Laredo Oil, Inc. - Quarter Report: 2013 November (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 NOVEMBER 30, 2013
Commission File Number 333-153168
Laredo Oil, Inc.
(Exact name of registrant as specified in its charter)
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
111 Congress Avenue, Suite 400
Austin, Texas 78701
(Address of principal executive offices) (Zip code)
(512) 279-7870
(Registrant's telephone number, including area code)
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, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," "non-accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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o
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Accelerated filer
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o
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Non-accelerated filer
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o
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Smaller reporting company
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x
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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:
53,650,013 shares of common stock issued and outstanding as of January 14, 2014.
1
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PART I FINANCIAL INFORMATION
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||
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Item 1.
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Financial Statements
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3
|
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Balance Sheets as of November 30, 2013 (unaudited) and May 31, 2013
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4
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|
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Statements of Operations (unaudited)
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5
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|
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Statements of Cash Flows (unaudited)
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6
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Notes to Financial Statements (unaudited)
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7
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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11
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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12
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Item 4.
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Controls and Procedures
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12
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PART II OTHER INFORMATION
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||
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Item 6.
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Exhibits
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13
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Signatures
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14
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2
ITEM 1. FINANCIAL STATEMENTS
The following unaudited 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, 2013. 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 August 29, 2013. 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 November 30, 2013 and the results of its operations for the three and six month periods and cash flows for the six month periods then ended, have been included. The results of operations for the three and six month periods ended November 30, 2013 are not necessarily indicative of the results for the full year ending May 31, 2014.
3
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Laredo Oil, Inc.
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||||||||
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Balance Sheets
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||||||||
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November 30,
2013
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May 31,
2013
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|||||||
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(Unaudited)
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||||||||
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ASSETS
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||||||||
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Current Assets
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||||||||
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Cash and cash equivalents
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$
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63,181
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$
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107,674
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||||
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Prepaid expenses and other current assets
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51,575
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35,690
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||||||
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Total Current Assets
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114,756
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143,364
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||||||
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TOTAL ASSETS
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$
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114,756
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$
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143,364
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||||
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LIABILITIES AND STOCKHOLDERS’ DEFICIT
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||||||||
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Current Liabilities
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||||||||
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Accounts payable
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$
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30,383
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$
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27,963
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||||
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Accrued payroll liabilities
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311,538
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222,631
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||||||
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Accrued interest
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64,476
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50,293
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||||||
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Deferred management fee revenue
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45,833
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40,833
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||||||
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Warrant liabilities
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266,377
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140,365
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||||||
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Total Current Liabilities
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718,607
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482,085
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||||||
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Long term notes payable
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350,000
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350,000
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||||||
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TOTAL LIABILITIES
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1,068,607
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832,085
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||||||
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Commitments and Contingencies
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-
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-
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||||||
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Stockholders’ Deficit
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||||||||
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Preferred stock: $0.001 par value; 10,000,000 shares authorized; none issued and outstanding
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-
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-
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||||||
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Common stock: $0.0001 par value; 90,000,000 shares authorized; 53,650,013 and 53,500,013 issued and outstanding, respectively
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5,365
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5,350
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||||||
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Additional paid in capital
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6,374,856
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6,163,086
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||||||
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Accumulated deficit
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(7,334,072
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)
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(6,857,157
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)
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||||
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Total Stockholders’ Deficit
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(953,851
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)
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(688,721
|
)
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||||
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TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
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$
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114,756
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$
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143,364
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||||
The accompanying notes are an integral part of these financial statements.
4
Laredo Oil, Inc.
Statements of Operations
(Unaudited)
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Three Months Ended
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Three Months Ended
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Six Months Ended
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Six Months Ended
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|||||||||||||
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November 30, 2013
|
November 30, 2012
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November 30, 2013
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November 30, 2012
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|||||||||||||
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Management fee revenue
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$
|
768,651
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$
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490,593
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$
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1,468,848
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$
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961,886
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||||||||
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Direct costs
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742,972
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423,242
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1,391,490
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792,596
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||||||||||||
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Gross profit
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25,679
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67,351
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77,358
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169,290
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||||||||||||
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General, selling and administrative expenses
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125,665
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134,089
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256,397
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275,350
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||||||||||||
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Consulting and professional services
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72,843
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86,148
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157,505
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169,564
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||||||||||||
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Total Operating Expense
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198,508
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220,237
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413,902
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444,914
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||||||||||||
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Operating loss
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(172,829
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)
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(152,886
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)
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(336,544
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)
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(275,624
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)
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||||||||
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Other income (expense)
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||||||||||||||||
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Gain on revaluation of warrant liability
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(77,136
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)
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7,551
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(126,012
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)
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28,620
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||||||||||
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Interest expense
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(8,925
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)
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(5,268
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)
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(14,359
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)
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(10,690
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)
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||||||||
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Net loss
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$
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(258,890
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)
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$
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(150,603
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)
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$
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(476,915
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)
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$
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(257,694
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)
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||||
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Net loss per share, basic and diluted
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$
|
(0.00
|
)
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$
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(0.00
|
)
|
$
|
(0.01
|
)
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$
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(0.00
|
)
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||||
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Weighted average number of common shares outstanding
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53,650,013
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53,500,013
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53,594,275
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53,327,882
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||||||||||||
The accompanying notes are an integral part of these financial statements.
5
Laredo Oil, Inc.
Statements of Cash Flows
(Unaudited)
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Six Months Ended
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Six Months Ended
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|||||||
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November 30, 2013
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November 30, 2012
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|||||||
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CASH FLOWS FROM OPERATING ACTIVITIES
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||||||||
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Net loss
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$
|
(476,915
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)
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$
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(257,694
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)
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||
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Adjustments to Reconcile Net Loss to Net Cash Used by Operating Activities
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||||||||
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Stock issued for services
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28,333
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20,556
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||||||
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Warrants issued for services
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-
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-
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||||||
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Share based compensation
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183,452
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191,646
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||||||
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Loss (gain) on revaluation of warrant liability
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126,012
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(28,620
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)
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|||||
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(Increase) decrease in prepaid expenses and other current assets
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(15,885
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)
|
4,402
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|||||
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Increase in accounts payable and accrued liabilities
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105,510
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54,646
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||||||
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Increase in deferred management fee revenue
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5,000
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-
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||||||
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NET CASH USED BY OPERATING ACTIVITIES
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(44,493
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)
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(15,064
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)
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||||
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CASH FLOWS FROM INVESTING ACTIVITIES
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-
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-
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||||||
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CASH FLOWS FROM FINANCING ACTIVITIES
|
-
|
-
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||||||
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Net decrease in cash and cash equivalents
|
(44,493
|
)
|
(15,064
|
)
|
||||
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
107,674
|
114,563
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||||||
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CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
$
|
63,181
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$
|
99,499
|
||||
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Supplemental disclosures
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||||||||
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Noncash Financing Activities
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||||||||
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Reclassification of warrant liability to equity
|
$
|
-
|
$
|
(107,091
|
)
|
|||
The accompanying notes are an integral part of these financial statements.
6
Laredo Oil, Inc.
Notes to Financial Statements
November 30, 2013
(Unaudited)
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
On June 14, 2011, the Company entered into agreements with Stranded Oil Resources Corporation (“SORC”) to seek recovery of stranded crude oil from mature, declining oil fields by using the Enhanced Oil Recovery (“EOR”) method known as Underground Gravity Drainage (“UGD”). Such agreements include license agreements, management services agreements, and other agreements (collectively the “Agreements”). SORC is a subsidiary of Alleghany Capital Corporation (“Alleghany Capital”) which is a subsidiary of Alleghany Corporation (“Alleghany”).
The Agreements stipulate that the Company and Mark See, the Company’s Chairman and Chief Executive Officer (“CEO”), will provide to SORC management services and expertise through exclusive, perpetual license agreements and a management services agreement (the “Management Service Agreement”) 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 Management Service Agreement outlines that the Company will provide the services of key employees (“Key Persons”), including Mark See, in exchange for monthly and quarterly management service fees. The monthly and quarterly management service fees provide funding for the salaries, benefit costs, and FICA taxes for the Key Persons identified in the Management Services Agreement. The quarterly management fee was raised from $122,500 per quarter to $137,500 per quarter in August 2013 and is paid on the first day of each calendar quarter, and, as such, $45,833 has been recorded as deferred management fee revenue at November 30, 2013. In addition, SORC will reimburse the Company for monthly expenses incurred by the Key Persons in connection with their rendition of services under the Management Services Agreement. The Company may 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, will determine whether or not to fund.
As consideration for the licenses to SORC, the Company will receive a 19.49% 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 by the Company to Laredo Royalty Incentive Plan, LLC, a special purpose Delaware limited liability company and wholly owned subsidiary of Laredo Oil, Inc. formed to carry out the purposes of the Plan (the “Plan Entity”). Through November 30, 2013 the subsidiary has had no activity. As a result of the assignment of the Incentive Royalty to the Plan Entity, the Royalty retained by the Company has been reduced from 19.49% to 17.24% subject to reduction to 15% under certain events stipulated in the SORC License Agreement. Additionally, in the event of a SORC initial public offering or certain other defined corporate events, the Company will receive 17.24%, subject to reduction to 15% under the SORC License Agreement, of the SORC common equity or proceeds emanating from the event in exchange for termination of the Royalty. Under certain circumstances regarding termination of exclusivity and license terminations, the Royalty could be reduced to 7.25%. If any Incentive Royalty is funded as a result of those conditions being met, the Company may record compensation expense for the fair value of the Incentive Royalty, once all pertinent factors are known and considered probable.
Basic and Diluted Loss per Share
The Company’s basic and diluted loss per share 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 six month periods ended November 30, 2013 and 2012, no potentially dilutive securities were included in the calculation of diluted loss per share as their impact would have been anti-dilutive.
NOTE 2 – GOING CONCERN
These financial statements have been prepared on a going concern basis. The Company has no significant operating history as of November 30, 2013, and has a net loss of approximately $476,915 for the six months ended November 30, 2013. The Company entered into the Agreements with SORC to fund operations and to provide working capital. However, there is no assurance that in the future such financing will be available to meet the Company’s needs.
Management has undertaken steps as part of a plan to improve operations with the goal of sustaining our operations for the next twelve months and beyond. These steps include (a) providing services and expertise under the Agreements to expand operations; and (b) controlling overhead and expenses. 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 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.
7
Laredo Oil, Inc.
Notes to Financial Statements
November 30, 2013
(Unaudited)
NOTE 3 - 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 4 - 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, trade accounts receivable, accounts payable, accrued liabilities, warrant liabilities and notes payable. All instruments, with the exception of the warrant liabilities which are measured at fair value, are accounted for on a historical cost basis, which, due to the short maturity of these financial instruments, approximates fair value at November 30, 2013. 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.
FASB ASC 820, Fair Value Measurements (“FASB ASC 820”), defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. FASB ASC 820 provides a framework for measuring fair value, establishes a three level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and requires consideration of the counterparty’s creditworthiness when valuing certain assets.
The three level fair value hierarchies for disclosure of fair value measurements defined by FASB ASC 820 are as follows:
Level 1 – Unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. An active market is defined as a market where transactions for the financial instrument occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 – Inputs, other than quoted prices in active markets, that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. Valuation under level 3 generally involves a significant degree of judgment from management.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
The Company has warrant liabilities which are measured at fair value on a recurring basis at November 30, 2013 and 2012. The Company recorded a loss on revaluation of warrant liability of $77,136 and $126,012 and a gain on revaluation of warrant liability of $7,551 and $28,620 for the three and six months ended November 30, 2013 and 2012, respectively. The Company measures the fair value of the warrant liabilities using the Black Scholes method. Inputs used to determine fair value under this method include the Company’s stock, volatility and expected remaining life as disclosed in Note 6.
The following table presents the fair value hierarchy for those assets measured at fair value on a recurring basis as of November 30, 2013 and 2012:
Fair Value Measurements on a Recurring Basis
|
Current Liability
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||||
|
Warrant Liabilities – November 30, 2013
|
$
|
-
|
$
|
266,377
|
$
|
-
|
$
|
266,377
|
||||||||
|
Warrant Liabilities – November 30, 2012
|
$
|
-
|
$
|
44,736
|
$
|
-
|
$
|
44,736
|
||||||||
8
Laredo Oil, Inc.
Notes to Financial Statements
November 30, 2013
(Unaudited)
NOTE 5 - 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:
● Affiliates of the entity;
● Entities for which investments in their equity securities is typically accounted for under the equity method by the investing entity;
● Trusts for the benefit of employees;
● Principal owners of the entity and members of their immediate families;
● Management of the entity and members of their immediate families;
Other parties that can significantly influence the management or operating policies of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
SORC and Alleghany are considered related parties under FASB ASC 850. All management fee revenue reported by the Company for the three and six months ended November 30, 2013 and 2012 is generated from charges to SORC. All outstanding long term notes payable at November 30, 2013 and May 31, 2013 are held by Alleghany Capital. See Note 8.
NOTE 6 - 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.
The following table summarizes share-based compensation:
|
Six Months Ended
|
||||||||
|
November 30, 2013
|
November 30, 2012
|
|||||||
|
Share-based compensation:
|
||||||||
|
General, selling and administrative expenses
|
$
|
183,452
|
$
|
191,646
|
||||
|
Consulting and professional services
|
28,333
|
20,556
|
||||||
|
211,785
|
212,202
|
|||||||
|
Share-based compensation by type of award:
|
||||||||
|
Stock options
|
183,452
|
191,646
|
||||||
|
Restricted stock
|
28,333
|
20,556
|
||||||
|
$
|
211,785
|
$
|
212,202
|
|||||
Stock Options
On August 8, 2013, the Company granted 1,540,000 stock options to employees with an exercise price of $0.25 per share, the fair market value on the date of grant. The options vest monthly over three years beginning September 1, 2013 and expire on August 8, 2023. The grant date fair value of this employee stock option grant amounted to approximately $380,000. The assumptions used in calculating these values were based on an expected term of 7.0 years, volatility of 187% and a 1.98% risk free interest rate at the date of grant.
On November 22, 2013, the Company granted 1,200,000 stock options to employees with an exercise price of $0.36 per share, the fair market value on the date of grant. The options vest monthly over three years beginning December 1, 2013 and expire on November 22, 2023. The grant date fair value of this employee stock option grant amounted to approximately $427,000. The assumptions used in calculating these values were based on an expected term of 7.0 years, volatility of 186% and a 2.1% risk free interest rate at the date of grant. On November 22, 2013, the Company reduced the number of stock options previously granted to an employee with an exercise price of $2.00, resulting in a forfeiture of 400,000 stock options. As a result of this forfeiture, the Company recorded a reversal of compensation cost of approximately $40,000.
9
Laredo Oil, Inc.
Notes to Financial Statements
November 30, 2013
(Unaudited)
NOTE 6 - STOCKHOLDERS' DEFICIT - continued
Restricted Stock
On August 8, 2013, the three independent board members were each granted 50,000 restricted shares which vest in equal annual installments over three years beginning on the grant date.
The fair value of the restricted stock granted is the market value as of the respective grant date since the restricted stock is granted at no cost to the directors. The grant date fair value of restricted stock granted during the first quarter of fiscal year 2014 was $37,500, using $0.25 per share.
In August 2012, Laredo Oil granted 500,000 shares of restricted stock to its new independent board member at a grant date fair value of $65,000 using $0.13 per share. The shares vest over three years.
Warrants
No warrants have been issued during the first half of fiscal year 2014 or 2013.
All outstanding warrants are currently exercisable.
NOTE 7 - CONVERTIBLE NOTES PAYABLE
During May and June 2010, the Company issued ten convertible notes totaling $300,000, with an interest rate of 10% per annum, related to the Purchase Agreement. During June and July 2011, the ten convertible notes and accrued interest were repaid in full.
In addition, the Company issued warrants to purchase 770,000 aggregate shares of capital stock. These warrants are exercisable for five years from the date of the Notes and warrants. The exercise price of each warrant will be equal to the lesser of the conversion price of the corresponding Note or $2.00. Accordingly, these warrants contain anti-dilution provisions that adjust the exercise price of the warrants in the event additional shares of common stock or securities convertible into common stock are issued by the Company at a price less than the then applicable exercise price of the warrants. Pursuant to FASB ASC 815-40, Derivatives and Hedging, these warrants are treated as a liability measured at fair value at inception, with the calculated increase or decrease in fair value each quarter being recognized in the Statement of Operations. The fair value of the warrants was determined during the three months ending November 30, 2013 and 2012 using the Black-Scholes option pricing model based on the following weighted average assumptions:
|
2013
|
2012
|
|||||||
|
Risk-free interest rates
|
0.28
|
%
|
1.18
|
%
|
||||
|
Contractual life
|
1.7 years
|
2.5 years
|
||||||
|
Expected volatility
|
202.5
|
%
|
184.7
|
%
|
||||
|
Dividend yield
|
0
|
%
|
0
|
%
|
||||
NOTE 8 - LONG TERM NOTES PAYABLE
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 accrue interest on the outstanding principal of $350,000 at the rate of 6% per annum. As of November 30, 2013, accrued interest totaling $64,476 is recorded in current liabilities. The interest is payable in either cash or in kind. The notes have been amended and restated and now have a maturity date of December 31, 2014 and are classified as long term notes payable. The loan agreements require any stock issuances for cash be utilized to pay down the outstanding loan balance unless written consent is obtained from Alleghany Capital.
10
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.
The Company is a management services company managing both the acquisition of mature oil fields and the recovery of stranded oil from those fields using enhanced oil recovery methods for its sole customer, SORC, an indirect, wholly owned subsidiary of Alleghany. The sole source of revenue for the Company comes from the management fees described in the Management Services Agreement and from royalty fees based upon the success of SORC.
As of November 30, 2013, Alleghany Capital Corporation has invested approximately $55.2 million for a project located near Fredonia, Kansas and another project located in a different state. A portion of these funds were used to acquire oil-producing leases or to purchase mineral rights. Construction continues for the Kansas project as of the date of the filing of this report.
SORC has continued to acquire oil-producing leases in another state which contains a targeted oil reservoir. Negotiations continue to acquire additional mineral rights and leases in that oil field, and the Company believes that mineral rights underlying sufficient acreage are already in place to develop another UGD project there. The Company plans to develop test wells on the targeted field and, if certain criteria are met, will begin implementing the UGD recovery method after approval by the SORC board of directors.
When SORC acquires mineral rights, it generally will continue to operate any producing properties associated with those rights and expects to generate revenue and profit from doing so. Some mineral rights acquired thus far include leases which have producing wells on them. Once development of the underground chamber and the UGD method is prepared for operation, selected conventional wells are expected to be plugged and abandoned after UGD production has begun. The effect of such operational procedures should result in minimal disruption of oil production from the SORC field investments.
In accordance with the terms of the Agreements, the Company has agreed with SORC that it will not acquire for its own account any fields associated with UGD development unless authorized by the SORC Board of Directors.
LIQUIDITY & CAPITAL RESOURCES
Due to the nature of the SORC transaction, the Company forecasts that it will need no additional funding in order to execute its agreements with SORC. In accordance with the SORC license and management services agreements, the Company believes that it will receive from SORC sufficient working capital necessary to meet its obligations under the Agreements. The Company provides the know-how, expertise, and management required to identify, evaluate, acquire, test and develop targeted properties, and SORC will provide all required funding and will own the acquired assets. It is expected that SORC will be funded primarily by Alleghany Capital in exchange for issuance by SORC to Alleghany Capital of 12% Cumulative Preferred Stock and common stock. In calendar year 2014, it is expected that SORC or subsidiaries thereof may enter into one or more non-recourse credit facilities to provide a lower cost source of funding than funds from Alleghany Capital. As of November 30, 2013, SORC has received approximately $55.2 million in funding from Alleghany Capital. Prior to the Company’s receiving any Royalty cash distributions from SORC, all SORC preferred share accrued dividends must be paid, preferred shares redeemed, and debt retired to comply with any loan agreements.
Our reported cash at November 30, 2013 was $63,181. Since entering into the SORC transaction on June 14, 2011, the Company has received $6,321,732 from SORC in management fees, reimbursement for transaction expenses, and funds used to retire a portion of Company debt. Total debt outstanding as of the filing date of this report is $350,000 owed to Alleghany Capital.
RESULTS OF OPERATIONS
As a result of the ongoing Agreements with SORC, we received and recorded management fee revenue and direct costs totaling $768,651 and $742,972 and $1,468,848 and $1,391,490 for the three and six month periods ending November 30, 2013, respectively. We received and recorded management service fee revenue and direct costs totaling $490,593 and $423,242 and $$961,886 and $792,596, respectively, for the three and six month periods ended November 30, 2012. The increases in management fee revenue and direct costs are primarily attributable to additional direct personnel costs which are reimbursable.
During the three and six month periods ended November 30, 2013 and 2012, respectively, we incurred operating expenses of $198,508 and $413,902 and $220,237 and $444,914. 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
Additionally, for the three and six month periods ended November 30, 2013 and 2012, the Company experienced a loss on revaluation of the warrant liability of $77,136 and $126,012 and a gain on revaluation of the warrant liability of $7,551 and $28,620, respectively, due to the changes in the common stock price in the respective periods, as well as a change in the exercise price on certain warrants. The Company’s operating loss will continue to be affected by changes of value of the warrant liability associated with the warrants issued in conjunction with the sale of $500,000 of common stock in 2010 and which contain price-protection provisions. Those warrants will be outstanding until they are either exercised or expire in July 2015.
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. Such estimates primarily relate to revaluation of warrants as of the date of the financial statements; accordingly, actual results may differ from estimated amounts. Our estimates and assumptions are based on current facts, historical experience and various other factors we believe to be reasonable under the circumstances. The most significant estimates with regard to the financial statements included with this report relate to the valuation of warrants.
These estimates and assumptions are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the periods in which they become known.
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.
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PART II - OTHER INFORMATION
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:
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3.1
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Certificate of Incorporation, included as Exhibit 3.1 in our Form S-1 filed August 25, 2008, File No. 333-153168 and incorporated herein by reference.
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3.2
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Certificate of Amendment of Certificate of Incorporation, included as Exhibit 10.1 to our Form 8-K filed October 22, 2009 and incorporated herein by reference.
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3.3
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Bylaws, included as Exhibit 3.2 in our S-1 filed August 25, 2008, File No. 333-153168 and incorporated herein by reference.
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101.INS
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XBRL Instance Document
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101.SCH
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XBRL Taxonomy Extension Schema
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase
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101.LAB
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XBRL Taxonomy Extension Label Linkbase
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101.PRE
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XBRL Extension Presentation Linkbase
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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)
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Date: January 14, 2014
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By:
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/s/ Mark See
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Mark See
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Chief Executive Officer and Chairman of the Board
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Date: January 14, 2014
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By:
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/s/ Bradley E. Sparks
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Bradley E. Sparks
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Chief Financial Officer, Treasurer and Director
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