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LRDC > SEC Filings for LRDC > Form 10-K on 29-Aug-2013All Recent SEC Filings

Show all filings for LAREDO OIL, INC.

Form 10-K for LAREDO OIL, INC.


Annual Report

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The Company is a management services company managing both the acquisition of mature oil fields and the 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 royalty fees based upon the success of SORC.

As of May 31, 2013, Alleghany Capital Corporation has invested approximately $38.7 million, and as of the filing date of this report, invested over $44.3 million for a project located near Fredonia, Kansas and a separate project located in another state. A portion of these funds were used to acquire oil-producing leases or to purchase mineral rights totaling approximately 2,245 acres in Kansas. In January 2013, permits were issued by the Kansas Corporation Commission ("KCC") to begin work on the project, and in the spring, a construction contract was entered into with Frontier-Kemper to complete the first phase of the project. Construction was underway as of the fiscal yearend, as it is as of the date of the filing of this report.

SORC has also acquired oil-producing leases in another state which contains 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 is preparing to develop one or more test wells on the targeted field and, if certain criteria are met, will begin implementing the UGD recovery method after approval 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. Once development of the underground chamber and the UGD method is prepared for operation, selected conventional wells are expected to be plugged and abandoned after UGD production has begun. The effect of such operational procedures should result in minimal disruption of oil production from the SORC field investments.

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

Liquidity and Capital Resources

Due to the nature of the SORC transaction, the Company forecasts that it will need no additional funding in order to execute its agreements with SORC. 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 solely by Alleghany Capital in exchange for issuance by SORC to Alleghany Capital of 12% Cumulative Preferred Stock and common stock. As of May 31, 2013, SORC has received $38.7 million in funding from Alleghany Capital. As of the date of the filing of this report, that funding figure has grown to over $44.3 million. Prior to the Company's receiving any Royalty cash distributions from SORC, all SORC preferred share accrued dividends must be paid and preferred shares redeemed.

Our reported cash at May 31, 2013 was $107,674. For the year ended May 31, 2013, the Company received $2,204,676 from SORC in management fees. Total debt outstanding as of the filing date of this report is $350,000 owed to Alleghany Capital, which is classified as long-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

As a result of signing the Agreements with SORC, we started receiving payments under the MSA effective June 14, 2011, and received and recorded management fee revenue and direct costs totaling $2,204,676 and $1,954,574 for the fiscal year ending May 31, 2013 and $1,581,145 and $1,145,166 for the fiscal year ending May 31, 2012. The increase in revenues and direct costs is primarily attributable to an increase in employees in fiscal year ending May 31, 2013 as compared to fiscal year ending May 31, 2012.

During the years ended May 31, 2013 and 2012, respectively, we incurred operating expenses of $849,325 and $5,465,706. 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 costs associated with fund raising. The decrease in expenses for the year ended May 31, 2013 as compared to the same period in 2012 is primarily attributable to the costs of closing the Alleghany transaction.

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.

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - continued

Further, for the year ended May 31, 2013, the Company experienced a loss on revaluation of the warrant liability of $67,009 and for the year ended May 31, 2012, the Company experienced a gain on revaluation of the warrant liability of $541,086. These changes on revaluation are due to an increase and decrease in the common stock price in the respective periods, as well as a change in the exercise price on certain warrants.

During June 2011, the Company fixed the price of the warrants issued in connection with the $300,000 Convertible Notes to $0.25 per share and removed the price protection originally included with the warrants. Removal of the price protection feature associated with the warrants issued in connection with the convertible debt resulted in reclassification of $651,153 of the associated warrant liability to additional paid in capital. However, the Company's operating income (loss) will continue to be affected by changes of value of the warrant liability associated with the remaining 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 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 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.

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