
|
|
770,553
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
889,918
|
|
|
|
|
|
|
Results of Operations:
|
|
Three and Six Months
Ended
November 30, 2020
|
|
Revenue
|
|
$
|
300,885
|
|
Gross Profit
|
|
|
147,061
|
|
Net Loss
|
|
$
|
(127,247
|
)
|