LAREDO OIL, INC.
10-Ks and 10-Qs
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the fiscal year ended May 31, 2017
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the
transition period from
to
Commission file number: 333-153168
Laredo Oil, Inc.
(Exact name of Registrant as Specified in its Charter)
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Delaware
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26-2435874
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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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)
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes
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No
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
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No
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 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 past 90 days. Yes
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No
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Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, 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 and post such files). Yes
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No
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1
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.
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Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company. See the definitions of "large
accelerated filer," "accelerated filer" and "smaller reporting
company" in Rule 12b-2 of the Exchange Act. (Check
one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12-b of the Act). Yes
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No
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The aggregate market value of the registrant's outstanding shares
of voting common stock held by non-affiliates based on the closing
price of these shares on November 30, 2016 of $0.0601 per share as
reported on the OTC Bulletin Board, was $1.2 million. That date was
the last business day of the most recently completed second fiscal
quarter. Shares held by each executive officer and director and by
each person who owns 10% or more of the outstanding common stock
are considered affiliates. The determination of affiliate status is
not necessarily a conclusive determination for other
purposes.
As of August 29, 2017, the registrant had 54,514,765 shares of
voting common stock outstanding.
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LAREDO OIL, INC.
TABLE OF CONTENTS
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Page
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Part I
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Item 1. Business
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4
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Item 2. Properties
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6
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Item 3. Legal Proceedings
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7
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Part II
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Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
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7
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Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
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8
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Item 8. Financial Statements and Supplementary Data
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10
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Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
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10
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Item 9A. Controls and Procedures
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10
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Item 9B. Other Information
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11
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Part III
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Item 10. Directors, Executive Officers and Corporate
Governance
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11
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Item 11. Executive Compensation
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13
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Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
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16
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Item 13. Certain Relationships and Related Transactions, and
Director Independence
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17
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Item 14. Principal Accounting Fees and Services
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18
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Part IV
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Item 15. Exhibits, Financial Statement Schedules
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18
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Signatures
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21
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Index to Financial Statements
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F-1
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3
LAREDO OIL, INC.
ANNUAL REPORT FOR THE YEAR ENDED MAY 31, 2017 ON FORM
10-K
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Item 1.
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Business
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Summary
Laredo Oil, Inc. (“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
(“EOR”) methods for its sole customer, Stranded Oil
Resources Corporation (“SORC”), an indirect, wholly
owned subsidiary of Alleghany Corporation
(“Alleghany”).
From its inception through October 2009, the Company was primarily
engaged in acquisition and exploration efforts for mineral
properties. After a change in control in October 2009, the Company
shifted its focus to locating mature oil fields with the intention
of acquiring those oil fields and recovering stranded oil using EOR
methods. The Company was unable to raise the capital required to
purchase any suitable oil fields. On June 14, 2011, the Company
entered into several agreements with SORC to seek recovery of
stranded crude oil from mature, declining oil fields by using the
EOR method known as Underground Gravity Drainage
(“UGD”). Such agreements consist of a license agreement
between the Company and SORC (the “SORC License
Agreement”), a license agreement between the Company and Mark
See, the Company’s Chairman and Chief Executive Officer
(“CEO”) (the “MS-Company License
Agreement”), an Additional Interests Grant Agreement between
the Company and SORC, a Management Services Agreement between the
Company and SORC (the “MSA”), a Finder’s Fee
Agreement between the Company and SORC (the “Finder’s
Fee Agreement”), and a Stockholders Agreement (the
“Stockholders Agreement”) among the Company, SORC and
Alleghany Capital Corporation, a wholly-owned subsidiary of
Alleghany (“Alleghany Capital”), each of which are
dated June 14, 2011 (collectively, the
“Agreements”).
The Company and Mark See now provide to SORC both management
services and expertise pursuant to the SORC License Agreement,
MS-Company License Agreement and the MSA. 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
“Royalty”). Under the SORC License Agreement, the
Company agreed that a portion of the Royalty equal to at least
2.25% of the net profits (the “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”).
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%.
The
MSA provides that the Company will provide the services of various
employees (“Service Employees”), including Mark See, in
exchange for monthly and quarterly management service fees. Mark
See acts as the CEO of SORC pursuant to the MSA. He and other
members of Company management spend substantially all of their time
and effort in fulfilling the terms of the Agreements whereby they
use theirbest efforts to evaluate, acquire, develop and recover
crude oil from fields conducive to the UGD oil recovery method. The
quarterly management services fee is $137,500 and the monthly
management services fee is payment towards the salaries, benefit
costs, and employment taxes specified for the Service Employees
identified in the Agreements. In addition, SORC reimburses the
Company for expenses incurred by 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. To date, no requests for additional funding have been
submitted by the Company to SORC.
SORC is funded solely by Alleghany Capital in exchange for issuance
by SORC of 12% Cumulative Preferred Stock. As of June 30, 2017,
SORC has received approximately $274.6 million in net funding from
Alleghany Capital. Prior to the Company receiving any cash
distributions from SORC, all accrued dividends (in excess of $100
million as of May 31, 2017) must be paid and preferred shares
redeemed.
Under the Finder’s Fee Agreement, SORC agreed to provide
funding for amounts payable to Sunrise Securities Corporation
(“Sunrise”) for certain finder’s fees relating to
Alleghany’s investment in SORC, which amounts shall not
exceed $1,100,000 in the aggregate. During fiscal year 2015,
cumulative fee payments to Sunrise reached $1,100,000, thus
fulfilling the total amount due under the Finder’s Fee
Agreement.
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Item 1.
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Business
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Under the MS-Company License Agreement, Mark See granted the
Company an exclusive license to use certain knowhow and expertise.
The Stockholders Agreement, which shall not be effective unless and
until the Royalty is converted into SORC common stock pursuant to
the Agreements, provides, among other things, that the Company
shall have certain registration rights with respect to the SORC
common stock it acquires.
The Agreements require the Company to maintain confidentiality of
SORC confidential information, except to the extent such
confidential information is required to be disclosed under
applicable law, but such disclosure is expressly limited to the
sole purpose of complying with such law and such disclosure is
permitted only to the extent required by such law.
The UGD method uses conventional mining processes to establish a
drilling chamber underneath an existing oil field from where
closely spaced wellbores are intended to be drilled up into the
reservoir, using residual radial pressure and gravity to then drain
the targeted reservoir through the wellbores. This method is
applicable to mature oil fields that have very specific geological
characteristics. The Company has done extensive research and has
identified oil fields within the United States that it believes are
qualified for UGD recovery methods. The Company continues to manage
and support SORC’s efforts to pursue and recover stranded oil
from selected mature fields chosen from this group which may be
acquired by SORC in its sole and absolute discretion.
We believe the costs of implementing the UGD method are
significantly lower than those presently experienced by commonly
used EOR methods. We also estimate that we can materially increase
the field oil production rate from prior periods and, in some
cases, recover amounts of oil equal to or greater than amounts
previously recovered from the mature fields
selected
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Our shares are currently listed for trading on the Over-the-Counter
Bulletin Board (“OTCBB”) under the symbol LRDC. As of
the date of this report, there has been light to medium trading for
our common stock and we cannot provide assurance that an active
trading market for our securities will ever develop.
Competition
Our operating results are largely dependent upon SORC’s net
profits as defined in the SORC License Agreement. We believe that
SORC will encounter competition from other oil companies in all
areas of operation, including the acquisition of mature fields, and
that such competitors may include large, well established companies
with substantial capital resources.
Dependence on One or a Few Major Customers
The Company is dependent upon maintaining the Agreements with SORC
and Alleghany Capital for its funding and for access to
SORC’s net profits as defined in the Agreements.
Operating Hazards and Uninsured Risks
Drilling activities are subject to many risks, including the risk
that no commercially productive reservoirs will be encountered. We
believe that the cost and timing of drilling, completing and
operating wells is often uncertain and that drilling operations may
be curtailed, delayed or canceled as a result of numerous factors,
including low oil prices, title problems, reservoir
characteristics, weather conditions, equipment failures, delays by
project participants, compliance with governmental requirements,
shortages or delays in the delivery of equipment and services and
increases in the cost for such equipment and services. SORC’s
future oil recovery activities may not be successful and, if
unsuccessful, such failure may result in cancellation of the
Agreements and have a material adverse effect on our business,
financial condition, results of operations and cash
flows.
Operations that the Company will manage for SORC are subject to
hazards and risks inherent in drilling for and producing and
transporting oil, such as fires, natural disasters, explosions,
encountering formations with abnormal pressures, blowouts,
craterings, pipeline ruptures and spills, any of which can result
in the loss of hydrocarbons, environmental pollution, personal
injury claims and other damage to SORC properties and those of
others. The Company maintains insurance against some, but not all,
of the risks described above. In particular, the insurance we
maintain does not cover claims relating to failure of title to oil
leases, loss of surface equipment at well locations, business
interruption, loss of revenue due to low commodity prices or loss
of revenues due to well failure. The occurrence of an event that is
not covered, or not fully covered, by insurance which we maintain
or which SORC may acquire, could have a material adverse effect on
our Royalty in the period such event may occur.
Governmental Regulation
Oil and natural gas exploration, production, transportation and
marketing activities are subject to extensive laws, rules and
regulations promulgated by federal and state legislatures and
agencies, including but not limited to the Mine Safety and Health
Administration (“MSHA”), the Federal Energy Regulatory
Commission (“FERC”), the Environmental Protection
Agency (“EPA”), the Bureau of Land Management
(“BLM”), and various state regulatory agencies. Failure
to comply with such laws, rules and regulations can result in
substantial penalties, including the delay or stopping of our
operations. The legislative and regulatory burden on the oil
industry increases our cost of doing business and affects our
Royalty.
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Item 1.
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Business
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State regulatory agencies, as well as the federal government when
operating on federal or Indian lands, require permits for drilling
operations, drilling bonds and reports concerning operations and
impose other requirements relating to the exploration and
production of oil. These governmental authorities also have
statutes or regulations addressing conservation matters, including
provisions for the unitization or pooling of oil and natural gas
properties, the establishment of maximum rates of production from
wells and the regulation of spacing, plugging and abandonment of
such wells. In each jurisdiction, we will most likely need
exceptions to some regulations requiring regulatory approval. All
of these matters could affect the Royalty.
Environmental Matters
The oil industry is subject to extensive and changing federal,
state and local laws and regulations relating to both environmental
protection, including the generation, storage, handling, emission,
transportation and discharge of materials into the environment, and
safety and health. The recent trend in environmental legislation
and regulation is generally toward stricter standards, and this
trend is likely to continue. These laws and regulations may require
a permit or other authorization before construction or drilling
commences, and for certain other activities, limit or prohibit
access, seismic acquisition, construction, drilling and other
activities on certain lands lying within wilderness and other
protected areas, impose substantial liabilities for pollution
resulting from its operations, and require the reclamation of
certain
lands.
The permits that are required for oil and gas operations are
subject to revocation, modification and renewal by issuing
authorities.
Federal regulations require certain owners or operators of
facilities that store or otherwise handle oil to prepare and
implement spill prevention, control countermeasure and response
plans relating to the possible discharge of oil into surface
waters. The Oil Pollution Act of 1990 (“OPA”) contains
numerous requirements relating to the prevention of and response to
oil spills into waters of the United States. For onshore and
offshore facilities that may affect waters of the United States,
the OPA requires an operator to demonstrate financial
responsibility. Regulations are currently being developed under
federal and state laws concerning oil pollution prevention and
other matters that may impose additional regulatory burdens on
participants in the oil and gas industry. In addition, the Clean
Water Act and analogous state laws require permits to be obtained
to authorize discharge into surface waters or to construct
facilities in wetland areas. The Clean Air Act of 1970 and its
subsequent amendments in 1990 and 1997 also impose permit
requirements and necessitate certain restrictions on point source
emissions of volatile organic carbons (nitrogen oxides and sulfur
dioxide) and particulates with respect to certain of our
operations. The EPA and designated state agencies have in place
regulations concerning discharges of storm water runoff and
stationary sources of air emissions. These programs require covered
facilities to obtain individual permits, participate in a group or
seek coverage under an EPA general permit. Most agencies recognize
the unique qualities of oil and natural gas exploration and
production operations. A number of agencies including but not
limited to MSHA, the EPA, the BLM, and similar state commissions
have adopted regulatory guidance in consideration of the
operational limitations on these types of facilities and their
potential to emit pollutants.
Formation
We were
incorporated under the
laws of the State of Delaware on March 31, 2008 under the name of
“Laredo Mining, Inc.” with authorized common stock of
90,000,000 shares at $0.0001 par value and authorized preferred
stock of 10,000,000 shares at $0.0001 par value. On October 21,
2009 the name was changed to “Laredo Oil, Inc.”
Effective October 21, 2009, all shares of the Company’s
common stock issued and outstanding were combined and reclassified
on a 1-to-6.25 basis. In connection with this change, the
Certificate of Incorporation was amended to retain the par value at
$0.0001 per share.
Facilities
Our principal executive office is located in Golden, Colorado, at
110 N. Rubey Dr., Suite 120, Golden, Colorado 80403.
Employees
As of May 31, 2017, we had 70 full-time employees and two
non-employee directors.
Website Access
We make available, free of charge through our website,
www.laredo-oil.com, our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on form 8-K, and all
amendments to those reports as soon as reasonably practicable after
such material is electronically filed with the Securities and
Exchange Commission. Information on our website is not a part of
this report.
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Item 2.
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Properties
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We currently do not own any material physical property or own any
real property. Physical property consists of office equipment and
furniture, and offices are rented on an annual basis.
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Item 3.
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Legal Proceedings
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We are not currently involved in any legal proceedings and we are
not aware of any pending or potential legal actions.
As of May 31, 2017, there are no known environmental or other
regulatory matters related to our operations that are reasonably
expected to result in a material liability to us.
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Item 5.
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Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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Market Information
The Company’s common stock currently is quoted on the OTCBB
which is not recognized as a stock exchange for SEC reporting
purposes. Since the Company began trading November 5, 2009 on the
OTCBB, there has been a limited trading market for the Company's
common stock. The following table presents the range of high and
low bid information for the common equity for each full quarterly
period within the two most recent fiscal years.
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Laredo Oil, Inc. High/Low Market Bid Prices ($)
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Fiscal Q1: Jun 2016 — Aug 2016
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Fiscal Q2: Sep 2016 — Nov 2016
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Fiscal Q3: Dec 2016 — Feb 2017
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Fiscal Q4: Mar 2017 — May 2017
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High Bid
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0.14
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0.11
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0.09
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0.085
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Low Bid
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0.0751
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0.05
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0.0413
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0.045
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Fiscal Q1: Jun 2015 — Aug 2015
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Fiscal Q2: Sep 2015 — Nov 2015
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Fiscal Q3: Dec 2015 — Feb 2016
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Fiscal Q4: Mar 2016 — May 2016
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High Bid
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0.58
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0.34
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0.25
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0.12
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Low Bid
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0.33
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0.20
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0.06
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0.075
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Over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
The
Securities and Exchange Commission ("SEC") has adopted rules that
regulate broker-dealer practices in connection with transactions in
penny stocks. Penny stocks are generally equity securities with a
price of less than $5.00, other than securities registered on
certain national securities exchanges or quoted on the NASDAQ
system, provided that current price and volume information with
respect to transactions in such securities is provided by the
exchange or quotation system. The penny stock rules require a
broker-dealer, prior to a transaction in a penny stock, to deliver
a standardized risk disclosure document prepared by the SEC, that:
(a) contains a description of the nature and level of risk in the
market for penny stocks in both public offerings and secondary
trading; (b) contains a description of the broker’s or
dealer’s duties to the customer and of the rights and
remedies available to the customer with respect to a violation to
such duties or other requirements of securities laws; (c) contains
a brief, clear, narrative description of a dealer market, including
bid and ask prices for penny stocks and the significance of the
spread between the bid and ask price; (d) contains a toll-free
telephone number for inquiries on disciplinary actions; (e) defines
significant terms in the disclosure document or in the conduct of
trading in penny stocks; and (f) contains such other information
and is in such form, including language, type, size and format, as
the SEC shall require by rule or regulation. The broker-dealer also
must provide, prior to effecting any transaction in a penny stock,
the customer with: (a) bid and offer quotations for the penny
stock; (b) the compensation of the broker-dealer and its
salesperson in the transaction; (c) the number of shares to which
such bid and ask prices apply, or other comparable information
relating to the depth and liquidity of the market for such stock;
and (d) monthly account statements showing the market value of each
penny stock held in the customer’s account. In addition, the
penny stock rules require that prior to a transaction in a penny
stock not otherwise exempt from those rules, the broker-dealer must
make a special written determination that the penny stock is a
suitable investment for the purchaser and receive the
purchaser’s written acknowledgment of the receipt of a risk
disclosure statement, a written agreement to transactions involving
penny stocks, and a signed and dated copy of a suitably written
statement.
These disclosure requirements may have the effect of reducing the
trading activity in the secondary market for our stock if it
becomes subject to these penny stock rules. Therefore, if our
common stock becomes subject to the penny stock rules, stockholders
may have difficulty selling those securities.
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Item 5.
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Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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Holders
As of August 29, 2017, the Company had 54,514,765 shares of common
stock issued and outstanding estimated to be held by more than 300
record holders including those who own units through their brokers
"in street name". Additionally, the Company had outstanding
warrants to purchase 5,374,501 shares of stock at an exercise price
equal to $0.70 per share. The Company also had outstanding options
to purchase 1,935,000 shares of common stock at $0.20 per share,
694,000 shares of common stock at $0.25 per share, 250,000 shares
of common stock at $0.27 per share 1,200,000 shares of common stock
at $0.36 per share, 1,100,000 shares of common stock at $0.38 per
share, 600,000 shares of common stock at $0.40 per share, 575,000
shares of common stock at $0.405, and 1,500,000 shares of common
stock at $2.00 per share, all of which total 7,854,000 options. If
shares underlying all outstanding warrants and both vested and
unvested options were issued, the fully diluted number of shares
outstanding would be 67,743,266 shares.
Dividends
Since its inception, the Company has not paid any dividends on its
common stock, and the Company does not anticipate that it will pay
dividends before the Royalty is paid to the Company by SORC, and
there can be no assurance provided that the Royalty will be
received, and if received, that such Royalty will be in sufficient
amounts to warrant payment of a dividend
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Item 7.
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Management's Discussion and Analysis of Financial Condition and
Results of Operations
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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” 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 May 31, 2017, no
royalties have been accrued or paid.
From SORC’s formation in 2011 through June 30, 2017,
Alleghany Capital has invested $274.6 million into SORC, including
$5.4 million through the first half of calendar year 2017 and $25.3
million and $88.2 million in calendar years 2016 and 2015,
respectively. This investment has been channeled primarily into
three major projects located in separate states. The projects are
listed in order of acquisition, but not necessarily in order of
when work may commence on Underground Gravity Drainage
(“UGD”) projects if and when approved by the SORC board
of directors.
The first project is in Fredonia, Kansas. After completing
construction of its underground facility in 2014, SORC commenced
its drilling program in 2015. The drilling program was delayed by
third-party equipment problems as well as a longer than expected
trial-and-error process determining the optimum well completion
technique for the reservoir which is characterized by a lack of
vertical permeability. As part of its 2016 year-end asset
impairment accounting assessments, SORC engaged a third-party
petroleum engineering firm to provide it with an evaluation of the
oil-recovery prospects from the project. The evaluation found that
the field proved to have much less oil in place than originally
estimated and was of poor quality. This conclusion coupled with the
current level of oil prices at calendar year-end 2016 led to a
$98.8 million impairment charge concerning certain assets in
Fredonia. At December 31, 2016, there were approximately $9 million
in net oil reserve assets reported. As of the date of this filing,
several underground wellbores are in production.
The second project is in Louisiana. SORC has acquired oil and gas
leases on approximately 9,240 acres in a targeted oil reservoir.
Discussions continue to acquire additional mineral rights and
leases in that oil field, and 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 and further developing those leases acquired using
conventional production methods, and continues to gather and
analyze geological data concerning the oil reservoir regarding its
suitability for implementing the UGD recovery method if approved by
the SORC board of directors.
The third project is 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, on behalf of SORC, is currently
operating and further developing those leases acquired using
conventional production methods, and continues to gather and
analyze geological data concerning the oil reservoir regarding its
suitability for implementing the UGD recovery method if approved by
the SORC board of directors.
Using the knowledge gained from the Fredonia 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.
8
|
Item 7.
|
Management's Discussion and Analysis of Financial Condition and
Results of Operations
- continued
|
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.
In accordance with the terms of the Agreements, the Company has
agreed with SORC that it will not acquire any fields associated
with UGD development.
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 May 31, 2017, 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 June 30, 2017, SORC had received $274.6
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 $100 million as of
May 31, 2017) 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. 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 reported cash at May 31, 2017 was $330,684. For the year ended
May 31, 2017, the Company received $10,000,037 from SORC in
management fees and payments. Total debt outstanding as of the
filing date of this report is $350,000 owed to Alleghany Capital,
which is classified as short-term.
Recently issued accounting pronouncements
Refer to Note 3 of the Notes to Financial Statements for a
discussion of recently issued accounting
pronouncements.
Results of Operations
Pursuant to the Management Services Agreement with SORC, the
Company received and recorded management fee revenue and direct
costs totaling $9,823,386 and $10,101,432, respectively, for the
fiscal year ending May 31, 2017 and $10,896,736 and $10,624,321,
respectively, for the fiscal year ending May 31, 2016. The decrease
in revenues and direct costs is primarily attributable to a
decrease in average number of employees as operations contracted in
fiscal year ending May 31, 2017 as compared to fiscal year ending
May 31, 2016. The decrease in direct costs in fiscal year ending
May 31, 2017 is offset by an increase in employee separation costs,
resulting in the negative gross profit.
During the years ended May 31, 2017 and 2016, respectively, we
incurred operating expenses of $656,034 and $880,054. 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 year ended
May 31, 2017 as compared to the same period in 2016 is primarily
attributable to decreases in share based compensation expense,
legal 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.
Prior to the second quarter of fiscal year 2016, the
Company’s operating results were affected by changes of value
of the warrant liability associated with the Sutter and Seaside
warrants. The warrants to purchase 975,000 shares of common stock
were exercised on a cashless basis during the first quarter of
fiscal year 2016, resulting in the issuance of 516,196 shares of
common stock. Further, for the year ended May 31, 2016, the Company
experienced a loss on revaluation of the warrant liability of
$24,424. The change on revaluation is due to increases and
decreases in the common stock price in the respective period, as
well as a change in the exercise price on certain
warrants.
9
|
Item 7.
|
Management's Discussion and Analysis of Financial Condition and
Results of Operations
- continued
|
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. Such estimates primarily
relate to stock options and warrants as of the date of the
financial statements; accordingly, actual results may differ from
estimated amounts. Our estimates and assumptions are based on
current facts, historical experience and various other factors we
believe to be reasonable under the circumstances. The most
significant estimates with regard to the financial statements
included with this report relate to stock options and
warrants.
These estimates and assumptions are reviewed periodically and, as
adjustments become necessary, they are reported in earnings in the
periods in which they become known.
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 8.
|
Financial Statements and Supplementary Data
|
Our Financial Statements required by this item are included on the
pages immediately following the Index to Financial Statements
appearing on page F-1.
|
Item 9.
|
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
Item 9A
|
Controls and Procedures
|
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.
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 ensuring 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.
Management’s Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal controls over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)). Under the supervision
and with the participation of our management, including our CEO and
CFO, we conducted an evaluation of the effectiveness of our
internal controls over financial reporting based on the framework
in Internal Controls – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
Based on our evaluation under the framework in Internal Control
– Integrated Framework, our management concluded that our
internal controls over financial reporting were not effective as of
May 31, 2017. As we grow, we are working on further improving our
segregation of duties and level of supervision.
10
|
Item 9A
|
Controls and Procedures
- continued
|
This annual report does not include an attestation report of the
Company’s registered public accounting firm regarding
internal control over financial reporting. Management’s
report was not subject to attestation by the Company’s
registered public accounting firm pursuant to SEC rules adopted in
conformity with the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial
reporting (as defined in Exchange Rules 13a-15(f) and 15d-15(f))
that occurred during the quarter ended May 31, 2017 that have
materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
|
Item 9B
|
Other Information
|
None.
|
Item 10.
|
Directors, Executive Officers and Corporate Governance
|
The following table sets forth as of August 29, 2017, the name,
age, and position of each executive officer and director and the
term of office of each director of the Company.
|
Name
|
|
Age
|
|
Position Held
|
|
Term as Director or Officer Since
|
|
Donald Beckham
|
|
57
|
|
Director
|
|
March 1, 2011
|
|
Christopher E. Lindsey
|
|
51
|
|
General Counsel and Secretary
|
|
October 16, 2013
|
|
Michael H. Price
|
|
69
|
|
Independent Director
|
|
August 3, 2012
|
|
Mark See
|
|
56
|
|
Chief Executive Officer and Chairman
|
|
October 16, 2009
|
|
Bradley E. Sparks
|
|
70
|
|
Chief Financial Officer, Treasurer and Director
|
|
March 1, 2011
|
Each director of the Company serves for a term of three years and
until his successor is elected at the Company's annual
shareholders' meeting and is qualified, subject to removal by the
Company's shareholders. Each officer serves at the pleasure of the
Board of Directors for a term of one year and until his successor
is elected at the Annual General Meeting of the Board of
Directors.
Set forth below is certain biographical information regarding each
of the Company's executive officers and directors.
DONALD BECKHAM
has served as a
director of the Company since March 1, 2011.
Since July 2015, he has served as Senior Vice
President of Operations for Copestone Energy Partners, LLC. In 1993
he founded Beckham Resources, Inc. (“BRI”) which for
the past 20 years has been a licensed, bonded and insured operator
in good standing with the Railroad Commission of Texas. Through
BRI, Mr. Beckham has drilled and operated fields for his own
account. His expertise is in the acquisition, exploitation,
exploration and production enhancement of mature oil and gas fields
through which he has been able to enhance production by compressor
optimization, pump design, work-over programs, stimulation
techniques and identifying new pay zones. BRI has operated wells in
the following fields: Hull, Liberty, Aransas Pass, McCampbell,
Mission River, Garcitas Creek, Sour Lake, Batson, Barton Ranch and
Dayton. Prior to BRI, Mr. Beckham was the chief operations manager
for Houston Oil Fields Corporation (“HOFCO”) where he
began his career. There he was responsible for drilling, production
and field operations and managed approximately 100 people including
engineers, geologists, land men, pumpers, and other contract
personnel, as well as state and federal environmental and
regulatory functions. He managed an annual capital budget of
approximately $30 million and operated approximately 100 wells.
HOFCO drilled about 20 wells per annum and performed approximately
30 recompletions and work over operations each year. HOFCO owned
interests in about 10 key fields principally in Texas, and
company-managed production was approximately 1,000 bpd of crude oil
and 10 mm cfd of natural gas. Fields that he managed were as
follows: Manvell, Cold Springs, Shepherd, Turtle Bay, Red Fish Bay,
Dickinson, Refugio, Lost Lake, Liberty and Abbeville. Mr. Beckham
is a petroleum engineer and 1984 graduate of Mississippi State
University.
CHRISTOPHER E. LINDSEY
has
served as the General Counsel and Secretary of the Company since
October 16, 2013. Prior to joining the Company, Mr. Lindsey served
briefly as a partner in the Houston office of Liskow & Lewis,
representing oil and gas clients. Prior to Liskow, in 2013 Mr.
Lindsey was a partner at Gordon Arata McCollam Duplantis &
Eagan LLC as an oil and gas partner in the Houston office. Before
that Mr. Lindsey was an oil and gas partner in the Houston office
of Burleson LLP from 2011 to 2012. From 2010 to 2011, Mr. Lindsey
was in the legal department of Boxer Property Management
Corporation. Prior to that Mr. Lindsey was a partner in the
Greensboro, North Carolina office of Purrington Moody WeilLLP from
2001 to 2009. He has practiced law both in-house and at various
firms for over 21 years, including in-house positions as general
counsel of Mariner Energy, LLC from 1998 to 2000 and
SalvageSale.com from 2000 to 2001. Mr. Lindsey began his career as
an associate in the Houston office of Bracewell and Giuliani LLP
from 1993 to 1998. Mr. Lindsey graduated from the University of
Virginia with a BA in Economics in 1988, from the University of
Texas School of Law with a JD in 1993 and from the University of
Texas at Austin with an MBA in 2003.
11
|
Item 10.
|
Directors, Executive Officers and Corporate Governance
- continued
|
MICHAEL H. PRICE
, has over 40
years of senior financial and petroleum experience in the global
oil and gas industry. He has been a principal in Octagon Energy
Advisors, a Houston based energy investment advisory firm, from
2002 to the present. The firm advises financial institutions and
institutional investors participating in energy investments. Since
2008, he has been a Managing Director at ING Capital which provides
debt financing to domestic exploration and production companies.
From 1998 through 2002, Mr. Price was the Chief Financial Officer
of Forman Petroleum Corporation. Before that, Mr. Price was
Managing Director at Chase Manhattan Bank for fifteen years, and
was in charge of technical support for Chase’s worldwide
energy merchant banking activities. In his early career, he worked
as a consulting principal on domestic petroleum engineering and
landowner matters, and gained extensive international experience
working with major oil companies in a variety of operating
positions. He holds a BS and MS from Illinois Institute of
Technology, a MBA from the University of Chicago, a M.Sc. from the
London School of Economics, and a MS in Petroleum Engineering from
Tulane University.
MARK SEE
has been the Chief Executive Officer and Chairman
of the Board of Directors for the Company since October 16, 2009.
He has over 25 years experience in tunneling, natural resources and
the petroleum industries. He was the founder and founding CEO of
Rock Well Petroleum, a private oil & gas company from January
2005 until December 2008 and worked from then until October of 2009
forming Laredo Oil. He was employed with Albian Sands as the
Manager for the Alberta Oil Sands Projects at Fort McMurray,
Alberta, Canada, a joint venture between Shell Canada and Chevron.
Mr. See was also President of Oil Recovery Enhancement LLC in
Bozeman, Montana, a private oil company. He was selected as one of
the top 25 Engineers in North America by the
Engineering News Record
for his innovations in the petroleum
industry. He is a member of the Society of Mining Engineers and the
Society of Petroleum
Engineers.
BRADLEY E. SPARKS
currently
serves as the Chief Financial Officer and Treasurer and has been a
director of the Company since March 1, 2011. Before joining Laredo
Oil in October 2009, he was the Chief Executive Officer, President
and a Director of Visualant, Inc. Prior to joining Visualant, he
was the Chief Financial Officer of WatchGuard Technologies, Inc.
from 2005-2006. Before joining WatchGuard, he was the founder and
managing director of Sunburst Growth Ventures, LLC, a private
investment firm specializing in emerging-growth companies.
Previously, he founded Pointer Communications and served as Chief
Financial Officer for several telecommunications and internet
companies, including eSpire Communications, Inc., Digex, Inc.,
Omnipoint Corporation, and WAM!NET. He also served as Vice
President and Treasurer of MCI Communications from 1988-1993 and as
Vice President and Controller from 1993-1995. Before his tenure at
MCI, Mr. Sparks held various financial management positions at
Ryder System, Inc. Mr. Sparks currently serves on the Board of
Directors of iCIMS and Comrise. Mr. Sparks graduated from the
United States Military Academy at West Point in 1969 and is a
former Army Captain in the Signal Corps. He has a Master of Science
in Management degree from the Sloan School of Management at the
Massachusetts Institute of Technology and is a licensed CPA in
Florida.
To the knowledge of management, except as noted below, during the
past ten years, no present or former director, executive officer or
person nominated to become a director or an executive officer of
the Company:
|
(1)
|
filed a petition under the federal bankruptcy laws or any state
insolvency law, nor had a receiver, fiscal agent or similar officer
appointed by the court for the business or property of such person,
or any partnership in which he was a general partner at or within
two years before the time of such filings;
|
||
|
(2)
|
was convicted in a criminal proceeding or named subject of a
pending criminal proceeding (excluding traffic violations and other
minor offenses);
|
||
|
(3)
|
was the subject of any order, judgment or decree, not subsequently
reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining him from or
otherwise limiting, the following activities:
|
||
|
|
(i)
|
acting as a futures commission merchant, introducing broker,
commodity trading advisor, commodity pool operator, floor broker,
leverage transaction merchant, any other person regulated by the
Commodity Futures Trading Commission, or an associated person of
any of the foregoing, or as an investment adviser, underwriter,
broker or dealer in securities, or as an affiliated person,
director or employee of any investment company, bank, savings and
loan association or insurance company, or engaging in or continuing
any conduct or practice in connection with such
activity;
|
|
|
|
(ii)
|
engaging in any type of business practice; or
|
|
|
|
(iii)
|
engaging in any activities in connection with the purchase or sale
of any security or commodity or in connection with any violation of
federal or state securities laws or federal commodities
laws;
|
|
|
(4)
|
was the subject of any order, judgment, or decree, not subsequently
reversed, suspended, or vacated, of any federal or state authority
barring, suspending or otherwise limiting for more than 60 days the
right of such person to engage in any activity described above
under this Item, or to be associated with persons engaged in any
such activities;
|
||
|
(5)
|
was found by a court of competent jurisdiction in a civil action or
by the Securities and Exchange Commission to have violated any
federal or state securities law, and the judgment in such civil
action or finding by the Securities and Exchange Commission has not
been subsequently reversed, suspended, or vacated;
|
||
|
(6)
|
was found by a court of competent jurisdiction in a civil action or
by the Commodity Futures Trading Commission to have violated any
federal commodities law, and the judgment in such civil action or
finding by the Commodity Futures Trading Commission has not been
subsequently reversed, suspended or vacated;
|
||
|
(7)
|
was the subject of, or a party to, any federal or state judicial or
administrative order, judgment, decree, or finding, not
subsequently reversed, suspended or vacated, relating to an alleged
violation of:
|
||
|
|
(i)
|
Any federal or state securities or commodities law or regulation;
or
|
|
|
|
(ii)
|
Any law or regulation respecting financial institutions or
insurance companies including, but not limited to, a temporary or
permanent injunction, order of disgorgement or restitution, civil
money penalty or temporary or permanent cease-and-desist order, or
removal or prohibition order; or
|
|
|
|
(iii)
|
Any law or regulation prohibiting mail or wire fraud or fraud in
connection with any business entity; or
|
|
12
|
Item 10.
|
Directors, Executive Officers and Corporate Governance
- continued
|
|
(8)
|
was the subject of, or a party to, any sanction or order, not
subsequently reversed, suspended or vacated, of any self-regulatory
organization (as defined in Section 3(a)(26) of the Exchange Act
(15 U.S.C. 78c(a)(26))), any registered entity (as defined in
Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C.
1(a)(29))), or any equivalent exchange, association, entity or
organization that has disciplinary authority over its members or
persons associated with a member.
|
||
|
|
|
||
In calendar year 2014, Mr. Beckham served as an executive officer
of Mining Oil, Inc. which filed for bankruptcy in January 2015.
Four months prior to that filing, Mr. Beckham had resigned his
position due to policy differences with members of the management
team.
Section 16(a) Beneficial Ownership Reporting
Compliance
During the fiscal year ended May 31, 2017, the Company had no class
of equity securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934. Accordingly, no reports were
required to be filed pursuant to Section 16(a) with respect to the
Company's officers, directors, and beneficial holders of more than
ten percent of any class of equity securities.
Code of Ethics
The Company’s Code of Ethics is attached by reference as
Exhibit 14.1 to this Form 10-K and can be found on the
Company’s web site at www.laredo-oil.com.
|
Item 11.
|
Executive Compensation
|
Compensation Summary for Executive Officers
The following table sets forth compensation paid or accrued by the
Company for the last two years ended May 31, 2017 and 2016 with
regard to individuals who served as the Principal Executive Officer
and for executive officers receiving compensation in excess of
$100,000 during these fiscal periods.
|
Name
and Principal Position
|
Fiscal Year
|
Salary($)
|
Bonus($)
|
Option Awards($)
|
All Other Compensation($)
|
Total($)
|
|
|
|
|
|
|
|
|
|
Mark
See (1)
|
2017
|
525,000
|
-
|
-
|
33,923
|
558,923
|
|
Chief
Executive Officer and Chairman of the Board
|
2016
|
525,000
|
-
|
-
|
51,356
|
576,356
|
|
|
|
|
|
|
||
|
Bradley
E. Sparks (2)
|
2017
|
415,000
|
-
|
-
|
-
|
415,000
|
|
Chief
Financial Officer, Treasurer and Director
|
2016
|
415,000
|
-
|
-
|
-
|
415,000
|
|
|
|
|
|
|
||
|
Christopher
E. Lindsey (3)
|
2017
|
314,310
|
-
|
-
|
5,737
|
320,047
|
|
General
Counsel and Secretary
|
2016
|
322,075
|
-
|
-
|
16,061
|
338,136
|
|
(1)
|
The salary amount shown in fiscal year 2017 includes $461,954 in
cash payments and $63,046 of deferred compensation. In 2016 salary
includes $507,750 in cash payments and $17,250 of deferred
compensation. Other compensation includes untaken earned vacation
days sold back to the Company in exchange for cash payments. As of
May 31, 2017, Mr. See has cumulative deferred compensation of
$125,088.
|
|
|
|
|
(2)
|
The amounts shown in 2017 include $250,306 of salary paid in cash
and $164,694 of deferred compensation and in 2016 include $267,507
of salary paid in cash and $147,493 of deferred compensation. As of
May 31, 2017, Mr. Sparks has cumulative deferred compensation of
$667,946.
|
|
|
|
|
(3)
|
Other compensation for Mr. Lindsey includes untaken earned vacation
days sold back to the Company for cash payments.
|
13
|
Item 11.
|
Executive Compensation
- continued
|
Named Executive Officers Compensation and Termination of Employment
Provisions
Pursuant to a letter agreement dated October 16, 2009 between the
Company and Mr. See, the Company agreed to pay Mr. See an annual
base salary of $240,000, and, after the Company is funded with a
minimum of $7.5 million of capital, a base salary of $450,000 per
year. The base salary has an automatic cost of living increase of
10% per year. He also is entitled to a monthly automobile allowance
of $1,000, a monthly professional allowance of $1,000, and a
monthly communication allowance of $500. We also granted to Mr. See
12,844,269 shares of our common stock. In October 2012, the Laredo
Board of Directors voted to increase Mr. See’s salary to
$450,000 per year as a result of the SORC Board of Directors both
authorizing commencement of UGD development on the Company’s
initial project with SORC and increasing the monthly management fee
to fund the salary increase. When the Company receives insufficient
funds under the MSA to pay the base salary, including automatic
cost of living increases, the difference of his actual paid base
salary rate and the contractual per year rate, calculated monthly,
is treated as deferred compensation until such time as the Company
has adequate operating funds to satisfy such obligation or until
otherwise paid through the issuance of equity or debt securities of
the Company as determined by the Compensation Committee. If Mr. See
is terminated by us without “Cause” (as such term is
defined in the letter agreement), we will pay severance to Mr. See
equal to 100% of his then-current annualized base salary, and any
bonuses earned, paid out on a pro rata basis over our regular
payroll schedule over the three year period following the effective
date of such termination. In addition, Mr. See will continue to
receive all applicable benefits under our standard benefits plans
currently available to other senior executives, for a period not to
exceed 24 months following the termination of employment. Moreover,
pursuant to a change in control severance agreement between us and
Mr. See, if Mr. See is terminated by us within 12 months following
a change in control of the Company without Cause (as such term is
defined in the change in control agreement) or if Mr. See
terminates his employment with us for “Good Reason” (as
such term is defined in the change in control agreement), he will
be entitled to receipt of 100% of bonuses earned and his annual
base salary paid out on a pro rata basis over our regular payroll
schedule until contract expiration. In addition, Mr. See will
continue to receive all applicable benefits under our standard
benefits plans currently available to other senior executives, for
a period not to exceed 24 months following the termination of
employment.
On October 14, 2014, the letter agreement dated October 16, 2009
between the Company and Mr. See was amended to set the salary
amount at $495,000 per year and delete the automatic cost of living
increase of 10% per year. In addition, the amendment modified the
terms of the severance so that if Mr. See is terminated by us
without “Cause” (as such term is defined in the letter
agreement), we will pay severance to Mr. See equal to 100% of his
then-current annualized base salary, and any bonuses earned, paid
out on a pro rata basis over our regular payroll schedule over the
two-year period following the effective date of such termination,
provided that if such termination occurs within 12 months after a
Change of Control, such two year period shall be increased to a
three year period. On March 1, 2016, the rate of cash salary
compensation paid to Mr. See was reduced by 10% from $490,000 to
$441,000 per year as part of an overall company salary
reduction.
Beginning January 1,
2017, the rate of annual cash salary compensation paid to Mr. See
was increased by 3% from $441,000 to $454,230 per year.
Under his contract with Laredo and as
of May 31, 2017, Mr. See has $125,088 of cumulative deferred
compensation owed him which is the difference between his contract
salary and the actual cash compensation he has received
thereunder.
Pursuant to a letter agreement dated October 20, 2009 between the
Company and Mr. Sparks, we agreed to pay Mr. Sparks an annual base
salary of $180,000, and, after the Company is funded with a minimum
of $7.5 million of capital, a base salary of $350,000 per year. The
base salary has an automatic cost of living increase of 10% per
year. He also is entitled to a monthly automobile allowance of
$1,000, a monthly professional allowance of $1,000, and a monthly
communication allowance of $500. We also granted to Mr. Sparks
2,824,857 shares of our common stock. In April 2013 the Laredo
Board of Directors voted to increase Mr. Sparks’ salary to
$350,000 per year with the effect of the SORC Board of Directors
authorizing commencement of UGD development on the Company’s
initial project with SORC. When the Company receives insufficient
funds under the MSA to pay the base salary, including automatic
cost of living increases, the difference of his actual paid base
salary rate and the contractual per year rate, calculated monthly,
is treated as deferred compensation until such time as the Company
has adequate operating funds to satisfy such obligation or until
otherwise paid through the issuance of equity or debt securities of
the Company as determined by the Compensation Committee. If Mr.
Sparks is terminated by us without “Cause” (as such
term is defined in the letter agreement), we will pay severance to
Mr. Sparks equal to 100% of his then-current annualized base
salary, and any bonuses earned, paid out on a pro rata basis over
our regular payroll schedule over the three-year period following
the effective date of such termination. In addition, Mr. Sparks
will continue to receive all applicable benefits under our standard
benefits plans currently available to other senior executives, for
a period not to exceed 24 months following the termination of
employment. Moreover, pursuant to a change in control severance
agreement between us and Mr. Sparks, if Mr. Sparks is terminated by
us within 12 months following a change in control of the Company
without Cause (as such term is defined in the change in control
agreement) or if Mr. Sparks terminates his employment with us for
“Good Reason” (as such term is defined in the change in
control agreement), he will be entitled to receipt of 100% of
bonuses earned and his annual base salary paid out on a pro rata
basis over our regular payroll schedule until contract expiration.
In addition, Mr. Sparks will continue to receive all applicable
benefits under our standard benefits plans currently available to
other senior executives, for a period not to exceed 24 months
following the termination of employment.
On October 14, 2014, the letter agreement dated October 20, 2009
between the Company and Mr. Sparks was amended to set the salary
amount at $385,000 per year and delete the automatic cost of living
increase of 10% per year. In addition, the amendment modified the
terms of the severance so that if Mr. Sparks is terminated by us
without “Cause” (as such term is defined in the letter
agreement), we will pay severance to Mr. Sparks equal to 100% of
his then-current annualized base salary, and any bonuses earned,
paid out on a pro rata basis over our regular payroll schedule over
the two year period following the effective date of such
termination, provided that if such termination occurs within 12
months after a Change of Control, such two year period shall be
increased to a three year period. On March 1, 2016, the rate of
cash salary compensation paid to Mr. Sparks was reduced by 5% from
$239,580 to $227,601 per year as part of an overall company salary
reduction. Under his contract with Laredo and as of May 31, 2017,
Mr. Sparks has $667,946 of cumulative deferred compensation owed
him which is the difference between his contract salary and the
actual cash compensation he has received thereunder.
14
|
Item 11.
|
Executive Compensation
- continued
|
Pursuant to a letter agreement dated October 16, 2013 between the
Company and Mr. Lindsey, we agreed to pay Mr. Lindsey an annual
base salary of $300,000 per year. He also is entitled to a monthly
professional allowance of $1,000. We also granted to Mr. Lindsey an
option to purchase 800,000 shares of our common stock at a price of
$0.36 per share in accordance with the Laredo Oil, Inc. 2011 Equity
Incentive Plan. If Mr. Lindsey is terminated by us without
“Cause” (as such term is defined in the letter
agreement), we will pay severance to Mr. Lindsey equal to 100% of
his then-current annualized base salary, and any bonuses earned,
paid out on a pro rata basis over our regular payroll schedule over
the one year period following the effective date of such
termination. In addition, Mr. Lindsey will continue to receive all
applicable benefits under our standard benefits plans currently
available to other senior executives, for a period not to exceed 24
months following the termination of employment. In January 2015,
the Laredo Board of Directors increased the annual base salary of
Mr. Lindsey to $314,000 per year. Effective March 1, 2016, as part
of an overall company salary reduction, the annual base salary for
Mr. Lindsey was reduced 5% to $298,300. Beginning January 1, 2017,
the rate of annual cash salary compensation paid to Mr. Lindsey was
increased by 3% from $298,300 to $307,249 per year.
Effective June 29, 2012, the Board approved the Laredo Management
Retention Plan (the “Royalty Plan”) that outlines the
terms and conditions under which employees of the Company are
eligible to participate in the Incentive Royalty to be assigned to
the Royalty Plan. In accordance with the terms of the Royalty Plan,
a new special purposes entity was formed on July 3, 2012 as a
Delaware limited liability company (the “Plan Entity”).
On October 11, 2012, the Board (i) amended the Royalty Plan to,
among other things, change the name of the Royalty Plan to
“Laredo Royalty Incentive Plan”, (ii) appointed a
Compensation Committee of the non-employee board members (the
“Compensation Committee”) to administer the Royalty
Plan and make awards thereunder, (iii) authorized the filing of an
Amendment to the Certificate of Formation of the Plan Entity to
change its name to “Laredo Royalty Incentive Plan,
LLC”, (iv) adopted and approved an Assignment Agreement
pursuant to which the Incentive Royalty was assigned to the Plan
Entity in accordance with the Royalty Plan. Also on October 11,
2012, the Compensation Committee made awards of Restricted Common
Units of the Plan Entity (the “Plan Units”) pursuant to
Award Agreements to certain of its employees. These Plan Units vest
over a period of three years from grant, but are subject to
accelerated vesting upon the commencement of production under the
initial UGD project as provided in the award agreement. Ten
thousand (10,000) Plan Units are authorized for issuance under the
Royalty Plan, of which 7,000 Plan Units were issued and outstanding
as of May 31, 2017.
Outstanding equity awards as of May 31, 2017:
|
(a)
Name
and Principle Position
|
(b)
Number of Securities Underlying Unexercised Options
Exercisable
|
(e)
Option Exercise Price($)
|
(f)
Option Expiration Date
|
|
Christopher
E. Lindsey
General
Counsel and Secretary
|
800,000
|
0.36
|
November
22, 2023
|
|
|
|
|
|
|
Bradley
E. Sparks
CFO,
Treasurer & Director
|
1,500,000
|
2.00
|
April
11, 2022
|
In February 2011, the Company approved the Laredo Oil, Inc. 2011
Equity Incentive Plan. The Equity Incentive Plan was filed with the
Securities and Exchange Commission on Form S-8 on November 8, 2011
and was amended in December 2014 to increase the number of shares
available for issuance thereunder to an aggregate of 15,000,000
shares.
Director Compensation
|
(a)
Name
|
(b)
Fees Earned or Paid in Cash($)
|
(c)
Stock Awards($)
|
(d)
Option Awards($)
|
(j)
Total($)
|
|
Donald
Beckham
|
50,000
|
-
|
-
|
50,000
|
|
Michael
H. Price
|
50,000
|
-
|
-
|
50,000
|
The compensation for each non-employee director is as follows:
quarterly cash payment of $12,500 payable mid-quarter in arrears,
500,000 shares of restricted common stock vesting in three equal
installments over three years, and all reasonable expenses
associated with attendance at Board meetings. Five hundred thousand
shares of the aforementioned restricted stock were granted in
January 2012 to Mr. Beckham and were fully vested in January 2015.
In August 2012, Mr. Price was granted 500,000 shares of restricted
common stock vesting in three equal installments over three years
and were fully vested in August 2015. On August 8, 2013, each
non-employee director was awarded 50,000 restricted shares vesting
in equal installments over three years. As of May 31, 2017, all
50,000 shares were vested for Messrs. Beckham and Price. Since they
are executive officers, Messrs. See and Sparks receive no
additional compensation for Board service.
On January 2, 2015, the Company granted options to purchase
1,100,000 common shares to Mr. Beckham with an exercise price of
$0.38 per share, the fair market value on the date of grant. The
options vest monthly over three years and expire on January 2,
2025. As of May 31, 2017, 855,556 options had vested.
15
|
Item 12.
|
Security Ownership of Certain Beneficial Owners and
Management
|
The following table sets forth as of the date of the filing of this
Form 10-K, the name and address and the number of shares of the
Company's common stock, with a par value of $0.0001 per share, held
of record or beneficially by each person who held of record, or was
known by the Company to own beneficially, more than 5% of the
issued and outstanding shares of the Company's common stock, and
the name and shareholdings of each executive officer, director and
of all officers and directors as a group.
|
Name and Address
of Beneficial
Owner
|
Nature of
Ownership(1)
|
Amount
of Beneficial
Ownership (1)
|
Percent
of Class
|
|
Bedford
Holdings, LLC (2)
44
Polo Drive
Big
Horn, WY 82833
|
Direct
|
12,829,269
|
23.5
%
|
|
|
|
|
|
|
Darlington,
LLC (2)
P.O.
Box 723
Big
Horn, WY 82833
|
Direct
|
5,423,138
|
9.9
%
|
|
|
|
|
|
|
Mark
See (3)
110
N. Rubey Dr., Suite 120
Golden,
Colorado 80403
|
Direct
|
31,096,676
|
57.0
%
|
|
|
|
|
|
|
Bradley
E. Sparks (4)
110
N. Rubey Dr., Suite 120
Golden,
Colorado 80403
|
Direct
|
4,324,857
|
7.7
%
|
|
|
|
|
|
|
Donald
Beckham (5)
110
N. Rubey Dr., Suite 120
Golden,
Colorado 80403
|
Direct
|
1,558,333
|
2.8
%
|
|
|
|
|
|
|
Christopher
E. Lindsey
110
N. Rubey Dr., Suite 120
Golden,
Colorado 80403
|
Direct
|
800,000
|
1.4
%
|
|
|
|
|
|
|
Michael
H. Price
110
N. Rubey Dr., Suite 120
Golden,
Colorado 80403
|
Direct
|
550,000
|
1.0
%
|
|
|
|
|
|
|
All
Directors and Officers as a Group (5) persons)
|
Direct
|
38,329,866
|
66.3
%
|
|
(1)
|
All shares owned directly are owned beneficially and of record, and
such shareholder has sole voting, investment and dispositive power,
unless otherwise noted. Amounts of beneficial ownership include all
options to purchase common stock expected to be vested 60 days
after the filing date of this Form 10-K.
|
|
(2)
|
These shares are mutually owned by Mr. and Mrs. See, and Mr. See
has a proxy from Mrs. See to vote the shares.
|
|
(3)
|
Includes 18,252,407 shares mutually owned by Mr. and Mrs. See,
through Bedford Holdings, LLC and Darlington, LLC, as shown in the
table above. These 18,252,407 shares are the only shares owned by
relatives which are required to be included in the total number of
shares owned by all directors and officers as a group (5
persons).
|
|
|
|
|
(4)
|
Includes fully vested options to purchase 1,500,000 shares of
common stock at $2.00 per share.
|
|
|
|
|
(5)
|
Includes vested options to purchase 1,008,333 shares of common
stock at $0.38 per share as of October 28, 2017.
|
|
|
|
Securities authorized for issuance under equity compensation
plans
The following table provides information as of May 31, 2017
concerning the issuance of equity securities with respect to
compensation plans under which our equity securities are authorized
for issuance.
16
|
Item 12.
|
Security Ownership of Certain
Beneficial Owners and Management
-
continued
|
Equity Compensation Plan Information
|
Plan category
|
Number of securities to be issued upon exercise of outstanding
options, warrants and rights
(a)
|
Weighted –average exercise price of outstanding options,
warrants and rights ($)
(b)
|
Number of securities remaining available for future issuance under
equity compensation plans (excluding securities reflected in column
(a))
(c)
|
|
Equity
compensation plans approved by security holders (1)
|
7,854,000
|
0.63
|
5,520,000
(2)
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
(3)
|
5,374,501
|
0.70
|
N/A
|
|
|
|
|
|
|
Total
|
13,228,501
|
0.66
|
5,520,000
|
1)
Effective November 6, 2011,
the holders of a majority of the shares of Common Stock of Laredo
Oil, Inc. (the “Company”) took action by written
consent to approve the Company’s 2011 Equity Incentive Plan
(the “Plan”). Stockholders then owning an aggregate of
31,096,676 shares, or 59.8% of the then issued and outstanding
Common Stock of the Company, approved the matter. The Plan and
corresponding agreements are exhibits to the Company’s
Registration Statement on Form S-8 filed with the Securities and
Exchange Commission on November 8, 2011. The Plan reserved
10,000,000 shares of common stock for issuance to eligible
recipients. In December 2014, the holders of a majority of the
shares of Common Stock of Laredo Oil, Inc. (the
“Company”) took action by written consent to amend the
Plan by reserving an additional 5,000,000 shares of common stock
for issuance to eligible recipients. The Company filed a
Registration Statement on Form S-8 with the Securities and Exchange
Commission on December 19, 2014 regarding the additional
shares.
2)
During fiscal year 2012, we issued 500,000
restricted shares to each of our two non-employee directors for a
total of one million shares. During fiscal year 2013, we issued
500,000 restricted shares to our third non-employee director. In
fiscal year 2014, we issued to our non-employee directors 150,000
restricted shares of which 50,000 restricted shares were later
forfeited. In total, a net 1,600,000 restricted shares have been
issued to our non-employee directors under the Plan. Since
restricted shares were issued to directors, they are not available
for issuance under the Plan and thus reduce the number of
securities remaining available in this column. In addition, we
granted options to purchase 6,010,000 shares of common stock to
employees and contractors during fiscal year 2012, none in fiscal
year 2013, 2,990,000 in fiscal year 2014, 1,700,000 in fiscal year
2015, 925,000 in fiscal year 2016 and none in fiscal year 2017.
Also during fiscal year 2014, options to purchase 600,000 shares of
common stock previously granted to Mr. See and 50,000 shares of
restricted stock previously granted to a former director were
forfeited and subsequently granted to key contractors in the form
of options to purchase shares of common stock. In April 2017, the
remaining 900,000 options to purchase common stock held by Mr. See
expired and were returned to the unissued option pool. In addition
to the See options forfeited, 2,245,000 options to purchase shares
of common stock have been forfeited by terminated employees and
returned to the option pool for future grants as per the Plan.
Since Plan inception, 26,000 common shares have been issued
pursuant to option exercises and are not available for issuance
under the Plan. The aforementioned restricted stock and options
were issued under the 2011 Equity Incentive Plan, as amended (the
“Amended Plan”) which has 15,000,000 shares of common
stock reserved for issuance for directors, employees and
contractors.
3)
Associated with the
Alleghany transaction, and as payment for arranging the transaction
between the Company and SORC, Laredo agreed to issue Sunrise
Securities Corporation warrants equal to 10% of the total issued
and outstanding fully diluted number of shares of common stock of
the Company. In September 2011, Laredo issued warrants to purchase
5,374,501 shares of common stock at an exercise price of $0.70 per
share to two Sunrise Securities Corporation members to satisfy the
finders’ fee obligation associated with the Alleghany
transaction. The warrants will expire June 14,
2021.
|
Item 13.
|
Certain Relationships and Related Transactions, and Director
Independence
|
Transactions with Management and Others
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. Subsequent to May 31, 2015, Mr. Beckham was
paid an additional amount of approximately $62,000 as consideration
for such services during fiscal year 2016. This consulting
arrangement terminated on July 24, 2015.
Director Independence
.
Mr. Price is an “independent” director based on the
definition of independence in the listing standards of NASDAQ
Marketplace Rule 4200(a)(15).
17
|
Item 14.
|
Principal Accounting Fees and Services
|
(1)
Audit
Fees
The aggregate fees billed by the independent accountants for each
of the last two fiscal years for professional services for the
audit of the Company’s annual financial statements and the
review of financial statements included in the Company’s Form
10-Q and services that are normally provided by the accountants in
connection with statutory and regulatory filings or engagements for
those fiscal years were $73,610 for the fiscal year ended May 31,
2017 and $70,248 for the fiscal year ended May 31,
2016.
(2)
Audit-Related
Fees
The aggregate fees billed in each of the last two fiscal years for
assurance and related services by the principal accountants that
are reasonably related to the performance of the audit or review of
the Company’s financial statements and are not reported under
paragraph (1) above was $0.
(3)
Tax
Fees
The aggregate fees billed in each of the last two fiscal years
ending May 31, 2017 and 2016 for professional services rendered by
the principal accountants for tax compliance, tax advice, and tax
planning was $5,750 and $5,325, respectively.
(4)
All Other
Fees
During the last two fiscal years ending May 31, 2017 and 2016,
respectively there were $0 fees charged by the principal
accountants other than those disclosed in (1) and (2)
above.
(5)
Audit
Committee’s Pre-approval Policies and
Procedures
The Audit Committee pre-approves the engagement with the
independent auditor. It meets four times annually and reviews
financial statements with the independent auditor. Additionally,
the Audit Committee meets in executive session with the independent
auditor at the conclusion of those meetings.
|
Item 15.
|
Exhibits, Financial Statement Schedules
|
|
(a) (1)
|
Financial Statements.
See Index
to Financial Statements on page F-1.
|
|
(a) (2)
|
Financial Statement Schedules
|
The following financial statement schedules are included as part of
this report:
None.
|
(a) (3)
|
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:
|
3.1
|
Certificate of Incorporation, included as Exhibit 3.1 in our Form
S-1 filed August 25, 2008, File No. 333-153168 and incorporated
herein by reference.
|
|
3.2
|
Certificate of Amendment of Certificate of Incorporation, included
as Exhibit 10.1 to our Form 8-K filed October 22, 2009 and
incorporated herein by reference.
|
|
|
|
|
3.3
|
Bylaws, included as Exhibit 3.2 in our S-1 filed August 25, 2008,
File No. 333-153168 and incorporated herein by
reference.
|
|
10.1
|
Letter Agreement dated October 16, 2009 between the Company and
Mark See, CEO, regarding CEO compensation package, included as
Exhibit 10.1 to our Form 10-K filed September 14, 2010 and
incorporated herein by reference.
|
|
10.2
|
Letter Agreement dated October 20, 2009 between the Company and
Bradley E. Sparks regarding CFO compensation package, included as
Exhibit 10.2 to our Form 10-K filed September 14, 2010 and
incorporated herein by reference.
|
|
|
|
|
10.3
|
Letter Agreement dated October 16, 2013 between the Company and
Christopher E. Lindsey, General Counsel and Secretary, regarding
compensation, included as Exhibit 10.3 to our Form 10-K filed
August 29, 2014 and incorporated herein by reference.
|
18
|
Item 15.
|
Exhibits, Financial Statement Schedules
- continued
|
|
10.4
|
Purchase Agreement, included as Exhibit 10.1 to our Form 8-K filed
June 9, 2010 and incorporated herein by reference.
|
|
|
|
|
10.5
|
Amended and Restated Form of Warrant to Purchase Stock of Laredo
Oil, Inc. (amending Form of Warrant to Purchase Stock of Laredo
Oil, Inc. included as Exhibit 10.2 in our Current Report on Form
8-K filed June 9, 2010)., included as Exhibit 10.1 to our Form 10-Q
filed October 17, 2011 and incorporated herein by
reference.
|
|
|
|
|
10.6
|
Form of Subordinated Convertible Promissory Note, included as
Exhibit 10.3 to our Form 8-K filed June 9, 2010 and incorporated
herein by reference.
|
|
|
|
|
10.7
|
Securities Purchase Agreement, dated as of July 26, 2010, among the
Company and each Purchaser identified on the signature pages
thereto, included as Exhibit 10.1 to our Form 8-K filed July 28,
2010 and incorporated herein by reference.
|
|
|
|
|
10.8
|
Amended and Restated Form of Common Stock Purchase Warrant
(amending Form of Common Stock Purchase Warrant included as Exhibit
10.7 in our Current Report on Form 8-K filed June 20, 2011),
included as Exhibit 10.2 to our Form 10-Q dated October 17, 2011
and incorporated herein by reference.
|
|
|
|
|
10.9
|
Loan Agreement dated November 22, 2010 between Laredo Oil, Inc. and
Alleghany Capital Corporation, included as Exhibit 10.1 to our Form
8-K filed November 24, 2010 and incorporated herein by
reference.
|
|
|
|
|
10.10
|
Form of Amended and Restated Senior Promissory Note accompanying
Loan Agreement dated November 22, 2010 between Laredo Oil, Inc. and
Alleghany Capital Corporation (amending the Form of Senior
Promissory Note included as Exhibit 10.2 in our Current Report on
Form 8-K filed November 24, 2010), included as Exhibit 10.1 to our
Form 8-K filed November 18, 2011 and incorporated herein by
reference.
|
|
|
|
|
10.11
|
Loan Agreement dated April 6, 2011 between Laredo Oil, Inc. and
Alleghany Capital Corporation, included as Exhibit 10.1 to our Form
8-K filed April 8, 2011 and incorporated herein by
reference.
|
|
10.12
|
Form of Amended and Restated Senior Promissory Note accompanying
Loan Agreement dated April 6, 2011 between Laredo Oil, Inc. and
Alleghany Capital Corporation (amending the Form of Senior
Promissory Note included as Exhibit 10.2 in our Current Report on
Form 8-K filed April 12, 2011), included as Exhibit 10.2 to our
Form 8-K filed November 18, 2011 and incorporated herein by
reference.
|
|
|
|
|
10.13
|
Laredo Oil, Inc. 2011 Equity Incentive Plan, included as Exhibit
4.1 to our Form S-8 filed on November 8, 2011 and incorporated by
reference herein.
|
|
|
|
|
10.14
|
Form of Laredo Oil, Inc. 2011 Equity Incentive Plan Stock Option
Award Certificate, included as Exhibit 4.2 to our Form S-8 filed on
November 8, 2011 and incorporated by reference herein.
|
|
|
|
|
10.15
|
Form of Laredo Oil, Inc. 2011 Equity Incentive Plan Restricted
Stock Award Certificate, included as Exhibit 4.3 to our Form S-8
filed on November 8, 2011 and incorporated by reference
herein.
|
|
|
|
|
10.16
|
Amended and Restated Laredo Management Retention Plan dated as of
October 11, 2012, included as Exhibit 10.1 to our Form 10-Q filed
on October 15, 2012 and incorporated by reference
herein.
|
|
|
|
19
|
Item 15.
|
Exhibits, Financial Statement Schedules
- continued
|
|
10.17
|
Certificate of Formation of Laredo/SORC Incentive Plan Royalty,
LLC., included as Exhibit 10.16 to our Form 10-K filed on August
29, 2012 and incorporated by reference herein.
|
|
|
|
|
10.18
|
Amendment to Certificate of Formation of Laredo/SORC Incentive Plan
Royalty, LLC, included as Exhibit 10.2 to our Form 10-Q filed on
October 15, 2012 and incorporated by reference herein.
|
|
|
|
|
10.19
|
Limited Liability Company Agreement of Laredo Royalty Incentive
Plan, LLC, dated as of October 11, 2012, included as Exhibit 10.3
to our Form 10-Q filed on October 15, 2012 and incorporated by
reference herein.
|
|
|
|
|
10.20
|
Form of Restricted Common Unit Agreement for Laredo Royalty
Incentive Plan, LLC. , included as Exhibit 10.4 to our Form 10-Q
filed on October 15, 2012 and incorporated by reference
herein.
|
|
|
|
|
14.1
|
Code of Ethics for Employees and Directors, included as Exhibit
14.1 to our Form 10-K filed September 14, 2010 and incorporated
herein by reference
|
|
|
|
|
|
|
|
|
|
20
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
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LAREDO OIL, INC.
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(the "Registrant")
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Date: August 29, 2017
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By:
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/s/ MARK SEE
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Mark See
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Chief Executive Officer and Chairman of the Board
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In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
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Date: August 29, 2017
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By:
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/s/ MARK SEE
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Mark See
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Chief Executive Officer and Chairman of the Board
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(Principal Executive Officer)
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Date: August 29, 2017
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By:
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/s/ BRADLEY E. SPARKS
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Bradley E. Sparks
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Chief Financial Officer, Treasurer and Director
(Principal Financial and Accounting Officer)
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Date: August 29, 2017
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By:
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/s/ DONALD BECKHAM
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Donald Beckham
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Director
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Date: August 29, 2017
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By:
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/s/ MICHAEL H. PRICE
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Michael H. Price
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Director
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21
LAREDO OIL, INC.
INDEX TO FINANCIAL STATEMENTS
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Page
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Report of Independent Registered Public Accounting
Firm
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F-2
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Balance Sheets as of May 31, 2017 and 2016
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F-3
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Statements of Operations for the Years Ended May 31, 2017 and
2016
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F-4
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Statement of Stockholders' Deficit for the Years Ended May 31, 2017
and 2016
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F-5
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Statements of Cash Flows for the Years Ended May 31, 2017 and
2016
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F-6
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Notes to the Financial Statements
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F-7
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F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and Stockholders
of Laredo Oil, Inc.
We have audited the accompanying balance sheets of Laredo Oil, Inc.
(the Company) as of May 31, 2017 and 2016, and the related
statements of operations, stockholders’ deficit, and cash
flows for each of the years then ended. The Company’s
management is responsible for these financial statements. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Laredo
Oil, Inc. as of May 31, 2017 and 2016, and the results of its
operations and its cash flows for each of the years then ended in
conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note
2 to the financial statements, the Company has incurred losses
since inception and is dependent upon one customer for its revenue.
These factors raise substantial doubt that the Company will be able
to continue as a going concern. Management's plans in regard to
these matters are also discussed in Note 2 to the financial
statements. The financial statements do not include any adjustments
that might result from the outcome of this
uncertainty.
/s/ Weaver and Tidwell, L.L.P.
WEAVER AND TIDWELL, L.L.P.
Austin, Texas
August 29
, 2017
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AN INDEPENDENT
MEMBER OF BAKER TILLY
INTERNATIONAL
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WEAVER AND TIDWELL LLP
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
WWW.WEAVERLLP.COM
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AUSTIN
1601 SO. MoPAC EXPRESSWAY,
SUITE D250, AUSTIN, TX 78746
P: (512) 609 1900 F: (512) 609 1911
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F-2
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Laredo Oil, Inc.
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Balance Sheets
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May 31,
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May 31,
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2017
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2016
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ASSETS
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Current Assets
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Cash
and cash equivalents
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$
330,684
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$
393,937
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Prepaid
expenses and other current assets
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47,195
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46,293
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Total
Current Assets
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377,879
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440,230
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TOTAL ASSETS
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$
377,879
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$
440,230
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LIABILITIES AND STOCKHOLDERS’ DEFICIT
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Current Liabilities
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Accounts
payable
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$
38,219
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$
33,363
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Accrued
payroll liabilities
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1,671,651
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1,057,280
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Accrued
liabilities – related party
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20,128
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170,079
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Accrued
interest
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159,339
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129,632
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Deferred
management fee revenue
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45,833
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45,833
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Notes
payable
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350,000
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350,000
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Total
Current Liabilities
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2,285,170
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1,786,187
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TOTAL LIABILITIES
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2,285,170
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1,786,187
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Commitments
and Contingencies
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-
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-
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Stockholders’ Deficit
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Preferred
stock: $0.0001 par value; 10,000,000 shares authorized; none issued
and outstanding
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-
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-
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Common
stock: $0.0001 par value; 90,000,000 shares authorized; 54,514,765
and 54,514,765 issued and outstanding, respectively
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5,451
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5,451
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Additional
paid in capital
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8,591,327
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8,188,199
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Accumulated
deficit
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(10,504,069
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(9,539,607
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Total Stockholders’ Deficit
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(1,907,291
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(1,345,957
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TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
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$
377,879
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$
440,230
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The accompanying notes are an integral part of these financial
statements.
F-3
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Laredo Oil, Inc.
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Statements of Operations
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Year Ended
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Year Ended
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May 31, 2017
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May 31, 2016
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Management
fee revenue
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$
9,823,386
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$
10,896,736
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Direct
costs
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10,101,432
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10,624,321
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Gross
profit (loss)
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(278,046
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272,415
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General,
selling and administrative expenses
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369,466
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494,715
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Consulting
and professional services
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286,568
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385,339
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Total
Operating Expense
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656,034
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880,054
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Operating
loss
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(934,080
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(607,639
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Non-operating
income (expense)
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(Loss)
Gain on revaluation of warrant liability
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-
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(24,424
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Interest
expense
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(30,382
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(28,085
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Net
loss
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$
(964,462
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$
(660,148
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Net
loss per share, basic and diluted
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$
(0.02
)
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$
(0.01
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Weighted
average number of basic and diluted common shares
outstanding
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54,514,765
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54,454,050
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The accompanying notes are an integral part of these financial
statements.
F-4
Laredo Oil, Inc.
Statement of Stockholders' Deficit
For the Years Ended May 31, 2017 and 2016
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Common Stock
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Preferred Stock
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Additional Paid
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Accumulated
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Total Stockholders’
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Shares
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Amount
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Shares
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Amount
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In Capital
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Deficit
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Deficit
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Balance at May 31, 2015
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53,998,569
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$
5,400
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-
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-
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$
7,320,378
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$
(8,879,459
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$
(1,553,681
)
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Exercise
of warrants
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516,196
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51
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-
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-
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(51
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-
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-
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Reclassification
of warrant liability
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-
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-
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-
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-
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276,414
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-
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276,414
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Vested
restricted stock
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-
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-
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-
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-
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11,944
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-
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11,944
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Share
based compensation
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-
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-
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-
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-
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579,514
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-
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579,514
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Net
Loss
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-
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-
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-
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-
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-
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(660,148
)
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(660,148
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Balance at May 31, 2016
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54,514,765
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$
5,451
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-
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-
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$
8,188,199
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$
(9,539,607
)
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$
(1,345,957
)
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Vested
restricted stock
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-
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-
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-
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-
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1,389
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-
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1,389
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Share
based compensation
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-
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-
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-
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-
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401,739
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-
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401,739
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Net
Loss
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-
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-
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-
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-
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-
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(964,462
)
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(964,462
)
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Balance at May 31, 2017
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54,514,765
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$
5,451
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-
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-
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$
8,591,327
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$
(10,504,069
)
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$
(1,907,291
)
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The accompanying notes are an integral part of these financial
statements.
F-5
Laredo Oil, Inc.
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Year Ended
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Year Ended
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May 31, 2017
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May 31, 2016
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CASH
FLOWS FROM OPERATING ACTIVITIES
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Net
loss
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$
(964,462
)
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$
(660,148
)
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Adjustments
to Reconcile Net Loss to Net Cash Provided by (Used in) Operating
Activities:
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Stock
issued for services
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1,389
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11,944
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Share
based compensation
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401,739
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579,514
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Loss
(Gain) on revaluation of warrant liability
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-
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24,424
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Decrease
(Increase) in prepaid expenses and other current
assets
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(902
)
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109,629
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Increase
in accounts payable and accrued liabilities
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498,983
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242,739
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NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
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(63,253
)
|
308,102
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CASH
FLOWS FROM INVESTING ACTIVITIES
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-
|
-
|
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CASH
FLOWS FROM FINANCING ACTIVITIES
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-
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-
|
|
|
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Net
(decrease) increase in cash and cash equivalents
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(63,253
)
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308,102
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Cash
and cash equivalents at beginning of period
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393,937
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85,835,
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CASH
AND CASH EQUIVALENTS AT END OF PERIOD
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$
330,684
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$
393,937
|
The accompanying notes are an integral part of these financial
statements.
F-6
The accompanying financial statements have been prepared by
management of Laredo Oil, Inc. (“the Company”). In the
opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows as of and for the
years ended May 31, 2017 and 2016 presented have been
made.
The Company was incorporated under the laws of the State of
Delaware on March 31, 2008 under the name of “Laredo Mining,
Inc.” with authorized common stock of 90,000,000 shares at
$0.0001 par value and authorized preferred stock of 10,000,000
shares at $0.0001 par value. On October 21, 2009 the name was
changed to “Laredo Oil, Inc.”
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 (“EOR”) methods for its sole customer,
Stranded Oil Resources Corporation (“SORC”), an
indirect, wholly owned subsidiary of Alleghany Corporation
(“Alleghany”).
From its inception through October 2009, the Company was primarily
engaged in acquisition and exploration efforts for mineral
properties. After a change in control in October 2009, the Company
shifted its focus to locating mature oil fields with the intention
of acquiring those oil fields and recovering stranded oil using
enhanced oil recovery methods. The Company was unable to raise the
capital required to purchase any suitable oil fields.
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 May 31, 2017. 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 May 31, 2017 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.
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 years ended May 31, 2017 and 2016, no
potentially dilutive securities were included in the calculation of
diluted loss per share as their impact would have been
anti-dilutive.
F-7
These financial statements have been prepared on a going concern
basis. The Company has incurred losses since inception, has a net
loss of $964,462 for the year ended May 31, 2017, and is dependent
on 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.
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
Management Services Agreement. 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.
USE OF ESTIMATES
Management uses estimates and assumptions in preparing these
financial statements in accordance with generally accepted
accounting principles. Those estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities, and the reported revenues and
expenses. Actual results could differ from those
estimates.
REVENUE RECOGNITION
Revenue is recognized from services when it is realized or
realizable and earned. Management fee revenue is considered
realized and earned when persuasive evidence of an arrangement
exists, the service has been performed, the sales price is fixed
and determinable, no significant unfulfilled obligation exists, and
collection is reasonably assured.
CASH AND CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or
less are considered to be cash equivalents. There were no cash
equivalents as of May 31, 2017 and 2016. At times, the Company
maintains cash balances deposited at its financial institution that
exceed FDIC insured limits.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
The Company financed directors’ and officers’ insurance
and is amortizing the expense over the 12 month contract
life.
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,
trade accounts receivable, accounts payable, accrued liabilities,
warrant liabilities and notes payable. All instruments, with the
exception of the warrant liabilities which are measured at fair
value, are accounted for on a historical cost basis, which, due to
the short maturity of these financial instruments, approximates
fair value at May 31, 2017.
Based on the borrowing rates currently available to the Company for
loans with similar terms and average maturities, the fair value of
notes payable approximate their 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.
F-8
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- continued
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 unobservable 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 fiscal year ended May 31,
2016. The Company measured 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. As of May 31, 2017 and 2016, there are no remaining assets
measured at fair value on a recurring basis.
EMPLOYEE SEPARATIONS
The Company establishes obligations for expected termination
benefits provided under existing agreements with a former or
inactive employee after employment but before retirement. These
benefits generally include severance payments and medical
continuation coverage. As of May 31, 2017, the Company had a
severance accrual of approximately $269,000 included in accrued
payroll liabilities. There were no similar accruals as of May 31,
2016. During the year ended May 31, 2017, the Company recorded
direct costs for termination benefit expense totaling approximately
$291,000.
SHARE BASED EXPENSES
FASB ASC 718,
Compensation - Stock
Compensation
prescribes
accounting and reporting standards for all stock-based payment
awards to employees, including employee stock options, restricted
stock, employee stock purchase plans and stock appreciation rights.
Stock-based payment awards may be classified as either equity or
liabilities. The Company should determine if a present obligation
to settle the share-based payment transaction in cash or other
assets exists. A present obligation to settle in cash or other
assets exists if: (
a
) the option to settle by issuing equity
instruments lacks commercial substance or (
b
) the present obligation is implied because of an
entity's past practices or stated policies. If a present obligation
exists, the transaction should be recognized as a liability;
otherwise, the transaction should be recognized as
equity.
The Company accounts for stock-based compensation issued to
non-employees and consultants in accordance with the provisions of
FASB ASC 505-50,
Equity - Based Payments to
Non-Employees.
Measurement of
share-based payment transactions with non-employees shall be based
on the fair value of whichever is more reliably measurable:
(
a
) the goods or services received; or
(
b
) the equity instruments issued. The fair value of
the share-based payment transaction should be determined at the
earlier of performance commitment date or performance completion
date.
INCOME TAXES
The Company accounts for income taxes by the asset and liability
method in accordance with FASB ASC 740,
Income Taxes.
Under this method, current income
taxes are recognized for the estimated income taxes payable for the
current year. Deferred income tax assets and liabilities are
recognized in the current year for temporary differences between
the tax and accounting bases of assets and liabilities as well as
for the benefit of losses available to be carried forward to future
years for tax purposes that are likely to be realized. In addition,
a valuation allowance is established to reduce any deferred tax
asset for which it is determined that it is more likely than not
that some portion of the deferred tax asset will not be
realized.
In addition, the Company utilizes the two-step approach to
recognizing and measuring uncertain tax positions taken or expected
to be taken in a tax return. The first step is to determine if the
weight of available evidence indicates that it is more likely than
not that the tax position will be sustained in an audit, including
resolution of any related appeals or litigation processes. The
second step is to measure the tax benefit as the largest amount
that is more than 50% likely to be realized upon ultimate
settlement. The Company recognizes interest and penalties accrued
on unrecognized tax benefits within general and administrative
expense. To the extent that accrued interest and penalties do not
ultimately become payable, amounts accrued will be reduced and
reflected as a reduction in general and administrative expenses in
the period that such determination is made.
F-9
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2014, the FASB issued ASU 2014-12, "Compensation - Stock
Compensation (Topic 718): Accounting for Share-Based Payments When
the Terms of an Award Provide That a Performance Target Could be
Achieved after the Requisite Service Period." This ASU provides
more explicit guidance for treating share-based payment awards that
require a specific performance target that affects vesting and that
could be achieved after the requisite service period as a
performance condition. The new guidance is effective for annual and
interim reporting periods beginning after December 15, 2015. As a
result of the adoption, there is no material impact on the results
of operations, cash flows or financial position.
In August 2014, the FASB issued ASU No. 2014-15, "Presentation of
Financial Statements - Going Concern
(Subtopic 205-40) -
Disclosure of Uncertainties about an Entity's Ability to Continue
as a Going Concern
", which requires
management to evaluate, at each annual and interim reporting
period, whether there are conditions or events that raise
substantial doubt about the entity's ability to continue as a going
concern within one year after the date the financial statements are
issued and provide related disclosures. ASU 2014-15 is effective
for annual periods ending after December 15, 2016 and interim
periods thereafter. Early application is permitted. The adoption of
ASU 2014-15 did not have a material effect on the Company’s
results of operations, cash flows or financial
position.
In
January 2015, the FASB issued ASU No. 2015-01, “Simplifying
Income Statement Presentation by Eliminating the Concept of
Extraordinary Items
.
”
This ASU eliminates from U.S. GAAP the concept of extraordinary
items and the need for an entity to separately classify, present,
and disclose extraordinary events and transactions, while retaining
certain presentation and disclosure guidance for items that are
unusual in nature or occur infrequently. The pronouncement is
effective for annual reporting periods beginning after December 15,
2015, including interim periods within that reporting period and
may be applied retrospectively, with early application permitted.
The Company does not expect the
adoption of this guidance to have a material impact on the results
of operations, cash flows or financial
position.
In February 2016, the FASB issued ASU No.
2016-02
,
“
Leases (Topic
842)”, which requires
the recognition of lease assets
and lease liabilities on the balance sheet for those
leases classified as operating leases under
previous GAAP.
The amended guidance also requires additional
quantitative and qualitative disclosures regarding the amount,
timing and uncertainty of cash flows arising from leases in order
to provide additional information about the nature of an
organization’s leasing activities.
This standard will be effective for the Company
beginning in the first quarter of fiscal year 2020, with early
adoption permitted. This standard will be adopted using a modified
retrospective approach. The Company is currently evaluating the
impact this standard will have on its financial
statements.
In
March 2016, the FASB issued ASU No. 2016-09,
“Compensation—Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment
Accounting”
,
that
changes several aspects of accounting for share-based payment
transactions. The amended guidance requires all excess tax benefits
and tax deficiencies to be recognized in the income statement
rather than additional paid-in capital. In addition, such excess
tax benefits or tax deficiencies will no longer be classified on
the Statement of Cash Flows as a financing activity, with
prospective application required. Additionally, the guidance
clarifies the classification of employee taxes paid when an
employer withholds shares for tax-withholding purposes on the
Statement of Cash Flows as a financing activity, with retrospective
application required. The new guidance also provides an accounting
policy election to account for forfeitures as they occur, with a
modified retrospective application required. This standard will be
effective for the Company beginning in the first quarter of fiscal
year 2018, with early adoption
permitted.
In the
first quarter of fiscal 2018, the Company will recognize
forfeitures of share-based awards as they occur in the period of
forfeiture rather than estimating the number of awards expected to
be forfeited at the grant date and subsequently adjusting the
estimate when awards are actually forfeited. The Company does not
expect that the change in accounting policy will result in an
adjustment to retained earnings as of June 1, 2017. The Company
will determine the method of adoption for the remaining provisions
during the first quarter of fiscal 2018.
Management does not believe that any other recently issued, but not
yet effective accounting standards, if currently adopted, would
have a material effect on the accompanying financial
statements.
Basic and diluted earnings per share is computed by dividing net
loss available to common shareholders by the weighted average
number of common shares outstanding during the period. Diluted loss
per share gives effect to all dilutive potential common shares
outstanding during the period. Dilutive loss per share excludes all
potential common shares if their effect is anti-dilutive. As of May
31, 2017 and 2016, warrants to purchase 5,374,501 and 6,349,501
shares of common stock, respectively and options to purchase
7,854,000 and 10,074,000 shares of common stock, respectively, were
not included in the computation of diluted net loss per share
because they were anti-dilutive.
F-10
|
|
For the
Year Ended
|
|
|
|
May
31,
|
|
|
|
2017
|
2016
|
|
Numerator
- net loss attributable to
|
|
|
|
common
stockholders
|
$
(964,462
)
|
$
(660,148
)
|
|
|
|
|
|
Denominator
- weighted average
|
|
|
|
number
of common shares outstanding
|
54,514,765
|
54,454,050
|
|
|
|
|
|
Basic
and diluted loss
|
|
|
|
per
common share
|
$
(0.02
)
|
$
(0.01
)
|
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 are considered related parties under FASB ASC
850. All management fee revenue reported by the Company for the
years ended May 31, 2017 and 2016 is generated from charges to
SORC. The Company also recorded an approximate $28,000 and $31,000
receivable from SORC as of May 31, 2017 and 2016, respectively, for
employee expense reports presented in prepaid expenses and other
current assets on the balance sheet and $20,000 and $170,000
payable to SORC for payroll liabilities as of May 31, 2017 and
2016, respectively, covered by SORC pursuant to the management
services agreements. All outstanding notes payable and related
accrued interest at May 31, 2017 and 2016, respectively, are held
by Alleghany. 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 year ended May 31, 2016,
respectively, Mr. Beckham was paid approximately $62,000 by SORC as
consideration for such services. No amounts were paid during the
year ended May 31, 2017. This consulting arrangement terminated on
July 24, 2015.
Share Based Compensation
Effective November 6, 2011, the holders of a majority of the shares
of common stock approved the Plan to reserve 10,000,000 shares of
common stock for issuance to eligible recipients. Effective
December 2014, an additional 5,000,000 shares of common stock were
reserved for issuance to eligible recipients under the Plan. Shares
under the plan can be issued in the form of options, restricted
stock, and other forms of equity securities. The Company’s
board of directors has the discretion to set the amount and vesting
period of award grants. As of May 31, 2017, 5,520,000 shares remain
available for issuance under the Plan.
The Black-Scholes option pricing model is used to estimate the fair
value of options granted under our stock incentive
plan.
F-11
NOTE 6 - STOCKHOLDERS' DEFICIT -
continued
The following table summarizes share-based
compensation:
|
|
Year Ended
|
|
|
|
May 31, 2017
|
May 31, 2016
|
|
Share-based
compensation:
|
|
|
|
General,
selling and administrative expenses
|
$
312,521
|
$
426,825
|
|
Consulting
and professional services
|
90,607
|
164,633
|
|
|
403,128
|
591,458
|
|
Share-based
compensation by type of award:
|
|
|
|
Stock
options
|
401,739
|
579,514
|
|
Restricted
stock
|
1,389
|
11,944
|
|
|
$
403,128
|
$
591,458
|
Stock Options
On August 17, 2015, the Company granted options for the purchase of
925,000 shares of common stock with an exercise price of $0.405 per
share, the fair market value on the date of the grant. 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.
For the years ended May 31, 2017 and May 31, 2016, respectively,
$401,739 (for 1,128,475 vested shares) and $579,514 (for 1,378,752
vested shares) was recognized as expense related to the stock
options. As of May 31, 2017, $264,845 of expense was not recognized
for 653,476 unvested shares with a weighted average vesting period
of 0.8 years. As of May 31, 2016, $761,285 of expense was not
recognized for 1,978,859 unvested shares with a weighted average
vesting period of 0.8 years.
The following table summarizes information about options granted
during the years ended May 31, 2017 and 2016:
|
|
Number of Shares
|
Weighted Average Exercise Price
|
|
|
|
|
|
Balance,
May 31, 2015
|
10,074,000
|
$
0.69
|
|
Options
granted and assumed
|
925,000
|
0.405
|
|
Options
expired
|
-
|
-
|
|
Options
cancelled, forfeited
|
(490,000
)
|
(0.27
)
|
|
Options
exercised
|
-
|
-
|
|
|
|
|
|
Balance,
May 31, 2016
|
10,509,000
|
$
0.68
|
|
Options
granted and assumed
|
-
|
-
|
|
Options
expired
|
(900,000
)
|
(2.00
)
|
|
Options
cancelled, forfeited
|
(1,755,000
)
|
(0.25
)
|
|
Options
exercised
|
-
|
-
|
|
|
|
|
|
Balance,
May 31, 2017
|
7,854,000
|
$
0.63
|
All stock options are exercisable upon vesting.
As of May 31, 2017 and 2016, 7,854,000 and 10,509,000 options have
been granted at a weighted average exercise price of $0.63 and
$0.68, respectively.
Restricted Stock
During fiscal years ending May 31, 2017 and 2016, no restricted
stock has been granted. The Company granted 1.6 million shares of
restricted stock during fiscal year 2014. As of May 31, 2017, all
of the granted shares have vested. The Company recognized $1,389
and $11,944 in expense for the years ended May 31, 2017 and 2016,
respectively.
F-12
Warrants
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 May 31, 2017, 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.
No warrants have been granted or cancelled during the years ended
May 31, 2017 and 2016 as follows:
|
|
Number of Shares
|
Weighted Average Exercise Price
|
|
Balance,
May 31, 2015
|
6,349,501
|
$
0.63
|
|
Warrants
granted and assumed
|
—
|
—
|
|
Warrants
expired
|
—
|
—
|
|
Warrants
cancelled, forfeited
|
—
|
—
|
|
Warrants
exercised
|
975,000
|
—
|
|
|
|
|
|
Balance,
May 31, 2016
|
5,374,501
|
$
0.70
|
|
Warrants
granted and assumed
|
—
|
—
|
|
Warrants
expired
|
—
|
—
|
|
Warrants
cancelled, forfeited
|
—
|
—
|
|
Warrants
exercised
|
—
|
—
|
|
|
|
|
|
Balance,
May 31, 2017
|
5,374,501
|
$
0.70
|
All warrants are exercisable as of May 31, 2017.
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 during the first
quarter of fiscal year 2016. Accordingly, the warrant liability is
no longer measured at fair value as of May 31, 2016. The fair value
of the warrants was determined during the three months ending
August 31, 2015 using the Black-Scholes option pricing model based
on the following weighted average assumptions:
|
|
August 31, 2015
|
|
|
|
|
Risk-free interest rates
|
0.02%
|
|
Expected Term
|
0.4 years
|
|
Expected volatility
|
163.1%
|
|
Dividend yield
|
0%
|
During the fiscal year ended May 31, 2011, the Company entered into
two Loan Agreements with Alleghany 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 May 31, 2017, accrued interest totaling $159,339 is recorded in
current 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, 2017 and are classified as short term
notes payable as of May 31, 2017. 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.
F-13
We did not provide any current or deferred U.S. federal income tax
provision or benefit for any of the periods presented because we
have experienced operating losses since inception. Per the
authoritative literature when it is more likely than not that a tax
asset cannot be realized through future income the Company must
allow for this future tax benefit. We provided a full valuation
allowance on the net deferred tax asset, consisting of net
operating loss carryforwards, because management has determined
that it is more likely than not that we will not earn income
sufficient to realize the deferred tax assets during the
carryforward period.
The Company has not taken any tax positions that, if challenged,
would have a material effect on the financial statements for the
twelve-months ended May 31, 2017 and 2016. The Company’s tax
returns for the fiscal years ended May 31 of 2010 to 2016 remain
subject to examination by the tax authorities.
The components of the Company's deferred tax asset as of May 31,
2017 and 2016 are as follows:
|
|
2017
|
2016
|
|
Net
operating loss
|
$
458,557
|
$
426,055
|
|
Other
|
968,581
|
681,830
|
|
Valuation
allowance
|
(1,427,138
)
|
(1,107,885
)
|
|
Net
deferred tax asset
|
$
-
|
$
-
|
A reconciliation of income taxes computed at the statutory rate to
the income tax amount recorded is as follows:
|
|
2017
|
201
6
|
|
Tax
at statutory rate (34%)
|
$
327,917
|
$
224,450
|
|
Effect
of non-deductible permanent differences
|
(59,647
)
|
(119,835
)
|
|
Other
|
50,983
|
(57,826
)
|
|
(Increase)
in valuation allowance
|
(319,253
)
|
(46,789
)
|
|
Net
deferred tax asset
|
$
-
|
$
-
|
The net federal operating loss carry forward will expire between
2028 and 2036. This carry forward may be limited upon the
consummation of a business combination under IRC Section
381.
No office leases currently extend beyond one year. Rent expense
amounted to $1,539 and $16,336 for the years ending May 31, 2017
and 2016, respectively.
F-14
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1. Business - ContinuedItem 2. PropertiesItem 3. Legal ProceedingsPart IIItem 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity Securities - ContinuedItem 7. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7. Management's Discussion and Analysis Of Financial Condition and Results Of Operations - ContinuedItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A Controls and ProceduresItem 9A Controls and Procedures - ContinuedItem 9B Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 10. Directors, Executive Officers and Corporate Governance - ContinuedItem 11. Executive CompensationItem 11. Executive Compensation - ContinuedItem 12. Security Ownership Of Certain Beneficial Owners and ManagementItem 12. Security Ownership Of Certain Beneficial Owners and Management - ContinuedItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits, Financial Statement SchedulesItem 15. Exhibits, Financial Statement Schedules - ContinuedNote 1 - Organization and Description Of BusinessNote 2 Going ConcernNote 3 - Summary Of Significant Accounting PoliciesNote 3 - Summary Of Significant Accounting Policies - ContinuedNote 4 - Loss Per ShareNote 4 - Loss Per Share - ContinuedNote 5 - Related Party TransactionsNote 6 - Stockholders' DeficitNote 6 - Stockholders' Deficit - ContinuedNote 7 Notes PayableNote 8 - Provision For Income TaxesNote 9 Office Leases