Laredo Oil, Inc. - Quarter Report: 2016 November (Form 10-Q)
U.S. SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.20549
FORM 10-Q
☒ QUARTERLY REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2016
Commission File Number 333-153168
Laredo Oil, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State
or other jurisdiction of incorporation or
organization)
110 N. Rubey Dr., Suite 120
Golden, Colorado 80403
(Address of principal executive offices) (Zip code)
(720) 295-1214
(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 ☒ No ☐
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 ☒
No ☐
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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☐
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Accelerated filer
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☐
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Non-accelerated filer
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☐
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Smaller reporting company
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☒
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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 ☐
No ☒
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
January 16, 2017.
1
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PART I FINANCIAL INFORMATION
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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, 2016 (unaudited) and
May 31, 2016
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4
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Statements of Operations (unaudited)
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5
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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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12
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Item 3.
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Quantitative and Qualitative Disclosures About Market
Risk
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14
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Item 4.
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Controls and Procedures
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14
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PART II OTHER INFORMATION
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Item 6.
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Exhibits
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15
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Signatures
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16
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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, 2016. 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, 2016. 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, 2016, and
the results of its operations for the three and six-month periods
then ended 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, 2016 are not
necessarily indicative of the results for the full year ending May
31, 2017.
3
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Laredo Oil, Inc.
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Balance Sheets
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November 30,
2016
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May 31,
2016
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(Unaudited)
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ASSETS
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Current Assets
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Cash and cash equivalents
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$129,966
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$393,937
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Prepaid expenses and other current assets
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118,829
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46,293
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Total Current
Assets
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248,795
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440,230
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TOTAL ASSETS
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$248,795
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$440,230
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LIABILITIES AND STOCKHOLDERS’ DEFICIT
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Current Liabilities
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Accounts payable
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$19,620
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$33,363
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Accrued payroll liabilities
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1,178,750
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1,0527,280
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Accrued liabilities – related party
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-
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170,079
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Accrued interest
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144,580
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129,632
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Deferred management fee revenue
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45,833
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45,833
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Notes payable
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-
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350,000
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Total Current Liabilities
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1,388,783
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1,786,187
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Long-term notes payable
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350,000
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-
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TOTAL LIABILITIES
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1,738,783
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1,795,438
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Commitments and Contingencies
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-
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-
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Stockholders’ Deficit
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Preferred stock: $0.0001 par value; 10,000,000 shares authorized;
none issued and outstanding
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-
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-
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Common stock: $0.0001 par value; 90,000,000 shares authorized;
54,514,765 issued and outstanding
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5,451
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5,451
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Additional paid in capital
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8,436,370
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8,188,199
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Accumulated deficit
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(9,931,809)
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(9,539,607)
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Total Stockholders’ Deficit
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(1,489,988)
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(1,345,957)
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TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
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$248,795
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$440,230
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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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November 30, 2016
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November 30, 2015
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November 30, 2016
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November 30, 2015
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Management
fee revenue
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$2,408,232
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$2,856,704
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$5,031,443
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$5,648,608
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Direct
costs
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2,510,548
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2,688,664
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5,024,958
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5,423,509
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Gross
profit
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(102,316)
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168,040
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6,485
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225,099
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General,
selling and administrative expenses
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86,887
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136,035
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195,819
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248,129
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Consulting
and professional services
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75,606
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98,227
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187,523
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211,920
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Total
Operating Expense
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162,493
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234,262
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383,342
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460,049
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Operating
loss
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(264,809)
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(66,222)
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(376,857)
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(234,950)
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Other income
(expense)
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Gain
(loss) on revaluation of warrant liability
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-
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-
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-
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(24,424)
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Interest
expense
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(7,158)
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(6,741)
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(15,345)
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(13,651)
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Net
income/(loss)
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$(271,967)
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$(72,963)
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$(392,202)
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$(273,025)
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Net
income/(loss) per share, basic and diluted
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$(0.00)
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$(0.00)
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$(0.01)
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$(0.01)
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Weighted
average number of common shares outstanding
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54,514,765
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54,514,765
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54,514,765
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54,394,375
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The accompanying notes are an integral part of these financial
statements.
5
Laredo Oil, Inc.
Statements of Cash Flows
(Unaudited)
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Six Months Ended
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Six Months Ended
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November 30, 2016
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November 30, 2015
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CASH
FLOWS FROM OPERATING ACTIVITIES
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Net
loss
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$(392,202)
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$(273,025)
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Adjustments
to Reconcile Net Loss to Net Cash provided by /(used in) Operating
Activities
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Share
based compensation
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248,171
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289,466
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Loss
on revaluation of warrant liability
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-
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24,424
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Increase
in prepaid expenses and other current assets
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(72,536)
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(33,693)
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(Decrease)/increase
in accounts payable and accrued liabilities
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(47,404)
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134,964
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NET
CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES
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(263,971)
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142,136
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CASH
FLOWS FROM INVESTING ACTIVITIES
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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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-
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Net
(decrease)/increase in cash and cash equivalents
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(263,971)
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142,136
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CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
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393,937
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85,835
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CASH
AND CASH EQUIVALENTS AT END OF PERIOD
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$129,966
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$227,971
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NON-CASH
FINANCING ACTIVITY
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Reclassification
of warrant liability to equity
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$-
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$276,415
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The accompanying notes are an integral part of these financial
statements.
6
NOTES TO FINANCIAL STATEMENTS
(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 (“MSA”) 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 management service
fees provide funding for the salaries, benefit costs, and FICA
taxes for the Key Persons 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 is $137,500 per quarter 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, 2016. In
addition, SORC will reimburse the Company for monthly expenses
incurred by the Key Persons in connection with their rendition of
services under the MSA. 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 of the filing
date, no such additional funding requests have been
made.
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, 2016
the subsidiary has received no distributions from
SORC. 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.
Prior to the Company 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. Additionally, when SORC acquires additional
oil fields, any Alleghany Capital funds invested into SORC to
finance their acquisition and development must be repaid prior to
the distribution of any Royalty cash distributions to
Laredo.
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 six month periods ended
November 30, 2016 and 2015, and the three month period ended
November 30, 2016, 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, 2016, and has a net loss of $392,202 for the six
months ended November 30, 2016. 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.
7
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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. 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 at a time
of expanding demand for its services under the
MSA. Further, the Company works closely with SORC to
obtain its approval in advance of committing to material costs and
expenditures in order to keep the Company’s expenses in line
with the management fee revenue. 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.
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 and
cash equivalents, accounts payable, accrued liabilities, warrant
liabilities and notes payable. All instruments are
accounted for on a historical cost basis, which, due to the short
maturity of these financial instruments, approximates fair value at
November 30, 2016.
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 had warrant liabilities which were measured at fair
value on a recurring basis until the underlying warrants were
exercised in July 2015. The Company recorded a loss on
revaluation of warrant liability of $24,424 for the three months
ended August 31, 2015. 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 price volatility and
expected remaining life as disclosed in Note 6.
8
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
During July 2015, the warrant liabilities were measured at fair
value prior to exercise of the underlying warrants. Upon
exercise of the warrants in July 2015 the resulting liability was
reclassified to additional paid in capital. Accordingly,
the warrant liability no longer requires fair value measurement as
of August 31, 2015.
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 Capital are considered related parties under
FASB ASC 850. All management fee revenue reported by the Company
for the three and six month periods ended November 30, 2016 and
2015 is generated from charges to SORC. All outstanding notes
payable at November 30, 2016 and 2015 are held by Alleghany
Capital. See Note 7.
Mr. Donald Beckham, a director of the Company, provided consulting
services to SORC related to the Teapot Dome Oilfield acquired by
SORC in January 2015. During the quarter ended August
31, 2015, Mr. Beckham was paid approximately $62,000 as
consideration for such services. This consulting arrangement
terminated on July 24, 2015.
9
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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:
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Six Months Ended
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|
November 30, 2016
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November 30, 2015
|
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Share-based
compensation:
|
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General,
selling and administrative expenses
|
$165,415
|
$199,373
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Consulting
and professional services
|
82,756
|
90,093
|
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|
248,171
|
289,466
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|
Share-based
compensation by type of award:
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Stock
options
|
246,782
|
281,689
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Restricted
stock
|
1,389
|
7,777
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$248,171
|
$289,466
|
Stock Options
No option grants were made during the first half of fiscal year
2017. Option grants for the purchase of 925,000 shares
of common stock at a price of $0.405 per share were made during the
first quarter of fiscal year 2016. The
options vest monthly over three years beginning September 1, 2015
and expire on August 8, 2025. The grant date fair value
of this employee stock option grant amounted to approximately
$365,000. The assumptions used in calculating these
values were based on an expected term of 7.0 years, volatility of
174% and a 1.92% risk free interest rate at the date of
grant.
Restricted Stock
No restricted stock was granted during the first half of fiscal
year 2017 or during fiscal year 2016.
Warrants
No warrants were issued during the first half of fiscal year 2017
or during fiscal year 2016. During July 2015, warrants to purchase
975,000 shares of common stock were exercised on a cashless basis,
resulting in the issuance of 516,196 shares of common
stock. As of November 30, 2016 there were 5,374,501
warrants remaining to be exercised at a price of $0.70 per share to
Sunrise Securities Corporation to satisfy the finders’ fee
obligation associated with the Alleghany transaction. The
warrants will expire June 14, 2021.
10
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
All outstanding warrants are currently exercisable.
During fiscal year 2011, the Company issued warrants to purchase
975,000 shares of common stock in connection with a stock purchase
agreement. These warrants are exercisable for five years from the
date of the Company’s Private Placement. The exercise price
of each warrant is equal to the lesser of the stock price in a
future financing arrangement or $0.25. Accordingly, these warrants
contained 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 were
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. During July 2015,
the warrant liabilities were measured at fair value prior to
exercise of the underlying warrants issued to purchase 975,000
shares of common stock on a cashless basis resulting in the
issuance of 516,196 shares of common stock. The
resulting liability was reclassified to additional paid in
capital. Accordingly, the warrant liability is no longer
measured at fair value as of November 30, 2016. The fair
value of the warrants was determined prior to the warrant exercise
during the three months ending August 31, 2015 using the
Black-Scholes option pricing model based a risk free interest rate
of 0.02%, expected term of 0.4 years, expected volatility of 163.1%
and no dividend yield.
NOTE 7 - 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, 2016, accrued interest
totaling $144,580 is recorded in accrued
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, 2017 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.
11
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 the
acquisition and conventional operation of mature oil fields and the
further recovery of stranded oil from those fields using enhanced
oil recovery methods for its sole customer, SORC, an indirect,
wholly owned subsidiary of Alleghany. See “Item 1.
Business” in the Form 10-K for the year ended May 31, 2016
for a discussion of our business and our transactions with
SORC. The sole source of revenue for the Company
comes from the management fees described in the MSA and from a
Royalty based upon the success of SORC. As of November 30,
2016, no royalties have been accrued or paid.
From its formation in 2011 through September 30, 2016, Alleghany
Capital has invested $269.2 million in SORC. This
investment is primarily being channeled into three major projects
located in separate states. The projects are listed in
order of acquisition, but not necessarily in order of when work may
commence on UGD projects if and when approved by the SORC board of
directors.
The first project is located in Kansas. SORC funds have been used
to acquire oil and gas leases and to purchase mineral rights
totaling approximately 2,500 acres and used to construct and
develop a UGD facility. After completing construction of its
underground facility in 2014, SORC commenced its drilling program
in 2015. The drilling program, however, was delayed by third-party
equipment problems that have since been corrected as well as a
longer than expected trial-and-error process determining the
optimum well completion technique for the reservoir which is
characterized by a lack of vertical permeability. As of the date of
this filing, several selected individual underground wellbores have
been put into production and are being monitored for their ability
to produce commercially viable oil quantities. As part of its
year-end asset impairment accounting assessments, SORC has engaged
a third-party petroleum engineering firm to provide it with an
evaluation of the oil-recovery prospects from the
project.
The second project is located in Louisiana. SORC has acquired oil
and gas leases on approximately 9,244 acres in a targeted oil
reservoir. The oil field there is operational and currently
producing crude oil using conventional production methods. The
Company believes that mineral rights underlying sufficient acreage
are already in place to develop another UGD project there. The
Company, on behalf of SORC, is currently operating those leases
acquired using conventional recovery methods. The Company is
assessing the geological data concerning the oil reservoir and will
begin implementing the UGD recovery method if approved by the SORC
board of directors.
The third project is located in Wyoming. On January 30, 2015, SORC,
through one of its subsidiaries, purchased the Department of
Energy's Naval Petroleum Reserve Number 3 (NPR-3), the Teapot Dome
Oilfield, for $45.2 million. The purchase culminated a competitive
bidding process that closed on October 16, 2014. Under the terms of
the sale, operation and ownership of all of NPR-3’s mineral
rights and approximately 9,000 acres of land immediately
transferred to SORC. The remaining surface acreage transferred in
June 2015, bringing the total acres purchased to 9,318. The oil
field there is operational and currently producing crude oil using
conventional production methods. The Company is assessing the
geological data concerning the oil reservoir and will begin
implementing the UGD recovery method if approved 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 any fields associated
with UGD development.
Liquidity and Capital Resources
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. In April 2014, one of the
SORC subsidiaries obtained a $250 million non-recourse secured bank
credit facility to provide it with a lower cost source of funding
as compared to the cost of funds received from Alleghany
Capital. As of November 30, 2016, SORC had no borrowings
under the facility which is limited to the value of properties
included in the borrowing base as determined by the lending
institution.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
continued
From its formation in 2011 through September 30, 2016, Alleghany
Capital has invested $269.2 million in SORC. 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. Additionally, when SORC acquires additional
oil fields, any Alleghany Capital funds invested into SORC to
finance their acquisition and development must be repaid prior to
the distribution of any Royalty cash distributions to
Laredo. With such uncertainty, Royalty cash
distributions are not foreseen in the near future, and the main
source of income for the Company will continue to be the management
fee revenue under the Management Services Agreement.
Our cash and cash equivalents at November 30, 2016 was
$129,966. Total debt outstanding as of the filing
date of this report is $350,000 owed to Alleghany Capital, which is
classified as long-term.
Results of Operations
Pursuant to the MSA with SORC, the Company received and recorded
management fee revenue and direct costs totaling $2,408,232 and
$2,510,548 for the quarter ended November 30, 2016 and $2,856,704
and $2,688,664 for the same quarter ended November 30,
2015. Similarly, the Company received and recorded
management fee revenue and direct costs totaling $5,031,443 and
$5,024,958 for the six months ended November 30, 2016 and
$5,648,608 and $5,423,509 for the six months ended November 30,
2015. The decrease in revenues and direct costs is primarily
attributable to a decrease in employees in the three and six months
ended November 30, 2016 as compared to the same three and six
months of the prior fiscal year.
During the quarters ended November 30, 2016 and 2015, respectively,
we incurred operating expenses of $162,493 and $234,262. The
Company incurred operating expenses of $383,342 and $460,049 during
the six months ended November 30, 2016 and 2015, respectively.
These expenses consisted of general operating expenses incurred in
connection with the day to day operation of our business, the
preparation and filing of our required reports and stock option
compensation expense. The decrease in expenses for the
three and six months ended November 30, 2016 as compared to the
same periods in 2015 is primarily attributable to the decreased
share based compensation expense, professional fees and rent
expense.
Due to the nature of the Agreements, the Company is 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.
Further, for the six months ended November 30, 2015, the Company
experienced a loss on revaluation of warrant liability of $24,424.
During the quarter ended August 31, 2015, the underlying warrants
to purchase 975,000 shares of common stock were exercised on a
cashless basis, resulting in the issuance of 516,196 shares of
common stock. After revaluation of the warrants, the related
warrant liability was reclassified to additional paid in capital.
The changes on revaluation during the six months ended November 30,
2015 are due to an increase in the common stock price, as well as a
change in the exercise price on certain warrants. The
Company’s operating results in future periods will no longer
continue to be affected by changes of value of the warrant
liability associated with the Sutter and Seaside
warrants.
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.
13
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.
14
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:
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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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15
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 17, 2017
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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 17, 2017
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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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16