NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
The
accompanying condensed consolidated financial statements have been prepared by management of Laredo Oil, Inc. (the “Company”).
In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows as of and for the periods presented have been made.
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.
The Company is an oil exploration and production, or E&P, company, primarily engaged in acquisition
and exploration efforts for mineral properties. From June 14, 2011 to December 31, 2020, the Company was a management services company,
managing the acquisition and conventional operation of mature oil fields and the further recovery of stranded oil from those fields using
enhanced oil recovery (EOR) methods for its sole customer, Stranded Oil Resources Corporation (SORC), a wholly
owned subsidiary of Alleghany Corporation (Alleghany).
From its inception through October 2009, the
Company was primarily engaged in acquisition and exploration efforts for mineral properties. After a change in control in October 2009,
the Company shifted its focus to locating mature oil fields, with the intention of acquiring those oil fields and recovering stranded
oil using EOR methods. The Company, however, was unable to raise the capital required to purchase any suitable oil fields. On June 14,
2011, the Company entered into several agreements with SORC (collectively, the 2011 SORC Agreements) to seek recovery of
stranded crude oil from mature, declining oil fields by using the EOR method known as Underground Gravity Drainage, or UGD. The 2011
SORC Agreements consisted of (i) a license agreement between the Company and SORC (the SORC License Agreement), (ii) a
license agreement between the Company and Mark See, the Companys Chairman and Chief Executive Officer (the MS-Company License
Agreement), (iii) an Additional Interests Grant Agreement between the Company and SORC, (iv) a Management Services Agreement between
the Company and SORC (the MSA), (v) a Finders Fee Agreement between the Company and SORC (the Finders
Fee Agreement), and a Stockholders Agreement among the Company, SORC and Alleghany Capital Corporation, a subsidiary of Alleghany
(Alleghany Capital), each of which were dated June 14, 2011.
The 2011 SORC Agreements stipulated that the
Company and Mark See would provide management services and expertise to SORC through exclusive, perpetual license agreements and the
MSA. As consideration for the licenses to SORC, the Company received an interest in SORCs net profits, as defined in the 2011
SORC Agreements (the Royalty). The MSA provided that the Company would provide the services of various employees, including
Mark See, in exchange for monthly and quarterly management service fees. The monthly management service fees provided funding for the
salaries, benefit costs, and FICA taxes for the Company employees identified in the MSA. SORC remitted payment for the monthly management
fees under the MSA. The quarterly management fee totaled $137,500. The Company received the last such payment on October 1, 2020. Prior
to December 31, 2020, SORC also reimbursed the Company for monthly expenses incurred by Company employees in connection with their services
under the MSA.
As
consideration for the licenses to SORC, the Company was entitled to receive an interest in SORC net profits, as defined in 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 Companys board of directors approved and adopted the Laredo Royalty
Incentive Plan (the Plan), and the Incentive Royalty was assigned to the Plan. As a result of a Securities Purchase Agreement,
dated December 31, 2020 (the SORC Purchase Agreement), by and among the Company, Alleghany, SORC, and SORC Holdings LLC,
a wholly owned subsidiary of the Company (SORC Holdings), the Company no longer receives any Incentive Royalties payable
pursuant to the Plan, and Royalties are no longer being paid to the Company by SORC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS - continued
Pursuant
to the SORC Purchase Agreement, the Company, through SORC Holdings, purchased all of the issued and outstanding shares of SORC (the “SORC
Shares”) on December 31, 2020 (the “SORC Purchase Transaction”). As consideration for the SORC Shares, SORC Holdings
paid Alleghany $72,678 (comprised of $55,000 purchase price plus a $17,678 working capital adjustment calculated in accordance with the
SORC Purchase Agreement), and the Company agreed to pay Alleghany a royalty of 5.0% of the Company’s future consolidated revenues
and net profits of the Company’s unconsolidated investments relating to oil, gas, gas liquids and all other hydrocarbons, subject
to certain adjustments, for a period of seven years. The 2011 SORC Agreements were terminated effective as of December 31, 2020 pursuant
to the SORC Purchase Transaction.
Pursuant
to the SORC Purchase Transaction, the Company and Alleghany also entered into a Consulting Agreement (the Alleghany Consulting
Agreement), pursuant to which Alleghany agreed to pay the Company an aggregate of approximately $1.245 million during calendar
year 2021 in consideration of the Company providing consulting services to Alleghany from Mark See, the Companys Chief Executive
Officer and Chairman, and Chris Lindsey, the Companys then General Counsel and Secretary (for a period of three years for Mr. See
and one year for Mr. Lindsey).
The
Company believes that the SORC Purchase Transaction was advantageous to the Company as it simplified in a timely manner the unwinding
of the 2011 SORC Agreements, and allowed the Company to acquire vehicles and oil field equipment to be utilized in future oil recovery
projects.
As
the Company now owns SORC, and the 2011 SORC Agreements have been terminated, the Company no longer receives any payments outlined in
the 2011 SORC Agreements. As a result, the Company no longer receives 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 Companys revenues prior to
the closing of the SORC Purchase Transaction.
Prior
to December 31, 2020, the Companys management gained specialized know-how and operational experience in evaluating, acquiring,
operating and developing oil and gas properties while implementing UGD projects for Allegheny, as well as gaining expertise designing,
drilling and producing conventional oil wells. Based upon that knowledge, the Company has identified and acquired 45,246 gross acres
and 37,932 net acres of mineral property interests in the State of Montana. The Company began drilling one exploratory well during May
2022. That well has not been completed or put into production. The Company is continuing its efforts to complete the well and begin commercial
production. Simultaneously, the Company is attempting to raise additional funds to continue field development. Each additional well is
planned to have an 80-acre footprint, so the first ten wells would cover approximately 800 acres, or less than two percent of the Companys
leased acreage. The ability of the Company to secure further funding will determine future plans and the pace of field development.
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) with Erehwon Oil & Gas, LLC (Erehwon).
Under the Erehwon APA, the parties will acquire oil and gas interests and drill, complete, re-enter, re-complete, sidetrack, and equip
wells in Valley County, Daniels County and Roosevelt County, Montana. The Erehwon APA specifies calculations for royalty interests and
working interests for the first ten well completions and first ten well recompletions, and for all additional wells and recompletions
thereafter. Lustre will acquire the initial mineral leases and pay 100% of the acquisition costs, with a cap of $500,000. When the cap
is exceeded, Erehwon will have the option to acquire a 10% working interest in a lease by paying 10% of the lease acquisition cost of
the lease, resulting in Lustre paying 90% of the lease acquisition costs, on a lease-by-lease basis. Until amounts paid to complete the
first ten new wells and first ten recompletions are repaid, the working interest split between Erehwon and Lustre will be 10%/90%. Thereafter,
the split between Erehwon and Lustre will be 20%/80%. Additional wells and recompletions will have a working interest split equal to
the parties respective working interest in the leases, which will be 10% to Erehwon and 90% to Lustre, unless Erehwon exercises
its option to increase its working interest, as described above. Under the Erehwon APA, Lustre will fund 100% of the construction costs
of the first ten wells and first ten completions. Additional wells will be funded 80% by Lustre and 20% by Erehwon; provided, however,
that Erehwon has the option to pay 10% of the costs to increase its working interest to 20%. 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, the Prospect Generators will receive an amount equal
to 5% of the cost of each completed producing well.
On
June 30, 2020, the Company entered into the Limited Liability Company Agreement (the Cat Creek Agreement) of Cat Creek Holdings
LLC (Cat Creek), a Montana limited liability company formed as a joint venture with Lipson Investments LLC (Lipson)
and Viper Oil & Gas, LLC (Viper) for the purchase of certain oil and gas properties in the Cat Creek Field in Petroleum
and Garfield Counties in the State of Montana (the Cat Creek Properties). Cat Creek entered into an Asset Purchase and Sale
Agreement (the Cat Creek Purchase Agreement) with Carrell Oil Company (Carrell Oil) on July 1, 2020. The Cat
Creek Purchase Agreement provides for the purchase of the Cat Creek Properties from Carrell Oil. Upon closing, Carrell Oil received consideration
of $400,000, subject to certain adjustments resulting from revenue, expense and tax allocations. In accordance with the Cat Creek Agreement,
the Company invested $448,900 in Cat Creek for 50% of the ownership interests in Cat Creek, using cash on hand. Each of Lipson Investments
LLC and Viper Oil & Gas, LLC, the other two members of Cat Creek, have ownership interests in Cat Creek of 25% in consideration of
their respective investments of $224,450. Cat Creek will be managed by four directors, two of whom shall be designated by the Company.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS - continued
In January 2022, the Company and Lustre executed
a Net Profits Interest Agreement (NPI Agreement) with Erehwon and Olfert No. 11-4 Holdings, LLC (Olfert Holdings)
for the purpose of funding the first well, Olfert #11-4 (the Well), under the Erehwon APA. In connection with the NPI Agreement,
the Company was credited with a contribution of $59,935 of well development costs, representing a 5.5% interest in Olfert Holdings. The
total investment recorded by the Company was $19,435 as of May 31, 2022. The difference between the $59,935 contribution recorded by
Olfert Holdings and the investment recorded by the Company is due to the investment by the Company being recorded at the carrying value
of the assets it contributed to Olfert Holdings. As the Company also currently serves as the manager of Olfert Holdings, the Company
exercises significant influence over its operations. Accordingly, the amount of the Companys investment in Olfert is recorded as
an equity method investment as of May 31, 2022. See further disclosures in Note 9.
Basic
and Diluted Loss per Share
Basic
and diluted earnings/(loss) per share is computed by dividing net income/(loss) available to common shareholders by the weighted average
number of common shares outstanding during the period. Diluted earnings/(loss) per share gives effect to all dilutive potential common
shares outstanding during the period. Dilutive earnings/(loss) per share excludes all potential common shares if their effect is anti-dilutive.
As the Company realized a net loss for the three-month period ended August 31, 2022, 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 August 31,
2021 all options and warrants potentially convertible into common equivalent shares are considered antidilutive and have also been excluded
in the calculation of diluted earnings per share. Diluted earnings/(loss) per share is computed by dividing the net income (loss) by
the weighted-average number of common and dilutive common equivalent shares outstanding during the period.
Schedule
of Earnings/(Loss) Per Share
| |
|
|
|
|
|
| |
| |
For
the Three Months Ended | |
| |
August 31, | |
| |
2022 | | |
2021 | |
Numerator
– net income (loss) attributable to common stockholders | |
$ | (874,625 | ) | |
$ | 884,576 | |
| |
| | | |
| | |
Denominator – weighted average number of common
shares outstanding | |
| 55,200,901 | | |
| 54,514,765 | |
| |
| | | |
| | |
Basic and diluted earnings/(loss)
per common share | |
$ | (0.02 | ) | |
$ | 0.02 | |
NOTE
2 – GOING CONCERN
These
consolidated financial statements have been prepared on a going concern basis. The Company has routinely incurred losses since inception,
resulting in an accumulated deficit, and historically has been dependent on one customer for its revenue. The Company entered into the
Agreements with SORC to fund operations and to provide working capital. However, as a result of the SORC Purchase Agreement, except for
payments to be made in calendar year 2021 to Laredo under the Alleghany Consulting Agreement, Alleghany no longer funds operations or
provides 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. This situation raises substantial doubt about the Companys ability to continue as a going concern within
one year following the issuance date of the consolidated financial statements.
The
Companys 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) control overhead and expenses; (b) raise funds connected
with specific well development; and (b) raise funds through notes payable and convertible debt to expand and fund property acquisitions,
exploration and development, as well as maintaining operations. The Company has worked to attract and retain key personnel with significant
experience in the industry. At the same time, in an effort to control costs, the Company has required a number of its personnel to multi-task
and cover a wider range of responsibilities in an effort to restrict any increase in the Companys 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
or 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.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
NOTE
3 – SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation – The accompanying consolidated financial statements include the accounts of the Company 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 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 income (loss) with a two-month lag. Accordingly, the financial results for the equity investment
are reported through June 30, 2022. No impairments were recognized for the Companys equity method investment during the
quarter ended August 31, 2022. See Note 12.
Property
and Equipment – The carrying value of the Companys property and equipment represents the cost incurred to acquire the
property and equipment, net of any impairments. For business combinations, property and equipment cost is based on the fair values at
the acquisition date.
Oil
and Gas Acquisition Costs – The Companys 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 Companys Wells and
Related Equipment and Facilities accounts. Absent proved reserves, the deferred costs of the well, net of salvage, are charged to
expense. All costs of wells drilled to develop proved reserves, along with all costs of equipment necessary to produce and handle
the hydrocarbons, are capitalized even if a development well proves dry. Costs are reviewed to determine if impairment has occurred.
The Company had oil and gas acquisition and drilling costs totaling $4,169,319
and $2,702,715
as of August 31, 2022 and May 31, 2022, respectively.
Schedule
of Oil and Gas Acquisition and Drilling Cost
| |
August 31, | | |
May 31, | |
| |
2022 | | |
2022 | |
Intangible and tangible drilling costs | |
$ | 3,149,785 | | |
$ | 1,857,967 | |
Acquisition costs | |
| 1,019,534 | | |
| 844,748 | |
| |
| | | |
| | |
Oil and gas acquisition and drilling costs | |
$ | 4,169,319 | | |
$ | 2,702,715 | |
NOTE
4 – REVENUE RECOGNITION
Other
Revenue
The Company and Alleghany have entered into the
Alleghany Consulting Agreement (see Note 1), under which Alleghany was obligated to pay the Company a total of $1,144,471, in quarterly
payments beginning January 1, 2021, in consideration for making certain individuals available for their advice, assistance and support
in connection with the oil and gas industry and any questions, issues or matters arising from Alleghanys previous ownership of
SORC. One individual is committed until December 31, 2023. The Companys management believes that any work necessary under this
obligation was completed by December 31, 2021, and recognized revenue on a monthly basis over the year ended December 31, 2021. Accordingly,
the Company recorded $286,118 as other revenue for the quarter ended August 31, 2021.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
NOTE
5 – RECENT AND ADOPTED ACCOUNTING STANDARDS
In
August 2020, the FASB issued ASU 2020-06,–Debt - Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives
and Hedging - Contracts in Entitys Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entitys
Own Equity (ASU 2020-06), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity.
Reporting companies should adopt the guidance as of the beginning of the fiscal year of adoption, and cannot adopt the guidance in an
interim reporting period. This accounting standard update, which the Company adopted effective June 1, 2022, impacts the ongoing accounting
of the Convertible Notes.
Reporting
companies are allowed to adopt this standard by either a modified retrospective method of transition or a fully retrospective method
of transition. Under the modified retrospective method, entities should apply the guidance to transactions outstanding as of the beginning
of the fiscal year in which the standard was adopted. Transactions that were settled (or expired) during prior reporting periods are
unaffected. The cumulative effect of the change should be recognized as an adjustment to the opening balance of retained earnings at
the date of adoption. Due to the adoption of this accounting standard update under the modified retrospective method, prior periods for
the Company were not restated. Upon adoption, the Company recorded a $16,200 cumulative-effect adjustment that increased the opening
balance of retained earnings on the consolidated balance sheet due to the reduction in non-cash interest expense associated with the
historical separation of debt and equity components for the Companys Convertible Notes described in Note 11. The Company also recorded
a $39,718 increase to convertible debt and a decrease to additional paid-in capital of $55,918, due to no longer separating the embedded
conversion feature of the Convertible Notes. This adoption did not have a material impact on the Companys consolidated statement
of cash flows.
The
Company has reviewed other 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—ACCOUNTING FOR ASSET RETIREMENT AND ENVIRONMENTAL OBLIGATIONS
The
Company accounts for its asset retirement obligations in accordance with Accounting for Asset Retirement and Environmental
Obligations. This requires that legal obligations associated with the retirement of long-lived assets be recognized at fair
value when incurred and capitalized as part of the related long-lived asset. Over time, the liability is accreted to its present
value each period, and the capitalized asset is depreciated over the useful life of the long-lived asset.
In
the absence of quoted market prices, the Company estimates the fair value of our asset retirement obligations using present value
techniques, in which estimates of future cash flows associated with retirement activities are discounted using a credit-adjusted
risk-free rate. The Companys estimated liability could change significantly if actual costs vary from assumptions or if governmental
regulations change significantly.
The Companys asset
retirement obligation was established in May 2022, when it commenced drilling the Olfert#11-4 well in the Lustre oil field. At August
31, 2022 and May 31, 2022, the asset retirement obligation totaled $63,306 and $61,762, respectively.
The
Companys 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
Companys accretion expense totaling $1,544
was recorded in the three months ending August 31, 2022. Since drilling of the Olfert#11-4 well commenced in May 2022, the Company recorded no accretion expense as of May 31, 2022.
NOTE
7 – FAIR VALUE MEASUREMENTS
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, accounts and other receivables, 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 Company 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 as of August 31, 2022.
Based
on the borrowing rates currently available to the Company for loans with similar terms and maturities, the fair value of notes payable
approximates the carrying value.
Assets
and Liabilities Measured at Fair Value on a Nonrecurring Basis
The estimated fair value of the Companys oil and gas properties and the asset retirement obligation incurred
in the drilling of such 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 by the Company 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.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
NOTE
7 – FAIR VALUE MEASUREMENTS - continued
The Company estimates the fair value of asset
retirement obligations based on the projected discounted future cash outflows required to settle abandonment and restoration liabilities.
Such an estimate requires assumptions and judgments regarding the existence of liabilities, the amount and timing of cash outflows required
to settle the liability, what constitutes adequate restoration, inflation factors, credit adjusted discount rates, and consideration
of changes in legal, regulatory, environmental and political environments. The Company determines the abandonment and restoration cost
estimates in conjunction with the Companys 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.
The Companys asset retirement obligation fair value measurements in the current period were Level 3 fair value measurements. As
further described in Note 6, 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
8 – RELATED PARTY TRANSACTIONS
Transactions
between related parties are considered to be related party transactions even though they may not be given accounting recognition. FASB
ASC 850, Related Party Disclosures (FASB ASC 850) requires that transactions with related parties that would make
a difference in decision making should 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. |
On
April 4, 2022, Cat Creek, in which the Company has an equity investment, loaned the Company $136,479
at a market rate of interest. The Company repaid the note and accrued interest in August 2022 in an exchange for property,
plant and equipment.
In accordance with the NPI Agreement, Olfert
#11-4 Holdings transferred funds totaling $1,859,195 to Lustre, the Companys wholly owned subsidiary, to provide funds for drilling
expenses incurred by Lustre with respect to the development of one well.
In
June 2022, the Companys Chief Financial Officer invested $356,000 in Olfert #11-4.
NOTE
9 - NET PROFITS INTEREST AGREEMENT
In January 2022, the Company and Lustre executed the NPI Agreement, with an effective date of October 2021, with
Erehwon and Olfert Holdings for the purpose of funding the first well, Olfert #11-4, (the Well) under the Erehwon APA.
The NPI Agreement grants Olfert Holdings a flow of an Applicable Percentage of available funds from the Well in exchange
for Olfert Holdings funding of its development. The Applicable Percentage under the NPI Agreement is 90% prior to Payout
and 50% after Payout, in which Payout means the point in time when the aggregate of all Net Profits Interest payments made
to Olfert Holdings under the NPI Agreement equals 105% of the well development costs. In January 2022, the Company entered into an Amended
and Restated Limited Liability Company Operating Agreement of Olfert Holdings dated effective as of November 2021 (the Olfert
Holdings Operating Agreement). Pursuant to the Olfert Holdings Operating Agreement, the Company has agreed to make a capital contribution
to Olfert Holdings in the amount of $500,000, out of the aggregate $1,500,000 of capital raised by Olfert Holdings. During October and
November of 2021, through Lustre, the Companys wholly owned subsidiary, the Company received advance payments totaling $1.0 million
from four investors pursuant to the NPI agreement. Pursuant to the Olfert Holdings Operating Agreement, the Company was credited an amount
equal to $59,935 of well development costs as part of its capital contribution. In May 2022, a vendor made a $83,822 capital contribution
in the form of services rendered. Further, in June 2022, the Companys Chief Financial Officer invested $356,243 in Olfert Holdings
pursuant to the NPI Agreement. These two contributions fulfilled the Companys initial capital contribution commitment under the
Olfert Holdings Operating Agreement. The Company has also been appointed as the Manager of Olfert Holdings. On August 3, 2022, the Company
issued a capital call notice to the investors in Olfert Holdings to pay an additional $461,440 for expenses that [Olfert Holdings?] is
obligated to pay pursuant the NPI Agreement. As of August 31, 2022, investors had paid $358,747 of the capital call. As of August 31,
2022, [Olfert Holdings?] had incurred approximately $3,100,000 in expenses related to the development of the first well. As the
expected well development cost for the first well to be developed under the NPI Agreement is in excess of that amount, the Company expects
one or more additional capital calls.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
NOTE
9 - NET PROFITS INTEREST AGREEMENT - continued
In connection with the NPI Agreement, the Company was credited with a contribution totaling $59,935 of well development
costs under an agreement with Olfert Holdings, representing a 5.5% interest in Olfert Holdings as of May 31, 2022. The total investment
in Olfert Holdings recorded by the Company was $19,435 as of May 31, 2022. The difference between the $59,935 contribution recorded by
Olfert Holdings and the $19,435 investment recorded by the Company is due to the Companys investment being recorded at the carrying
value of the assets contributed. As the Company also serves as the manager of Olfert Holdings, the Company exercises significant influence
over Olfert Holdings. Accordingly, the amount the Company paid to Olfert Holdings is recorded as an equity method investment as of May
31, 2022.
NOTE
10 – STOCKHOLDERS DEFICIT
Share
Based Compensation
The Company made option grants for the purchase of 650,000 shares of common stock, at a price of $0.19 per share,
during the first quarter of fiscal year 2023. These options vest immediately and expire on June 2, 2032. The Company made option grants
for the purchase of 1,600,000 shares of common stock at a price of $0.074 per share during the first quarter of fiscal year 2022. These
options vest monthly over three years, beginning August 1, 2021, and expire on August 1, 2031. The Company used the Black-Scholes option
pricing model to estimate the fair value of options granted under its stock incentive plan.
The fair value of the stock option grants, as of the respective grant date, during the three months ending August 31, 2022 and 2021 amounted to approximately $123,487
and $118,387, respectively. The weighted average assumptions used in calculating these values were based on the following:
Schedule
of Fair Value Assumptions
| |
2022 | | |
2021 | |
Risk-free interest rate | |
| 1.85 | % | |
| 0.95 | % |
Expected dividend yield | |
| 0 | % | |
| 0 | % |
Expected volatility | |
| 314.9 | % | |
| 314.6 | % |
Expected life of options | |
| 6.0 years | |
| 6.0 years |
The
risk-free interest rate is based upon the U.S. Treasury interest rate in effect at the time of grant for a bond with a similar term. The
Company does not anticipate declaring dividends in the foreseeable future. Volatility is estimated based on the historical share prices
over the same period as the expected life of the stock options. The Company uses the simplified method for determining the expected term of
its stock options.
Share
based compensation for stock option grants totaling $123,487 and $3,288 was recorded in general, selling and administrative expense during
the three months ended August 31, 2022 and 2021, respectively.
Restricted
Stock
The
Company entered into a financial advisory agreement dated July 21, 2022 (the Advisory Agreement), pursuant to which the
Company engaged Dawson James Securities, Inc. (Dawson) to render services as a corporate finance consultant. The term of
the Advisory Agreement is twelve months from the date of the Advisory Agreement, unless terminated by either party with 30 days prior
written notice to the other party, beginning 60 days following the date of the Advisory Agreement. Under the terms of the Advisory Agreement,
Dawson will provide advice to the Company concerning business and financial planning, corporate organization and structure, private and
public equity and debt financing, and such other matters as the parties may mutually agree.
As
compensation to Dawson for the services provided under the Advisory Agreement, the Company will pay Dawson $30,000 per calendar quarter,
with the first such payment being paid one day after the date of execution, and each subsequent payment being due three months after
the previous payment. The Company also agreed to issue to Dawson 2,600,000 shares of the Companys common stock, payable in four
installments of (i) 1,000,000 shares issued within three business days after the date of the Advisory Agreement, (ii) 550,000 shares
for the subsequent quarter, and (iii) 525,000 shares for each of the remaining two quarters of the term of the Advisory Agreement. During
the three months ending August 31, 2022, the Company recorded advisory services totaling $160,000 with respect to the 1,000,000 shares
of common issued pursuant to the Advisory Agreement.
If
during the term of the Advisory Agreement the Company decides to (i) finance or refinance any indebtedness using a manager or an agent,
or (ii) raise funds by means of a public offering or private placement of equity or debt securities, Dawson will have the right to act
as lead manager, placement agent or agent (or have any affiliate act in such role) for such financing, provided that Dawson has then
secured at least $5,000,000 in equity financing for the Company,.
In
April 2022, the Company entered a consulting agreement with an individual for corporate structuring and strategic planning and compliance
services. Pursuant to this agreement, the Company agreed to compensate the consultant with cash and restricted shares of the Companys
common stock, which shares vest equally over the 12-month term of the contract. During the three-months ending August 31, 2022, the Company
recorded $27,257 in professional fees with respect to the issuance of the first two tranches of 272,474 restricted shares. The consulting
agreement was terminated in July 2022.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
NOTE
10 – STOCKHOLDERS DEFICIT - continued
The Company granted no shares of restricted stock during the first quarter of fiscal year 2022.
Warrants
The Company issued no warrants during the first quarters of fiscal years 2023 or 2022.
NOTE
11 – NOTES PAYABLE
Convertible
Debt
In
October, November, December of 2021, and March, April and May of 2022, the Company entered into Securities Purchase Agreements with three
accredited investors, pursuant to which the Company issued six convertible promissory notes in the aggregate principal amount of $608,575 (the Convertible Notes),
receiving $527,500 in
net cash proceeds. The Convertible Notes had an original issue discount of $58,575. Additional debt
issue costs of $22,500 were deducted from the gross proceeds from the Convertible Notes. The Company is amortizing a total of $81,075 recorded
as debt discount using the effective interest method through the maturity dates of the Convertible Notes. The
Convertible Notes are due in one year from the date of issuance, accrue interest at 8% per annum (22% upon the occurrence of an
event of default) and are convertible 180 days after issuance into shares of the Companys common stock at a discount of 25% of the
average of the three lowest trading prices during the 15 trading days immediately preceding the conversion. As of May 31, 2022, the
Company determined the value associated with the beneficial conversion feature in connection with the Convertible Notes resulting in a further
increase in the debt discount of $55,918. This additional debt discount will be amortized using the effective interest method
through the date the notes are initially convertible.
In August 2020, the FASB issued ASU 2020-06, which simplifies the
accounting for certain financial instruments with characteristics of liabilities and equity. Entities should adopt the guidance as
of the beginning of the fiscal year of adoption and cannot adopt the guidance in an interim reporting period. This accounting
standard update, which was adopted by the Company effective June 1, 2022, impacts the ongoing accounting of the convertible
notes.
The
Company adopted this standard using the modified retrospective method of transition and applied the guidance to transactions
outstanding as of the beginning of the current fiscal year on June 1, 2022. Transactions that were settled (or expired) during prior
reporting periods are unaffected. The cumulative effect of the change is recognized as an adjustment to the opening balance of
retained earnings at the date of adoption. Due to the adoption of this accounting standard update under the modified retrospective
method, prior periods were not restated. Upon adoption, the Company recorded a $16,200 cumulative-effect adjustment that increased
the opening balance of retained earnings on the consolidated balance sheet due to the reduction in non-cash interest expense
associated with the historical separation of debt and equity components for the Companys Convertible Notes. The Company also
recorded a $39,718 increase to convertible debt and a decrease to additional paid-in capital of $55,918 due to no longer separating
the embedded conversion feature of the Convertible Notes. This adoption did not have a material impact on the Companys
consolidated statement of cash flows.
The
Company has the right to prepay the Convertible Notes at any time during the first six months the Convertible Notes are outstanding at
the rate of (a) 110% of the unpaid principal amount of such note plus interest, during the first 120 days the note is outstanding, and
(b) 115% of the unpaid principal amount of such note plus interest between days 121 and 180 after the issuance date of the note. The
Convertible Notes may not be prepaid after the 180th day following the issuance date unless the applicable note holders
agree to such repayment and such terms.
The
Company agreed to reserve the number of shares of its common stock that may be issuable upon conversion of the Convertible Notes while
the Convertible Notes are outstanding.
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 Companys 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 Companys
common stock.
The
proceeds from the Convertible Notes could be used by the Company for general corporate purposes.
On
June 27, 2022, the Company repaid the single Convertible Note entered into in December 2021. The repayment totaled $65,745, comprised
of $55,000 principal and $10,745 in related accrued interest and prepayment penalty interest. Further, the related deferred debt discount
and debt issue costs totaling $4,435 were recorded as interest expense.
During
April and May 2022, the Company repaid the Convertible Notes entered into in October and November 2021. The repayment for remaining Convertible
Notes totaled $136,479, comprised of $114,125 principal and $22,354 related accrued interest and prepayment penalty interest. The
Company borrowed $136,479 from Cat Creek to repay the Convertible Notes.
The
Convertible Note issued in November 2021 was repaid in an amount that totaled $85,469, comprised of $71,500 principal and $13,969 related
accrued interest and prepayment penalty interest.
Upon
the repayment of the October and November 2021 Convertible Notes, the Company amortized the related remaining outstanding debt discount
and debt issue costs totaling $12,388, which were recorded as interest expense.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
NOTE
11 – NOTES PAYABLE - continued
Revolving
Note
On May 25, 2022, the Company entered into a Revolving Credit Note (the Revolving Note) with AEI
Management, Inc. (AEI), with a maximum draw amount of $1,500,000.00. The Revolving Note is dated to be effective May 12,
2022. In May 2022 and June 2022, the Company borrowed $62,858 and $48,000, respectively, under the Revolving Note. The Revolving Note
has a maturity date of May 1, 2023, or such later date as requested by the Company and agreed in writing by AEI in its sole discretion.
Under the Revolving Note, AEI may, at its sole discretion, make advances to the Company upon the Companys request in amounts not
to exceed an aggregate amount of $150,000 in any 30-day period and not to exceed the full principal amount of the Revolving Note in the
aggregate. The Revolving Note accrues interest on the outstanding principal sum at the rate of 8.75% per annum, which is payable by the
Company every 90 days following the date of the first drawdown. All unpaid principal, accrued interest and any other amounts will be
due and payable on the May 1, 2023 maturity date.
In accordance with the Revolving Note, AEI is
entitled, upon its issuance of a conversion notice to the Company, to convert all or any part of the outstanding and unpaid principal
and accrued interest amount under the Revolving Note into fully paid and non-assessable shares of common stock of the Company, at a conversion
price that shall equal the following:
-
if the Companys common stock is not listed for trading on an exchange or quoted for trading on the OTC Bulletin Board or the Pink
Sheets, the lesser of (i) par value of the Companys common stock or (ii) the cost basis of the most recent, non-affiliate issuance
of common stock, or
-
if the Companys common stock is listed for trading on an exchange or quoted for trading on the OTC Bulletin Board or the OTC Markets
Group, a 20% discount to the closing price of the common stock as reported by the Companys primary market on the trading day immediately
preceding the issuance of the conversion notice by AEI to the Company.
Notwithstanding anything to the contrary, in no event may the
Revolving Note be converted into shares of common stock or other securities of the Company to the extent that such conversion would
result in AEI and its affiliates together beneficially owning more than 4.99% of the outstanding shares of the Companys
common stock.
The Company did not provide any collateral or guarantees for the Revolving Note, nor did the Company pay any facility
charge to obtain the loan represented by the Revolving Note. The Revolving Note requires consent by AEI for the Company to take certain
actions, including, among others, any redemption, repurchase, acquisition or declaration or payment of any cash dividend or distribution
on any capital stock of the Company, increase of the par value of the Companys common stock, issuance of debt or sale of substantially
all assets or stock, as well as customary events of default, including, among others, those relating to failure to make payment, bankruptcy,
breaches of representations and termination or impairment of the Companys business in any material respect. The Company may prepay
the Revolving Note at any time without payment of any penalty or premium.
Promissory
Note
The Company entered into a Secured Promissory
Note, dated June 28, 2022 (the Secured Note),with the initial principal amount of $750,000. The Secured Note is payable
to Cali Fields LLC (the Lender). The Secured Note accrues interest on the outstanding principal sum at the rate of 15.0%
per annum. The Company may prepay the Secured Note in whole or in part, without penalty, with any such payment being applied first to
any accrued and unpaid interest, and then to the principal amount. The Secured Note has a maturity date of December 31, 2023.
As partial consideration for the Lenders
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 Companys fifty percent (50%) interest in Cat Creek Holdings, LLC.
Alleghany
Notes
Schedule
of Notes Payable - Related Party
| |
August 31, | | |
May 31, | |
| |
2022 | | |
2022 | |
Total note payable – Alleghany | |
$ | 617,934 | | |
$ | 617,934 | |
Less debt discount | |
| - | | |
| - | |
Less amounts classified as current | |
| - | | |
| 617,934 | |
| |
| | | |
| | |
Note payable – Alleghany, net of current portion | |
$ | 617,934 | | |
$ | - | |
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.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
NOTE
11 – NOTES PAYABLE - continued
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 Capital.
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. The Company repaid $13,500 of the Senior
Consolidated Note upon the sale of certain equipment during fiscal year 2021. The note bore no interest until January 1, 2022 whereupon
the interest rate increased to 5% per annum through June 30, 2022. Principal with all accrued and unpaid interest was 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 Senior Consolidated Note
is recorded as a Note payable – Alleghany, net of debt discount as of May 31, 2022. 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 under which the maturity date
of the Senior Consolidated Note was extended to December 31, 2023 in exchange for an increase in interest rate to 8% per annum for the
period from July 1, 2022 through December 31, 2023. Also, since the loan was not paid prior to December 31, 2022, the revenue royalty,
as defined in the Purchase Agreement, was be increased from 5% to 6%.
Paycheck
Protection Program Loan
| |
August 31, | | |
May 31, | |
| |
2022 | | |
2022 | |
Total PPP Loan | |
$ | 1,121,333 | | |
$ | 1,185,952 | |
Less amounts classified as current | |
| 343,785 | | |
| 328,613 | |
| |
| | | |
| | |
PPP loan, excluding current portion | |
$ | 777,548 | | |
$ | 857,339 | |
On
April 28, 2020, the Company entered into a promissory note (the PPP 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 PPP Note continues to accrue interest on the outstanding principal sum at the rate of 1% per
annum. In addition, the initial two-year PPP 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 Note.
The
Flexibility Act also provides that if a borrower does not apply for forgiveness of a loan within ten 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 eight weeks or 24 weeks.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
NOTE
11 – NOTES PAYABLE - continued
No
interest or principal will be due during the deferral period, although interest will continue to accrue over this period. As of
August 31, 2022, interest totaling approximately $1,000 was recorded in accrued interest on the accompanying consolidated balance
sheets. After the deferral period and after taking into account any loan forgiveness applicable to the PPP Note, any remaining
principal and accrued interest will be payable in substantially equal monthly installments over the remaining term of the
PPP 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.
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. As of August 31, 2022 both PPP Notes have been recorded as Notes Payable. 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 commence on September 1, 2021 with respect to the remaining
$23,847 balance on the first PPP 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 with respect to the remaining $1,166,973 balance on the second PPP Note. The October 2022 payment
under the PPP Second Draw Loan is due and has not been paid as of the date of this filing.
NOTE
12 – EQUITY METHOD INVESTMENT
Cat
Creek Holdings
On
June 30, 2020, the Company 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, the Company invested $448,900 in Cat Creek for 50% of the ownership interests in Cat Creek, using cash on hand. Each
of Lipson Investments LLC and Viper Oil & Gas, LLC, the other two members of Cat Creek, have ownership interests in Cat Creek of
25% in consideration of their respective investments of $224,450. Cat Creek will be managed by four
directors, two of whom are designated by the Company.
Cat Creek entered into an Asset Purchase and
Sale Agreement (the Cat Creek Purchase Agreement) with Carrell Oil on July 1, 2020 for the purchase of the Cat Creek Properties
from Carrell Oil. On September 21, 2020, upon resolving the purchase contingency under the Cat Creek Purchase Agreement, Carrell Oil
received consideration of $400,000, taking into effect certain adjustments resulting from pre- and post-effective date revenue, expense,
and allocations.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
NOTE
12 – EQUITY METHOD INVESTMENT - continued
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 August 31, 2022 period presented and has been compiled from respective financial statements of the Company, reflects
certain historical adjustments, and is reported on a two-month lag. Results of operations are excluded for periods prior to acquisition.
Summarized Financial Information
Balance Sheet: | |
As of
August 31, 2022 | |
|
Current Assets | |
$ | 300,632 | |
|
Non-current Assets | |
| 1,051,078 | |
|
Total Assets | |
$ | 1,351,710 | |
|
| |
| | |
|
Current Liabilities | |
$ | 254,242 | |
|
Non-current Liabilities | |
| 429,870 | |
|
Shareholders equity | |
| 667,598 | |
|
Total Liabilities and Shareholders Equity | |
$ | 1,351,710 | |
|
Results of Operations: | |
Three Months Ended August 31, 2022 | | |
Three Months Ended August 31, 2021 | |
Revenue | |
$ | 259,416 | | |
$ | 147,681 | |
Gross Profit | |
| 220,188 | | |
| 88,633 | |
Net Income (Loss) | |
$ | (21,810 | ) | |
$ | 21,693 | |
Olfert
11-4 Holdings
The
following table provides summarized financial information for the Companys ownership interest in Olfert #11-4 Holding accounted
for under the equity method for the August 31, 2022 period presented and has been compiled from respective financial statements
of the Company and reflects certain historical adjustments. Results of operations are excluded for periods prior to acquisition. See Note 10 for further
information.
Summarized Financial Information
Balance Sheet: | |
As of August 31, 2022 | |
Current Assets | |
$ | 508 | |
Non-current Assets | |
| 1,859,195 | |
Total Assets | |
$ | 1,859,703 | |
| |
| | |
Shareholders equity | |
| 1,859,703 | |
Total Liabilities and Shareholders Equity | |
$ | 1,859,703 | |
Results of Operations: | |
Year Ended August 31, 2022 | |
Revenue | |
$ | - | |
Gross Profit | |
| - | |
Net Loss | |
$ | (40 | ) |
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
NOTE
13 – COMMITMENTS AND CONTINGENCIES
On
February 4, 2021, a case captioned Lustre Oil Company LLC and Erewhon Oil & Gas, LLC v. Anadarko Minerals, Inc. and A&S
Mineral Development Co., LLC was filed in the Montana Seventeenth Judicial District Court for Valley County by Lustre, to initiate a quiet title action confirming Lustres
rights under certain mineral leases in Valley County, Montana. Lustre is also seeking damages with respect to actions taken by A&S
Mineral Development Co., LLC to improperly produce oil on the property subject to such mineral leases.
Except
as set forth above, we are not currently involved in any other legal proceedings and we are not aware of any other pending or potential
legal actions.
Revenue
Royalty – In accordance with the Securities Purchase Agreement, 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 ending December 31, 2027. Further, if the loan is not paid prior to December 31, 2022, the revenue
royalty, as defined in the Purchase Agreement, will be increased from 5% to 6%.
In
accordance with the Secured Promissory Note, the Company agreed to pay a revenue royalty of 0.5% on consolidated revenue of the Company arising
from the direct production of oil and gas. The royalty period extends from June 1, 2022 through May 31, 2027.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
NOTE
14 – SUBSEQUENT EVENTS
On September 6, 2022, the Company entered into
a Securities Purchase Agreement with an accredited investor, pursuant to which the Company issued a convertible promissory note in the
principal amount of $97,625, receiving $85,000 in net cash proceeds. The convertible promissory note had an original issue discount
of $8,875. Further, $3,750 in debt issue costs were deducted from the gross proceeds. The total of $12,625 recorded as debt
discount is being amortized using the effective interest method through the maturity dates of the convertible promissory note. The convertible
note is due in one year from the date of issuance, accrues interest at 8% per annum (22% upon the occurrence of an event of default)
and is convertible after 180 days into shares of the Companys common stock at a discount of 25% of the average of the three lowest
trading prices during the 15 trading days immediately preceding the conversion.
The Company entered
into a Note Purchase Agreement dated September 23, 2022 (the Note Purchase Agreement), for the issuance of promissory notes
in the aggregate principal amount of up to $7,500,000. Pursuant to this Note Purchase Agreement, on September 23, 2022, the Company issued
a promissory note in the original principal amount of $50,000. Under the Note Purchase Agreement, the Company may issue additional promissory
notes, up to the $7,500,000 total principal amount, until November 30, 2022. The promissory notes will accrue interest on the outstanding
principal sum at the rate of 10.0% per annum. The promissory notes have a maturity date of September 23, 2025.
In October 2022, the Company entered into a Securities
Purchase Agreement with an accredited investor, pursuant to which the Company issued a convertible promissory note in the principal amount
of $55,000, receiving $45,000 in net cash proceeds. The note had an original issue discount of $5,000. Further $5,000 debt
issue costs were deducted from the gross proceeds. The total of $10,000 recorded as debt discount are being amortized using the
effective interest method through the maturity dates of the convertible promissory note. The convertible promissory note is due in one
year from the date of issuance, accrues interest at 12% per annum (22% upon the occurrence of an event of default) and is convertible
after 180 days into shares of the Companys common stock at a discount of 30% of the average of the three lowest trading prices
during the 15 trading days immediately preceding the conversion.
In September and October 2022, the Company
received advances totaling $150,000 from Bradley Sparks, its Chief Financial Officer.