Prior to December 31, 2020, we managed several projects for Stranded Oil
Resources Corporation, or SORC, a subsidiary of Alleghany Corporation, or
Alleghany. Also prior to December 31, 2020, SORC sold the assets of the projects
and transferred the funds it received from those sales to Alleghany. On December
31, 2020, we purchased 100% of the outstanding stock of SORC from Alleghany. At
that time, SORC owned vehicles and oil field assets that were not included in
the previous sales.
During the period from June 14, 2011 through December 31, 2020, we gained
specialized know-how and operational experience implementing underground gravity
drainage, or UGD, projects, as well as experience developing conventional oil
wells. Based upon this knowledge we gained, as of August 15, 2022, we had
identified and acquired approximately 45,246 gross acres and 37,932 net acres of
mineral properties in northeastern Montana.. We are currently drilling an
exploratory well, Olfert #11-4, there and, if that well is successful, we plan
to develop the remainder of the field thereafter. As of the filing date of this
report, the well has not yet been completed and put into production. We are
continuing our ongoing efforts to complete the well and begin commercial
production.
Liquidity and Capital Resources
As a result of the transactions described above, we are no longer entitled to
receive management fee revenue or operations reimbursements, or royalty
distributions, from Alleghany or SORC. We plan to use our cash and cash
equivalents on hand, to maintain our mineral rights acquisition program in
Montana and to cover our operating expenses.
On April 28, 2020, we borrowed $1,233,656 under the terms of the Paycheck
Protection Program, or the PPP, authorized by the Coronavirus Aid, Relief and
Economic Security (CARES) Act. The PPP provides loans to qualifying businesses
for amounts up to 2.5 times the average monthly payroll expenses of the
business. On July 19, 2021, we were notified that $1,209,809 of the principal
amount of our PPP loan had been forgiven, leaving $23,847 in principal payable
over the remaining five year life of the loan. We will repay the PPP loan
through monthly payments of principal and accrued interest in the amount of $559
per payment, through April 28, 2025.
Effective as of February 3, 2021, we received a second PPP loan in the amount of
$1,233,655. On April 25, 2022, $66,682 of the principal amount of the loan was
forgiven, leaving $1,166,973 payable over the remaining life of the five-year
loan. We will repay the loan through monthly payments of $26,752, beginning June
3, 2022 and ending February 2026.
9
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Our cash and cash equivalents at May 31, 2022 was $109,183. Our total debt
outstanding as of May 31, 2022 was $2,377,980, including (i) $617,934 owed to
Alleghany, which is classified as a short-term note payable, (ii) $1,185,952
pursuant to the PPP notes. Pursuant to the terms of those notes, we have
classified $857,339 of that debt as a long-term note, net of the current
portion, totaling $328,613, which is classified as a current note payable, (iii)
$374,757 short term convertible notes, net of deferred debt discount, (iv)
$62,858 revolving note classified as short-term and (v) $136,479 note payable
due Cat Creek as current.
Results of Operations
Pursuant to the Management Services Agreement, or MSA, with SORC, which
terminated effective December 31, 2020, we received and recorded management fee
revenue of $4,015,763 and direct costs of $4,775,976, respectively, for the
fiscal year ending May 31, 2021. The decrease in revenues and direct costs from
fiscal year 2021 to 2022 is primarily attributable to the termination of the MSA
with SORC. The termination of the MSA also resulted in in a reduction in force,
contributing to the decrease in our employee related costs, as well as the
cessation of the related monthly and quarterly management fee revenue in the
fiscal year ending May 31, 2022, as compared to the fiscal year ending May 31,
2021. Partially offsetting our decrease of management fee revenue in fiscal 2021
was an increase in other revenue and direct costs, respectively totaling
$667,608 and $1,286,244 for continued consulting services we provided to
Alleghany after the termination of the MSA.
During the fiscal years ended May 31, 2022 and 2021, we incurred operating
expenses of $1,580,069 and $499,332, respectively. These expenses consisted of
general operating expenses incurred in connection with the day to day operation
of our business, the preparation and filing of our required public reports and
stock option compensation expense. In addition, commencing January 1, 2022
payroll related expenses are also included in the general operating expenses as
the Company is no longer providing any direct management services. The increase
in expenses for the year ended May 31, 2022, as compared to the same period in
2021, is primarily attributable to these payroll costs, increased accounting and
other professional fees including public relations and stock based compensation.
We also experienced increases in other general and administrative expenses,
including insurance, IT and internet services and transfer agent fees, as well
as depreciation expense in connection with previously acquired property, plant
and equipment.
During the year ended May 31, 2022, we recognized other income and expenses
comprised of the $1,292,396 gain on PPP loan forgiveness of both principle and
accrued interest, $15,421 equity method income related to our July 2020 equity
investment, and $131,153 other income for the sale of a license. During the year
ended May 31, 2021, we recognized a $119,617 equity method loss and a gain on
bargain purchase totaling $486,294 in connection to the acquisition of 100%
equity interest in Stranded Oil Resources Corporation.
Recently Issued Accounting Pronouncements
Refer to Note 3 of the Notes to Consolidated financial statements for a
discussion of recently issued accounting pronouncements.
Critical Accounting Policies and Estimates
The process of preparing consolidated 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 consolidated financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Significant estimates in these consolidated financial
statements include estimates 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 consolidated financial
statements and actual results could differ from the estimates and assumptions.
10
Going Concern
These consolidated financial statements have been prepared on a going concern
basis. The Company has routinely incurred losses since inception, resulting in
an accumulated deficit, and historically has been dependent on one customer for
its revenue. The Company entered into the Agreements with SORC to fund
operations and to provide working capital. However, as a result of the SORC
Purchase Transaction, except for payments to be made in calendar year 2021 to
Laredo under the Consulting Agreement, Alleghany will no longer fund operations
or provide working capital to the Company or SORC. There is no assurance that in
the future such financing will be available to meet the Company's needs. This
situation raises substantial doubt about the Company's ability to continue as a
going concern within one year of the issuance date of the consolidated financial
statements.
Management has undertaken steps as part of a plan to improve operations with the
goal of sustaining operations for the next twelve months and beyond. These steps
include an ongoing effort to raise straight and convertible debt to fund well
development and maintain operations. The Company has worked to attract and
retain key personnel with significant experience in the industry. At the same
time, in an effort to control costs, the Company has required a number of its
personnel to multi-task and cover a wider range of responsibilities in an effort
to restrict the growth of the Company's headcount. There can be no assurance
that the Company can successfully accomplish these steps and it is uncertain
that the Company will achieve a profitable level of operations and obtain
additional financing. There can be no assurance that any additional financing
will be available to the Company on satisfactory terms and conditions, if at
all.
The accompanying 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.
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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