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 Companys 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 SORCs 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 29, 2020. 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 Companys 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 Companys 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 29, 2020 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.
It
is expected that SORC will continue to be funded primarily by Alleghany in exchange for issuance by SORC to Alleghany of 12% Cumulative Preferred Stock. Prior to the Company receiving any Royalty cash distributions from SORC, all SORC
preferred share accrued dividends must be paid (in excess of $232 million as of December 31, 2019), preferred shares redeemed
($275.9 million as of December 31, 2019), and debt retired to comply with any loan agreements ($0 as of December 31, 2019).
Additionally, when SORC acquires additional oil fields, any Alleghany funds invested in SORC to finance their
acquisition and development must be repaid prior to the distribution of any Royalty cash distributions to Laredo.
NOTES
TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 - ORGANIZATION AND DESCRIPTION OF BUSINESS - continued
Basic
and Diluted Loss per Share
The
Companys basic earnings per share (EPS) amounts have been computed based on the weighted-average number of
shares of common stock outstanding for the period. As the Company realized a net loss for the three and nine-month periods ended
February 29, 2020, no potentially dilutive securities were included in the calculation of diluted loss per share as their impact
would have been anti-dilutive. For the three and nine-month periods ended February 28, 2019, 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. 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, resulting
in an accumulated deficit, 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 Companys needs.
Management
has undertaken steps as part of a plan to improve operations with the goal of sustaining operations for the next twelve months
and beyond. These steps include (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 Companys 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
Companys 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 - REVENUE RECOGNITION
Monthly
Management Fee
The
Company generates monthly management revenues from fees for labor and benefit costs. The Company recognizes revenue for these
services in the month the labor and benefits are received by the customer. Monthly management fee revenues of $2,048,216 and $5,895,121
were recognized for the three and nine months ended February 29, 2020, respectively. Similarly, monthly management fee revenues
of $2,218,216 and 6,081,441 were recognized for the three and nine months ended February 28, 2019.
NOTES
TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
3 - REVENUE RECOGNITION - continued
Quarterly
Management Fee
The
Company generates management fee revenue each quarter. The Company recognizes revenue over the applicable quarter on a straight-line
basis. The management fee is billed quarterly in advance. As a result, we have recorded deferred revenue for services that have
not been provided of $45,833 as of February 29, 2020 and February 28, 2019. Quarterly management fees recognized for the three
and nine months ended in both February 29, 2020 and February 28, 2019 were $137,500 and $412,500, respectively.
NOTE
4 - 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
5 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The
Companys 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 29, 2020.
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
6 - 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:
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Affiliates
of the entity;
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Entities
for which investments in their equity securities is typically accounted for under the equity method by the investing entity;
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Trusts
for the benefit of employees;
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Principal
owners of the entity and members of their immediate families;
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Management
of the entity and members of their immediate families.
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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.
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NOTES
TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
6 - RELATED PARTY TRANSACTIONS - continued
SORC
and Alleghany are considered related parties under FASB ASC 850. All management fee revenue reported by the Company for the three
and nine months ended February 29, 2020 and February 28, 2019 is generated from charges to SORC. All outstanding notes payable
at February 29, 2020 and May 31, 2019 are held by Alleghany Capital Corporation (Alleghany Capital), a wholly owned
subsidiary of Alleghany. See Note 8.
NOTE
7 - 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 recorded in general,
selling and administrative expenses for the nine months ended February 28, 2019. Share based compensation expense is fully recorded
with respect to stock option awards outstanding. Accordingly, no further share based compensation expense was recorded for periods
subsequent to February 28, 2019.
Stock
Options
No
option grants were made during the first three quarters of fiscal years 2020 and 2019.
Restricted
Stock
No
restricted stock was granted during the first three quarters of fiscal years 2020 or 2019.
Warrants
No
warrants were issued during the first three quarters of fiscal years 2020 or 2019. As of February 29, 2020, 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.
NOTE
8 - 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 February 29, 2020, accrued interest totaling $249,068 is recorded in accrued interest. 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, 2020 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.
NOTES
TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
9 - SUBSEQUENT EVENTS
In
March 2020, the COVID-19 outbreak was declared a National Public Health Emergency which continues to spread throughout the
world and has adversely impacted global activity and contributed to significant declines and volatility in financial markets.
The outbreak could have a continued material adverse impact on economic and market conditions and trigger a period of global
economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to the ultimate material
adverse impact of the coronavirus outbreak. Nevertheless, the outbreak presents uncertainty and risk with respect to the
Company and its performance and financial results.
In
March 2020, the failure of an alliance between the Saudi Arabia-led Organization of Petroleum Exporting Countries and Russia to
reach an agreement on oil production volumes resulted in what is widely referred to in the media as a price war.
The price war and the declaration of the pandemic have resulted in a sharp fall in global oil prices.