Laredo Oil, Inc. - FORM 10-Q - January 14, 2015

Attached files

file	filename
EXCEL - IDEA: XBRL DOCUMENT - Laredo Oil, Inc.	Financial_Report.xls
EX-32.1 - CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350 SIGNED BY THE CHIEF EXECUTIVE OFFICER - Laredo Oil, Inc.	exhibit_32-1.htm
EX-32.2 - CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350 SIGNED BY THE CHIEF FINANCIAL OFFICER - Laredo Oil, Inc.	exhibit_32-2.htm
EX-31.2 - CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - Laredo Oil, Inc.	exhibit_31-2.htm
EX-31.1 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - Laredo Oil, Inc.	exhibit_31-1.htm

U.S. SECURITIES AND EXCHANGE

COMMISSION

Washington, D.C.20549

FORM 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2014

Commission File Number 333-153168

Laredo Oil, Inc.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

111 Congress Avenue; Suite 400

Austin, Texas 78701

(Address of principal executive offices) (Zip code)

(512) 279-7870

(Registrant's telephone number, including area code)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 last 90 days. Yes x No o

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 x No o

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," "non-accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 or the Exchange Act). Yes o No x

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:

53,668,177 shares of common stock issued and outstanding as of January 14, 2015.

PART I FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Balance Sheets as of November 30, 2014 (unaudited) and May 31, 2014	4
	Statements of Operations (unaudited)	5
	Statements of Cash Flows (unaudited)	6
	Notes to Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	12

Item 4.	Controls and Procedures	13


PART II OTHER INFORMATION

Item 6.	Exhibits	14

Signatures		15

ITEM 1. FINANCIAL STATEMENTS

The following unaudited financial statements have been prepared by Laredo Oil, Inc. (the “Company"), pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented not misleading. However, except as disclosed herein, there have been no material changes in the information disclosed in the notes to the financial statements for the year ended May 31, 2014. These financial statements and the notes attached hereto should be read in conjunction with the financial statements and notes included in the Company's Form 10-K, which was filed with the SEC on August 29, 2014. In the opinion of management of the Company, all adjustments, including normal recurring adjustments necessary to present fairly the financial position of Laredo Oil, Inc., as of November 30, 2014 and the results of its operations and cash flows for the six month period then ended, have been included. The results of operations for the six month period ended November 30, 2014 are not necessarily indicative of the results for the full year ending May 31, 2015.

Laredo Oil, Inc.
Balance Sheets

	November 30, 2014			May 31, 2014
	(Unaudited)

ASSETS
Current Assets
Cash and cash equivalents	$	99,632		$	88,271
Prepaid expenses and other current assets		190,531			48,223
Total Current Assets		290,163			136,494

TOTAL ASSETS	$	290,163		$	136,494

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities
Accounts payable	$	47,481		$	28,286
Accrued payroll liabilities		705,547			482,515
Accrued interest		89,350			76,805
Deferred management fee revenue		45,833			45,833
Warrant liabilities		379,109			636,428
Notes payable		-			350,000

Total Current Liabilities		1,267,320			1,619,867

Long term notes payable		350,000			-

TOTAL LIABILITIES		1,617,320			1,619,867


Commitments and Contingencies

Stockholders’ Deficit
Preferred stock: $0.001 par value; 10,000,000 shares authorized; none issued and outstanding		-			-
Common stock: $0.0001 par value; 90,000,000 shares authorized; 53,642,177 and 53,600,013 issued and outstanding, respectively		5,364			5,360
Additional paid in capital		7,017,846			6,684,403
Accumulated deficit		(8,350,367	)		(8,173,136	)

Total Stockholders’ Deficit		(1,327,157	)		(1,483,373	)

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	290,163		$	136,494

The accompanying notes are an integral part of these financial statements.

Laredo Oil, Inc.

Statements of Operations

(Unaudited)

	Three Months Ended			Three Months Ended			Six Months Ended			Six Months Ended
	November 30, 2014			November 30, 2013			November 30, 2014			November 30, 2013


Management fee revenue	$	1,849,091		$	768,651		$	3,403,993		$	1,468,848

Direct costs		1,728,005			742,972			3,229,979			1,391,490

Gross profit		121,086			25,679			174,014			77,358


General, selling and administrative expenses		168,118			125,665			354,888			256,397
Consulting and professional services		118,066			72,843			240,794			157,505

Total Operating Expense		286,184			198,508			595,682			413,902

Operating loss		(165,098	)		(172,829	)		(421,668	)		(336,544	)

Other income (expense)
Gain (loss) on revaluation of warrant liability		172,130			(77,136	)		257,319			(126,012	)
Interest expense		(6,351	)		(8,925	)		(12,882	)		(14,359	)

Net income/(loss)	$	681		$	(258,890	)	$	(177,231	)	$	(476,915	)


Net income/(loss) per share, basic and diluted	$	0.00		$	(0.00	)	$	(0.00)		$	(0.01	)

Weighted average number of common shares outstanding		53,628,277			53,650,013			53,614,068			53,594,275

Diluted weighted average number of common shares outstanding		58,234,769			-			-			-

The accompanying notes are an integral part of these financial statements.

Laredo Oil, Inc.

Statements of Cash Flows

(Unaudited)

	Six Months Ended			Six Months Ended
	November 30, 2014			November 30, 2013

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(177,231	)	$	(476,915	)
Adjustments to Reconcile Net Loss to Net Cash Provided By (Used in) Operating Activities
Share based compensation		333,447			211,785
(Gain)/Loss on revaluation of warrant liability		(257,319)			126,012
Increase in prepaid expenses and other current assets		(142,308	)		(15,885	)
Increase in accounts payable and accrued liabilities		254,772			105,510
Increase in deferred management fee revenue		-			5,000

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		11,361			(44,493	)

CASH FLOWS FROM INVESTING ACTIVITIES		-			-

CASH FLOWS FROM FINANCING ACTIVITIES		-			-

Net increase (decrease) in cash and cash equivalents		11,361			(44,493	)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		88,271			107,674

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	99,632		$	63,181

The accompanying notes are an integral part of these financial statements.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

On June 14, 2011, the Company entered into agreements with Stranded Oil Resources Corporation (“SORC”) to seek recovery of stranded crude oil from mature, declining oil fields by using the enhanced oil recovery (“EOR”) method known as Underground Gravity Drainage (“UGD”). Such agreements include license agreements, management services agreements, and other agreements (collectively the “Agreements”). SORC is a subsidiary of Alleghany Capital Corporation (“Alleghany Capital”) which is a subsidiary of Alleghany Corporation (“Alleghany”).

The Agreements stipulate that the Company and Mark See, the Company’s Chairman and Chief Executive Officer (“CEO”), will provide to SORC, management services and expertise through exclusive, perpetual license agreements and a management services agreement with SORC. As consideration for the licenses to SORC, the Company will receive an interest in SORC’s net profits as defined in the Agreements (the “Royalty”). The Management Service Agreement (“MSA”) outlines that the Company will provide the services of key employees (“Key Persons”), including Mark See, in exchange for monthly and quarterly management service fees. The monthly and quarterly management service fees provide funding for the salaries, benefit costs, and FICA taxes for the Key Persons identified in the MSA. The quarterly management fee is $137,500 per quarter and is paid on the first day of each calendar quarter, and, as such, $45,833 has been recorded as deferred management fee revenue at November 30, 2014. In addition, SORC will reimburse the Company for monthly expenses incurred by the Key Persons in connection with their rendition of services under the MSA. The Company may submit written requests to SORC for additional funding for payment of the Company’s operating costs and expenses, which SORC, in its sole and absolute discretion, will determine whether or not to fund.

As 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 November 30, 2014 the subsidiary has had no activity. 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 Net Income/(Loss) per Share

The Company’s basic earnings per share (“EPS”) amounts have been computed based on the weighted-average number of shares of common stock outstanding for the period. As the Company realized a net loss for the six month period ended November 30, 2014 and the three and six month periods ended November 30, 2013, no potentially dilutive securities were included in the calculation of diluted loss per share as their impact would have been anti-dilutive. Diluted net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of common and dilutive common equivalent shares outstanding during the period. As the Company realized net income for the three month period ended November 30, 2014, warrants and options convertible into 4,606,492 common equivalent shares are considered dilutive and have been included in the calculation of diluted earnings per share.

NOTE 2 – GOING CONCERN

These financial statements have been prepared on a going concern basis. The Company has no significant operating history as of November 30, 2014, and has a net loss of $177,231 for the six months ended November 30, 2014. 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 MSA. Further, the Company works closely with SORC to obtain its approval in advance of committing to material costs and expenditures in order to keep the Company’s expenses in line with the management fee revenue. There can be no assurance that the Company can successfully accomplish these steps and it is uncertain that the Company will achieve a profitable level of operations and obtain additional financing. There can be no assurance that any additional financing will be available to the Company on satisfactory terms and conditions, if at all.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 2 – GOING CONCERN - continued

The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.

NOTE 3 - RECENT AND ADOPTED ACCOUNTING STANDARDS

The Company has reviewed recently issued accounting standards and plans to adopt those that are applicable to it. It does not expect the adoption of those standards to have a material impact on its financial position, results of operations, or cash flows.

NOTE 4 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments as defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 825-10-50, Financial Instruments, include cash, trade accounts receivable, accounts payable, accrued liabilities, warrant liabilities and notes payable. All instruments, with the exception of the warrant liabilities which are measured at fair value, are accounted for on a historical cost basis, which, due to the short maturity of these financial instruments, approximates fair value at November 30, 2014. Based on the borrowing rates currently available to the Company for loans with similar terms and maturities, the fair value of long term notes payable approximates the carrying value.

FASB ASC 820, Fair Value Measurements (“FASB ASC 820”), defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. FASB ASC 820 provides a framework for measuring fair value, establishes a three level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and requires consideration of the counterparty’s creditworthiness when valuing certain assets.

The three level fair value hierarchies for disclosure of fair value measurements defined by FASB ASC 820 are as follows:

Level 1 – Unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. An active market is defined as a market where transactions for the financial instrument occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 – Inputs, other than quoted prices in active markets, that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. Valuation under level 3 generally involves a significant degree of judgment from management.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

The Company has warrant liabilities which are measured at fair value on a recurring basis at November 30, 2014 and 2013. The Company recorded a gain on revaluation of warrant liability of $172.130 and $257,319 for the three and six months ended November 30, 2014. The Company recorded a loss on revaluation of warrant liability of $77,136 and $126,012 for the three and six months ended November 30, 2013, respectively. The Company measures the fair value of the warrant liabilities using the Black Scholes method. Inputs used to determine fair value under this method include the Company’s stock price volatility and expected remaining life as disclosed in Note 6.

The following table presents the fair value hierarchy for those assets measured at fair value on a recurring basis as of November 30, 2014 and May 31, 2014:

Fair Value Measurements on a Recurring Basis

Current Liability	Level 1		Level 2		Level 3		Total
Warrant Liabilities – November 30, 2014	$	-	$	379,109	$	-	$	379,109
Warrant Liabilities – May 31, 2014	$	-	$	636,428	$	-	$	636,428

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 5 - RELATED PARTY TRANSACTIONS

Transactions between related parties are considered to be related party transactions even though they may not be given accounting recognition. FASB ASC 850, Related Party Disclosures (“FASB ASC 850”) requires that transactions with related parties that would make a difference in decision making shall be disclosed so that users of the financial statements can evaluate their significance. Related party transactions typically occur within the context of the following relationships:

●	Affiliates of the entity;

●	Entities for which investments in their equity securities are 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; and

●	Management of the entity and members of their immediate families;

Other parties that can significantly influence the management or operating policies of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

SORC and Alleghany Capital are considered related parties under FASB ASC 850. All management fee revenue reported by the Company for the three and six months ended November 30, 2014 and 2013 is generated from charges to SORC. All outstanding notes payable at November 30, 2014 and May 31, 2014 are held by Alleghany Capital. See Note 7.

NOTE 6 - STOCKHOLDERS' DEFICIT

Share Based Compensation

The Black-Scholes option pricing model is used to estimate the fair value of options granted under our stock incentive plan.

The following table summarizes share-based compensation:

	Six Months Ended		Six Months Ended
	November 30, 2014		November 30, 2013
Share-based compensation:
General, selling and administrative expenses	$	277,289	$	183,452
Consulting and professional services		56,158		28,333
		333,447		211,785
Share-based compensation by type of award:
Stock options		318,447		183,452
Restricted stock		15,000		28,333
	$	333,447	$	211,785

Stock Options

No stock options were granted during the first half of fiscal year 2015. On August 8, 2013, the Company granted 1,540,000 stock options to employees with an exercise price of $0.25 per share, the fair market value on the date of grant. The options vest monthly over three years beginning September 1, 2013 and expire on August 8, 2023. The grant date fair value of this employee stock option grant amounted to approximately $380,000. The assumptions used in calculating these values were based on an estimated contractual life of 7.0 years, volatility of 187% and a 1.98% risk free interest rate at the date of grant.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 6 - STOCKHOLDERS' DEFICIT - continued

On November 22, 2013, the Company granted 800,000 stock options to an employee and 400,000 stock options to an independent contractor with an exercise price of $0.36 per share, the fair market value on the date of grant. The options vest monthly over three years beginning December 1, 2013 and expire on November 22, 2023. The grant date fair value of this employee stock option grant amounted to approximately $427,000. The assumptions used in calculating these values were based on an estimated contractual life of 7.0 years, volatility of 186% and a 2.1% risk free interest rate at the date of grant.

Restricted Stock

No restricted stock was granted during the first half of fiscal year 2015. In August 2013, the three independent board members were each granted 50,000 restricted shares which vest in equal annual installments over three years beginning on the grant date. During 4th quarter fiscal 2014, one of the independent board members resigned from their position resulting in a forfeiture of 50,000 restricted shares resulting in a $2,000 reduction to consulting and professional services expense.

The fair value of the restricted stock granted is the market value as of the respective grant date since the restricted stock is granted at no cost to the directors. The grant date fair value of restricted stock granted during the first quarter of fiscal year 2014 was $37,500, using $0.25 per share.

Warrants

No warrants were issued during the first half of fiscal year 2015 or 2014. During the second quarter of fiscal year 2015, warrants for 62,500 shares were exercised in a cashless share transaction resulting in the issuance of 42,164 shares.

All outstanding warrants are currently exercisable.

During fiscal year 2011, the Company issued warrants to purchase 975,000 shares of common stock in connection with a stock purchase agreement. These warrants are exercisable for five years from the date of the Company’s Private Placement. The exercise price of each warrant is equal to the lesser of the stock price in a future financing arrangement or $0.25. Accordingly, these warrants contain anti-dilution provisions that adjust the exercise price of the warrants in the event additional shares of common stock or securities convertible into common stock are issued by the Company at a price less than the then applicable exercise price of the warrants. Pursuant to FASB ASC 815-40, Derivatives and Hedging, these warrants are treated as a liability measured at fair value at inception, with the calculated increase or decrease in fair value each quarter being recognized in the Statement of Operations. The fair value of the warrants was determined during the six months ending November 30, 2014 and 2013 using the Black-Scholes option pricing model based on the following assumptions:

	2015			2014

Risk-free interest rates		0.10	%		0.28	%
Contractual life	0.65 years			1.65 years
Expected volatility		98.2	%		202.49	%
Dividend yield		0	%		0	%

NOTE 7 - NOTES PAYABLE

During the fiscal year ended May 31, 2011, the Company entered into two Loan Agreements with Alleghany Capital for a combined available borrowing limit of $350,000. The notes accrue interest on the outstanding principal of $350,000 at the rate of 6% per annum. As of November 30, 2014, accrued interest totaling $89,350 is recorded in accrued liabilities. The interest is payable in either cash or in kind. The notes have been amended and restated and now have a maturity date of December 31, 2015 and are classified as long term notes payable. The loan agreements require any stock issuances for cash be utilized to pay down the outstanding loan balance unless written consent is obtained from Alleghany Capital.

NOTE 8 – SUBSEQUENT EVENTS

Stock Options

On January 2, 2015, the Company granted 1,100,000 stock options to a member of the board of directors 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 beginning February 2, 2015 and expire on January 2, 2025. The grant date fair value of this employee stock option grant amounted to approximately $432,000. The assumptions used in calculating these values were based on an estimated contractual life of 7.0 years, volatility of 177%, a dividend yield of zero and a 1.92% risk free interest rate at the date of grant.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report contains forward-looking statements that involve risk and uncertainties. We use words such as "anticipate", "believe", "plan", "expect", "future", "intend", and similar expressions to identify such forward-looking statements. Investors should be aware that all forward-looking statements contained within this filing are good faith estimates of management as of the date of this filing. Our actual results could differ materially from those anticipated in these forward-looking statements.

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” in the Form 10-K for the year ended May 31, 2014 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 November 30, 2014, no royalties have been accrued or paid.

As of November 30, 2014, Alleghany Capital had a net investment of approximately $147.8 million into SORC. This investment is primarily being channeled into two major projects located in separate states.

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 a UGD facility. In January 2013, the Kansas Corporation Commission (“KCC”) issued permits to begin work on the project, and as of November 30, 2014, the first phase of excavating and preparing the underground chamber for drilling had been completed, testing of all equipment, designs, procedures and systems had begun, and the initial drilling phase had commenced.

In Louisiana, SORC has acquired oil and gas leases on approximately 9,240 acres in a targeted oil reservoir. Negotiations continue to acquire additional mineral rights and leases in that oil field, and the Company believes that mineral rights underlying sufficient acreage are already in place to develop another UGD project there. The Company, on behalf of SORC, is currently operating those leases acquired. The Company has assessed the geological data concerning the oil reservoir there and will begin implementing the UGD recovery method if and when approved by the SORC board of directors.

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. For those fields, once development of the underground chamber is complete, the UGD method is prepared for operation, and production has begun, selected conventional wells are expected to be plugged and abandoned. The effect of such operational procedures should result in minimal disruption of oil production from the SORC field investments.

In accordance with the terms of the Agreements, the Company has agreed with SORC that it will not acquire any fields associated with UGD development.

Liquidity and Capital Resources

In accordance with the SORC license and management services agreements, the Company believes that it will receive from SORC sufficient working capital necessary to meet its obligations under the Agreements. The Company provides the know-how, expertise, and management required to identify, evaluate, acquire, test and develop targeted properties, and SORC will provide all required funding and will own the acquired assets. It is expected that SORC will be funded primarily by Alleghany Capital in exchange for issuance by SORC to Alleghany Capital of 12% Cumulative Preferred Stock. In April 2014, one of the SORC subsidiaries obtained a $250 million non-recourse secured bank credit facility to provide it with a lower cost source of funding as compared to the cost of funds received from Alleghany Capital. As of November 30, 2014, SORC had $6.75 million of borrowings under the facility, its current borrowing capacity, which is limited to the value of properties included in the borrowing base as determined by the lending institution. As of November 30, 2014, SORC had received $147.8 million in net funding from Alleghany Capital. Prior to the Company’s receiving any Royalty cash distributions from SORC, all SORC preferred share accrued dividends must be paid, preferred shares redeemed, and debt retired to comply with any loan agreements. Additionally, when SORC acquires additional oil fields, any Alleghany Capital funds invested into SORC to finance their acquisition and development must be repaid prior to the distribution of any Royalty cash distributions to Laredo. 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 MSA.

Our cash and cash equivalents at November 30, 2014 was $99,632. Total debt outstanding as of the filing date of this report is $350,000 owed to Alleghany Capital, which is classified as long-term.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

Results of Operations

Pursuant to the MSA with SORC, the Company received and recorded management fee revenue and direct costs totaling $1,849,091 and $1,728,005 for the quarter ended November 30, 2014 and $768,651 and $742,972 for the quarter ended November 30, 2013. Similarly, the Company received and recorded management fee revenue and direct costs totaling $3,403,993 and $3,229,979 for the six months ended November 30, 2014 and $1,468,848 and $1,391,490 for the six months ended November 30, 2013. The increase in revenues and direct costs is primarily attributable to an increase in employees for both the three and six months ended November 30, 2014 as compared to the same three and six months of last year.

During the quarters ended November 30, 2014 and 2013, respectively, we incurred operating expenses of $286,184 and $198,508. The Company incurred operating expenses of $595,682 and $413,902 during the six months ended November 30, 2014 and 2013, respectively. 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 increase in expenses for the quarter ended November 30, 2014 as compared to the same period in 2013 is primarily attributable to the increased share based compensation 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.

Further, for the quarters ended November 30, 2014 and 2013, respectively, the Company experienced a gain on revaluation of warrant liability of $172,130 and a loss on revaluation of warrant liability of $77,136. For the six months ended November 30, 2014 and 2013, respectively, the Company experienced a gain on revaluation of warrant liability of $257,319 and a loss on revaluation of warrant liability of $126,012. The changes on revaluation during the three and six months ended November 30, 2014 are due to a decrease in the common stock price, as well as a change in the exercise price on certain warrants, whereas the changes on revaluation during the three and six months ended November 30, 2013 are due to an increase in the common stock price and the change in the exercise price on certain warrants.

The Company’s operating loss will continue to be affected by changes of value of the warrant liability associated with the Sutter and Seaside warrants which contain price-protection provisions. Those warrants will be outstanding until they are either exercised or expire in July 2015.

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 revaluation of 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 the valuation of warrants.

These estimates and assumptions are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the periods in which they become known.

OFF-BALANCE SHEET ARRANGEMENTS

We do not currently have any off balance sheet arrangements or other such unrecorded obligations, and we have not guaranteed the debt of any other party.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk is confined to our cash equivalents. We invest in high-quality financial instruments and we believe we are subject to limited credit risk. Due to the short-term nature of our cash, we do not believe that we have any material exposure to interest rate risk arising from our investments.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission (“SEC”) rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives, and management necessarily is required to use its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, the CEO and CFO have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are not effective in insuring 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.

(b) Changes in Internal Control Over Financial Reporting

None.

PART II - OTHER INFORMATION

ITEM 6. EXHIBITS

The exhibits required to be filed herewith by Item 601 of Regulation S-K, as described in the following index of exhibits, are attached hereto unless otherwise indicated as being incorporated herein by reference, as follows:

3.1	Certificate of Incorporation, included as Exhibit 3.1 in our Form S-1 filed August 25, 2008, File No. 333-153168 and incorporated herein by reference.

3.2	Certificate of Amendment of Certificate of Incorporation, included as Exhibit 10.1 to our Form 8-K filed October 22, 2009 and incorporated herein by reference.

3.3	Bylaws, included as Exhibit 3.2 in our S-1 filed August 25, 2008, File No. 333-153168 and incorporated herein by reference.

31.1	Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

31.2	Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.1	Certificate Pursuant to 18 U.S.C. Section 1350 signed by the Chief Executive Officer

32.2	Certificate Pursuant to 18 U.S.C. Section 1350 signed by the Chief Financial Officer

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema

101.CAL	XBRL Taxonomy Extension Calculation Linkbase

101.DEF	XBRL Taxonomy Extension Definition Linkbase

101.LAB	XBRL Taxonomy Extension Label Linkbase

101.PRE	XBRL Extension Presentation Linkbase

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

LAREDO OIL, INC.

(Registrant)


Date: January 14, 2015	By:	/s/ Mark See
		Mark See
		Chief Executive Officer and Chairman of the Board


Date: January 14, 2015	By:	/s/ Bradley E. Sparks
		Bradley E. Sparks
		Chief Financial Officer, Treasurer and Director

Laredo Oil, Inc. - FORM 10-Q - January 14, 2015

Attached files

Laredo Oil, Inc. Reports