This report contains forward-looking statements that involve risk and
uncertainties. We use words such as "anticipate", "believe", "plan", "expect",
"future", "intend", and similar expressions to identify such forward-looking
statements. Investors should be aware that all forward-looking statements
contained within this filing are good faith estimates of management as of the
date of this filing. Our actual results could differ materially from those
anticipated in these forward-looking statements.
Impact of COVID-19 to our Business
The long-term impacts of the global emergence of novel coronavirus 2019
("COVID-19") on our business are currently unknown. In an effort to protect the
health and safety of our employees, we took proactive, aggressive action from
the earliest signs of the outbreak in China to adopt social distancing policies
at our locations, including working from home, limiting the number of employees
attending meetings, reducing the number of people in our sites at any one time,
and suspending employee travel. We anticipate that the global health crisis
caused by COVID-19 will continue to negatively impact business activity. We have
observed declining demand and price reductions in the oil and gas sector as
business and consumer activity decelerates across the globe. When COVID-19 is
demonstrably contained, we anticipate a rebound in economic activity, depending
on the rate, pace, and effectiveness of the containment efforts deployed by
various national, state, and local governments.
We will continue to actively monitor the situation and may take further actions
altering our business operations that we determine are in the best interests of
our employees, customers, partners, suppliers, and stakeholders, or as required
by federal, state, or local authorities. It is not clear what the potential
effects any such alterations or modifications may have on our business,
including the effects on our customers, employees, and prospects, or on our
financial results for the remainder of 2021.
Company Description and Operations
Laredo Oil, Inc. ("the Company") is an oil exploration and production ("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 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 to seek recovery of stranded crude oil from mature,
declining oil fields by using the EOR method known as Underground Gravity
Drainage ("UGD"). Such agreements consisted of a license agreement between the
Company and SORC (the "SORC License Agreement"), a license agreement between the
Company and Mark See, the Company's Chairman and Chief Executive Officer ("CEO")
(the "MS-Company License Agreement"), an Additional Interests Grant Agreement
between the Company and SORC, a Management Services Agreement between the
Company and SORC (the "MSA"), a Finder's Fee Agreement between the Company and
SORC (the "Finder's Fee Agreement"), and a Stockholders Agreement (the
"Stockholders Agreement") among the Company, SORC and Alleghany Capital
Corporation, a subsidiary of Alleghany ("Alleghany Capital"), each of which were
dated June 14, 2011 (collectively, the "2011 SORC Agreements").
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - continued
Pursuant to 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"), SORC
Holdings purchased all of the issued and outstanding shares of SORC stock (the
"SORC Shares") in a transaction that closed on December 31, 2020 (the "SORC
Purchase Transaction"). As consideration for the SORC Shares, 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 to Alleghany a revenue royalty of 5.0% of the
Company's future revenues and net profits relating to oil, gas, gas liquids and
all other hydrocarbons, subject to certain adjustments, for a period of seven
years after the closing. The SORC Purchase Agreement provides for customary
adjustments to the purchase price based on the effective date of December 31,
2020. In connection with the SORC Purchase Transaction, the 2011 SORC Agreements
were terminated effective as of December 31, 2020.
Further, pursuant to the SORC Purchase Agreement, the Company and Alleghany
entered into a consulting agreement dated as of December 31, 2020 (the
"Alleghany Consulting Agreement"), pursuant to which Alleghany agreed to pay an
aggregate of approximately $1.245 million during calendar year 2021 in
consideration of the Company causing certain individuals, including Mark See,
the Company's Chief Executive Officer and Chairman, and Chris Lindsey, the
Company's General Counsel and Secretary, to provide consulting services to
Alleghany (for a period of three years for Mr. See and one year for Mr.
Lindsey).
The Company believes that the SORC Purchase Transaction was advantageous as it
simplified in a timely manner the unwinding of the 2011 SORC Agreements and
allowed the Company to acquire vehicles and oil field assets that can 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 from SORC (including any Royalty
payable by SORC to the Company) outlined in the 2011 SORC Agreements. As a
result, except for the payments to be made in calendar year 2021 to the Company
under the Alleghany Consulting Agreement, the Company will no longer receive
management fee revenue from Alleghany or reimbursement from Alleghany for the
monthly expenses of its employees, which fees and reimbursements were
effectively all of the Company's revenues prior to the closing of the SORC
Purchase Transaction.
During the period from June 14, 2011 through December 31, 2020, Company
management gained specialized know-how and operational experience in evaluating,
acquiring, operating and developing oil and gas properties while implementing
UGD projects, as well as gaining expertise designing, drilling and producing
conventional oil wells. Based upon the knowledge gained, the Company has
identified and acquired 28,376 gross acres and 24,369 net acres of mineral
property interests in Montana. The Company has received a reserve report from an
independent petroleum engineering firm estimating that interests of proved
undeveloped, probable undeveloped and contingent reserves, and forecasts of
economics attributable to 27 wells in the initial target area. Within the area
encompassed by the reserve report, 10 drilling locations have been identified
with the intention to drill an initial development well there early in calendar
year 2022 and, if that well yields anticipated results, the Company plans to
continue to develop the field thereafter. Each well is planned to have an
80-acre footprint, so the first 10 wells would affect only 800 acres, or less
than 2 percent of the leased acreage.
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 ("Erewhon APA") with Erehwon Oil & Gas, LLC
("Erewhon") to acquire oil and gas interests and drill, complete, re-enter,
re-complete, sidetrack, and equip wells in Valley County, Daniels County and
Roosevelt County, Montana. The Erewhon APA specifies calculations for royalty
interests and working interests for the first 10 well completions and first 10
well recompletions and for all additional wells and recompletions thereafter.
Lustre will acquire initial mineral leases and pay 100% of the costs with a cap
of $500,000. When the cap is exceeded, Erehwon will have the option to acquire a
10% working interest ("WI") in a lease by paying 10% of any lease acquisition
cost, resulting in Lustre paying 90% of the lease costs, on a lease by lease
basis. Until amounts paid to complete the first 10 new wells and first 10
recompletions are repaid ("Payback"), the WI split between Erehwon and Lustre is
10%/90%. Thereafter, the split between Erewhon and Lustre is 20%/80%. Additional
wells and recompletions will have a WI split equal to their respective working
interest in the leases. This will be 10% Erehwon and 90% Lustre unless Erehwon
exercises its option to increase its WI by 10 percent points to 20%/80%, as
described above. Under the Erewhon APA, Lustre will fund 100% of the
construction costs of the first 10 wells and first 10 completions. Additional
wells will be funded 80% by Lustre and 20% by Erehwon; provided, that Erehwon
has the option to pay 10% of the cost to increase its WI to 20%. Royalty expense
will consist of the sum of royalty interest to the land owner and an overriding
royalty interest to two individuals ("Prospect Generators") not to exceed 6% nor
be less than 3%. For the first 10 new wells and first 10 recompletions, the
Prospect Generators will receive an amount equal to 5% of the cost of each
completed producing well.
Subsequent Events
In January 2022, the Company and Lustre executed a Net Profits Interest
Agreement dated effective as of October 2021 ("NPI Agreement") with Erewhon and
Olfert No. 11-4 Holdings, LLC ("Olfert Holdings") for the purpose of funding the
first well, Olfert #11-4, (the "Well") under the Erewhon 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 its development. The
"Applicable Percentage" under the NPI Agreement is 90% prior to Payout and 50%
after Payout, where "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.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - continued
In January 2022, the Company entered into that certain Amended and Restated
Limited Liability Company Operating Agreement of Olfert Holdings dated effective
as of November 2022 (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. 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. The Company has not yet
determined the source of its funds for the balance of its capital contribution,
and it is possible that another investor may invest all or a part of such funds
instead of the Company. The Company has also been appointed as the Manager of
Olfert Holdings. The expected well development cost for the first well to be
developed under the NPI Agreement is $1.5 million.
On June 30, 2020, the Company entered into the Limited Liability Company
Agreement (the "LLC 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 for the
purchase of the Cat Creek Properties from Seller. Upon closing under the Cat
Creek Purchase Agreement, Carrell received consideration of $400,000, subject to
certain adjustments resulting from pre- and post-effective date revenue, expense
and tax allocations. 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 a Board of Directors consisting of four directors, two of which shall
be designated by the Company. The Company accounts for its investment in Cat
Creek as an equity method investment.
The original UGD method used conventional mining processes to establish a
drilling chamber underneath an existing oil field from where closely spaced
wellbores were intended to be drilled up into the reservoir, using residual
radial pressure and gravity to then drain the targeted reservoir through the
wellbores. As experience has been gained through practical application of the
processes involved in oil recovery, variants of the UGD concept are continually
developed and evaluated. The UGD method is applicable to mature oil fields that
have very specific geological characteristics. The Company has done extensive
research and has identified oil fields within the United States that it believes
are qualified for UGD recovery methods. We believe the costs of implementing the
UGD method are significantly lower than those presently experienced by other
commonly used EOR methods. We also estimate that we can materially increase the
field oil production rate from prior periods and, in some cases, recover amounts
of oil equal to or greater than amounts previously recovered from the mature
fields selected.
Our shares are currently listed for trading on the Over-the-Counter Bulletin
Board ("OTCBB") under the symbol LRDC. As of the date of this report, there has
been light to medium trading for our common stock and we cannot provide
assurance that an active trading market for our securities will ever develop.
Liquidity and Capital Resources
As a result of the SORC Purchase Transaction, the Company is no longer entitled
to receive management fee revenue or operations reimbursements from Alleghany or
SORC. Further, the Company is no longer entitled to any Royalty cash
distributions from Alleghany or SORC. The Company plans to use its cash and cash
equivalents on hand, and the proceeds from the Alleghany Consulting Agreement,
to maintain the mineral rights acquisition program in Montana and to pay its
operating costs.
On April 28, 2020, the Company entered into a note in the amount of $1,233,656
(the "First PPP Note") pursuant to the terms of the Paycheck Protection Program
("PPP") authorized by the Coronavirus Aid, Relief and Economic Security (CARES)
Act (the "Program"). The Program provides loans to qualifying businesses for
amount up to 2.5 times the average monthly payroll expenses of the qualifying
business. On July 19, 2021, the Company was notified that the SBA forgave
$1,209,809 of the note, leaving $23,847 payable over the remaining life of the
five-year loan. The loan will be repaid through monthly payments of principal
and accrued interest in the amount of $559 beginning September 1, 2021 and
ending April 28, 2025 with the final payment including all outstanding principal
as well as accrued interest through that date.
Effective as of February 3, 2021, the Company entered into a note in the amount
of $1,233,655 (the "Second PPP Note" and, together with the First PPP Note, the
"PPP Notes") for a second draw under the Program.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - continued
Under the terms of the Second PPP Note, PPP loan participants can apply for and
be granted forgiveness for all or a portion of the loan (including interest)
granted pursuant to the PPP. Such forgiveness will be determined, subject to
limitations, based on the use of the loan proceeds for eligible purposes. No
assurance can be given that the Company will obtain forgiveness of the Second
PPP Note, in whole or part.
Our cash and cash equivalents at November 30, 2021 was $1,329,858, of which
$1,000,000 is restricted. Total debt outstanding as of November 30, 2021 is
$2,036,466 comprised of $165,202, recorded net of $20,423 deferred debt
discount, convertible debt classified as short-term payable and owed to two
accredited investors, $615,381, recorded net of $2,553 deferred debt discount
and owed to Alleghany Capital, which is classified as a short-term notes payable
and $1,255,883 pursuant to the PPP Notes. Based on the terms of the PPP Notes,
$1,098,040 is classified as a long-term note, net of the current portion
totaling $157,843 which is classified as a current note payable.
Results of Operations
Pursuant to the Management Services Agreement with SORC, which terminated
effective December 31, 2020 in connection with the SORC Purchase Transaction,
the Company received and recorded management fee and other revenue and direct
costs totaling $1,247,554 and $1,262,837 for the quarter ended November 30, 2020
and recorded management fee and other revenue and direct costs totaling
$2,923,541 and $2,981,701 for the six months ended November 30, 2020. Due to the
termination of the MSA, there are no similar management fee revenues and
expenses during the first and second quarters of fiscal 2022. During the three
and six months ended November 30, 2021, the Company recorded other revenue
totaling $286,118 and $572,236 comprised of revenue from consulting services
provided pursuant to the Alleghany Consulting Agreement. The overall decrease in
revenues and direct costs is primarily attributable to the termination of the
MSA with SORC resulting in a reduction in force contributing to the decrease in
employee related costs in the three and six months ended November 30, 2021 as
compared to the same periods in the prior fiscal year.
During the quarters ended November 30, 2021 and November 30, 2020, respectively,
the Company incurred operating expenses of $215,476 and $134,422. These expenses
consisted of general operating expenses incurred in connection with the day to
day operation of our business and the preparation and filing of our required
reports. The increase in expenses for the quarter ended November 30, 2021 as
compared to the same period in 2020 is primarily attributable increases in
depreciation and an increase in general operating costs related to the acquired
SORC assets, stock based compensation, travel and initial costs incurred in
developing the initial well sites during the quarter ended November 30, 2021.
During the six months ended November 30, 2021 and November 30, 2020,
respectively, the Company incurred operating expenses of $380,431 and
$274,177. These expenses consisted of general operating expenses incurred in
connection with the day to day operation of our business and the preparation and
filing of our required reports. The increase in expenses for the six months
ended November 30, 2021 as compared to the same period in 2020 is primarily
attributable increases in depreciation and an increase in general operating
costs related to the acquired SORC assets, stock based compensation, travel and
initial costs incurred establishing the initial Lustre well sites during the six
months end November 30, 2021.
During the six months ended November 30, 2021, the Company recognized $1,224,908
gain on PPP loan forgiveness of both principle and accrued interest, recognized
$7,844 equity method loss related to their July 2020 equity investment, and
recognized $131,153 other income for the sale of a license. The Company had no
other income during the six months ended November 30, 2020.
Due to the nature of the 2011 SORC Agreements, the Company has been relatively
unaffected by the impact of inflation. Usually, when general price inflation
occurs, the price of crude oil increases as well, which may have a positive
effect on sales. However, as the price of oil increases, it also most likely
will result in making targeted oil fields more expensive.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - continued
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The process of preparing financial statements requires that we make estimates
and assumptions that affect the reported amounts of liabilities and
stockholders' equity/(deficit) at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period. The
financial statements include estimates and assumptions based on currently
available information, historical experience and various other factors we
believe to be reasonable under the circumstances. Significant estimates in these
financial statements include estimates related to the valuation of stock-based
compensation and related to purchase price allocation. Changes in the status of
certain facts or circumstances could result in a material change to the
estimates used in the preparation of the financial statements and actual results
could differ from the estimates and assumptions.
OFF-BALANCE SHEET ARRANGEMENTS
We do not currently have any off-balance sheet arrangements or other such
unrecorded obligations, and we have not guaranteed the debt of any other party.
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LAREDO OIL, INC. 
