Laredo Oil, Inc. - Quarter Report: 2022 February (Form 10-Q)

U.S. SECURITIES AND EXCHANGE

COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2022

Commission File Number 333-153168

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 or the Exchange Act). Yes o No x

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

54,514,765 shares of common stock issued and outstanding as of April 14, 2022.

ITEM 1. FINANCIAL STATEMENTS

The following unaudited condensed consolidated financial statements (“financial statements”) have been prepared by Laredo Oil, Inc. (the “Company”), pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented not misleading. However, except as disclosed herein, there have been no material changes in the information disclosed in the notes to the financial statements for the year ended May 31, 2021. These financial statements and the notes attached hereto should be read in conjunction with the financial statements and notes included in the Company’s Form 10-K, which was filed with the SEC on September 14, 2021. In the opinion of management of the Company, all adjustments, including normal recurring adjustments necessary to present fairly the financial position of Laredo Oil, Inc. as of February 28, 2022, and the results of its operations for the three and nine month periods then ended and cash flows for the nine month periods then ended, have been included. The results of operations for the three and nine month periods ended February 28, 2022 are not necessarily indicative of the results for the full year ending May 31, 2022.

The accompanying notes are an integral part of these financial statements.

The accompanying notes are an integral part of these financial statements.

For the three and nine months ended February 28, 2022

The accompanying notes are an integral part of these financial statements.

The accompanying notes are an integral part of these financial statements.

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

The accompanying condensed consolidated financial statements have been prepared by management of Laredo Oil, Inc. (“the Company”). In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows as of and for the periods presented have been made.

The Company was incorporated under the laws of the State of Delaware on March 31, 2008 under the name of “Laredo Mining, Inc.” with authorized common stock of 90,000,000 shares at $0.0001 par value and authorized preferred stock of 10,000,000 shares at $0.0001 par value. On October 21, 2009 the name was changed to “Laredo Oil, Inc.”

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”).

The 2011 SORC Agreements stipulated that the Company and Mark See will provide to SORC, management services and expertise through exclusive, perpetual license agreements and the MSA with SORC. As consideration for the licenses to SORC, the Company will receive an interest in SORC’s net profits as defined in the Agreements (the “Royalty”). The MSA outlines that the Company will provide the services of various employees (“Service Employees”), including Mark See, in exchange for monthly and quarterly management service fees. The monthly management service fees provide funding for the salaries, benefit costs, and FICA taxes for the Service Employees identified in the MSA. SORC remits payment for the monthly management fees in advance and is payable on the first day of each calendar month. The quarterly management fee totals $137,500 and was paid on the first day of each calendar quarter, with the last payment being received October 1, 2020. In addition, prior to December 31, 2020, SORC reimbursed the Company for monthly expenses incurred by Service Employees in connection with their rendition of services under the MSA. The Company could also submit written requests to SORC for additional funding for payment of the Company’s operating costs and expenses, which SORC, in its sole and absolute discretion, determined whether or not to fund.

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS - continued

As consideration for the licenses to SORC, the Company was to receive an interest in SORC net profits as defined in the SORC License Agreement (the “SORC License Agreement”). Under the SORC License Agreement, the Company agreed that a portion of the Royalty equal to at least 2.25% of the net profits (“Incentive Royalty”) be used to fund a long-term incentive plan for the benefit of its employees, as determined by the Company’s board of directors. On October 11, 2012, the Laredo Royalty Incentive Plan (the “Plan”) was approved and adopted by the Board and the Incentive Royalty was assigned to the Plan. As a result of the Securities Purchase Agreement dated December 31, 2020, (the “SORC Purchase Agreement”), there are no longer any Incentive Royalties payable pursuant to the Plan and no Royalties will be paid to the Company by SORC in the future.

Pursuant to 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 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, or December 31, 2027. 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 and, except for the payments to the Company in 2021 under the Alleghany Consulting Agreement, the Company no longer receives management fee revenue from Alleghany or reimbursement from Alleghany for the monthly expenses of its employees, which fees and reimbursements were effectively all of the 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 31,303 gross acres and 28,497 net acres of mineral property interests in Montana. The Company has received a reserve report from an independent petroleum engineering firm estimating the 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 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. The success of the first development well and the ability to secure further funding will drive future plans and at this point there is nothing concrete that can be planned out.

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 (“Erehwon APA”) with Erehwon Oil & Gas, LLC (“Erehwon”) 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 Erehwon 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 Erehwon 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 Erehwon 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.

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS - continued

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 Holdings, LLC (“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.

Basic and Diluted Loss per Share

The Company’s basic earnings per share (“EPS”) amounts have been computed based on the weighted-average number of shares of common stock outstanding for the period. As the Company realized a net loss for the three and nine month periods ended February 28, 2022 and the three and nine month periods ended February 28, 2021, no potentially dilutive securities were included in the calculation of diluted loss per share as their impact would have been anti-dilutive. Diluted net income (loss) per share is computed by dividing the net income (loss) by the weighted-average number of common and dilutive common equivalent shares outstanding during the period.

NOTE 2 – GOING CONCERN

These consolidated financial statements have been prepared on a going concern basis. The Company has routinely incurred losses since inception, resulting in an accumulated deficit, and historically has been dependent on one customer for its revenue. Further the Company has negative working capital as of February 28, 2022 and May 31, 2021. The Company entered into the 2011 SORC Agreements to fund operations and to provide working capital. However, as a result of the SORC Purchase Transaction, except for payments made to Laredo in 2021 under the Alleghany Consulting Agreement, Alleghany no longer funds operations or provides working capital to the Company or SORC. There is no assurance that in the future such financing will be available to meet the 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 controlling overhead and expenses. In that regard, the Company has worked to attract and retain key personnel with significant experience in the industry to enhance the quality and breadth of the services it provides. At the same time, in an effort to control costs, the Company has required a number of its personnel to multi-task and cover a wider range of responsibilities in an effort to 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.

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation – The accompanying consolidated financial statements include the accounts of Laredo Oil 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 Company’s proportional share of investee’s 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 Company’s 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 method investment are reported through December 31, 2021. No impairments were recognized for the Company’s equity method investment during the quarter ended February 28, 2022. See Note 14.

Related Party Receivables – Receivables include amounts due from Cat Creek Holdings represent related party balances arising from employee expense reports incurred by Laredo for work performed solely on the Company’s equity investment in Cat Creek Holdings, but not paid at February 28, 2022 period end.

Property and Equipment – The carrying value of the Company’s property and equipment represents the cost incurred to acquire the property and equipment, net of any impairments. For business combinations, property and equipment cost is based on the fair values at the acquisition date.

Oil and Gas Acquisition Costs – Oil and gas acquisition costs include expenditures representing investments in unproved and unevaluated properties and include non-producing leasehold, geological and geophysical costs associated with leasehold or drilling interests. Costs are reviewed to determine if impairment has occurred. The Company has incurred oil and gas acquisition costs totaling $604,599 and $389,480 during the nine months ended February 28, 2022 and the year ended May 31, 2021, respectively.

NOTE 4 – CASH AND CASH EQUIVALENTS

Laredo has entered a Net Profits Interest Agreement in exchange for funding for well development costs. The contracts require that participants pay Lustre the contract price upon execution of the agreement. The funds received in advance of the drilling of a well from a working interest participant are held for the expressed purpose of drilling, completing and equipping a well. If something changes, the Company may designate these funds for a substitute well. Under certain conditions, a portion of these funds may be required to be returned to a participant. The funds are used to satisfy the well development costs. Laredo classifies these funds prior to commencement of well development as restricted cash based on guidance codified as under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 230-10-50-8. In the event that progress payments are made from these funds, they are recorded as Oil and Gas Acquisition Costs.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheet that sum to the total of the same amounts shown in the statement of cash flows.

Restricted cash is recorded with respect to the advance funding for well development in accordance with the Net Profits Agreement. See Note 11. These funds are restricted for use for the development of the first well in the Lustre field.

NOTE 5 – REVENUE RECOGNITION

Monthly Management Fee

The Company generated monthly management revenues from fees for labor and benefit costs in accordance with the 2011 SORC Agreements. The Company recognizes revenue for these services in the month the labor and benefits are received by the customer. As a result, the Company records deferred revenue for services that have not been provided. Monthly management fee revenues of $1,046,390 and $3,694,931 were recognized for the three months and nine months ended February 28, 2021, respectively. The last monthly management fee payment from SORC was paid in February 2021, thus no monthly management fee revenues were recorded in fiscal year 2022.

NOTE 5 – REVENUE RECOGNITION - continued

Quarterly Management Fee

While the 2011 SORC Agreements were in place with Alleghany during calendar year 2020, the Company generated management fee revenue of $137,500 each quarter, payable in advance. The Company recognized that revenue over the applicable quarter on a straight-line basis. Quarterly management fees recognized for the three and nine months ended February 28, 2021, respectively were $45,833 and $320,833. Pursuant to the SORC Purchase Agreement, the quarterly management fee has been terminated effective December 31, 2020 and no additional quarterly fees have been recognized for the three and nine months ended February 28, 2022. As a result, the Company has not recorded quarterly management fee deferred revenue as of February 28, 2022 and May 31, 2021.

Other Revenue

The Company and Alleghany entered into the Alleghany Consulting Agreement (see Note 1), where Alleghany was obligated to pay the Company a total of $1,144,471, in quarterly payments beginning January 1, 2021, in consideration for making certain individuals available for their advice, assistance and support in connection with the oil and gas industry and any questions, issues or matters arising from Alleghany’s previous ownership of SORC. Two individuals are committed for a one-year period ending December 31, 2021, and one individual is committed for a three year period ending December 31, 2023. The Company’s management believes that any work necessary under this obligation will in fact be completed by December 31, 2021 and recognized revenue on a monthly basis over the calendar year ended December 31, 2021. Accordingly, $95,372 and $667,608 is recorded as other revenue for the three and nine month periods ended February 28, 2022. Deferred revenue recorded in calendar year 2021 related to amounts received but not yet earned under this contract. As of February 28, 2022, there are no remaining deferred amounts under this contract. In addition, Alleghany paid the Company $100,000 on January 1, 2021, to be paid to an individual, with no further performance obligations. Other Revenue for both the three and nine months ended February 28, 2021 was $290,745.

NOTE 6 – RECENT AND ADOPTED ACCOUNTING STANDARDS

The Company has reviewed recently issued accounting standards and plans to adopt those that are applicable to it. It does not expect the adoption of those standards to have a material impact on its financial position, results of operations, or cash flows.

NOTE 7 – ACQUISITION OF SORC

Purchase Price Allocation

Effective December 31, 2020, the Company acquired a 100% equity interest in SORC (see Note 1). We have accounted for the acquisition of SORC as a business combination using the acquisition method. The preliminary allocations of the purchase price with less than a year of ownership are subject to revisions as additional information is obtained about the facts and circumstances that existed as of the acquisition date. The purchase price allocation was preliminary and was subject to revision through the end of the measurement period on December 31, 2021. The original purchase price allocation is final and no further adjustments are necessary.

Financial Information

Pursuant to Topic 2, section 2010 of the SEC financial reporting manual, the Company evaluated the business combination. Prior to the acquisition by the Company, SORC sold all operating assets, terminated all employees and no longer maintained any of the business processes that previously existed. As a result, historical consolidated financial statements are not considered relevant to the ongoing operations and are not required.

NOTE 7 – ACQUISITION OF SORC - continued

In accordance with the SORC Purchase Agreement, Laredo 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 Company has not attributed a value to this potential liability in the preliminary purchase price allocation as eligible revenues or net profits do not currently exist and are not estimable.

In connection with the acquisition, the Company received tangible assets which had previously been written off by the Seller. This previous reduction in asset values in combination with the Seller’s desire to close the transaction on an accelerated basis enabled the Company to obtain the assets at a lower price resulting in the recognition of a bargain purchase gain.

For the quarter ended February 28, 2022, SORC recognized no revenues and $17,629 interest expense recorded related to the debt discount amortization, included in the Consolidated Statement of Operations.

NOTE 8 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company’s financial instruments as defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 825-10-50, Financial Instruments, include cash and cash equivalents, equity method investments, accounts payable, accrued liabilities and notes payable. The equity method investments approximate fair value as a result of limited activity by the investee since formation. All other instruments are accounted for on a historical cost basis, which, due to the short maturity of these financial instruments, approximates fair value at February 28, 2022.

Based on the borrowing rates currently available to the Company for loans with similar terms and maturities, the fair value of long-term notes payable approximates the carrying value.

NOTE 9 – RELATED PARTY TRANSACTIONS

Transactions between related parties are considered to be related party transactions even though they may not be given accounting recognition. FASB ASC 850, Related Party Disclosures (“FASB ASC 850”) requires that transactions with related parties that would make a difference in decision making shall be disclosed so that users of the financial statements can evaluate their significance. Related party transactions typically occur within the context of the following relationships:

Prior to the SORC Purchase Transaction on December 31, 2020, SORC and Alleghany were considered related parties under FASB ASC 850. See Note 1. All management fee revenue reported by the Company for the year ended May 31, 2020 and the following seven months through December 31, 2020 is generated from charges to SORC.

Subsequent to the Company’s purchase of 100% of SORC’s stock on December 31, 2020, Alleghany and its subsidiaries are no longer a related party.

NOTE 10 – STOCKHOLDERS’ DEFICIT

Share Based Compensation

The Black-Scholes option pricing model is used to estimate the fair value of options granted under our stock incentive plan.

Share based compensation for stock option grants totaling $9,865 and $23,019, respectively is recorded in general, selling and administrative expense during the three and nine months ended February 28, 2022. No share based compensation costs were recorded during the three and nine months ended February 28, 2021.

Stock Options

No option grants were made during the second or third quarter of fiscal year 2022. Option grants for the purchase of 1,600,000 shares of common stock at a price of $0.074 per share were made during the first quarter of fiscal year 2022. The options vest monthly over three years beginning August 1, 2021 and expire on August 1, 2031. The grant date fair value of these stock option grants amounted to approximately $118,387. The assumptions used in calculating these values were based on an expected term of 6.0 years, volatility of 315% and a 0.95% risk free interest rate at the date of grant. No option grants were made during the first nine months of fiscal year 2021.

Restricted Stock

No restricted stock was granted during the first nine months of fiscal years 2022 or 2021.

Warrants

No warrants were issued during the first nine months of fiscal years 2022 or 2021. The 5,374,501 warrants previously outstanding expired June 14, 2021 and are no longer exercisable.

NOTE 11 – NET PROFITS INTEREST AGREEMENT

In January 2022, the Company and Lustre executed a Net Profits Interest Agreement effective as of October 2021 (“NPI Agreement”) with Erehwon and Olfert No. 11-4 Holdings, LLC (“Olfert Holdings”) for the purpose of funding the first well, Olfert #11-4, (the “Well”) under the Erehwon Acquisition and Participation Agreement (“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. In January 2022, the Company entered into an Amended and Restated Limited Liability Company Operating Agreement of Olfert Holdings dated effective as of November 2021 (the “Olfert Holdings Operating Agreement”). Pursuant to the Olfert Holdings Operating Agreement, the Company has agreed to make a capital contribution to Olfert Holdings in the amount of $500,000 out of the aggregate $1,500,000 of capital raised by Olfert Holdings. During October and November 2021, through the Company’s wholly owned subsidiary, Lustre Holdings, Laredo received advance payments totaling $1.0 million from four investors pursuant to the NPI agreement. Pursuant to the Olfert Holdings Operating Agreement, the Company was credited an amount equal to $59,935 of well development costs as part of its capital contribution. 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. Through February 28, 2022, the Company has incurred approximately $220,000 related to the development of the first well. The expected well development cost for the first well to be developed under the NPI Agreement is $1.5 million.

In connection with the NPI Agreement, the Company was credited a contribution totaling $59,935 of well development costs as determined per agreement with Olfert on behalf of Olfert Holding representing a 5.5% interest in the entity as of February 28, 2022 based on the carrying value of assets contributed to Olfert. The total investment recorded by Laredo was $19,435 as of February 28, 2022. The difference between the $59,935 contribution recorded at the Olfert level and the investment recorded by Laredo is due to the investment at Laredo being recorded at the carrying value of the assets contributed. As Laredo also currently serves as the manager of Olfert, the Company exercises significant influence. Accordingly, the amount paid is recorded as an equity method investment as of February 28, 2022.

NOTE 12 – NOTES PAYABLE

Convertible Debt

In October, November and December 2021, Laredo entered into Securities Purchase Agreements with two accredited investors, pursuant to which the Company issued three convertible promissory notes in the principal amount of $240,625, receiving $207,500 in net cash proceeds (the “Convertible Notes”). The Convertible Notes had an original issue discount of $21,875. Further $11,250 debt issue costs were deducted from the gross proceeds. The total of $33,125 recorded as debt discount are being amortized 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 after 180 days into shares of the Company’s common stock at a discount of 25% of the average of the three lowest trading prices during the 15 trading days immediately preceding the conversion.

The Company has the right to prepay the Convertible Notes at any time during the first six months the note is outstanding at the rate of (a) 110% of the unpaid principal amount of the note plus interest, during the first 120 days the note is outstanding, and (b) 115% of the unpaid principal amount of the note plus interest between days 121 and 180 after the issuance date of the note. The Convertible Notes may not be prepaid after the 180^th day following the issuance date, unless the note holders agree to such repayment and such terms.

The Company agreed to reserve a number of shares of its common stock which may be issuable upon conversion of the Convertible Notes at all times.

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, as amended, reporting requirements and the failure to maintain a listing on the OTC Markets. The Convertible Notes also contains customary positive and negative covenants. The Convertible Notes include penalties and damages payable to the noteholders in the event we do not comply with the terms of such note, including in the event we do not issue shares of common stock to the noteholders upon conversion of the notes within the time periods set forth therein. Additionally, upon the occurrence of certain defaults, as described in the Convertible Notes, we are 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 note).

At no time may the Convertible Notes be converted into shares of Laredo common stock if such conversion would result in the note holders and their affiliates owning an aggregate of in excess of 4.99% of the then outstanding shares of Laredo common stock.

The proceeds from the Convertible Notes can be used by the Company for general corporate purposes.

See Note 16 – Subsequent Events for Convertible Debt activity after period end.

Alleghany Notes

During the fiscal year ended May 31, 2011, the Company entered into two Loan Agreements with Alleghany Capital for a combined available borrowing limit of $350,000. The notes accrued interest on the outstanding principal of $350,000 at the rate of 6% per annum, with a due date of December 31, 2020.

NOTE 12 – NOTES PAYABLE - continued

In connection with the SORC Purchase Transaction, the notes were amended, restated and consolidated into one note including all accrued interest through December 31, 2020, the date of the transaction, for a total of $631,434 (the “Senior Consolidated Note”) with a maturity date of June 30, 2022. The Senior Consolidated Note requires any stock issuances for cash be utilized to pay down the outstanding loan balance unless written consent is obtained from Alleghany. As part of the SORC Purchase Transaction, the Company agreed to secure repayment of the Senior Consolidated Note with certain equipment and to reduce the note balance with any proceeds received from any sales of such equipment. The note bears no interest until January 1, 2022 whereupon the interest rate increases to 5% per annum through maturity. Accrued interest totaling $4,994 has been recorded as of February 28, 2022. Principal with all accrued and unpaid interest is 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 totaling $617,934 is recorded as a current note payable as of February 28, 2022. The debt discount has been fully amortized as of December 31, 2021.

Paycheck Protection Program Loan

On April 28, 2020, the Company entered into a Note (the “Note”) with IBERIA BANK for $1,233,656 pursuant to the terms of the Paycheck Protection Program (“PPP”) authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act (“CARES Act”). In June 2020, the Flexibility Act which amended the CARES Act was signed into law. Pursuant to the Flexibility Act, the Note continues to accrue interest on the outstanding principal sum at the rate of 1% per annum. In addition, the initial two-year Note term has been extended to five years through mutual agreement with IBERIA BANK as allowed under Flexibility Act provisions.

In February, 2021, the Company drew an additional $1,233,655 under the PPP Second Draw Loans, bringing the total principal borrowed to $2,467,311. The additional draw is under the same terms and conditions as the first PPP loan.

The Flexibility Act also provides that if a borrower does not apply for forgiveness of a loan within 10 months after the last day of the measurement period (“covered period”), the PPP loan is no longer deferred and the borrower must begin paying principal and interest. In addition, the Flexibility Act extended the length of the covered period from eight weeks to 24 weeks from receipt of proceeds, while allowing borrowers that received PPP loans before June 5, 2020 to determine, at their sole discretion, a covered period of either 8 weeks or 24 weeks.

No interest or principal will be due during the deferral period, although interest will continue to accrue over this period. As of February 28, 2022, interest totaling $13,303 is recorded in accrued interest on the accompanying balance sheets. After the deferral period and after taking into account any loan forgiveness applicable to the Note, any remaining principal and accrued interest will be payable in substantially equal monthly installments over the remaining term of the Note.

The Company did not provide any collateral or guarantees for the loan, nor did the Company pay any facility charge to obtain the loan. The Note provides for customary events of default, including, among others, those relating to failure to make payment, bankruptcy, breaches of representations and material adverse effects. The Company may prepay the Note at any time without payment of any penalty or premium.

NOTE 12 – NOTES PAYABLE - continued

The Company applied for forgiveness of the first PPP note and in July 2021 received notice that $1,209,809 of the $1,233,656 note payable balance has been forgiven along with the $15,099 related accrued interest through that date. As of May 31, 2021 both PPP Notes have been recorded as debt. During the nine months ended February 28, 2022, the portion of the loan forgiven has been recorded as income from PPP loan forgiveness as the Company has been legally released from being the primary obligor in accordance with ASC 405-20-40-1. Monthly payments commence on September 1, 2021 with respect to the remaining $23,847 balance on the first Note.

In April 2022, the Company applied for partial forgiveness on the PPP Second Draw Loan. No assurance can be given that the Company will obtain forgiveness of the loan, in whole or in part. Similar to the first PPP Note, any forgiveness on the PPP Second Draw Loan will be treated as income from the extinguishment of its loan obligation when it is legally released from being the primary obligor in accordance with ASC 405-20-40-1.

NOTE 13 – EMPLOYEE SEPARATIONS

The Company establishes obligations for expected termination benefits provided under existing agreements with a former or inactive employee after employment but before retirement. These benefits generally include severance payments and medical continuation coverage. During the nine months ending February 28, 2021, the Company continued to reduce expenses in response to the impact of the COVID-19 pandemic. The Company incurred severance and related charges totaling $222,023 during the first quarter 2021 and $284,113 during the third quarter 2021. As of February 28, 2022 and May 31, 2021, the Company has no remaining severance accrual included in accrued payroll liabilities.

NOTE 14 – EQUITY METHOD INVESTMENTS

On June 30, 2020, Laredo 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 certain oil and gas properties in the Cat Creek Field in Petroleum and Garfield Counties in the State of Montana (the “Cat Creek Properties”). In accordance with the LLC Agreement, Laredo invested $448,900 in Cat Creek for 50% of the ownership interests in Cat Creek using cash on hand. Each of Lipson Investments LLC and Viper Oil & Gas, LLC, the other two members of Cat Creek, have ownership interests in Cat Creek of 25% in consideration of their respective investments of $224,450. Cat Creek will be managed by a Board of Directors consisting of four directors, two of which shall be designated by Laredo.

Cat Creek entered into an Asset Purchase and Sale Agreement (the “Purchase Agreement”) with Carrell Oil Company (“Seller”) on July 1, 2020 for the purchase of the Cat Creek Properties from Seller. On September 21, 2020, upon resolving the purchase contingency under the Purchase Agreement, the Seller received consideration of $400,000, taking into effect certain adjustments resulting from pre- and post-effective date revenue, expense, and allocations.

NOTE 14 – EQUITY METHOD INVESTMENTS - continued

Summarized Financial Information

The following table provides summarized financial information for the Company’s ownership interest in Cat Creek accounted for under the equity method for the February 28, 2022 period presented and has been compiled from respective company financial statements, reflects certain historical adjustments, and is reported on a two-month lag. Results of operations are excluded for periods prior to acquisition.

Summarized Financial Information  

NOTE 15 – COMMITMENTS AND CONTINGENCIES

On February 4, 2021, a case captioned Lustre Oil Company LLC and Erehwon Oil & Gas, LLC v. Anadarko Minerals, Inc. and A&S Mineral Development Co., LLC was filed in the Montana Seventeenth Judicial District Court for Valley County by Lustre Oil Company LLC, a subsidiary of the Company (“Lustre”), to initiate a quiet title action confirming Lustre’s rights under certain mineral leases in Valley County, Montana. Lustre is also seeking damages with respect to actions taken by A&S Mineral Development Co., LLC to improperly produce oil on the property subject to such mineral leases. On January 14, 2022, the court dismissed this action on the motion of the defendant. This decision is being appealed by the Company to the Montana Supreme Court.

Except as set forth above, we are not currently involved in any other legal proceedings and we are not aware of any other pending or potential legal actions.

NOTE 16 – SUBSEQUENT EVENTS

In March 2022, Laredo 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 $53,625, receiving $45,000 in net cash proceeds. The convertible promissory note had an original issue discount of $4,875. Further $3,750 debt issue costs were deducted from the gross proceeds. The total of $8,625 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, accrue interest at 8% per annum (22% upon the occurrence of an event of default) and are convertible after 180 days into shares of the Company’s 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.

Further, on April 4, 2022 the Company repaid the Convertible Note entered into in October 2021. The repayment totaled $136,479 comprised of $114,125 principal and $22,354 related accrued interest. The Company borrowed $136,479 from Cat Creek to repay the Convertible Note.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 2022.

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”).

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). As of December 31, 2021, Mr. Lindsey was no longer providing the aforementioned consulting services.

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 made in calendar year 2021 to the Company under the Alleghany Consulting Agreement, the Company no longer receives management fee revenue from Alleghany or reimbursement from Alleghany for the monthly expenses of its employees, which fees and reimbursements were effectively all of the 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 31,303 gross acres and 28,497 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 before June 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 (“Erehwon APA”) with Erehwon Oil & Gas, LLC (“Erehwon”) 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 Erehwon 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 Erehwon 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 Erehwon 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 landowner 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.

In January 2022, the Company and Lustre executed a Net Profits Interest Agreement dated effective as of October 2021 (“NPI Agreement”) with Erehwon and Olfert No. 11-4 Holdings, LLC (“Olfert Holdings”) for the purpose of funding the first well, Olfert #11-4, (the “Well”) under the Erehwon APA. 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.

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.

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 February 28, 2022 was $994,823, of which $849,053 is restricted. Total debt outstanding as of February 28, 2022 is $2,089,390 comprised of $217,196, recorded net of $23,429 deferred debt discount, convertible debt classified as short-term payable and owed to two accredited investors, $617,934, owed to Alleghany Capital, which is classified as a short-term notes payable and $1,254,260 pursuant to the PPP Notes. Based on the terms of the PPP Notes, $1,012,198 is classified as a long-term note, net of the current portion totaling $242,062 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 $1,092,223 and $1,230,765 for the quarter ended February 28, 2021. Similarly, The Company received and recorded management fee and other revenue and direct cost totaling $4,015,764 and $4,212,466 for the nine months ended February 28, 2021. Due to the termination of the MSA, there are no similar management fee revenues and expenses during fiscal 2022. During the three and nine months ended February 28, 2022, the Company recorded other revenue totaling $95,372 and $667,608 comprised of revenue from consulting services provided pursuant to the Alleghany Consulting Agreement. The Company received and recorded other revenues totaling $290,745 for both the three and nine months ended February 28, 2021. 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 nine months ended February 28, 2022 as compared to the same periods in the prior fiscal year.

During the quarters ended February 28, 2022 and February 28, 2021, respectively, the Company incurred operating expenses of $151,151 and $102,137. 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 February 28, 2022 as compared to the same period in 2021 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 February 28, 2022.

During the nine months ended February 28, 2022 and February 28, 2021, respectively, the Company incurred operating expenses of $531,582 and $376,314. 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 nine months ended February 28, 2022 as compared to the same period in 2021 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 nine months ending February 28, 2022.

During the nine months ended February 28, 2022, the Company recognized $1,224,908 gain on PPP loan forgiveness of both principle and accrued interest, recognized $11,838 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 nine months ended February 28, 2021.

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.

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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk is confined to our cash equivalents. We invest in high-quality financial instruments and we believe we are subject to limited credit risk. Due to the short-term nature of our cash, we do not believe that we have any material exposure to interest rate risk arising from our investments.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission (“SEC”) rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives, and management necessarily is required to use its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, the CEO and CFO have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are not effective in insuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Our size has prevented us from being able to employ sufficient resources to enable us to have an adequate level of supervision and segregation of duties. Therefore, it is difficult to effectively segregate accounting duties which comprises a material weakness in internal controls. This lack of segregation of duties leads management to conclude that the Company’s disclosure controls and procedures are not effective to give reasonable assurance that the information required to be disclosed in reports that the Company files under the Exchange Act is recorded, processed, summarized and reported as and when required.

(b) Changes in Internal Control Over Financial Reporting

None.

PART II - OTHER INFORMATION

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The exhibits required to be filed herewith by Item 601 of Regulation S-K, as described in the following index of exhibits, are attached hereto unless otherwise indicated as being incorporated herein by reference, as follows:

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

LAREDO OIL, INC.

(Registrant)