NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
The
accompanying condensed consolidated financial statements have been prepared by the 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 of the Company 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.
On October 21, 2009, the Company changed its name 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 then 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. However, the Company was unable to raise the capital required to purchase
any suitable oil fields. On June 14, 2011, the Company entered into several agreements with 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. 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 the Companys employees in connection with their services to
SORC under the MSA.
As
consideration for the licenses made to SORC, the Company was entitled to receive an interest in SORCs 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 the Incentive Royalty that
was payable pursuant to the Plan; and SORC no longer makes any such payments to the Company or the Plan.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS – continued
Pursuant
to the terms of the SORC Purchase Agreement, on December 31, 2020 the Company, through SORC Holdings, purchased all of the issued and
outstanding shares of SORC (the SORC Shares). As consideration for the SORC Shares, SORC Holdings paid Alleghany $72,678
(comprised of a $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 Companys future consolidated revenues and net profits 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 terms of the SORC Purchase Agreement.
Pursuant
to the SORC Purchase Agreement, the Company and Alleghany also entered into a Consulting Agreement (the Alleghany Consulting Agreement),
pursuant to which Alleghany agreed to pay the Company approximately $1.245 million during calendar year 2021 in consideration of the
Company providing consulting services from Mark See and Chris Lindsey, then the Companys General Counsel and Secretary (for a
period of three years for Mr. See and one year for Mr. Lindsey).
The
Company believes that its entry into the SORC Purchase Agreement was advantageous to the Company as it simplified the timely unwinding
of the 2011 SORC Agreements, and allowed the Company to acquire vehicles and oil field equipment to be utilized in its future oil recovery
projects.
Since
the Company now owns SORC, and the 2011 SORC Agreements have been terminated, the Company no longer receives any of the 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 the Companys employees, which fees and reimbursements were effectively all of the Companys
revenues prior to the closing under the SORC Purchase Agreement.
Prior
to December 31, 2020, while implementing UGD projects for Allegheny, the Company gained specialized know-how and operational experience
in evaluating, acquiring, operating and developing oil and gas properties, as well as gaining expertise designing, drilling and producing
conventional oil wells. Based upon that know-how, the Company 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 an exploratory well in May 2022. That well has not yet been completed
or put into production. The Company is continuing its efforts to complete drilling the well and begin commercial production. Simultaneously,
the Company is attempting to raise additional funds to continue development of the other mineral property interests it purchased. The
Company plans to have each additional well have an 80-acre footprint, so that the first ten wells would cover approximately 800 acres,
or less than two percent of the Companys leased acreage. The ability of the Company to secure further funding will determine the
extent of future production for the acreage, and the pace of field development.
In
connection with securing the acreage in Montana described above, 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 the royalty interests
and working interests for the first ten well completions and first ten well recompletions, and for all additional wells and recompletions
thereafter. Under the Erehwon APA, Lustre will acquire the initial mineral leases, paying 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 each lease by paying 10% of the
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% to Erehwon and 90% to Lustre. 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 the 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 from
10% to 20%. Royalty expense will consist of the sum of royalty interest to the landowner and an overriding royalty interest, not to exceed
6% not less than 3%, to two individuals (Prospect Generators). 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 a 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 purpose of purchasing 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 Carrell Purchase Agreement) with Carrell Oil Company (Carrell Oil) on July 1, 2020. The
Carrell Purchase Agreement provided for Cat Creeks purchase of the Cat Creek Properties from Carrell Oil. Upon the closing of that
agreement, 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 in exchange for 50% of the ownership interests
in Cat Creek, using cash on hand. Each of Lipson and Viper, the other two members of Cat Creek, have ownership interests in Cat Creek
of 25%, in consideration of their respective investments of $224,450 in cash. Cat Creek is managed by four directors, two of whom are
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 Olfert Well),
under the Erehwon APA. In connection with the NPI Agreement, the Company was credited with a contribution of $59,935, consisting of well
development costs, representing a 5.5% interest in Olfert Holdings. As of May 31, 2022, the Companys total investment in Olfert
Holdings was $19,435. 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, as of February 28, 2023, the amount of the Companys recorded its investment in Olfert as an equity method investment.
See further disclosures in Note 9.
Basic
and Diluted Loss per Share
The
Companys basic and diluted earnings/(loss) per share is computed by dividing its net income/(loss) available to common stockholders
by the weighted average number of common shares outstanding during the period. Diluted earnings/(loss) per share gives effect to all
potentially dilutive outstanding common shares during the period. Dilutive earnings/(loss) per share excludes all potential shares of
common stock if their effect is anti-dilutive. As the Company realized a net loss for the nine-month period ended February 28, 2023 and
February 28, 2022, the Company did not include potentially dilutive securities in the calculation of diluted loss per share in those
periods, as the impact of their inclusion would have been anti-dilutive. e. The Company computes diluted earnings/(loss) per share by
dividing the net income (loss) by the weighted-average number of shares of common stock and dilutive common stock equivalents outstanding
during the period.
Schedule
of Earnings/(Loss) Per Share
|
|
|
|
|
|
|
|
|
|
|
For
the Nine Months Ended |
|
|
|
February
28, |
|
|
|
2023 |
|
|
2022 |
|
Numerator
– net income (loss) attributable to common stockholders |
|
$ |
(2,323,409 |
) |
|
$ |
(106,035 |
) |
|
|
|
|
|
|
|
|
|
Denominator
– weighted average number of common shares outstanding |
|
|
56,209,677 |
|
|
|
54,514,765 |
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings/(loss) per common share |
|
$ |
(0.04 |
) |
|
$ |
(0.00 |
) |
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. The Company has also been dependent on one customer for its revenue. The Company entered into the
SORC Agreements to fund operations and to provide the Company with working capital. However, after the execution of the SORC Purchase
Agreement, Alleghany no longer had any obligation to fund the Companys operations or provides working capital to the Company or
SORC. The Company is not certain that any financing will be available to the Company to support its proposed operations. Accordingly,
there is substantial doubt about the Companys ability to continue as a going concern within one year following the issuance date
of the consolidated financial statements included herein.
The
Companys management has undertaken steps to improve the Companys 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 the issuance of debt securities to expand and fund potential acquisitions,
exploration and development, as well as maintaining ongoing 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 its personnel to multi-task
and cover a wider range of responsibilities in an effort to avoid any increase in the Companys headcount. The Company cannot make
any 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. The Company cannot make any 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 December 31, 2022. The Company did not recognize any impairments for its equity method investment during
the fiscal quarter ended February 28, 2023. See Note 12.
Property
and Equipment – The carrying value of the Companys property and equipment represents the cost it 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 particular well is known. If an exploratory
well discovers proved reserves, the deferred costs are transferred to the Companys Wells and Related Equipment and Facilities
accounts. Absent proven 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 to be dry. The Company reviews costs to determine if impairment has occurred. The Company had oil and gas
acquisition and drilling costs totaling $4,257,564 and $2,702,715 as of February 28, 2023 and May 31, 2022, respectively.
Schedule
of Oil and Gas Acquisition and Drilling Cost
|
|
February
28, |
|
|
May
31, |
|
|
|
2023 |
|
|
2022 |
|
Intangible
and tangible drilling costs |
|
$ |
3,187,018 |
|
|
$ |
1,857,967 |
|
Acquisition
costs |
|
|
1,070,546 |
|
|
|
844,748 |
|
|
|
|
|
|
|
|
|
|
Oil
and gas acquisition and drilling costs |
|
$ |
4,257,564 |
|
|
$ |
2,702,715 |
|
NOTE
4 – REVENUE RECOGNITION
Other
Revenue
The
Company and Alleghany previously 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 the Company making certain
individuals available to Allegheny 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 such individual is committed to provide services to Allegheny
until December 31, 2023. The Companys management believes that all necessary work under the Alleghany Consulting Agreement was
completed prior to December 31, 2021, and the Company recognized revenue on a monthly basis over the year ended December 31, 2021. Accordingly,
the Company recorded $95,372 as other revenue for the quarter ended February 28, 2022 and $0 for the quarter ended February 28, 2023.
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 February 28, 2023 and May 31, 2022, the asset retirement obligation totaled $66,394 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 $4,632 was recorded in the nine months ending February 28, 2023. 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 February 28, 2023.
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 its 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. In
August 2022, the Company repaid the principal amount of the note, and accrued interest, in exchange for property, plant and equipment.
In
accordance with the NPI Agreement, between October 2021 and August 2022, Olfert #11-4 Holdings transferred funds totaling $1,859,195
to Lustre, the Companys wholly owned subsidiary, to provide funds for drilling expenses incurred by Lustre with respect to the
development of one well.
On
June 22, 2022, the Company assigned to the Companys Chief Financial Officer the right to purchase up to 356,243 of the 500,000
membership interests in in Olfert #11-4 in exchange for the Companys Chief Financial Officers payment of $356,243 of the
Companys capital commitment to Olfert #11-4.
On
October 26, 2022, the Company borrowed $150,000 from the Companys Chief Financial Officer pursuant to a demand note bearing an
annual interest rate of 10%. The demand note is secured by all of the Companys interests in Lustre, pursuant to the terms of a
Membership Interest Pledge Agreement.
In
February 2023, the Companys Chief Financial Officer made several advances to the Company, totally $50,000. The advances were not
made pursuant to a promissory note, and the advances are not secured.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
NOTE
9 – NET PROFITS INTEREST AGREEMENT
The
Company and Lustre executed the NPI Agreement with Erehwon and Olfert Holdings in January 2022, to be effective as of October 2021. The
NPI Agreement was executed for the purpose of funding the Olfert Well under the Erehwon APA. The NPI Agreement grants Olfert Holdings
an Applicable Percentage of available funds from the Olfert Well in exchange for Olfert Holdings funding development of the
Olfert Well. The Applicable Percentage is defined in the NPI Agreement as 90% prior to Payout and 50% after Payout, with
Payout being defined as the point in time when the aggregate of all Net Profits Interest payments made to Olfert Holdings
under the NPI Agreement equals 105% of the well development costs. In January 2022, the Company entered into an Amended and Restated
Limited Liability Company Operating Agreement of Olfert Holdings, dated to be effective as of November 2021 (the Olfert Holdings
Operating Agreement). Pursuant to the Olfert Holdings Operating Agreement, the Company has agreed to make a $500,000 capital contribution,
out of a total of $1,500,000 to be raised by Olfert Holdings. During October and November of 2021, the Company received advance payments
totaling $1.0 million from four investors, through Lustre, pursuant to the NPI Agreement. The Company was credited with $59,935 of well
development costs as part of its capital contribution under the Olfert Holding Operating Agreement. In May 2022, a vendor made an in
kind capital contribution of $83,822 to Olfert Holdings in the form of services rendered. In June 2022, the Companys Chief Financial
Officer invested $356,243 in Olfert Holdings pursuant to the NPI Agreement. These contributions fulfilled the Companys initial
capital contribution commitment under the Olfert Holdings Operating Agreement. On August 3, 2022, the Company, as Manager of Olfert Holdings,
issued a capital call to the investors in Olfert Holdings for payment of an additional $461,440 to cover expenses that Lustre is obligated
to pay pursuant the NPI Agreement. As of February 28, 2023, the investors had paid $358,747 of that capital call. As of February 28,
2023, Lustre had incurred approximately $3,300,000 in expenses related to the development of the Olfert Well. The Olfert Well has
exceeded its original budget, and there are certain construction costs that have not been satisfied. To pay the amounts owed, the Company
issued an additional capital call to the investors in Olfert Holdings to pay an additional $1.7 million. The investors did not have an
obligation to make additional investments, and Olfert Holdings did not raise the requested additional amount from that capital call.
Subsequently, several unpaid contractors have attached mechanic liens on the Olfert Well. One creditor has filed a lawsuit for payment
against Lustre, the operator of the Olfert Well in Montana. The Company believes that the Olfert Well is still economically viable, and
it intends to attempt to raise sufficient additional capital, complete the Olfert Well, and pay all amounts owed to contractors.
In
connection with the NPI Agreement, the Company was credited with a contribution totaling $59,935 of well development costs under an agreement
with Olfert Holdings, receiving 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
by the Company. 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 February 28, 2023.
NOTE
10 – STOCKHOLDERS DEFICIT
Share
Based Compensation
The
Company made grants of options for the purchase of 650,000 shares of its common stock, at a strike price of $0.19 per share, during the
first quarter of fiscal year 2023. These options vested immediately and expire on June 2, 2032. The Company made grants for the purchase
of 1,600,000 shares of its common stock at a strike price of $0.074 per share, during the first quarter of fiscal year 2022. These options
vest monthly over three years, beginning on August 1, 2021, and expire on August 1, 2031. The Company used the Black-Scholes option pricing
model to estimate the fair value of options granted under its stock incentive plan.
The
fair value of the stock option grants, as of the respective grant date, during the nine months ending February 28, 2023 and 2022 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
|
|
2023 |
|
|
2022 |
|
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.
The
Company recorded share-based compensation for stock option grants totaling $152,358 and $23,019 in general, selling and administrative
expense during the nine months ended February 28, 2023 and 2022, respectively.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
NOTE
10 – STOCKHOLDERS DEFICIT – continued
Restricted
Stock
The
Company entered into a financial advisory agreement, dated July 21, 2022 (the Advisory Agreement), pursuant to which the
Company engaged Dawson James Securities, Inc. (Dawson) to render services as a corporate finance consultant. The term of
the Advisory Agreement is twelve months from the date of the Advisory Agreement, unless terminated by either party with 30 days prior
written notice to the other party, beginning 60 days following the date of the Advisory Agreement. Under the terms of the Advisory Agreement,
Dawson will provide advice to the Company concerning business and financial planning, corporate organization and structure, private and
public equity and debt financing, and such other matters as the parties may mutually agree.
As
compensation to Dawson for the services provided under the Advisory Agreement, the Company is obligated to pay Dawson $30,000 per calendar
quarter, with the first such payment being paid one day after the date of execution, and each subsequent payment being due three months
after the previous payment. The Company made the first $30,000 payment in July 2022. The Company also agreed to issue to Dawson 2,600,000
shares of the 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. The first 1,000,000 restricted shares were issued in July 2022. During the nine months
ending February 28, 2023, the Company recorded advisory service fees totaling $160,000 with respect to the 1,000,000 shares of the Companys
common stock 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. As of the date of this filing, Dawson has not secured any equity financing
for the Company.
In
April 2022, the Company entered into a consulting agreement with an individual for corporate structuring and strategic planning and compliance
services. Pursuant to this agreement, the Company agreed to compensate the consultant with cash and restricted shares of the Companys
common stock, which shares vest equally over the 12-month term of the consulting agreement. During the nine months ending February 28,
2023, the Company recorded $27,257 in professional fees with respect to the issuance of the first two tranches of 272,474 restricted
shares. The consulting agreement was terminated in July 2022.
The
Company granted no shares of restricted stock during the first nine months of fiscal year 2023.
Warrants
The
Company issued no warrants during fiscal year 2022 or the first three quarters of fiscal year 2023.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
NOTE
11 – NOTES PAYABLE
Convertible
Debt
In
November of 2022, the Company entered into Securities Purchase Agreements with two accredited investors, pursuant to which the Company
issued two convertible promissory notes in the aggregate principal amount of $140,250 (the Convertible Notes), receiving
$120,000 in net cash proceeds. The Convertible Notes had an original issue discount of $12,750. The Company deducted $7,500 in additional debt
issue costs from the gross proceeds it received from the Convertible Notes. The Company is amortizing a total of $20,250 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.
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. An additional $5,000 in debt issue costs were deducted from the gross proceeds from the note. The total
of $10,000 recorded as debt discount is being amortized using the effective interest method through the maturity dates of the note.
The 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% to the average of the three lowest
trading prices during the 15 trading days immediately preceding the conversion.
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, and $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 promissory 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% from the average of the three lowest trading prices during the 15 trading days immediately preceding the conversion.
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,
receiving $527,500 in net cash proceeds (the Convertible Notes). 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 issuance of the Convertible
Notes resulted in a further increase in the debt discount of $55,918, which will be amortized using the effective interest method through
the dates the notes are initially convertible. The additional debt discount was subsequently reversed during the first quarter of fiscal
2023 pursuant to the adoption of ASU 2020-06 as follows.
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.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
NOTE
11 – NOTES PAYABLE – continued
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.
During
October and November 2022, the Company exchanged $114,125 of principal and $4,150 of accrued interest of the single Convertible Note
entered into on April 14, 2022 for 1,468,042 shares of the Companys common stock, at an average price of $0.0806 per share.
On
September 2, 2022 the Company repaid the single Convertible Note entered into on March 1, 2022. The repayment totaled $64,088, comprised
of $53,625 principal and $10,463 in related accrued interest and prepayment penalty interest. The Company recorded the related deferred
debt discount and debt issue costs, totaling $4,371, as interest expense.
On
June 27, 2022, the Company repaid the single Convertible Note entered into in December 2021. The repayment totaled $65,745, comprised
of $55,000 in principal and $10,745 in related accrued interest and prepayment penalty interest. The Company recorded the related deferred
debt discount and debt issue costs, totaling $4,435, as interest expense.
During
April and May 2022, the Company repaid the Convertible Notes entered into in October and November 2021. The repayment for the remaining
Convertible Notes totaled $136,479, comprised of $114,125 in principal and $22,354 in related accrued interest and prepayment penalty
interest. The Company borrowed the $136,479 from Cat Creek to repay these Convertible Notes.
The
Convertible Note issued in November 2021 was repaid in an amount that totaled $85,469, comprised of $71,500 in principal and $13,969
in related accrued interest and prepayment penalty interest.
Upon
the repayment of the October 2021 and November 2021 Convertible Notes, the Company recorded the related remaining outstanding debt discount
and debt issue costs, totaling $12,388, as interest expense.
12%
One Year Promissory Notes
On
May 20, 2022, the Company entered into a Securities Purchase Agreement with an accredited investor, pursuant to which the Company issued
a promissory note in the principal amount of $200,200, and received $175,000 in net cash proceeds. On January 5, 2023, the
note was satisfied in full with a payment of $67,266. The promissory note had an original issue discount of $21,450 and $3,750 in debt
issue costs were deducted from the gross proceeds. The Company was amortizing the total of $25,200 recorded as debt discount using
the effective interest method through the maturity dates of the convertible promissory note. The note was due one year following the
date of issuance, and accrued interest at 12% per annum (22% upon the occurrence of an event of default). Accrued, unpaid interest and
outstanding principal was due in ten equal monthly payments of $22,422.40, starting on July 15, 2022. In the event of default (including
a missed payment), the note was convertible at the option of the investor into shares of the Companys common stock at a discount
of 25% from the lowest closing bid price during the ten trading days immediately preceding the conversion date.
On
January 5, 2023, the Company entered into a Securities Purchase Agreement with an accredited investor, pursuant to which the Company
issued a promissory note in the principal amount of $197,313, receiving $150,000 in net cash proceeds. The convertible promissory
note had an original issue discount of $21,450, and an additional $3,750 in debt issue costs were deducted from the gross proceeds. The
total of $25,200 recorded as debt discount is being amortized using the effective interest method through the maturity date of the
convertible promissory note. The note is due one year following the date of issuance and accrues interest at 12% per annum (22% upon
the occurrence of an event of default). Accrued, unpaid interest and outstanding principal is due in ten equal monthly payments of $22,099.10,
starting on February 15, 2023. In the event of default (including a missed payment), the note is convertible at the option of the investor
into shares of the Companys common stock at a discount of 25% from the lowest closing bid price during the ten trading days immediately
preceding the conversion date.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
NOTE
11 – NOTES PAYABLE – continued
Secured
Convertible Debt
The
Company entered into a Note Purchase Agreement dated September 23, 2022 (the Note Purchase Agreement), for the issuance
of secured convertible promissory notes in the aggregate principal amount of up to $7,500,000. Pursuant to this Note Purchase Agreement,
during September, October and November, the Company issued three promissory notes in the aggregate principal amount of $290,000 and accrue
interest at 10% per annum. In December 2022 and January 2023, the Company issued additional promissory notes totaling $200,000. Under
the Note Purchase Agreement, the Company may issue additional promissory notes, up to the $7,500,000 total principal amount. The promissory
notes will accrue interest on the outstanding principal sum at the rate of 12.0% per annum, payable quarterly starting September 30,
2023, and are convertible into the Companys common stock at a conversion price of $1.00 per share. The notes issued under the
Note Purchase Agreement have a maturity date of September 23, 2025.
Revolving
Note
On
May 25, 2022, the Company entered into a Revolving Credit Note (the Revolving Note) with AEI Management, Inc. (AEI),
with a maximum draw amount of $1,500,000.00. 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 due under the Revolving Note 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 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.
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 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 in 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. The Company plans to satisfy payment of the Revolving Note and
accrued interest on May 1, 2023, with either cash raised by the Company from additional borrowings or conversion of the Revolving Note
and accrued interest into the Companys common stock, at the option of AEI.
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.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
NOTE
11 – NOTES PAYABLE – continued
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
|
|
February
28, |
|
|
May
31, |
|
|
|
2023 |
|
|
2022 |
|
Total
note payable – Alleghany |
|
$ |
617,934 |
|
|
$ |
617,934 |
|
Less
debt discount |
|
|
- |
|
|
|
- |
|
Less
amounts classified as current |
|
|
617,934 |
|
|
|
617,934 |
|
|
|
|
|
|
|
|
|
|
Note
payable – Alleghany, net of current portion |
|
$ |
- |
|
|
$ |
- |
|
During
the fiscal year ended May 31, 2011, the Company entered into two Loan Agreements with Alleghany Capital for a combined available borrowing
limit of $350,000. The notes accrued interest on the outstanding principal of $350,000 at the rate of 6% per annum.
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, at which date the interest rate increased to 5% per annum through June 30, 2022. The principal
amount of the Senior Consolidated Note, including 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, 2022 in exchange for an increase in interest rate to 8% per annum for the period from July 1, 2022 through December 31, 2022. Also,
since the loan was not paid prior to December 31, 2022, the revenue royalty, as defined in the SORC Purchase Agreement, was increased
from 5% to 6%.
Paycheck
Protection Program Loan
Schedule
of Paycheck Protection Program
|
|
February
28, |
|
|
May
31, |
|
|
|
2023 |
|
|
2022 |
|
Total
PPP Loan |
|
$ |
1,014,140 |
|
|
$ |
1,185,952 |
|
Less
amounts classified as current |
|
|
396,774 |
|
|
|
328,613 |
|
|
|
|
|
|
|
|
|
|
PPP
loan, excluding current portion |
|
$ |
617,366 |
|
|
$ |
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 amount 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 February
28, 2023, the Company recorded interest totaling approximately $2,521 included 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 Notes.
The
Company did not provide any collateral or guarantees for the PPP Notes, nor did the Company pay any facility charge to obtain the loan.
The PPP 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 its 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 February 28, 2023, both PPP Notes were 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 commenced 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. The Company received notice that $67,487 of the
principal and related interest balance has been forgiven, which is recorded as income from the extinguishment of the loan obligation.
The Company commenced monthly payments of $26,752 on June 3, 2022 with respect to the remaining $1,166,973 balance on the second PPP
Note. As of February 28, 2023, the Company had fallen behind on the monthly payments of the PPP Second Draw Loan.
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, a Montana
limited liability company formed as a joint venture for the purchase of the Cat Creek Properties. In accordance with the LLC Agreement,
the Company invested $448,900 for 50% of the ownership interests in Cat Creek, using cash on hand. Each of Lipson Investments LLC and
Viper Oil & Gas, LLC, the other two members of Cat Creek, have ownership interests in Cat Creek of 25% in consideration of their
respective investments of $224,450. Cat Creek is managed by four directors, two of whom are designated by the Company.
On
July 1, 2020, Cat Creek entered into the Cat Creek Purchase Agreement for the purchase of the Cat Creek Properties. On September 21,
2020, 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 tables provide summarized financial information for the Companys ownership interest in Cat Creek for the periods indicated,
accounted for under the equity method. The financial information was compiled from the respective financial statements of the Company,
reflects certain historical adjustments, and is reported with a two-month lag. Results of operations are excluded for periods prior to
the Companys acquisition of Cat Creek.
Summarized
Financial Information
Balance Sheet: | |
As of February 28, 2023 | | |
As of February 28, 2022 | |
Current Assets | |
$ | 82,601 | | |
$ | 229,679 | |
Non-current Assets | |
| 961,697 | | |
| 601,769 | |
Total Assets | |
$ | 1,044,298 | | |
$ | 831,448 | |
| |
| | | |
| | |
Current Liabilities | |
$ | 64,567 | | |
$ | 128,202 | |
Non-current Liabilities | |
| 437,890 | | |
| 68,355 | |
Shareholders equity | |
| 541,841 | | |
| 634,891 | |
Total Liabilities and Shareholders Equity | |
$ | 1,044,298 | | |
$ | 831,448 | |
Results of Operations: | |
Nine Months Ended February 28, 2023 | | |
Nine Months Ended February 28, 2022 | |
Revenue | |
$ | 645,921 | | |
$ | 504,629 | |
Gross Profit | |
| 595,275 | | |
| 163,905 | |
Net Income (Loss) | |
$ | (95,212 | ) | |
$ | (23,676 | ) |
Olfert
11-4 Holdings
The
following tables provide summarized financial information for the Companys ownership interest in Olfert #11-4 Holding for the
periods indicated, accounted for under the equity method. The financial information was compiled from the respective financial statements
of the Company and reflects certain historical adjustments. Results of operations are excluded for periods prior to the Companys
acquisition of Olfert #11-4 Holding. See Note 9 for further information.
Summarized
Financial Information
Balance Sheet: | |
As of February 28, 2023 | |
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: | |
Nine Months Ended February 28, 2023 | |
Revenue | |
$ | - | |
Gross Profit | |
| - | |
Net Loss | |
$ | (40 | ) |
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(UNAUDITED) |
|
NOTE
13 – COMMITMENTS AND CONTINGENCIES
On
February 4, 2021, Lustre filed a case captioned Lustre Oil Company LLC and Erewhon Oil & Gas, LLC v. Anadarko Minerals, Inc.
and A&S Mineral Development Co., LLC in the Montana Seventeenth Judicial District Court for Valley County (the District
Court), to initiate a quiet title action confirming Lustres rights under certain mineral leases in Valley
County, Montana. Lustre is also seeking damages from the defendants with respect to actions taken by A&S Mineral Development Co.,
LLC to improperly produce oil on the property that is subject to such mineral leases. On January 14, 2022, the District Court granted
the defendants Motion to Dismiss without addressing the merits of the quiet title action. Lustre appealed the decision to the
Montana Supreme Court.
On
March 20, 2023, Capex Oilfield Services, Inc. filed a suit against Lustre in the Montana Tenth Judicial District Court, Petroleum County,
demanding payment of $377,189.55 plus interest and collection costs for services provided to drill the Olfert 11-4 well. The Company
intends to bring that well to production as soon as possible, and reimburse unpaid vendors from well proceeds. See NOTE 9 – NET
PROFITS INTEREST AGREEMENT above.
Except
as set forth above, the Company is not currently involved in any other legal proceedings and it is not aware of any other pending or
potential legal actions involving the Company.
Revenue
Royalty – In accordance with the Securities Purchase Agreement with Alleghany, the Company agreed to pay 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, since the Company did not repay the loan
prior to December 31, 2022, the revenue royalty, as defined in the Alleghany Purchase Agreement, increased from 5% to 6%.
In
accordance with the Secured Promissory Agreement, the Company agreed to pay Alleghany a revenue royalty of 0.5% of the 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
April 6, 2023, in a unanimous decision, the Montana Supreme Court reversed the District Courts decision related to our quiet title
action and remanded the case to the District Court for further proceedings. See Note 13 – COMMITMENTS AND CONTINGENCIES.
During
March and April of 2023, the Company repaid the $97,625 in principal and $4,279 in accrued interest pursuant to a Convertible Note entered
into on September 6, 2022. To satisfy the obligation, the Company issued to the note holder 1,902,039 shares of the Companys common
stock, at an average price of $0.05358 per share.
On
April 6, 2023, the Company entered into a Securities Purchase Agreement with an accredited investor, pursuant to which the Company issued
a convertible promissory note in the principal amount of $59,675, receiving $50,000 in net cash proceeds. The convertible promissory
note had an original issue discount of $5,425. Further, $4,250 in debt issue costs were deducted from the gross proceeds. The total of
$10,125 recorded as debt discount is being amortized by the Company 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.
On
March 23, 2023, an individual accredited investor paid the Company the aggregate amount of $100,000 for a Secured Promissory Note, dated
March 23, 2023 , in the aggregate principal amount of $100,000 (the Note). The Note will accrue interest on the outstanding
principal sum at the rate of 12.0% per annum and has a maturity date of March 23, 2024. Interest will be due and payable monthly in arrears.
The Note will be secured by certain equipment owned by the Company pursuant to a Security Agreement to be negotiated with the Lender.
On
March 15, 2023, the Company received a loan of $30,000 from the Companys Chief Financial Officer. See Note 8 – RELATED PARTY
TRANSACTIONS.
On
March 2, 2023, the Company entered into a Securities Purchase Agreement with an accredited investor, pursuant to which the Company issued
a convertible promissory note in the principal amount of $70,125, receiving $60,000 in net cash proceeds. The convertible promissory
note had an original issue discount of $6,375. Further, $3,750 in debt issue costs were deducted from the gross proceeds. The total of
$10,125 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.