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 August 31, 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 August 31, 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 and diluted 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 month periods ended August 31, 2016 and 2015, 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 August 31, 2016, and has a net loss of approximately $120,000
for the quarter ended August 31, 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.
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, 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
August 31, 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.
NOTES
TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - FAIR VALUE OF FINANCIAL INSTRUMENTS –
continued
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 months ended August 31, 2016 and 2015 is generated
from charges to SORC. All outstanding notes payable at August 31,
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.
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 expense recognized as a result of
share-based compensation:
|
|
|
|
|
Share-based
compensation:
|
|
|
General,
selling and administrative expenses
|
$
92,557
|
$
85,520
|
Consulting
and professional services
|
42,547
|
46,852
|
|
135,104
|
132,372
|
Share-based
compensation by type of award:
|
|
|
Stock
options
|
133,715
|
126,678
|
Restricted
stock
|
1,389
|
5,694
|
|
$
135,104
|
$
132,372
|
Stock Options
No option grants were made during the first quarter 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 quarter of fiscal
year 2017 or during fiscal year 2016.
Warrants
No warrants were issued during the first quarter of fiscal year
2017 or 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
August 31, 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.
NOTES
TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' DEFICIT
-
continued
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 August 31, 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 on the following weighted
average assumptions:
|
2015
|
|
|
Risk-free interest rates
|
0.02
%
|
Expected Term
|
0.4 years
|
Expected volatility
|
163.1
%
|
Dividend yield
|
0
%
|
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 August 31, 2016, accrued interest totaling
$137,555 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, 2016 and are classified as current 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.