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LRDC > SEC Filings for LRDC > Form 10-Q on 14-Apr-2014All Recent SEC Filings

Show all filings for LAREDO OIL, INC.

Form 10-Q for LAREDO OIL, INC.


14-Apr-2014

Quarterly Report


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 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. The sole source of revenue for the Company comes from the management fees described in the Management Services Agreement and from royalty fees based upon the success of SORC.

As of February 28, 2014, Alleghany Capital Corporation has invested approximately $77.3 million for a project located near Fredonia, Kansas and another project located in a different state. Some of these funds were used to acquire oil-producing leases or to purchase mineral rights. Construction continues on the Kansas project as of the date of the filing of this report.

The Company has continued to hire additional employees. As of February 28, 2014, the employee count was 15 full time individuals including an attorney, who was appointed general counsel and Secretary for the Company, and several engineers and other professionals working both on the SORC UGD project in Kansas and acquiring access to mineral rights for another SORC project in another state. Salaries for these individuals are included in the monthly Management Services Agreement invoice presented to SORC for reimbursement. It is expected that the employee count will continue to increase as the UGD project progresses and as additional access to mineral rights is secured in another state.

SORC has continued to acquire oil-producing leases in another state which contains a targeted oil reservoir. SORC has acquired mineral rights there and negotiations continue to acquire additional mineral rights and leases in that oil field. The Company believes that mineral rights underlying sufficient acreage are already in place to develop another UGD project there. The Company plans to develop 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 for its own account any fields associated with UGD development unless authorized by the SORC Board of Directors.

As of March 1, 2014, Van Levy no longer serves on the board of directors as he had committed to a three year term which he fulfilled on February 28, 2014. The directors for the Company currently are Mark See, Bradley E. Sparks, Donald Beckham, and Michael Price. We do not plan to increase the size of the board as of the date of the filing of this report.

LIQUIDITY & 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 primarily by Alleghany Capital in exchange for issuance by SORC to Alleghany Capital of 12% Cumulative Preferred Stock. In calendar year 2014, one of the SORC subsidiaries entered into a non-recourse credit facility to provide SORC with a lower cost source of funding as compared to the cost of funds received from Alleghany Capital. As of February 28, 2014, SORC has received approximately $77.3 million in 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 Management Services Agreement.


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

Our reported cash at February 28, 2014 was $385,649. Since entering into the SORC transaction on June 14, 2011, the Company has received $7,615,717 from SORC in management fees, reimbursement for transaction expenses, and funds used to retire a portion of Company debt. Total debt outstanding as of the filing date of this report is $350,000 owed to Alleghany Capital.

RESULTS OF OPERATIONS

As a result of the ongoing Agreements with SORC, we received and recorded management fee revenue and direct costs totaling $974,398 and $875,582 and $2,443,246 and $2,267,072 for the three and nine month periods ending February 28, 2014, respectively. We received and recorded management service fee revenue and direct costs totaling $528,528 and $493,817 and $1,490,414 and $1,286,413, respectively, for the three and nine month periods ended February 28, 2013. The increases in management fee revenue and direct costs are primarily attributable to additional direct personnel costs which are reimbursable.

During the three and nine month periods ended February 28, 2013 and 2012, respectively, we incurred operating expenses of $273,503 and $687,405 and $195,317 and $640,231. These expenses consisted of general operating expenses incurred in connection with the day to day operation of our business, and the preparation and filing of our required reports.

Additionally, the Company recorded a gain on revaluation of warrant liability of $58,317 for the three months ended February 28, 2014 and a loss on revaluation of warrant liability of $19,376 for the three months ended February 28, 2013, and a loss on revaluation of $67,695 and a gain of $9,245, for the nine months ended February 28, 2014 and February 28, 2013, respectively due to the changes in the common stock price in the respective periods, as well as a 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 warrants issued in conjunction with the sale of $500,000 of common stock in 2010 and which contain price-protection provisions. Those warrants will be outstanding until they are either exercised or expire during the months of March 2015 through 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.

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