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, 2018
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.
☑
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, 2017 of $0.03 per share as
reported on the OTC Bulletin Board, was $0.6 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, 2018, 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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6
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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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9
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Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
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9
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Item 9A. Controls and Procedures
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9
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Item 9B. Other Information
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10
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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, 2018 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
(the “Board”). 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 their time
and effort fulfilling the terms of the Agreements whereby they use
their best 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, 2018,
SORC has received approximately $288.6 million in net funding from
Alleghany Capital. Prior to the Company receiving any cash
distributions from SORC, all accrued dividends (in excess of $150
million as of June 30, 2018) must be paid and preferred shares
redeemed.
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.
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Item 1.
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Business
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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 original 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. As experience
is gained through practical application of the processes involved
in oil recovery, variants of the UGD concept are continually
developed and evaluated. The UGD 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.
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.
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Item 1.
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Business
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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, 2018, we had 63 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, 2018, 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 2017 — Aug 2017
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Fiscal Q2: Sep 2017 — Nov 2017
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Fiscal Q3: Dec 2017 — Feb 2018
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Fiscal Q4: Mar 2018 — May 2018
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High Bid
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0.05
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0.035
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0.045
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0.111
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Low Bid
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0.0266
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0.0112
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0.0145
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0.0063
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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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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.
Holders
As of August 29, 2018, 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 254,000 shares of common stock at $0.25 per share,
800,000 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, 425,000 shares of common stock at $0.405, and
1,500,000 shares of common stock at $2.00 per share, all of which
total 4,679,000 options and are fully vested. If shares underlying
all outstanding warrants and options were issued, the fully diluted
number of shares outstanding would be 64,568,266
shares.
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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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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, 2018, no
royalties have been accrued or paid.
From SORC’s formation in 2011 through June 30, 2018,
Alleghany Capital has invested $288.6 million into SORC. This
investment has been channeled primarily into three major projects
discussed in the following paragraphs.
The first project was located in Kansas. SORC funds have been used
to acquire oil and gas leases and to purchase mineral rights
totaling approximately 2,500 acres and used to construct and
develop an Underground Gravity Drainage (“UGD”)
facility. SORC completed construction of its underground facility
in 2014 and commenced its drilling program in 2015. After a
thorough evaluation of the project, SORC sold substantially all its
assets to third parties as of December 29, 2017 and no longer has
oil and gas properties in Kansas.
The second project is located in Louisiana. SORC has acquired oil
and gas leases on approximately 9,244 acres in a targeted oil
reservoir. The oil field there is operational and currently
producing crude oil using conventional production methods. 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 those leases
acquired using conventional recovery methods. In addition, the
Company is evaluating a modified UGD site within the
field.
The third project is located 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 is also implementing
and evaluating a modified UGD site within the field.
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.
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 for its own account.
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 May31, 2018, 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, 2018, SORC had received $288.6
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 $150 million as of
June 30, 2018) 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.
8
|
Item 7.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
-
continued
|
Our cash and cash equivalents at May 31, 2018 was $106,311. 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 $9,362,459 and $8,749,147, respectively, for the
fiscal year ending May 31, 2018 and $9,823,386 and $10,101,432,
respectively, for the fiscal year ending May 31, 2017. 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, 2018 as compared to fiscal year ending
May 31, 2017. The direct costs in fiscal year ending May 31, 2017
further include an increase related to employee separation costs,
resulting in the negative gross profit.
During the years ended May 31, 2018 and 2017, respectively, we
incurred operating expenses of $495,309 and $656,034. 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, 2018 as compared to the same period in 2017 is primarily
attributable to decreases in share-based compensation expense 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.
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.
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.
9
|
Item 9A
|
Controls and
Procedures
-
continued
|
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, 2018. As we grow, we are working on further improving our
segregation of duties and level of supervision.
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, 2018 that have
materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
|
Item 9B
|
Other Information
|
None.
10
|
Item 10.
|
Directors, Executive Officers and Corporate Governance
|
The following table sets forth as of August 29, 2018, 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
|
|
58
|
|
Director
|
|
March 1, 2011
|
|
Christopher E. Lindsey
|
|
52
|
|
General Counsel and Secretary
|
|
October 16, 2013
|
|
Michael H. Price
|
|
70
|
|
Independent Director
|
|
August 3, 2012
|
|
Mark See
|
|
57
|
|
Chief Executive Officer and Chairman
|
|
October 16, 2009
|
|
Bradley E. Sparks
|
|
71
|
|
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 been a Partner with
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 Weil LLP 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.
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.
11
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
- continued
|
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
(currently inactive) 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
|
|
(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.
|
|
12
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
- continued
|
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, 2018, 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, 2018 and 2017 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)
|
2018
|
525,000
|
-
|
-
|
1,034
|
526,034
|
|
Chief
Executive Officer and Chairman of the Board
|
2017
|
525,000
|
-
|
-
|
33,923
|
558,923
|
|
|
|
|
|
|
||
|
Bradley
E. Sparks (2)
|
2018
|
415,000
|
-
|
-
|
1,250
|
416,250
|
|
Chief
Financial Officer, Treasurer and Director
|
2017
|
415,000
|
-
|
-
|
-
|
415,000
|
|
|
|
|
|
|
||
|
Christopher
E. Lindsey (3)
|
2018
|
321,192
|
6, 000
|
-
|
-
|
327,192
|
|
General
Counsel and Secretary
|
2017
|
314,310
|
-
|
-
|
5,737
|
320,047
|
|
(1)
|
The salary amounts shown in fiscal year 2018 include $490,776 in
cash payments and $35,258 of deferred compensation and in fiscal
year 2017 include $461,954 in cash payments and $63,046 of deferred
compensation. Other compensation includes untaken earned vacation
days sold back to the Company in exchange for cash payments. As of
May 31, 2018, Mr. See has cumulative deferred compensation of
$142,966.
|
|
|
|
|
(2)
|
The amounts shown in 2018 include 2017 include $258,851 of salary
paid in cash and $157,3999 in deferred compensation and in 2017
include $250,306 of salary paid in cash and $164,694 of deferred
compensation. As of May 31, 2018, Mr. Sparks has cumulative
deferred compensation of $818,972.
|
|
|
|
|
(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. Beginning
January 1, 2018, the rate of annual cash salary compensation paid
to Mr. See was increased by 3% from $454,230 to $468,000 per
year
(which, together with
previously approved allowances for Mr. See equaling $30,000, is an
aggregate of $498,000 per year). Under his contract with Laredo and
as of May 31, 2018, Mr. See has $142,966 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, 2018,
Mr. Sparks has $818,972 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, and he received a one-time
bonus of $6,000 in December 2017. Beginning January 1, 2018, the
rate of annual cash salary compensation paid to Mr. Lindsey was
increased from $307,249 to $311,000 per year (which, together with
previously approved allowances for Mr. Lindsey equaling $12,000, is
an aggregate of $323,000 per year).
Effective June 29, 2012, the Board approved the Laredo Management
Retention Plan (the “Royalty Plan”) that outlines the
terms and conditions under which employees of the Company are
eligible to participate in the Incentive Royalty to be assigned to
the Royalty Plan. In accordance with the terms of the Royalty Plan,
a new special purposes entity was formed on July 3, 2012 as a
Delaware limited liability company (the “Plan Entity”).
On October 11, 2012, the Board (i) amended the Royalty Plan to,
among other things, change the name of the Royalty Plan to
“Laredo Royalty Incentive Plan”, (ii) appointed a
Compensation Committee of the non-employee board members (the
“Compensation Committee”) to administer the Royalty
Plan and make awards thereunder, (iii) authorized the filing of an
Amendment to the Certificate of Formation of the Plan Entity to
change its name to “Laredo Royalty Incentive Plan,
LLC”, (iv) adopted and approved an Assignment Agreement
pursuant to which the Incentive Royalty was assigned to the Plan
Entity in accordance with the Royalty Plan. Also, on October 11,
2012, the Compensation Committee made awards of Restricted Common
Units of the Plan Entity (the “Plan Units”) pursuant to
Award Agreements to certain of its employees. These Plan Units vest
over a period of three years from grant, but are subject to
accelerated vesting upon the commencement of production under the
initial UGD project as provided in the award agreement. Ten
thousand (10,000) Plan Units are authorized for issuance under the
Royalty Plan, of which 7,000 Plan Units were issued and outstanding
as of May 31, 2018.
Outstanding equity awards as of May 31, 2018:
|
(a)
Name
and Principle Position
|
(b)
Number of Securities Underlying Unexercised Options
Exercisable
|
(e)
Option Exercise Price($)
|
(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, 2018, 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, 2018, all 1,100,000 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
|
1,650,000
|
3.0
%
|
|
|
|
|
|
|
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
|
38,421,533
|
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 1,100,000 shares of common
stock at $0.38 per share.
|
Securities authorized for issuance under equity compensation
plans
The following table provides information as of May 31, 2018
concerning the issuance of equity securities with respect to
compensation plans under which our equity securities are authorized
for issuance.
16
|
Item 12.
|
Security Ownership
of Certain Beneficial Owners and Management
- continued
|
Equity Compensation Plan Information
|
Plan category
|
Number of securities to be issued upon exercise of outstanding
options, warrants and rights (a)
|
Weighted –average exercise price of outstanding options,
warrants and rights ($) (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)
|
4,754,000
|
0.89
|
8,620,000
(2)
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
(3)
|
5,374,501
|
0.70
|
N/A
|
|
|
|
|
|
|
Total
|
10,128,501
|
0.79
|
8,620,000
|
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, none in fiscal year
2017 and none in fiscal year 2018. Also, during fiscal year 2014,
options to purchase 600,000 shares of common stock previously
granted to Mr. See 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,
5,345,000 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
None
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
$72,424
for the fiscal year ended May 31, 2018 and $73,610 for the fiscal
year ended May 31, 2017.
(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, 2018 and 2017 for professional services rendered by
the principal accountants for tax compliance, tax advice, and tax
planning was $
7,100 and $5,750,
respectively.
(4)
All Other
Fees
During the last two fiscal years ending May 31, 2018 and 2017,
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.
18
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
Item 15.
|
Exhibits, Financial Statement Schedules
- continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
LAREDO OIL, INC.
|
|
|||
|
|
(the "Registrant")
|
|
|||
|
|
|
|
|
|
|
|
Date: August 29, 2018
|
By:
|
/s/ MARK SEE
|
|
|
|
|
|
|
Mark See
|
|
|
|
|
|
|
Chief Executive Officer and Chairman of the Board
|
|
|
|
|
|
|
|
|
|
|
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.
|
Date: August 29, 2018
|
By:
|
/s/ MARK SEE
|
|
|
|
|
Mark See
|
|
|
|
|
Chief Executive Officer and Chairman of the Board
|
|
|
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
Date: August 29, 2018
|
By:
|
/s/ BRADLEY E. SPARKS
|
|
|
|
|
Bradley E. Sparks
|
|
|
|
|
Chief Financial Officer, Treasurer and Director
(Principal Financial and Accounting Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
Date: August 29, 2018
|
By:
|
/s/ DONALD BECKHAM
|
|
|
|
|
Donald Beckham
|
|
|
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
Date: August 29, 2018
|
By:
|
/s/ MICHAEL H. PRICE
|
|
|
|
|
Michael H. Price
|
|
|
|
|
Director
|
|
21
LAREDO OIL, INC.
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
|
Page
|
|
|
|
|
Report of Independent Registered Public Accounting
Firm
|
F-2
|
|
|
|
|
Balance Sheets as of May 31, 2018 and 2017
|
F-3
|
|
|
|
|
Statements of Operations for the Years Ended May 31, 2018 and
2017
|
F-4
|
|
|
|
|
Statement of Stockholders' Deficit for the Years Ended May 31, 2018
and 2017
|
F-5
|
|
|
|
|
Statements of Cash Flows for the Years Ended May 31, 2018 and
2017
|
F-6
|
|
|
|
|
Notes to the Financial Statements
|
F-7
|
|
|
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and Stockholders
of Laredo Oil, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Laredo Oil, Inc.
(the Company) as of May 31, 2018 and 2017, and the related
statements of operations, stockholders’ deficit, and cash
flows for each of the two years in the period ended May 31, 2018,
and the related notes (collectively referred to as the financial
statements). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the
Company as of May 31, 2018 and 2017, and the results of its
operations and cash flows for each of the two years in the period
ended May 31, 2018, in conformity with accounting principles
generally accepted in the United States of America.
Going Concern
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in
Note 2 to the financial statements, the entity has a history of
operating losses 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 described in Note 2 to the
financial statements. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
Basis for Opinion
These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (PCAOB) and are
required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting but not
for the purpose of expressing an opinion of the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits include performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
WEAVER AND TIDWELL, L.L.P.
We have served as Laredo Oil, Inc.'s auditor since
2011.
Austin, Texas
August 29, 2018
|
AN INDEPENDENT
MEMBER OF BAKER TILLY
INTERNATIONAL
|
|
WEAVER AND TIDWELL LLP
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
WWW.WEAVERLLP.COM
|
|
AUSTIN
1601 SO. MoPAC EXPRESSWAY,
SUITE D250, AUSTIN, TX 78746
P: (512) 609 1900 F: (512) 609 1911
|
F-2
|
Laredo Oil, Inc.
|
||
|
|
||
|
|
|
|
|
|
May
31,
|
May 31,
|
|
|
2018
|
2017
|
|
|
|
|
|
ASSETS
|
|
|
|
Current Assets
|
|
|
|
Cash
and cash equivalents
|
$
106,311
|
$
330,684
|
|
Receivable
– related party
|
120,124
|
27,870
|
|
Prepaid
expenses and other current assets
|
39,981
|
19,325
|
|
Total
Current Assets
|
266,416
|
377,879
|
|
|
|
|
|
TOTAL ASSETS
|
$
266,416
|
$
377,879
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
Current Liabilities
|
|
|
|
Accounts
payable
|
$
9,360
|
$
38,219
|
|
Accrued
payroll liabilities
|
1,207,417
|
1,671,651
|
|
Accrued
liabilities – related party
|
32,914
|
20,128
|
|
Accrued
interest
|
190,272
|
159,339
|
|
Deferred
management fee revenue
|
45,833
|
45,833
|
|
Notes
payable
|
350,000
|
350,000
|
|
Total
Current Liabilities
|
1,835,796
|
2,285,170
|
|
|
|
|
|
TOTAL LIABILITIES
|
1,835,796
|
2,285,170
|
|
|
|
|
|
Commitments
and Contingencies
|
-
|
-
|
|
|
|
|
|
Stockholders’ Deficit
|
|
|
|
Preferred
stock: $0.0001 par value; 10,000,000 shares authorized; none issued
and outstanding
|
-
|
-
|
|
Common
stock: $0.0001 par value; 90,000,000 shares authorized; 54,514,765
and 54,514,765 issued and outstanding, respectively
|
5,451
|
5,451
|
|
Additional
paid in capital
|
8,830,531
|
8,591,327
|
|
Accumulated
deficit
|
(10,405,362
)
|
(10,504,069
)
|
|
|
|
|
|
Total Stockholders’ Deficit
|
(1,569,380
)
|
(1,907,291
)
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
$
266,416
|
$
377,879
|
The accompanying notes are an integral part of these financial
statements.
F-3
|
Laredo Oil, Inc.
|
||
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
Year Ended
|
|
|
May 31, 2018
|
May 31, 2017
|
|
|
|
|
|
Management
fee revenue
|
$
9,362,459
|
$
9,823,386
|
|
|
|
|
|
Direct
costs
|
8,749,147
|
10,101,432
|
|
|
|
|
|
Gross
profit (loss)
|
613,312
|
(278,046
)
|
|
|
|
|
|
General,
selling and administrative expenses
|
300,084
|
369,466
|
|
Consulting
and professional services
|
195,225
|
286,568
|
|
Total
Operating Expense
|
495,309
|
656,034
|
|
|
|
|
|
Operating
income/(loss)
|
118,003
|
(934,080
)
|
|
|
|
|
|
Non-operating
income (expense)
|
12,034
|
-
|
|
Interest
expense
|
(31,330
)
|
(30,382
)
|
|
|
|
|
|
Net
income/(loss)
|
$
98,707
|
$
(964,462
)
|
|
|
|
|
|
Net
income/(loss) per share, basic and diluted
|
$
0.00
|
$
(0.02
)
|
|
|
|
|
|
Weighted
average number of basic and diluted common shares
outstanding
|
54,514,765
|
54,514,765
|
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, 2018 and 2017
|
|
Common Stock
|
Preferred Stock
|
Additional Paid
|
Accumulated
|
Total Stockholders’
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
In Capital
|
Deficit
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2016
|
54,514,765
|
$
5,451
|
-
|
$
-
|
$
8,188,199
|
$
(9,539,607
)
|
$
(1,345,957
)
|
|
|
|
|
|
|
|
|
|
|
Vested
restricted stock
|
-
|
-
|
-
|
-
|
1,389
|
-
|
1,389
|
|
|
|
|
|
|
|
|
|
|
Share
based compensation
|
-
|
-
|
-
|
-
|
401,739
|
-
|
401,739
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
-
|
-
|
-
|
-
|
-
|
(964,462
)
|
(964,462
)
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2017
|
54,514,765
|
$
5,451
|
-
|
-
|
$
8,591,327
|
$
(10,504,069
)
|
$
(1,907,291
)
|
|
|
|
|
|
|
|
|
|
|
Share
based compensation
|
-
|
-
|
-
|
-
|
239,204
|
-
|
239,204
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
-
|
-
|
-
|
-
|
-
|
98,707
|
98,707
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2018
|
54,514,765
|
$
5,451
|
-
|
$
-
|
$
8,830,531
|
$
(10,405,362
)
|
$
(1,569,380
)
|
The accompanying notes are an integral part of these financial
statements.
F-5
Laredo Oil, Inc.
|
|
Year Ended
|
Year Ended
|
|
|
May 31, 2018
|
May 31, 2017
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
Net
income/(loss)
|
$
98,707
|
$
(964,462
)
|
|
Adjustments
to Reconcile Net Income/(Loss) to Net Cash Used in Operating
Activities:
|
|
|
|
Stock
issued for services
|
-
|
1,389
|
|
Share
based compensation
|
239,204
|
401,739
|
|
(Increase)/decrease
in receivable – related party
|
(92,254
)
|
2,822
|
|
(Decrease)/Increase
in accounts payable and accrued liabilities
|
(449,374
)
|
498,983
|
|
Increase
in prepaid expenses and other current assets
|
(20,656
)
|
(3,724
)
|
|
|
|
|
|
NET
CASH USED IN OPERATING ACTIVITIES
|
(224,373
)
|
(63,253
)
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
-
|
-
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
-
|
-
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
(224,373
)
|
(63,253
)
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
330,684
|
393,937
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
$
106,311
|
$
330,684
|
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, 2018 and 2017 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, 2018. In addition,
SORC will reimburse the Company for monthly expenses incurred by
the Service Employees in connection with their rendition of
services under the MSA. The Company may submit written requests to
SORC for additional funding for payment of the Company’s
operating costs and expenses, which SORC, in its sole and absolute
discretion, will determine whether or not to fund. As of the filing
date, no such additional funding requests have been
made.
As consideration for the licenses to SORC, the Company will receive
a 19.49% interest in SORC net profits as defined in the SORC
License Agreement (the “SORC License Agreement”). Under
the SORC License Agreement, the Company agreed that a portion of
the Royalty equal to at least 2.25% of the net profits
(“Incentive Royalty”) be used to fund a long-term
incentive plan for the benefit of its employees, as determined by
the Company’s board of directors. On October 11, 2012, the
Laredo Royalty Incentive Plan (the “Plan”) was approved
and adopted by the Board and the Incentive Royalty was assigned by
the Company to Laredo Royalty Incentive Plan, LLC, a special
purpose Delaware limited liability company and wholly owned
subsidiary of Laredo Oil, Inc. formed to carry out the purposes of
the Plan (the “Plan Entity”). Through May 31, 2018 the
subsidiary has received no distributions from SORC. As a result of
the assignment of the Incentive Royalty to the Plan Entity, the
Royalty retained by the Company has been reduced from 19.49% to
17.24% subject to reduction to 15% under certain events stipulated
in the SORC License Agreement. Additionally, in the event of a SORC
initial public offering or certain other defined corporate events,
the Company will receive 17.24%, subject to reduction to 15% under
the SORC License Agreement, of the SORC common equity or proceeds
emanating from the event in exchange for termination of the
Royalty. Under certain circumstances regarding termination of
exclusivity and license terminations, the Royalty could be reduced
to 7.25%. If any Incentive Royalty is funded as a result of those
conditions being met, the Company may record compensation expense
for the fair value of the Incentive Royalty, once all pertinent
factors are known and considered probable.
Basic and Diluted Loss per Share
The Company’s basic earnings per share (“EPS”)
amounts have been computed based on the weighted-average number of
shares of common stock outstanding for the period. For the years
ended May 31, 2018 and 2017, all options and warrants potentially
convertible into common equivalent shares are considered
antidilutive and have been excluded in the calculation of diluted
earnings per share.
F-7
These financial statements have been prepared on a going concern
basis. The Company has a history of operating losses 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, 2018 and 2017. At times, the Company
maintains cash balances deposited at its financial institution that
exceed FDIC insured limits.
RECEIVABLE
– RELATED PARTY
Receivable – related party balances arise from employee
expense reports and estimated monthly license fees incurred in
accordance with the Company’s revenue recognition policy, but
not paid at period end.
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
and notes payable. All instruments are accounted for on a
historical cost basis, which, due to the short maturity of these
financial instruments, approximates fair value at May 31,
2018.
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.
F-8
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- continued
FASB ASC 820,
Fair Value Measurements
(“FASB ASC
820”)
,
defines fair value as the price that would be
received to sell an asset, or paid to transfer a liability, in an
orderly transaction between market participants at the measurement
date. FASB ASC 820 provides a framework for measuring fair value,
establishes a three-level hierarchy for fair value measurements
based upon the transparency of inputs to the valuation of an asset
or liability as of the measurement date and requires consideration
of the counterparty’s creditworthiness when valuing certain
assets.
The three level fair value hierarchies for disclosure of fair value
measurements defined by FASB ASC 820 are as follows:
Level 1
– Unadjusted,
quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities.
An active market is defined as a market where transactions for the
financial instrument occur with sufficient frequency and volume to
provide pricing information on an ongoing
basis.
Level 2
– Inputs, other
than quoted prices in active markets, that are either directly or
indirectly observable for the asset or liability through
correlation with market data at the measurement date and for the
duration of the instrument’s anticipated
life.
Level 3
– Prices or
valuations that require 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.
As of May 31, 2018 and 2017, 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, 2018 and 2017, the Company had
a severance accrual of approximately $24,000 and $269,000 included
in accrued payroll liabilities. 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
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-
continued
RECLASSIFICATIONS
Certain amounts in the prior period presentation have been
reclassified to conform to the current period financial statement
presentation. These reclassifications have no effect on previously
reported net income.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU 2014-09, “Revenue from
Contracts with Customers” (Topic 606) which amended the
existing accounting standards for revenue recognition. ASU 2014-09
establishes principles for recognizing revenue upon the transfer of
promised goods or services to customers, in an amount that reflects
the expected consideration received in exchange for those goods or
services. In July 2015, the FASB deferred the effective date for
annual reporting periods beginning after December 15, 2017
(including interim reporting periods within those periods), which
would be the Company’s fiscal year ending May 31, 2019. Early
adoption is permitted to the original effective date for annual
reporting periods beginning after December 15, 2016 (including
interim reporting periods within those periods). The amendments may
be applied retrospectively to each prior period (full
retrospective) or retrospectively with the cumulative effect
recognized as of the date of initial application (modified
retrospective). The Company will adopt ASU 2014-09 beginning June
1, 2018 using the full retrospective implementation. The adoption
of this guidance is not expected to have a material effect on the
Company’s financial position, result of operations or cash
flows.
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 beginning after December 15, 2016 and interim
periods thereafter. The Company has adopted this new guidance for
fiscal year 2018. 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 November 2015, the FASB issued ASU No. 2015-17, “Balance
Sheet Classification of Deferred Taxes,” (“ASU
2015-17”), which requires entities to present deferred tax
assets and deferred tax liabilities as noncurrent in a classified
balance sheet. ASU 2015-17 simplifies the current guidance in ASC
740, which requires entities to separately present deferred tax
assets and liabilities as current and noncurrent in a classified
balance sheet. ASU 2015-17 is effective for fiscal years beginning
after December 15, 2016, and interim periods within those annual
periods. The Company has adopted the new guidance for fiscal year
2018. The adoption of this ASU did not have a material impact on
the Company’s financial position, results of operations or
cash flows.
In January 2016, the FASB issued ASU No. 2016-01, “Financial
Instruments – Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities.”
The updated guidance enhances the reporting model for financial
instruments and requires entities to use the exit price notion when
measuring the fair value of financial instruments for disclosure
purposes, and the separate presentation of financial assets and
financial liabilities by measurement category and form of financial
asset (i.e., securities or loans and receivables) on the balance
sheet or the accompanying notes to the financial statements. The
guidance is effective for annual and interim reporting periods
beginning after December 15, 2017, which would be the
Company’s fiscal year ending May 31, 2019. The Company
expects that this guidance will not have a material effect on its
financial statements.
In February 2016, the FASB issued ASU No.
2016-02
,
“
Leases (Topic
842)”
to increase
transparency and comparability among organizations by recognizing
lease assets and lease liabilities on the balance sheet and
disclosing key information about leasing arrangements. Topic 842
affects any entity that enters into a lease, with some specified
scope exemptions. The guidance in this update supersedes Topic 840,
Leases. The core principle of Topic 842 is that a lessee should
recognize the assets and liabilities that arise from leases. A
lessee should recognize in the statement of financial position a
liability to make lease payments (the lease liability) and a
right-of-use asset representing its right to use the underlying
asset for the lease term. For public companies, the amendments in
this update are effective for fiscal years beginning after December
15, 2018, including interim periods within those fiscal years,
which would be the Company’s fiscal year ending May 31, 2020.
The Company does not expect the adoption of ASU 2016-09 to have a
material effect on its business, its financial position, results of
operations or cash flows.
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 is
effective for the Company beginning in the first quarter of fiscal
year ending May 31, 2018. The adoption of this ASU did not have a
material impact on the Company’s financial position, results
of operations or cash flows.
In August 2016, the FASB issued ASU 2016-15, “Statement of
Cash Flows (Topic 230) Classification of Certain Cash Receipts and
Cash Payments”, which will make eight targeted changes to how
cash receipts and cash payments are presented and classified in the
statement of cash flows. ASU 2016-15 is effective for annual
periods beginning after December 15, 2017, and interim periods
within those annual periods, which would be the Company’s
fiscal year ending May 31, 2019. The Company does not expect the
adoption of ASU 2016-15 to have a material effect on its business,
its financial position, results of operations or cash
flows.
F-10
In May 2017, FASB issued ASU 2017-09, Compensation—Stock
Compensation (Topic 718): Scope of Modification Accounting, which
amends the scope of modification accounting surrounding share-based
payment arrangements as issued in ASU 2016-09 by providing guidance
on the various types of changes which would trigger modification
accounting for share-based payment awards. ASU 2017-09 is effective
for annual periods beginning after December 15, 2017, and interim
periods within those annual periods, which would be the
Company’s fiscal year ending May 31, 2019. Early adoption is
permitted, including adoption in any interim period, for public
business entities for reporting periods for which financial
statements have not yet been issued. While the Company does not
expect the adoption of ASU 2017-09 to have a material effect on its
business, the Company is still evaluating any potential impact that
adoption of ASU 2017-09 may have on its financial position, results
of operations or cash flows.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share
(Topic 260), Distinguishing Liabilities from Equity (Topic 480),
Derivatives and Hedging (Topic 815). The amendments in Part I of
this update change the classification analysis of certain
equity-linked financial instruments (or embedded features) with
down round features. When determining whether certain financial
instruments should be classified as liabilities or equity
instruments, a down round feature no longer precludes equity
classification when assessing whether the instrument is indexed to
an entity’s own stock. The amendments also clarify existing
disclosure requirements for equity-classified instruments. As a
result, a freestanding equity-linked financial instrument (or
embedded conversion option) no longer would be accounted for as a
derivative liability at fair value as a result of the existence of
a down round feature. For freestanding equity classified financial
instruments, the amendments require entities that present earnings
per share (“EPS”) in accordance with Topic 260 to
recognize the effect of the down round feature when it is
triggered. That effect is treated as a dividend and as a reduction
of income available to common shareholders in basic EPS.
Convertible instruments with embedded conversion options that have
down round features are now subject to the specialized guidance for
contingent beneficial conversion features (in Subtopic 470-20,
Debt—Debt with Conversion and Other Options), including
related EPS guidance (in Topic 260). The amendments in Part II of
this update recharacterize the indefinite deferral of certain
provisions of Topic 480 that now are presented as pending content
in the codification, to a scope exception. Those amendments do not
have an accounting effect. For public business entities, the
amendments in Part I of this update are effective for fiscal years,
and interim periods within those fiscal years, beginning after
December 15, 2018, which would be the Company’s fiscal year
ending May 31, 2020. Early adoption is permitted for all entities,
including adoption in an interim period. If an entity early adopts
the amendments in an interim period, any adjustments should be
reflected as of the beginning of the fiscal year that includes that
interim period. While the Company does not expect the adoption of
ASU 2017-11 to have a material effect on its business, the Company
is still evaluating any potential impact that adoption of ASU
2017-11 may have on its financial position, results of operations
or cash flows.
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/(loss) per share is computed by dividing
net income/(loss) available to common shareholders by the weighted
average number of common shares outstanding during the period.
Diluted earnings/(loss) per share gives effect to all dilutive
potential common shares outstanding during the period. Dilutive
earnings/(loss) per share excludes all potential common shares if
their effect is anti-dilutive. As of May 31, 2018 and 2017,
warrants to purchase 5,374,501 shares of common stock, and options
to purchase 4,754,000 and 7,854,000 shares of common stock,
respectively, were not included in the computation of diluted
earnings/(loss) per share because they were
anti-dilutive.
|
|
For the
Year Ended
|
|
|
|
May
31,
|
|
|
|
201
8
|
201
7
|
|
Numerator
- net income/(loss) attributable to
|
|
|
|
common
stockholders
|
$
98,707
|
$
(964,462
)
|
|
|
|
|
|
Denominator
- weighted average
|
|
|
|
number
of common shares outstanding
|
54,514,765
|
54,514,765
|
|
|
|
|
|
Basic
and diluted earnings/(loss)
|
|
|
|
per
common share
|
$
0.00
|
$
(0.02
)
|
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:
F-11
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, 2018 and 2017 is generated from charges to
SORC. The Company also recorded an approximate $120,000 and $28,000
receivable from SORC as of May 31, 2018 and 2017, respectively, for
employee expense reports and estimated monthly license fees
presented in receivable – related party on the balance sheet
and $33,000 and $20,000 payable to SORC for payroll liabilities as
of May 31, 2018 and 2017, respectively, covered by SORC pursuant to
the management services agreements. All outstanding notes payable
and related accrued interest at May 31, 2018 and 2017,
respectively, are held by Alleghany. See Note 7.
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, 2018, 8,620,000 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.
The following table summarizes share-based
compensation:
|
|
Year Ended
|
|
|
|
May 31, 2018
|
May 31, 2017
|
|
Share-based
compensation:
|
|
|
|
General,
selling and administrative expenses
|
$
239,204
|
$
312,521
|
|
Consulting
and professional services
|
-
|
90,607
|
|
|
$
239,204
|
$
403,128
|
|
Share-based
compensation by type of award:
|
|
|
|
Stock
options
|
239,204
|
401,739
|
|
Restricted
stock
|
-
|
1,389
|
|
|
$
239,204
|
$
403,128
|
Stock Options
For the years ended May 31, 2018 and May 31, 2017, respectively,
$239,204 (for 618,061 vested shares) and $401,739 (for 1,128,475
vested shares) was recognized as expense related to the stock
options. As of May 31, 2018, $14,062 of expense was not recognized
for 35,415 unvested shares with a weighted average vesting period
of 0.25 years. 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.
F-12
The following table summarizes information about options granted
during the years ended May 31, 2018 and 2017:
|
|
Number of Shares
|
Weighted Average Exercise Price
|
|
|
|
|
|
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
|
|
Options
granted and assumed
|
-
|
-
|
|
Options
expired
|
-
|
-
|
|
Options
cancelled, forfeited
|
(3,100,000
)
|
(0.24
)
|
|
Options
exercised
|
-
|
-
|
|
|
|
|
|
Balance,
May 31, 2018
|
4,754,000
|
$
0.89
|
All stock options are exercisable upon vesting.
As of May 31, 2018 and 2017, 4,754,000 and 7,854,000 options are
outstanding at a weighted average exercise price of $0.89 and
$0.63, respectively.
Restricted Stock
During fiscal years ending May 31, 2018 and 2017, no restricted
stock has been granted. The Company granted 1.6 million shares of
restricted stock during fiscal year 2014. As of May 31, 2018, all
of the granted shares have vested. The Company recognized $0 and
$1,389 in expense for the years ended May 31, 2018 and 2017,
respectively.
Warrants
As of May 31, 2018, there were 5,374,501 warrants remaining to be
exercised at a price of $0.70 per share to Sunrise Securities
Corporation to satisfy the finders’ fee obligation associated
with the Alleghany transaction. The warrants will expire June 14,
2021.
No warrants have been granted, exercised or cancelled during the
years ended May 31, 2018 and 2017.
All warrants are exercisable as of May 31, 2018.
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, 2018 and 2017, accrued interest totaling $190,272 and
$159,339, respectively, 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,
2018 and are classified as short-term notes payable as of May 31,
2018. 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, 2018 and 2017. The Company’s tax
returns for the fiscal years ended May 31 of 2011 to 2017 remain
subject to examination by the tax authorities.
The components of the Company's deferred tax asset as of May 31,
2018 and 2017 are as follows:
|
|
201
8
|
2017
|
|
Net
operating loss
|
$
318,890
|
$
458,557
|
|
Other
|
524,616
|
968,581
|
|
Valuation
allowance
|
(843,506
)
|
(1,427,138
)
|
|
Net
deferred tax asset
|
$
-
|
$
-
|
A reconciliation of income taxes computed at the statutory rate to
the income tax amount recorded is as follows:
|
|
201
8
|
2017
|
|
Tax
at statutory rate (21% and 34%, respectively)
|
$
(20,728
)
|
$
327,917
|
|
Effect
of non-deductible permanent differences
|
(21,460
)
|
(59,647
)
|
|
Effect
of change in statutory tax rate
|
(522,170
)
|
-
|
|
Other
|
(19,274
)
|
50,983
|
|
Increase/(decrease)
in valuation allowance
|
583,632
|
(319,253
)
|
|
Net
deferred tax asset
|
$
-
|
$
-
|
The net federal operating loss carry forward will expire between
2028 and 2037. 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 $0 and $1,539 for the years ending May 31, 2018 and
2017, 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 Earnings/(loss) Per ShareNote 5 - Related Party TransactionsNote 5 - Related Party Transactions - ContinuedNote 6 - Stockholders' DeficitNote 6 - Stockholders' Deficit - ContinuedNote 7 Notes PayableNote 8 - Provision For Income TaxesNote 9 Office Leases