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 August 31, 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 August 31, 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 $150 million as of June 30, 2018), preferred shares
redeemed ($288.6 million as of June 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. As the Company
realized a net loss for the three month period ended August 31,
2018, 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 month period ended August 31,
2017, all options and warrants potentially convertible into common
equivalent shares are considered antidilutive 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
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)
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
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, result 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 August 31,
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:
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
· 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, 2018 and 2017 is generated
from charges to SORC. All outstanding notes payable at August 31,
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 $72,858 and recorded in
general, selling and administrative expenses for the three months
ended August 31, 2018 and 2017, respectively.
Stock Options
No option grants were made during the first quarter of fiscal years
2019 and 2018.
Restricted Stock
No restricted stock was granted during the first quarter of fiscal
years 2019 or 2018.
Warrants
No warrants were issued during the first quarter of fiscal years
2019 or 2018. As of August 31, 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.
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, 2018, accrued interest totaling $198,408 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, 2018 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.