Laredo Oil, Inc. - Quarter Report: 2018 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, 2018
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 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 such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company or an emerging growth company. See the
definitions of "large accelerated filer," "accelerated filer,"
"non-accelerated filer," "smaller reporting company," and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
|
Large accelerated filer
|
☐
|
Accelerated filer
|
☐
|
|
Non-accelerated filer
|
☐
|
Smaller reporting company
|
☒
|
|
|
|
Emerging growth company
|
☐
|
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
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 14, 2019.
1
|
PART I FINANCIAL INFORMATION
|
|
||
|
|
|
|
|
|
Item 1.
|
Financial Statements
|
3
|
|
|
|
Balance Sheets as of November 30, 2018 (unaudited) and May 31,
2018
|
4
|
|
|
|
Statements of Operations (unaudited)
|
5
|
|
|
|
Statements of Cash Flows (unaudited)
|
6
|
|
|
|
Notes to Financial Statements (unaudited)
|
7
|
|
|
|
|
|
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
|
11
|
|
|
|
|
|
|
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market
Risk
|
12
|
|
|
|
|
|
|
|
Item 4.
|
Controls and Procedures
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
PART II OTHER INFORMATION
|
|
||
|
|
|
|
|
|
Item 6.
|
Exhibits
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
Signatures
|
|
15
|
|
2
ITEM 1. FINANCIAL STATEMENTS
The following unaudited condensed 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 condensed
or 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, 2018. These condensed 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,
2018. 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, 2018,
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, 2018 are not necessarily
indicative of the results for the full year ending May 31,
2019.
3
|
Laredo Oil,
Inc.
|
||
|
Balance Sheets
|
||
|
|
|
|
|
|
November 30,
|
May 31,
|
|
|
2018
(unaudited)
|
2018
|
|
|
|
|
|
ASSETS
|
|
|
|
Current Assets
|
|
|
|
Cash
and cash equivalents
|
$435,418
|
$106,311
|
|
Receivable
– related party
|
19,778
|
120,124
|
|
Prepaid
expenses and other current assets
|
13,551
|
39,981
|
|
Total
Current Assets
|
468,747
|
266,416
|
|
|
|
|
|
TOTAL ASSETS
|
$468,747
|
$266,416
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
Current Liabilities
|
|
|
|
Accounts
payable
|
$33,356
|
$9,360
|
|
Accrued
payroll liabilities
|
1,301,283
|
1,207,417
|
|
Accrued
liabilities – related party
|
58,766
|
32,914
|
|
Accrued
interest
|
206,479
|
190,272
|
|
Deferred
management fee revenue
|
45,833
|
45,833
|
|
Notes
payable
|
-
|
350,000
|
|
Total
Current Liabilities
|
1,645,717
|
1,835,796
|
|
|
|
|
|
Long-term
notes payable
|
350,000
|
-
|
|
|
|
|
|
TOTAL LIABILITIES
|
1,995,717
|
1,835,796
|
|
|
|
|
|
Commitments
and Contingencies
|
-
|
-
|
|
|
|
|
|
Stockholders’ Deficit
|
|
|
|
Preferred
stock: $0.0001 par value; 10,000,000 shares authorized; none issued
and outstanding
|
-
|
-
|
|
Common
stock: $0.0001 par value; 90,000,000 shares authorized; 54,514,765
issued and outstanding
|
5,451
|
5,451
|
|
Additional
paid in capital
|
8,844,592
|
8,830,531
|
|
Accumulated
deficit
|
(10,377,013)
|
(10,405,362)
|
|
|
|
|
|
Total Stockholders’ Deficit
|
(1,526,970)
|
(1,569,380)
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
$468,747
|
$266,416
|
The accompanying notes are an integral part of these financial
statements.
4
Laredo Oil, Inc.
Statements of Operations
(Unaudited)
|
|
Three Months
Ended
|
Three Months
Ended
|
Six Months
Ended
|
Six Months
Ended
|
|
|
November 30,
2018
|
November 30,
2017
|
November 30,
2018
|
November 30,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
fee revenue – related party
|
$2,076,928
|
$2,165,923
|
$4,138,225
|
$4,631,204
|
|
|
|
|
|
|
|
Direct
costs
|
1,956,444
|
2,159,429
|
3,919,114
|
4,381,995
|
|
|
|
|
|
|
|
Gross
profit
|
120,484
|
6,494
|
219,111
|
249,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General,
selling and administrative expenses
|
13,845
|
87,402
|
42,805
|
175,226
|
|
Consulting
and professional services
|
43,460
|
70,184
|
130,964
|
106,684
|
|
Total
Operating Expense
|
57,305
|
157,586
|
173,769
|
281,910
|
|
|
|
|
|
|
|
Operating
income/(loss)
|
63,179
|
(151,092)
|
45,342
|
(32,701)
|
|
|
|
|
|
|
|
Other
income/(expense)
|
|
|
|
|
|
Interest
expense
|
(8,072)
|
(7,743)
|
(16,993)
|
(15,678)
|
|
|
|
|
|
|
|
Net
income/(loss)
|
$55,107
|
$(158,835)
|
$28,349
|
$(48,379)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income/(loss) per share, basic and diluted
|
$0.00
|
$(0.00)
|
$0.00
|
$(0.00)
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
54,514,765
|
54,514,765
|
54,514,765
|
54,514,765
|
The accompanying notes are an integral part of these financial
statements.
5
Laredo Oil, Inc.
Statements of Cash Flows
(Unaudited)
|
|
Six Months
Ended
|
Six Months
Ended
|
|
|
November 30,
2018
|
November 30,
2017
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
Net
income/(loss)
|
$28,349
|
$(48,379)
|
|
Adjustments
to Reconcile Net Income/(Loss) to Net Cash provided by /(used in)
Operating Activities
|
|
|
|
Share
based compensation
|
14,061
|
145,715
|
|
Decrease/(increase)
in receivable—related party
|
100,346
|
-
|
|
Decrease/(increase)
in prepaid expenses and other current assets
|
26,430
|
(6,793)
|
|
(Decrease)/increase
in accounts payable and accrued liabilities
|
159,921
|
(391,402)
|
|
NET
CASH USED IN OPERATING ACTIVITIES
|
329,107
|
(300,859)
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
-
|
-
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
-
|
-
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
329,107
|
(300,859)
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
106,311
|
330,684
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
$435,418
|
$29,825
|
|
|
|
|
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 various employees
(“Service Employees”), including Mark See, in exchange
for monthly and quarterly management service fees. The monthly
management service fees provide funding for the salaries, benefit
costs, and FICA taxes for the Service Employees identified in the
MSA. SORC remits payment for the monthly management fees in advance
and is payable on the first day of each calendar month. The
quarterly management fee is $137,500 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, 2018. In
addition, SORC will reimburse the Company for monthly expenses
incurred by the Service Employees 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, 2018
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 (in
excess of $160 million as of September 30, 2018), preferred shares
redeemed ($293.8 million as of September 30, 2018), and debt
retired to comply with any loan agreements. Additionally, when SORC
acquires additional oil fields, any Alleghany Capital funds
invested in 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. For the three
and six-month periods ended November 30, 2018, all options and
warrants potentially convertible into common equivalent shares are
considered antidilutive due to the exercise prices of the
instruments and have been excluded in the calculation of diluted
earnings per share. As the Company realized a net loss for the
three and six-month periods ended November 30, 2017, no potentially
dilutive securities were included in the calculation of diluted
loss per share as their impact would have been anti-dilutive.
Diluted net income (loss) per share is computed by dividing the net
income (loss) by the weighted-average number of common and dilutive
common equivalent shares outstanding during the
period.
NOTE 2 - GOING CONCERN
These financial statements have been prepared on a going concern
basis. The Company has routinely incurred losses since inception
and is dependent upon one customer for its revenue. 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)
NOTE 2 - GOING CONCERN - continued
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, 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
In May 2014, the FASB issued ASU 2014-09, “Revenue from
Contracts with Customers” (Topic 606) which amended the
existing accounting standards for revenue recognition. ASU 2014-09
establishes principles for recognizing revenue upon the transfer of
promised goods or services to customers, in an amount that reflects
the expected consideration received in exchange for those goods or
services. The amendments may be applied retrospectively to each
prior period (full retrospective) or retrospectively with the
cumulative effect recognized as of the date of initial application
(modified retrospective). The Company has adopted ASU 2014-09
beginning June 1, 2018 using the full retrospective implementation.
The adoption of this guidance has no material effect on the
Company’s financial position, results of operations or cash
flows.
As a result of this adoption, the following revenue recognition
policies have been adopted for each revenue stream.
Monthly Management Fee
We generate monthly management revenues from fees for labor and
benefit costs. We recognize revenue for these services in the month
the labor and benefits are received by the customer.
Quarterly Management Fee
We generate management fee revenue each quarter. We recognize
revenue over the applicable quarter on a straight-line basis. The
management fee is billed quarterly in advance. As a result, we
record deferred revenue for services that have not been
provided.
In addition to the above, 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 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,
2018.
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.
8
NOTES TO FINANCIAL STATEMENTS
(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 Capital 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, 2018 and 2017 is
generated from charges to SORC. All outstanding notes payable at
November 30, 2018 and 2017 are held by Alleghany Capital. See Note
7.
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 Company recognized shared based compensation expense related to
stock option awards totaling $14,061 and $145,715 and recorded in
general, selling and administrative expenses for the six months
ended November 30, 2018 and 2017, respectively.
Stock Options
No option grants were made during the first two quarters of fiscal
years 2019 and 2018.
Restricted Stock
No restricted stock was granted during the first two quarters of
fiscal years 2019 and 2018.
Warrants
No warrants were issued during the first half of fiscal year 2019
or 2018. As of November 30, 2018, 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 and are currently exercisable.
9
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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, 2018, accrued interest totaling $206,479 is
recorded. 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, 2019 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 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, 2018
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, 2018, no royalties have
been accrued or paid.
From SORC’s formation in 2011 through September 30, 2018,
Alleghany Capital has invested $293.8 million into SORC. This
investment has been channeled primarily into three major projects
discussed in the following paragraphs.
The first project was 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 an Underground Gravity Drainage (“UGD”)
facility. SORC completed construction of its underground facility
in 2014 and commenced its drilling program in 2015. After a
thorough evaluation of the project, SORC sold substantially all of
the project assets to third parties as of December 29, 2017 and no
longer has oil and gas properties in Kansas.
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. In addition, the
Company is evaluating a modified UGD site within the
field.
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 also implementing
and evaluating a modified UGD site within the field.
Using the knowledge gained from the Kansas project, the Company
continues to assist SORC in its search for additional oil fields
possessing characteristics conducive to employment of the UGD
enhanced recovery method and which are producing oil using
conventional production methods.
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.
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, 2018,
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. As of September 30, 2018, SORC had
received $293.8 million in net funding from Alleghany Capital.
Prior to the Company receiving any Royalty cash distributions from
SORC, all SORC preferred share accrued dividends (in excess of
$160 million as of September
30, 2018) must be paid, preferred shares redeemed ($293.8 million
as of September 30, 2018), 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, 2018 was $435,418.
Total debt outstanding as of the filing date of this report is
$350,000 owed to Alleghany Capital, which is classified as
long-term.
11
Results of Operations
Pursuant to the MSA with SORC, the Company received and recorded
management fee revenue and direct costs totaling $2,076,928 and
$1,956,444 for the quarter ended November 30, 2018 and $2,165,923
and $2,159,429 for the same quarter ended November 30, 2017.
Similarly, the Company received and recorded management fee revenue
and direct costs totaling $4,138,225 and $3,919,114 for the six
months ended November 30, 2018 and $4,631,204 and $4,381,995 for
the six months ended November 30, 2017. The decrease in revenues
and direct costs is primarily attributable to a decrease in
employees in the three and six months ended November 30, 2018 as
compared to the same three and six months of the prior fiscal
year.
During the quarters ended November 30, 2018 and 2017, respectively,
we incurred operating expenses of $57,305 and $157,586. The Company
incurred operating expenses of $173,769 and $281,910 during the six
months ended November 30, 2018 and 2017, 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, 2018 as compared to the same periods
in 2017 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.
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. Our estimates and assumptions
are based on current facts, historical experience and various other
factors we believe to be reasonable under the circumstances. As of
November 30, 2018 and 2017, there are no significant estimates with
regard to the financial statements included with this
report.
As of
June 1, 2018, we adopted Financial Accounting Standards Board
(FASB) Accounting Standards Update (ASU) No. 2014-09,
“Revenue from Contracts with Customers (Topic 606),” as
modified (ASC 606), using the full retrospective method. The
adoption of this guidance has no material effect on the
Company’s financial position, results of operations or cash
flows. (See Note 3)
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.
12
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.
13
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:
|
|
|
|
101.INS
|
XBRL Instance Document
|
|
|
|
|
101.SCH
|
XBRL Taxonomy Extension Schema
|
|
|
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase
|
|
|
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase
|
|
|
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase
|
|
|
|
|
101.PRE
|
XBRL Extension Presentation Linkbase
|
14
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)
|
|
|
|
|
|
Date: January 14, 2019
|
By:
|
/s/ Mark See
|
|
|
|
|
Mark See
|
|
|
|
|
Chief Executive Officer and Chairman of the Board
|
|
|
|
|
|
|
|
|
|
|
|
|
Date: January 14, 2019
|
By:
|
/s/ Bradley E. Sparks
|
|
|
|
|
Bradley E. Sparks
|
|
|
|
|
Chief Financial Officer, Treasurer and Director
|
|
|
|
|
|
|
15