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 February 28, 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 February 28, 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 $135 million as of February 28, 2018), preferred shares
redeemed ($281.8 million as of December 31, 2017), 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 Earnings/(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 nine-month periods ended February 28, 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 nine-month periods ended February 28, 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.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - GOING CONCERN - continued
Management
has undertaken steps to mitigate conditions that raise substantial
doubt about the Company inability to continue as a going concern 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 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 February 28,
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.
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 nine-month periods ended February 28, 2018 and
2017 is generated from charges to SORC. All outstanding notes
payable at February 28, 2018 and 2017 are held by Alleghany
Capital. See Note 7.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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:
|
|
|
|
|
Share-based
compensation:
|
|
|
General,
selling and administrative expenses
|
$
205,516
|
$
239,663
|
Consulting
and professional services
|
-
|
86,911
|
|
$
205,516
|
$
326,574
|
Share-based
compensation by type of award:
|
|
|
Stock
options
|
$
205,516
|
$
325,185
|
Restricted
stock
|
-
|
1,389
|
|
$
205,516
|
$
326,574
|
Stock Options
No option grants were made during the first three quarters of
fiscal years 2018 and 2017.
Restricted Stock
No restricted stock was granted during the first three quarters of
fiscal years 2018 and 2017.
Warrants
No warrants were issued during the first three quarters of fiscal
year 2018 or 2017.
As of February 28, 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.
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
original outstanding principal of $350,000 at the rate of 6% per
annum. As of February 28, 2018, accrued interest totaling $182,348
is recorded. The interest is payable in either cash or in kind. The
notes have been amended and restated and have a maturity date of
December 31, 2018 and are classified as short 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.