UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended June 30, 2012
¨
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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 No.: 000-49752
Legend Oil and Gas, Ltd.
(Exact name of registrant as specified in its charter)
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Colorado
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84-1570556
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(State or other jurisdiction of
incorporation or organization)
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(IRS Employer
Identification No.)
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1218 3
rd
Avenue, Suite 505
Seattle, Washington 98101
(Address of principal executive offices)
(206) 274-5165
(Registrants telephone number, including area code)
1420 5th
Avenue, Suite 2200, Seattle, Washington 98101
(Former name, former address and former fiscal year, if changed since last
report.)
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
x
No
¨
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 during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such
files). Yes
x
No
¨
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
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Large accelerated filer
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¨
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Accelerated filer
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¨
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Non-accelerated filer
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¨
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Smaller reporting company
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x
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
¨
No
x
As of August 2, 2012, the registrant had 75,362,031 shares of its common stock, par value $0.001 per share, issued and outstanding.
LEGEND OIL AND GAS, LTD.
FORM 10-Q
For the Quarterly Period ended June 30, 2012
Table of Contents
-1-
EXPLANATORY NOTE
Unless otherwise indicated or the context otherwise requires, all references in this Quarterly Report on Form 10-Q (Report) to
we, us, our, Legend and the Company are to Legend Oil and Gas, Ltd., a Colorado corporation, and references in this Report to Legend Canada are to Legend Energy Canada, Ltd., a
wholly-owned subsidiary of the Company. All references to Sovereign are to International Sovereign Energy Corp., an Alberta, Canada corporation. Unless otherwise indicated, references herein to $ or dollars are to
United States dollars. All references in this Current Report to CA$ are to Canadian dollars. All financial information with respect to the Company has been presented in United States dollars in accordance with U.S generally accepted
accounting principles.
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
We desire to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. This Report contains a
number of forward-looking statements that reflect managements current views and expectations with respect to our business, strategies, future results and events, and financial performance. All statements made in this Report other than
statements of historical fact, including statements that address operating performance, the economy, events or developments that management expects or anticipates will or may occur in the future, including statements related to revenues,
profitability, adequacy of funds from operations, and cash flows and financing are forward-looking statements. In particular, the words such as believe, expect, intend, anticipate,
estimate, may, will, can, plan, predict, could, future, variations of such words, and similar expressions identify forward-looking statements, but are
not the exclusive means of identifying such statements and their absence does not mean that the statement is not forward-looking.
Readers should not place undue reliance on these forward-looking statements, which are based on managements current expectations and projections
about future events, are not guarantees of future performance, are subject to risks, uncertainties and assumptions and apply only as of the date of this Report. Our actual results, performance or achievements could differ materially from historical
results as well as the results expressed in, anticipated or implied by these forward-looking statements.
In particular, our business,
including our financial condition and results of operations and our ability to continue as a going concern may be impacted by a number of factors, including, but not limited to, the following:
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Our ability to pay off our demand loan facility with National Bank of Canada when due;
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Our ability to draw down on our equity line of credit with Lincoln Park Capital Fund, LLC, in amounts and times when needed;
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Our ability to fund our 2012 drilling and development plan;
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Our ability to obtain buyers on terms favorable to us, in the event that we were to seek to sell certain of our oil and gas interests;
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The exercise of put rights held by holders of our preferred stock and by Sovereign;
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Our ability to retain the services of our President, Chief Financial Officer and other key employees, the loss of which could materially impair our
business plan;
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Changes in estimates of our crude oil and natural gas reserves and depletion rates;
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Our ability to control or reduce operating expenses and manage unforeseen costs;
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Our reliance on third-party contractors in performing the majority of our operations, which could make management of our drilling and production
efforts inefficient or unprofitable;
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Our ability to maintain our existing property leases and acquire rights on properties that we desire;
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Changes in commodity prices for crude oil and natural gas;
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Environmental risks from operations of our wells;
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Our ability to compete successfully against larger, well-funded, established oil and gas companies;
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Our ability to comply with the many regulations to which our business is subject; and
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Dilutive and other adverse effects on our existing shareholders and our stock price arising from future securities issuances.
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For a more detailed discussion of some of the factors that may affect our business, results and prospects, see our
Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission on March 30, 2012, as well as various disclosures made by us in our other reports filed with the Securities and Exchange
Commission. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
-2-
PART I FINANCIAL INFORMATION
ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS
Legend Oil and Gas Ltd.
CONSOLIDATED BALANCE SHEETS
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June 30,
2012
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December 31,
2011
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(unaudited)
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(audited)
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ASSETS
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Current Assets
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|
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Cash and cash equivalents
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$
|
71,689
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|
|
$
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52,726
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|
Accounts receivable
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329,417
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|
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|
388,792
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Stock subscription receivable
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100,000
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Prepaid expenses
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155,792
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|
|
|
90,109
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|
|
|
|
|
|
|
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|
Total current assets
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|
|
656,898
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|
|
|
531,627
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|
Deposits and other assets
|
|
|
142,620
|
|
|
|
3,740
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Oil and gas property, plant and equipment
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|
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|
|
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Proven property - net
|
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7,802,286
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|
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|
8,499,199
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Unproven property
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|
8,363,852
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|
|
|
8,335,380
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|
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|
|
|
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Total oil and gas properties, net
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16,166,138
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16,834,579
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|
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Total assets
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|
$
|
16,965,656
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|
|
$
|
17,369,946
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LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
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Current Liabilities
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Accounts payable
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$
|
909,790
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$
|
312,553
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|
Contingent consideration
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|
|
|
|
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1,404,059
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|
Note payable to bank
|
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|
5,323,590
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|
|
|
5,094,042
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|
|
|
|
|
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Total current liabilities
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|
6,233,380
|
|
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|
6,810,654
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Asset retirement obligations
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|
1,625,360
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|
1,601,423
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Total liabilities
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7,858,740
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8,412,077
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Contingently redeemable convertible preferred stock (100,000,000 shares authorized; $0.001 par value; 1,700,000 and 2,300,000
shares issued and outstanding , respectively; redemption $2.00 per share)
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366,953
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496,467
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Contingently redeemable common stock
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49,805,527
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7,105,032
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|
|
|
|
|
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|
|
|
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50,172,480
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7,601,499
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Stockholders Equity (Deficit)
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Common stock - 400,000,000 shares authorized; $0.001 par value; 74,345,764 and 50,582,516 shares issued and outstanding,
respectively
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74,346
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|
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|
50,583
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Additional paid-in capital
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|
(28,185,866
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)
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7,691,161
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Accumulated other comprehensive loss
|
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|
(33,795
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)
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(42,438
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)
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Accumulated deficit
|
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(12,920,249
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)
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(6,342,936
|
)
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|
|
|
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|
|
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|
Total stockholders equity (deficit)
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|
(41,065,564
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)
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1,356,370
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|
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|
|
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|
Total liabilities and stockholders equity (deficit)
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|
$
|
16,965,656
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|
|
$
|
17,369,946
|
|
The accompanying notes are an integral part of these consolidated financial statements.
-3-
Legend Oil and Gas Ltd
.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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For the Three Months Ended
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For the Six Months Ended
|
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June 30, 2012
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June 30, 2011
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June 30, 2012
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June 30, 2011
|
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Oil and gas revenue
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$
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588,016
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$
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49,791
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$
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1,286,264
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$
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95,611
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Costs and Expenses
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General and administrative
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911,875
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103,766
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1,923,481
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225,764
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Production expenses
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422,559
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48,834
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|
851,077
|
|
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|
82,485
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|
Depletion, depreciation, and amortization
|
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381,799
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19,794
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|
802,584
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|
|
|
19,794
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Accretion on asset retirement obligation
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|
12,914
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25,940
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|
|
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|
|
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|
Total costs and expenses
|
|
|
1,729,147
|
|
|
|
172,394
|
|
|
|
3,603,082
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|
328,043
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|
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|
Operating Loss
|
|
|
(1,141,131
|
)
|
|
|
(122,603
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)
|
|
|
(2,316,818
|
)
|
|
|
(232,432
|
)
|
|
|
|
|
|
Other Income and Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(57,381
|
)
|
|
|
|
|
|
|
(114,083
|
)
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
35
|
|
|
|
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|
|
|
121
|
|
Change in value of contingent consideration
|
|
|
(4,189,836
|
)
|
|
|
|
|
|
|
(4,146,412
|
)
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income and expense
|
|
|
(4,247,217
|
)
|
|
|
35
|
|
|
|
(4,260,495
|
)
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net loss
|
|
$
|
(5,388,348
|
)
|
|
$
|
(122,568
|
)
|
|
$
|
(6,577,313
|
)
|
|
$
|
(232,311
|
)
|
|
|
|
|
|
Basic and diluted weighted average shares outstanding
|
|
|
61,791,272
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|
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|
50,435,385
|
|
|
|
56,216,894
|
|
|
|
56,457,569
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.09
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.00
|
)
|
The accompanying notes are an integral part of these consolidated financial statements.
-4-
Legend Oil and Gas Ltd.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30, 2012
|
|
|
June 30, 2011
|
|
|
June 30, 2012
|
|
|
June 30, 2011
|
|
Net loss
|
|
$
|
(5,388,348
|
)
|
|
$
|
(122,568
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)
|
|
$
|
(6,577,313
|
)
|
|
$
|
(232,311
|
)
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(141,878
|
)
|
|
|
|
|
|
|
8,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(5,530,226
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)
|
|
$
|
(122,568
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)
|
|
$
|
(6,568,670
|
)
|
|
$
|
(232,311
|
)
|
The accompanying notes are an integral part of these consolidated financial statements.
-5-
Legend Oil and Gas Ltd.
STATEMENTS OF CONSOLIDATED STOCKHOLDERS EQUITY
(unaudited)
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Common Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
other
comprehensive
gain/(loss)
|
|
|
Accumulated
Deficit
|
|
|
Total
|
|
Balance at December 31, 2010
|
|
|
62,360,000
|
|
|
$
|
62,360
|
|
|
$
|
980,472
|
|
|
$
|
|
|
|
$
|
(293,601
|
)
|
|
$
|
749,231
|
|
Issuance of common stock and warrants February 2011
|
|
|
300,000
|
|
|
|
300
|
|
|
|
149,700
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
Cancellation of stock by shareholders April 2011
|
|
|
(15,890,000
|
)
|
|
|
(15,890
|
)
|
|
|
15,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock and warrants April 2011
|
|
|
250,000
|
|
|
|
250
|
|
|
|
249,750
|
|
|
|
|
|
|
|
|
|
|
|
250,000
|
|
Issuance of convertible preferred stock and warrants August 2011
|
|
|
|
|
|
|
|
|
|
|
4,103,533
|
|
|
|
|
|
|
|
|
|
|
|
4,103,533
|
|
Common stock issued for services
|
|
|
10,000
|
|
|
|
10
|
|
|
|
19,990
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
Issuance of common stock October 2011 as part of acquisition
|
|
|
3,552,516
|
|
|
|
3,553
|
|
|
|
706,952
|
|
|
|
|
|
|
|
|
|
|
|
710,505
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
1,464,874
|
|
|
|
|
|
|
|
|
|
|
|
1,464,874
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42,438
|
)
|
|
|
|
|
|
|
(42,438
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,049,335
|
)
|
|
|
(6,049,335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
50,582,516
|
|
|
|
50,583
|
|
|
|
7,691,161
|
|
|
|
(42,438
|
)
|
|
|
(6,342,936
|
)
|
|
|
1,356,370
|
|
Common stock issued for services
|
|
|
60,000
|
|
|
|
60
|
|
|
|
59,940
|
|
|
|
|
|
|
|
|
|
|
|
60,000
|
|
Conversion of convertible preferred stock to common stock
|
|
|
600,000
|
|
|
|
600
|
|
|
|
128,913
|
|
|
|
|
|
|
|
|
|
|
|
129,513
|
|
Issuance of common stock May 2012, net
|
|
|
915,900
|
|
|
|
916
|
|
|
|
247,394
|
|
|
|
|
|
|
|
|
|
|
|
248,310
|
|
Issuance of common stock to settle contingent consideration obligation
|
|
|
21,350,247
|
|
|
|
21,350
|
|
|
|
(37,170,780
|
)
|
|
|
|
|
|
|
|
|
|
|
(37,149,430
|
)
|
Issuance of common stock June 2012, net
|
|
|
837,101
|
|
|
|
837
|
|
|
|
149,163
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
708,343
|
|
|
|
|
|
|
|
|
|
|
|
708,343
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,643
|
|
|
|
|
|
|
|
8,643
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,577,313
|
)
|
|
|
(6,577,313
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2012
|
|
|
74,345,764
|
|
|
$
|
74,346
|
|
|
$
|
(28,185,866
|
)
|
|
$
|
(33,795
|
)
|
|
$
|
(12,920,249
|
)
|
|
$
|
(41,065,564
|
)
|
The accompanying notes are an integral part of these consolidated financial statements.
-6-
Legend Oil and Gas Ltd.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
|
|
|
|
June 30, 2012
|
|
|
June 30, 2011
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,577,313
|
)
|
|
$
|
(232,311
|
)
|
|
|
|
Adjustments to reconcile net loss to cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
708,343
|
|
|
|
|
|
Accretion on asset retirement obligation
|
|
|
25,940
|
|
|
|
|
|
Issuance of common stock for services
|
|
|
60,000
|
|
|
|
|
|
Change in value of contingent consideration liability
|
|
|
4,146,412
|
|
|
|
|
|
Depletion, depreciation, amortization and impairment
|
|
|
802,584
|
|
|
|
19,794
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts and subscriptions receivable
|
|
|
59,963
|
|
|
|
831
|
|
Prepaid expenses and other assets
|
|
|
2,934
|
|
|
|
14,701
|
|
Accounts payable
|
|
|
603,602
|
|
|
|
21,620
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from operating activities
|
|
|
(167,535
|
)
|
|
|
(175,365
|
)
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of oil and gas properties
|
|
|
(142,438
|
)
|
|
|
(171,774
|
)
|
|
|
|
|
|
|
|
|
|
Net cash flows from investing activities
|
|
|
(142,438
|
)
|
|
|
(171,774
|
)
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock and warrants
|
|
|
90,000
|
|
|
|
400,000
|
|
Proceeds from note payable to bank
|
|
|
229,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from financing activities
|
|
|
319,548
|
|
|
|
400,000
|
|
|
|
|
Change in cash and cash equivalents before effect of exchange rate changes
|
|
|
9,575
|
|
|
|
52,861
|
|
Effect of exchange rate changes
|
|
|
9,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
18,963
|
|
|
|
52,861
|
|
Cash and cash equivalents, beginning of period
|
|
|
52,726
|
|
|
|
100,894
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
71,689
|
|
|
$
|
153,755
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
109,333
|
|
|
$
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Stock subscription receivable
|
|
$
|
100,000
|
|
|
$
|
|
|
Common stock issued under purchase agreement
|
|
$
|
208,311
|
|
|
$
|
|
|
Common stock issued for contingent consideration
|
|
$
|
5,550,471
|
|
|
$
|
|
|
Common stock classified as contingently redeemable
|
|
($
|
42,700,494
|
)
|
|
$
|
|
|
Conversion of convertible preferred stock to common stock
|
|
$
|
129,513
|
|
|
$
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
-7-
Legend Oil and Gas Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND DESCRIPTION OF OPERATIONS
Description of Business
We are an oil and gas exploration, development and production company. Our oil and gas property interests are located in Western Canada (in Berwyn, Medicine River, Boundary Lake, Red Earth, Swan Hills and
Wildmere in Alberta, and Clarke Lake and Inga in British Columbia) and in the United States (in the Piqua region of the State of Kansas and in the Bakken and Three Forks formations in Divide County, North Dakota). Subsequent to the quarter ended
June 30, 2012, we entered into an agreement for the sale of our oil and gas property interests located in the Red Earth area of Alberta, Canada. See Note 7 Subsequent Events below.
The Company was incorporated under the laws of the State of Colorado on November 27, 2000 under the name SIN Holdings, Inc. From
inception until June 2010, we pursued our original business plan of developing a web portal listing senior resources across the United States through our former wholly-owned subsidiary Senior-Inet, Inc. On July 29, 2010, Senior-Inet, Inc. was
dissolved and we changed our business to the acquisition, exploration, development and production of oil and gas reserves. To align our name with our new business, on November 29, 2010, we changed our name to Legend Oil and Gas, Ltd.
On July 28, 2011, we formed a wholly owned subsidiary named Legend Energy Canada, Ltd. (Legend Canada), which is a
corporation registered under the laws of Alberta, Canada. Legend Canada was formed to acquire, own and manage certain oil and gas properties and assets located in Canada. Legend Canada completed the acquisition of significant oil and gas reserves
located in Canada on October 20, 2011.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and our wholly-owned subsidiary,
Legend Canada. Intercompany transactions and balances have been eliminated in consolidation. We account for our undivided interest in oil and gas properties using the proportionate consolidation method, whereby our share of assets, liabilities,
revenues and expenses are included in the financial statements.
Interim Reporting
The unaudited financial information furnished herein reflects all adjustments, consisting solely of
normal recurring items, which in the opinion of management are necessary to fairly state the financial position of Legend Oil & Gas Ltd. and the results of its operations for the periods presented. This report on Form 10-Q should be
read in conjunction with the Companys consolidated financial statements and notes thereto included in the Companys Form 10-K for the fiscal year ended December 31, 2011. The Company assumes that the users of the interim
financial information herein have read or have access to the audited financial statements for the preceding fiscal year and that the adequacy of additional disclosure needed for a fair presentation may be determined in that
context. Accordingly, footnote disclosure, which would substantially duplicate the disclosure contained in the Companys Form 10-K for the fiscal year ended December 31, 2011 has been omitted. The results of operations for the
interim periods presented are not necessarily indicative of results for the entire year ending December 31, 2012.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles
(U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Managements judgments
and estimates in these areas are to be based on information available from both internal and external sources, including engineers, geologists, consultants and historical experience in similar matters. The more significant
-8-
reporting areas impacted by managements judgments and estimates are accruals related to oil and gas sales and expenses, estimates of future oil and gas reserves, estimates used in the
impairment of oil and gas properties, and the estimated future timing and cost of asset retirement obligations.
Actual results could differ
from the estimates as additional information becomes known. The carrying values of oil and gas properties are particularly susceptible to change in the near term. Changes in the future estimated oil and gas reserves or the estimated future cash
flows attributable to the reserves that are utilized for impairment analysis could have a significant impact on the future results of operations.
Cash and Cash Equivalents
We consider all highly liquid short-term investments with original maturities of three months or
less to be cash equivalents.
Accounts Receivable
Accounts receivable are due under normal trade terms and are presented on the consolidated
balance sheets net of allowances for doubtful accounts. We establish provisions for losses on accounts receivable for estimated uncollectible accounts and regularly review collectability and establish or adjust the allowance as necessary using the
specific identification method. Account balances that are deemed uncollectible are charged off against the allowance. No allowance for doubtful accounts was necessary as of June 30, 2012 and December 31, 2011.
Comprehensive Income
For operations outside of the U.S. that prepare financial statements in currencies other than U.S.
dollars, we translate the financial statements into U.S. dollars. Results of operations and cash flows are translated at average exchange rates during the period, and assets and liabilities are translated at end of period exchange rates, except for
equity transactions and advances not expected to be repaid in the foreseeable future, which are translated at historical costs. The effects of exchange rate fluctuations on translating foreign currency assets and liabilities into U.S. dollars are
accumulated as a separate component in other comprehensive income (loss). Accumulated other comprehensive income (loss) consists entirely of foreign currency translation adjustments at June 30, 2012 and December 31, 2011.
Liquidity
We have incurred net operating losses and operating cash flow deficits over the last two years, continuing
through the second quarter of 2012. We are in the early stages of acquisition and development of oil and gas leaseholds, and we have been funded primarily by a combination of equity issuances and bank debt, and to a lesser extent by operating cash
flows, to execute on our business plan of acquiring working interests in oil and gas properties and for working capital for production. At June 30, 2012, we had cash and cash equivalents totalling approximately $72,000.
In October 2011, we established a revolving demand loan with National Bank of Canada through our wholly-owned subsidiary, Legend Canada. The credit
facility had a maximum borrowing base of CA$6.0 million. On March 25, 2012, we received notification from the Bank of its decision to reduce and restructure our credit facility, following their interim review in the first quarter of 2012. The
Bank advised us that it decided to reduce the maximum borrowing base under the credit facility due to decreases in the market prices of natural gas and the resulting decrease in the value of our reserves securing the credit facility. On
March 27, 2012, we entered into an Amending Offering Letter with the Bank to amend the credit facility on the following terms: (a) the revolving demand loan was reduced from CA$6.0 million to CA$4.0 million, which is payable in full at any
time upon demand by the Bank; (b) the Bank provided a new CA$1.5 million bridge demand loan, which was payable in full at any time upon demand by the Bank, and in any event no later than May 31, 2012; and (c) we were required to
provide an unlimited guarantee of the credit facility for Legend Canada. Outstanding principal under the bridge demand loan bears interest at the Banks prime rate of interest plus 2.0% (the Banks current prime rate is 3.0%). In
connection with the Amending Offering Letter, on March 27, 2012, Legend Canada entered into a CA$1.5 million variable rate demand note to the Bank, and we paid CA$15,000 to the Bank as a non-refundable bridge fee. In May 2012, we entered into
an unlimited guarantee of the credit facility in favor of the Bank, and we also entered into a blanket security
-9-
agreement, granting to the Bank a security interest in all of our personal property assets to secure the guarantee. On June 5, 2012, we entered an Amending agreement that extended the
repayment of the bridge demand loan to December 1, 2012, with CA$250,000 monthly payments being made beginning July 15, 2012 and last payment on December 1, 2012. On June 13, 2012, we received notification that as a result of our
May 31, 2012 bank review, our revolving credit facility would remain at CA$4.0 million and that our next scheduled reviewed would be December 1, 2012.
As of the date of this Report, we have an outstanding balance under the revolving demand loan with the Bank in the amount of approximately $3,968,000 (CA$3,975,000) and approximately $1,248,000
(CA$1,250,000) under the bridge demand loan. The Bank may demand repayment of all amounts owed by Legend Canada to it at any time. There is no assurance that any portion of this credit facility will be available to Legend Canada in the future.
The Amending Offering Letter with the Bank originally required that we complete an equity financing of at least CA$1.5 million on or before
May 31, 2012, the proceeds of which were required to be used to pay off the bridge demand loan. In conjunction with June 5, 2012, Amending agreement, the Company agreed to enter into an equity financing, the proceeds of which would be used
as required to make the periodic CA$250,000 payments. Subsequently on May 22, 2012, the Company entered into an agreement with Lincoln Park Capital (Lincoln Park) to sell up to $10.2 million in common stock during a three year term.
This agreement permits the Company to sell stock to LPC at increments of 250,000 shares, with timing based on the Companys discretion. There is a $0.10 per share floor price that would prohibit the Company from any sales below that price. At
the date of this Report, the Company has sold and issued 2,769,268 common shares to Lincoln Park, and received $344,000 in funding.
Subsequent to June 30, 2012, and discussed in Note 7, the Company agreed on July 26, 2012 to sell its oil and gas interests in the Red Earth,
Alberta property for CA$750,000 in gross proceeds. This transaction is expected to close on or about August 7, 2012. The revolving bank line borrowing base will be reduced by CA$150,000 as a result of this sale. It is managements
intention to use the net proceeds, after the costs of the sale, for the next scheduled monthly bridge loan payment and to retire current liabilities in working capital. From time to time, we may seek to sell certain of our other oil and gas
properties.
We believe that the combination of revenue from our on-going operations, proceeds from the Red Earth sale and potential future
asset sales, and our equity financing arrangement with Lincoln Park provide us the ability to make our scheduled monthly bridge loan payments. However, in the event we are unable to meet a bridge loan scheduled payment or the repayment of the
revolving demand loan at any time upon demand by the Bank, we will be in default of our obligations to the Bank. The Bank has a first priority security interest in all of our assets and can exercise its rights and remedies against us as a secured
creditor. Any such default by us or action by the Bank will have a material adverse effect on us and our business. If we are unable to negotiate favorably with the Bank, or if we are unable to secure additional financing, whether from equity, debt,
or alternative funding sources, this could have a material adverse effect on us and we may be required to sell some or all of our properties, sell or merge our business, or file a petition for bankruptcy.
In addition, Sovereign and the holders of our convertible preferred stock have put rights to require us to repurchase their shares at a price
of $2.00 per share. These put rights became exercisable on April 1, 2012. As of March 30, 2012, we received signed waivers from the holders of our convertible preferred stock of their put rights; however, these waivers are contingent on
Sovereign also agreeing to waive its rights. In addition, as of March 31, 2012, Sovereign executed a stand-still agreement agreeing not to exercise its put rights prior to June 15, 2012, and Sovereign has subsequently verbally agreed to
extend the stand-still agreement for an unspecified period of time. We currently do not have sufficient cash assets available to repurchase the shares of convertible preferred stock or the shares of common stock issued to Sovereign in the event that
the put rights are exercised, in which case we will be in default of our obligations under our purchase agreement with Sovereign and the terms of the convertible preferred stock in our Articles of Incorporation. The exercise of any of these put
rights would have a material adverse effect on our business and financial condition.
In the event that we are able to resolve our obligations
to the Bank and the put rights, we anticipate needing additional financing to fund our drilling and development plans in 2012. As described above, we have entered into an agreement with Lincoln Park to sell up to $10.2 million in common stock.
However, the timing for closing on funds is variable and there is no guarantee on the amount of proceeds we will receive. We may seek financing from
-10-
other sources, which may also include the sale of certain of our oil and gas properties. Our ability to obtain financing or to sell our properties on favorable terms may be impaired by many
factors outside of our control, including the capital markets (both generally and in the crude oil and natural gas industry in particular), our limited operating history, the location of our crude oil and natural gas properties and prices of crude
oil and natural gas on the commodities markets (which will impact the amount of asset-based financing available to us) and other factors. Further, if crude oil or natural gas prices on the commodities markets decline, our revenues will likely
decrease and such decreased revenues may increase our requirements for capital.
Any new debt or equity financing arrangements may not be
available to us, or may be available only on unfavorable terms. Additionally, these alternatives could be highly dilutive to our existing shareholders, and may not provide us with sufficient funds to meet our long-term capital requirements. We have
and may continue to incur substantial costs in the future in connection with raising capital to fund our business, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and
other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, which may adversely impact our financial condition. If the amount of capital we are able to raise from financing activities,
together with our revenues from operations, is not sufficient to satisfy our capital needs (even to the extent that we reduce our operations), we will be required to reduce operating costs, which could jeopardize our future strategic initiatives and
business plans, and we may be required to sell some or all of our properties (which could be on unfavorable terms), seek joint ventures with one or more strategic partners, strategic acquisitions and other strategic alternatives, cease our
operations, sell or merge our business, or file a petition for bankruptcy.
Our financial statements the quarter ended June 30, 2012 were
prepared assuming we would continue as a going concern, which contemplates that we will continue in operation for the foreseeable future and will be able to realize assets and settle liabilities and commitments in the normal course of business.
These 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 could result should we be unable to continue
as a going concern.
Fair Value Measurements
Certain financial instruments and nonfinancial assets and liabilities, whether measured on a
recurring or non-recurring basis, are recorded at fair value. A fair value hierarchy, established by U.S. GAAP, prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
Our
financial instruments include cash and cash equivalents, trade receivables, trade payables, and notes payable to bank, all of which are considered to be representative of their fair market value, due to the short-term and highly liquid nature of
these instruments.
As discussed in Note 4, we have incurred asset retirement obligations of $1,625,360, the value of which was determined
using unobservable pricing inputs (or Level 3 inputs). We use the income valuation technique to estimate the fair value of the obligation using several assumptions and judgments about the ultimate settlement amounts, inflation factors, credit
adjusted discount rates, and timing of settlement.
Our contingent consideration liability is also estimated using unobservable pricing inputs
(or Level 3 inputs). We use a model to simulate the value of our future stock based on the historical mean of the stock price to estimate the fair value of the contingent consideration liability. We incurred the contingent consideration liability on
October 20, 2011, in connection with the acquisition of assets from Sovereign and on that date the estimated value of the contingent consideration liability was nil. Subsequent changes in fair value resulted in a non-cash charge to operations
amounting to $1,404,059 during 2011. During the period ended June 30, 2012, the change in value of the contingent consideration liability resulted in a non-cash loss amounting to $4,146,412 and the obligation was settled by issuing 21,350,247
shares of common stock to Sovereign on May 17, 2012.
-11-
Full Cost Method of Accounting for Oil and Gas Properties
We have elected to utilize the full cost method of accounting for
our oil and gas activities. In accordance with the full cost method of accounting, all costs associated with acquisition, exploration, and development of oil and gas reserves, including directly related overhead costs and related asset retirement
costs, are capitalized into a cost center. Our cost centers consist of the Canadian cost center and the United States cost center.
All
capitalized costs of oil and gas properties within each cost center, including the estimated future costs to develop proved reserves, are amortized on the unit-of-production method using estimates of proved reserves. Excluded from this amortization
are costs associated with unevaluated properties, including capitalized interest on such costs. Unevaluated property costs are transferred to evaluated property costs at such time as wells are completed on the properties or management determines
that these costs have been impaired.
Oil and gas properties without estimated proved reserves are not amortized until proved reserves
associated with the properties can be determined or until impairment occurs. The cost of these properties is assessed quarterly, on a field-by-field basis, to determine whether the properties are recorded at the lower of cost or fair market value.
Sales of oil and gas properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such
adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in income. We have not sold any oil and gas properties through June 30, 2012.
Full Cost Ceiling Test
At the end of each quarterly reporting period, the cost of oil and gas properties in each cost center
are subject to a ceiling test which basically limits capitalized costs to the sum of the estimated future net revenues from proved reserves, discounted at 10% per annum to present value, based on current economic and operating
conditions, at the end of the period, plus the cost of properties not being amortized, plus the lower of cost or fair market value of unproved properties included in costs being amortized, less the income tax effects related to book and tax basis
differences of the properties. If the cost of oil and gas properties exceeds the ceiling, the excess is reflected as a non-cash impairment charge to earnings. The impairment charge is permanent and not reversible in future periods, even though
higher oil and gas prices in the future may subsequently and significantly increase the ceiling amount. No impairment charges were incurred during the periods ended June 30, 2012 and 2011.
Asset Retirement Obligation
We record the fair value of a liability for an asset retirement obligation in the period in which
the asset is acquired and a corresponding increase in the carrying amount of the related long-lived asset if a reasonable estimate of fair value can be made. The associated asset retirement cost capitalized as part of the related asset is
allocated to expense over the assets useful life. If the liability is settled for an amount other than the recorded amount, a gain or loss is recognized. The asset retirement obligation is recorded at its estimated fair value and accretion is
recognized over time as the discounted liability is accreted to its expected settlement value. Fair value is determined by using the expected future cash outflows discounted at our credit-adjusted risk-free interest rate.
Oil and Gas Revenue Recognition
We use the sales method of accounting for oil and gas revenues. Under this method, revenues are recognized
based on the actual volumes of gas and oil sold to purchasers at a fixed or determinable price, when delivery has occurred and title has transferred, and if collectability of the revenue is probable. Delivery occurs and title is transferred when
production has been delivered to a purchasers pipeline or truck. The volume sold may differ from the volumes we are entitled to, based on our individual interest in the property. We utilize a third-party marketer to sell oil and gas
production in the open market. As a result of the requirements necessary to gather information from purchasers or various measurement locations, calculate volumes produced, perform field and wellhead allocations and distribute and disburse
funds to various working interest partners and royalty owners, the collection of revenues from oil and gas production may take up to 45 days following the month of production. Therefore, we may make accruals for revenues and accounts receivable
based on estimates of our share of production. Since the settlement process may
-12-
take 30 to 60 days following the month of actual production, our financial results may include estimates of production and revenues for the related time period. We will record any differences
between the actual amounts ultimately received and the original estimates in the period they become finalized.
Stock-based compensation
We measure compensation cost for stock-based payment awards at fair value
and recognizes it as compensation expense over the service period for awards expected to vest. Compensation cost is recorded as a component of general and administrative expenses in the consolidated statements of operations, net of an estimated
forfeiture rate, and amounted to $708,343 for the period ended June 30, 2012. Compensation cost is only recognized for those awards expected to vest on a straight-line basis over the requisite service period of the award. Our policy is to issue
new shares to fulfill the requirements for options that are exercised.
Earnings (Loss) Per Share
The computation of basic net loss per common share is based on the weighted average number of shares that
were outstanding during the period, including contingently redeemable common stock. The computation of diluted net loss per common share is based on the weighted average number of shares used in the basic net loss per share calculation plus the
number of common shares that would be issued assuming the exercise of all potentially dilutive common shares outstanding. As of June 30, 2012, potentially dilutive common shares include warrants to purchase 4,150,000 shares of common stock,
options to purchase 2,840,000 shares of common stock, and preferred stock convertible into 1,700,000 shares of common stock. During the periods ended June 30, 2012 and 2011 potentially dilutive common shares were not included in the computation
of diluted loss per shares as to do so would be anti-dilutive.
Income Taxes
We recognize income taxes on an accrual basis based on tax position taken or expected to be taken in its tax
returns. A tax position is defined as a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income tax assets and liabilities. Tax positions
are recognized only when it is more likely than not (i.e., likelihood of greater than 50%), based on technical merits, that the position would be sustained upon examination by taxing authorities. Tax positions that meet the more
likely than not threshold are measured using a probability-weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Income taxes are accounted for using an asset and liability
approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. A valuation allowance is established to
reduce deferred tax assets if all, or some portion, of such assets will more than likely not be realized. Should they occur, our policy is to classify interest and penalties related to tax positions as interest expense. Since our
inception, no such interest or penalties have been incurred.
Concentration
During the six months ended June 30, 2012, sales of oil and gas to four customers individually
exceeded 10% of the total oil and gas revenue. Sales to Husky Energy Marketing, BP Canada Energy, Kelly Maclaskey Oilfield Service Inc., and Gibson Petroleum accounted for approximately 36%, 16%, 13% and 12% of total oil and gas sales, respectively.
We believe that the loss of any of the significant customers would not result in a material adverse effect on our ability to market future oil and natural gas production.
NOTE 3 - OIL AND GAS PROPERTIES
The amount of capitalized costs related to oil and gas property and the amount of related accumulated depletion, depreciation, and
amortization are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2012
|
|
|
December 31, 2011
|
|
Proven property, net of impairment
|
|
$
|
9,090,866
|
|
|
$
|
8,992,793
|
|
Accumulated depletion, depreciation, and amortization
|
|
|
(1,288,580
|
)
|
|
|
(493,594
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
7,802,286
|
|
|
|
8,499,199
|
|
Unproven property
|
|
|
8,363,852
|
|
|
|
8,335,380
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,166,138
|
|
|
$
|
16,834,579
|
|
|
|
|
|
|
|
|
|
|
-13-
NOTE 4 ASSET RETIREMENT OBLIGATION
The following table reconciles the value of the asset retirement obligation for the periods ended June 30, 2012 and June 30,
2011:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2012
|
|
|
June 30, 2011
|
|
Opening balance, January 1
|
|
$
|
1,601,423
|
|
|
$
|
|
|
Liabilities incurred
|
|
|
|
|
|
|
|
|
Liabilities settled
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(2,003
|
)
|
|
|
|
|
Accretion expense
|
|
|
25,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, June 30
|
|
$
|
1,625,360
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 5 - STOCKHOLDERS EQUITY
On February 2, 2011, we completed a private placement for 300,000 units at $0.50 per unit, for a total of $150,000 in gross
proceeds, to one foreign investor residing outside of the United States. Each unit consisted of one share of restricted common stock and one warrant to purchase an additional share of common stock of the Company at $0.50 per share with a term of
three years. This offering was exempt from registration pursuant to Regulation S under the Securities Act of 1933, as amended (rules governing offers and sales of securities made outside of the United States without registration). At the time
of the sale of the units, the relative fair value of the common stock and the warrants was estimated to be $140,200 and $9,800, respectively, as determined based on the relative fair value allocation of the proceeds.
In April 2011, in order to attract additional investment capital, our two executive officers (Mr. Vandeberg and Mr. Diamond-Goldberg) and
Mr. Wayne Gruden, a significant shareholder of the Company, surrendered a total of 15,890,000 shares of common stock owned by them to us, which shares were immediately cancelled.
On April 28, 2011, we completed a private placement for 250,000 units at $1.00 per unit, for a total of $250,000 in gross proceeds, to one foreign investor residing outside of the United States. Each
unit consisted of one share of restricted common stock and one warrant to purchase an additional share of common stock at $1.00 per share with a term of three years. This offering was exempt from registration pursuant to Regulation S under the
Securities Act of 1933, as amended. At the time of the sale of the units, the relative fair value of the common stock and the warrants was estimated to be $140,700 and $109,300, respectively, as determined based on the relative fair value allocation
of the proceeds.
On August 10, 2011, we completed a private placement for 2,300,000 units at $2.00 per unit, for a total of $4,600,000
in gross proceeds. Each unit consists of one share of restricted convertible preferred stock and a warrant to purchase one share of restricted common stock. The convertible preferred stock is convertible into one share of restricted common stock,
subject to customary adjustment for stock splits or similar events. The warrants are exercisable at $2.00 per share over a period of three years from the date of issuance. The offering was conducted under the exemption from registration provided
pursuant to Regulation S under the U.S. Securities Act of 1933, as amended. The holders of shares of convertible preferred stock have a put right to require us to repurchase such
-14-
shares for a price of $2.00 per share. The amount allocated to the convertible redeemable preferred stock is presented as mezzanine equity in the consolidated financial statements rather than as
permanent equity. We allocated the gross proceeds of $4,600,000 from the private placement between the convertible preferred stock and the warrants issued proportionately based on their estimated fair values as of the closing date of the private
placement. The relative fair value of the convertible preferred stock and the warrants was estimated to be $2,766,733 and $1,833,267, respectively. The effective conversion price was used to measure the intrinsic value of the embedded conversion
option which amounted to $2,270,266. As a result, the carrying value of the convertible preferred stock presented as mezzanine equity in the consolidated financial statements (net of the impact of the conversion of 600,000 shares on convertible
preferred stock described below) is $366,953. As of December 31, 2011 and June 30, 2012, no adjustment to the carrying value of the convertible preferred stock to its redemption value was necessary as it was not considered probable that
the convertible preferred stock would become redeemable (as described below, the holders of the convertible preferred stock conditionally agreed to waive their put rights). At June 30, 2012, the aggregate redemption value is $3.4 million.
On September 28, 2011, we entered into a retainer letter agreement with Midsouth Capital Inc., an investment banking firm, for
investment banking services. As part of the compensation to Midsouth, we issued 10,000 shares of restricted common stock to Midsouth.
On
October 21, 2011, we issued 3,552,516 common shares per share to Sovereign in connection with our acquisition of the Canadian oil and gas properties. Sovereign has a put right to require us to repurchase such shares for a price of $2.00 per
share. Sovereign executed a stand-still agreement that nullified their put rights until various conditions could be met, most significantly the joint effort by the Company and Sovereign to dispose, by sale to unrelated parties, of the 3,552,516
shares issued to Sovereign on the closing of the asset acquisition. In connection with the acquisition of assets from Sovereign, the Company agreed to a mechanism of staggered payments to maintain the value of the stock component of the purchase at
the original amount of $2.00 per share through a series of Variable Weighted Average Price (VWAP) calculations. Under the purchase agreement, Sovereign could not own more than 10% of the Companys common stock, unless they chose to
waive that condition. On May 17, 2012, in conjunction with the final VWAP calculation, Sovereign waived the 10% ownership limitation and the Company issued 21,350,247 shares of restricted common stock to Sovereign. The contingent consideration
obligation was settled and a loss of $4,146,412 was recognized to reflect the difference between the contingent consideration and the fair value of the final VWAP shares. The 21,350,247 shares of common stock issued to Sovereign on May 17,
2012, also include a put right, whereby Sovereign may require us to repurchase the shares for a price of $2.00 per share therefore, the redemption amount of the common stock is recorded as mezzanine equity.
On January 12, 2012, we issued 60,000 shares of common stock with a fair value of $60,000 to a consultant in exchange for services. The fair value
of the common shares was recorded as a component of general administrative expenses during the period ended March 31, 2012.
On
March 26, 2012 the holders of convertible preferred stock agreed to waive their put option, with the condition that Sovereign also waives its put option. In connection with the waiver by the holders of the convertible preferred stock, the
Company agreed to issue 2,772,728 shares of common stock to the convertible preferred stock holders as consideration for the waivers and only following a similar waiver by Sovereign. No such shares have been issued to date. Sovereign chose not to
waive its put option rights, but rather executed a stand-still agreement that nullified their put rights until various conditions could be met, most significantly the joint effort by the Company and Sovereign to dispose, by sale to unrelated
parties, of the 3,552,516 shares issued to Sovereign on the closing of the asset acquisition. The stand-still agreement was effective through June 15, 2012, and the Company and Sovereign have reached a verbal agreement to extend the stand-still
agreement while the parties continue their joint efforts to dispose of the shares. Upon achieving the sale of these original shares, the Company expects that Sovereign will then permanently waive its put option rights.
On March 30, 2012, a preferred stock holder elected to convert its preferred shares to common stock. Accordingly, the Company issued 600,000 shares
of common stock and retired 600,000 preferred shares. Mezzanine equity was reduced by $129,514, and then transferred to common shares and additional paid-in capital accordingly.
-15-
On May 22, 2012, the Company commenced an agreement with Lincoln Park Capital to sell up to $10.2
million in common stock during a term of three years. Upon signing the agreements, Lincoln Park made an initial purchase of 192,308 shares of common stock for $50,000 at a price of $0.26 per share. Upon filing the registration statement,
Lincoln Park purchased another $50,000 at a price of $0.23 per share. On June 29, 2012 the SEC declared effective the registration statement related to the transaction, at which time Lincoln Park purchased an additional $100,000 in common stock
at $0.165 per share (recorded as stock subscription receivable at June 30, 2012). In consideration for entering into the Purchase Agreement, the Company issued 723,592 shares of common stock to Lincoln Park as an initial commitment fee. The
fair value of these 723,592 commitment shares were recorded as deferred offering costs and amounted to $208,311. The deferred offering costs will be amortized as we utilize the purchase agreement with Lincoln Park. Up to 1,072,183 of additional
shares of common stock may be issued on a pro rata basis to LPC as an additional commitment fee as Lincoln Park purchases additional shares of common stock under the Purchase Agreement. The Company received $100,000 from Lincoln Park on July 3,
2012.
Warrants
The
following table summarizes outstanding warrants to purchase shares of our common stock as of December 31, 2011 and June 30, 2012, as described above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of Common Stock
Issuable from Warrants
Outstanding as of
|
|
|
|
|
|
|
|
Date of Issue
|
|
June 30,
2012
|
|
|
December 31,
2011
|
|
|
Exercise
Price
|
|
|
Expiration
|
|
October 2010
|
|
|
1,300,000
|
|
|
|
1,300,000
|
|
|
$
|
0.50
|
|
|
|
October 2013
|
|
February 2011
|
|
|
300,000
|
|
|
|
300,000
|
|
|
$
|
0.50
|
|
|
|
February 2014
|
|
April 2011
|
|
|
250,000
|
|
|
|
250,000
|
|
|
$
|
1.00
|
|
|
|
April 2014
|
|
August 2011
|
|
|
2,300,000
|
|
|
|
2,300,000
|
|
|
$
|
2.00
|
|
|
|
August 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,150,000
|
|
|
|
4,150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2012, none of the outstanding warrants had been exercised.
Stock Incentive Plan
On
May 3, 2011, our Board of Directors adopted the Legend Oil and Gas, Ltd. 2011 Stock Incentive Plan (Plan). The Plan provides for the grant of options to purchase shares of our common stock, and stock awards consisting of shares of
our common stock, to eligible participants, including directors, executive officers, employees and consultants of the Company. We have reserved 4,500,000 shares of common stock for issuance under the Plan. In November 2011, our Board approved the
grant of stock options for a total of 1,400,000 shares to two Directors and two employees at an exercise price of $2.17 per share. The fair value of the option grant was estimated at the date of the grant using the Black-Scholes option pricing model
with the following assumptions: expected volatility of 94.18%, a risk free rate of 2.03%, and an expected life of 10 years. In December 2011, the Board approved the grant of stock options for a total of 1,400,000 shares to two directors and two
employees at an exercise price of $0.99 per share. The fair value of the option grant was estimated at the date of the grant using the Black-Scholes option pricing model with the following assumptions: expected volatility of 92.9%, a risk free rate
of 1.92%, and an expected life of 10 years. In February 2012, the Board approved the grant of stock options for a total of 40,000 shares to two directors at an exercise price of $0.87 per share. The fair value of the option grant was estimated at
the date of the grant using the Black-Scholes option pricing model with the following assumptions: expected volatility of 92.9%, a risk free rate of 2.00%, and an expected life of 10 years.
At June 30, 2012, there were 1,660,000 shares of common stock available under the Plan, and there were options to purchase 973,333 shares of stock exercisable, with a remaining contractual term of
9.5 years. The weighted average exercise price of stock options granted and exercisable at June 30, 2012 was $1.57. There were no options exercised, forfeited, or expired during the period ended June 30, 2012.
-16-
At June 30, 2012, the aggregate intrinsic value of outstanding stock options was $0. Intrinsic value is
the total pretax intrinsic value for all in-the-money options (i.e., the difference between the Companys closing stock price on June 30, 2012 and the exercise price, multiplied by the number of shares) that would have been
received by the option holders had all option holders exercised their options as of June 30, 2012. This amount changes based on the fair market value of the Companys stock.
At June 30, 2012, the Company had $1.9 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted average period of 1.4
years.
NOTE 6 NOTE PAYABLE TO BANK
Under a series of agreements with National Bank of Canada (the Bank), as of June 30, 2012, we had a revolving credit
facility with a maximum borrowing base of $3,928,800 (CA$4,000,000) through our wholly-owned subsidiary, Legend Canada. Outstanding principal under the loan bears interest at a rate equal to the Banks prime rate of interest (currently 3%)
plus 1%. We are obligated to pay a monthly fee of 0.25% of any undrawn portion of the credit facility. The borrowings under the credit facility are payable upon demand at any time. Borrowings under the agreements are collateralized by a Fixed
and Floating Charge Demand Debenture (the Debenture) to the Bank in the face amount of CA$25 million, to secure payment of all debts and liabilities owed by Legend Canada to the Bank. The interest rate on amounts drawn under the
Debenture, as well as interest that is past due, is the prime rate, plus 7% per annum. As further collateral, Legend Canada also executed an Assignment of Book Debts on October 19, 2011, that grants, transfers and assigns to the Bank a
continuing and specific security interest in specific collateral of Legend Canada, including all debts, proceeds, accounts, claims, money and chooses in action which currently or in the future are owing to Legend Canada. Under the agreements, we
must maintain a working capital ratio, exclusive of bank indebtedness, of at least 1 to 1. For purposes of this calculation, the undrawn availability under the revolving credit facility is added to current assets. We were in compliance with this
debt covenant at June 30, 2012. The revolving credit facility is subject to review by the Bank at future dates as determined by the Bank, and the Bank may increase or lower the maximum borrowing base subject to their review.
The Company also had a bridge demand loan in place through Legend Canada that was fully drawn on June 30, 2012 for $1,473,330 (CA$1,500,000). This
bridge facility bears interest at a rate equal to the Banks prime rate of interest (currently 3%) plus 2%. On June 5, 2012, the Company entered into an agreement with National Bank to repay this bridge demand loan with 5 monthly payments
of CA$250,000 commencing July 15, 2012, with final repayment on December 1, 2012. The Company made the first scheduled payment of CA$250,000 to the Bank on July 15, 2012.
As of June 30, 2012, there was $5,323,590 (CA$5,420,067) in total indebtedness with National Bank outstanding on a combination of the revolving credit facility and bridge facility. The next scheduled
review of the revolving credit facility is December 1, 2012.
Legend Canada also has a CA$20,000 ($20,000USD) letter of guarantee
outstanding, related to a company that provides third party processing to the Company.
NOTE 7 SUBSEQUENT EVENT
From July 1, 2012, through the date of this Report, the Company sold an additional 1,000,000 shares of common stock under its
agreement with Lincoln Park for gross proceeds of $154,000. See Note 5 regarding the Lincoln Park agreement. The Company issued 16,267 additional commitment shares in conjunction with these sales. At the date of this report, the remaining registered
shares to be issued under the agreement for cash amounted to 7,480,962 and the remaining additional commitment shares to be issued under the agreement amounted to 1,040,071.
On July 26, 2012, the Company agreed to sell its oil and gas interests in the Red Earth area of Alberta, Canada for gross proceeds, before costs of sale, of CA$750,000. This transaction is expected
to close on or about August 7, 2012. The net proceeds from the sale of the Red Earth interests will be credited to the Companys Canadian full cost pool with no gain or loss recognized. At December 31, 2011, the discounted future net
cash flows associated with the Red Earth interest amounted to CA$537,000.
-17-
ITEM 2
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following discussion and analysis is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, and
should be read in conjunction with our financial statements and related notes. We incorporate by reference into this Report our audited consolidated financial statements for the years ended December 31, 2011 and 2010. The preparation of these
financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on
historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. In addition, the following discussion and analysis contains forward-looking statements that involve risks and uncertainties,
including, but not limited to, those discussed in Forward Looking Statements, and elsewhere in this Report.
The following
managements discussion and analysis is intended to assist in understanding the principal factors affecting our results of operations, liquidity, capital resources and contractual cash obligations. This discussion should be read in conjunction
with our consolidated financial statements which are incorporated by reference herein, information about our business practices, significant accounting policies, risk factors, and the transactions that underlie our financial results, which are
included in various parts of this filing.
For ease of presentation in the following discussions of Comparison of Results and
Liquidity and Capital Resources, we round dollar amounts to the nearest thousand dollars (other than average prices per barrel and per share amounts).
Overview of Business
We are an oil and gas exploration, development and production
company. Our oil and gas property interests are located in Western Canada (in Berwyn, Medicine River, Boundary Lake, Red Earth, Swan Hills and Wildmere in Alberta, and Clarke Lake and Inga in British Columbia) and in the United States (in the Piqua
region of the State of Kansas and in the Bakken and Three Forks formations in Divide County, North Dakota). Subsequent to the quarter ended June 30, 2012, we entered into an agreement for the sale of our oil and gas property interests located
in the Red Earth area of Alberta, Canada. See Note 7 in our Notes to Consolidated Financial Statements in this Report.
Our business focus is
to acquire producing and non-producing oil and gas right interests and develop oil and gas properties that we own or in which we have a leasehold interest. We also anticipate pursuing the acquisition of leaseholds and sites within other geographic
areas that meet our general investment guidelines and targets. The majority of our operational duties are outsourced to consultants and independent contractors, including for drilling, maintaining and operating our wells, and we maintain a limited
in-house employee base.
On October 20, 2011, our wholly-owned subsidiary, Legend Canada completed the acquisition of the majority of the
petroleum and natural gas leases, lands and facilities held by Sovereign. The assets acquired consisted of substantially all of Sovereigns assets, including interests in producing oil and gas leasehold properties in Western Canada that have
been maintained through the drilling of internally generated low to medium risk exploration and development sites. The principal natural gas leasehold properties are located in Medicine River and Berwyn in Alberta, and Clarke Lake in British
Columbia. The assets also include an interest in various light oil properties located in Red Earth and Swan Hills in Alberta, and in Inga in British Columbia.
Our company was incorporated under the laws of the State of Colorado on November 27, 2000 under the name SIN Holdings, Inc. On November 29, 2010, we changed our name to Legend Oil
and Gas, Ltd. Our only subsidiary is Legend Canada, which was formed in Alberta, Canada on July 28, 2011 to acquire the Sovereign assets. Neither we nor Legend Canada are reporting issuers in any province of Canada.
-18-
Results of Operations
The following is a discussion of our consolidated results of operations, financial condition and capital resources. You should read this discussion in conjunction with our Consolidated Financial
Statements and the Notes thereto contained elsewhere in this Form 10-Q. Comparative results of operations for the periods indicated are discussed below.
The following table sets forth certain of our oil and gas operating information for the three and six months ended June 30, 2012, and June 30, 2011, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Production Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil production (bbls)
|
|
|
5,402
|
|
|
|
512
|
|
|
|
11,230
|
|
|
|
1,045
|
|
Average daily oil production (bbl/d)
|
|
|
59
|
|
|
|
6
|
|
|
|
62
|
|
|
|
6
|
|
Natural gas production (mcf)
|
|
|
82,958
|
|
|
|
|
|
|
|
175,397
|
|
|
|
|
|
Average daily natural gas production (mcf/d)
|
|
|
912
|
|
|
|
|
|
|
|
964
|
|
|
|
|
|
Natural gas liquids production (bbl)
|
|
|
457
|
|
|
|
|
|
|
|
878
|
|
|
|
|
|
Average daily natural gas liquids production (bbl/d)
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
Total BOE
|
|
|
19,685
|
|
|
|
512
|
|
|
|
41,341
|
|
|
|
1,045
|
|
Total BOE/d
|
|
|
216
|
|
|
|
6
|
|
|
|
227
|
|
|
|
6
|
|
|
|
|
|
|
Revenue Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil revenue ($)
|
|
|
443,000
|
|
|
|
50,000
|
|
|
|
947,000
|
|
|
|
96,000
|
|
Average realized oil sales price ($/bbl)
|
|
|
82.05
|
|
|
|
97.22
|
|
|
|
84.46
|
|
|
|
91.49
|
|
Gas revenue ($)
|
|
|
118,000
|
|
|
|
|
|
|
|
284,000
|
|
|
|
|
|
Average realized gas sales price ($/mcf)
|
|
|
1.46
|
|
|
|
|
|
|
|
1.61
|
|
|
|
|
|
Natural gas liquids revenue ($)
|
|
|
27,000
|
|
|
|
|
|
|
|
55,000
|
|
|
|
|
|
Average realized natural gas liquids price ($/bbl)
|
|
|
59.42
|
|
|
|
|
|
|
|
63.32
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expenses
|
|
|
423,000
|
|
|
|
49,000
|
|
|
|
851,000
|
|
|
|
83,000
|
|
Average operating expenses ($/boe)
|
|
|
21.49
|
|
|
|
95.68
|
|
|
|
20.59
|
|
|
|
79.43
|
|
|
|
|
|
|
Operating Margin ($/boe)
|
|
|
8.38
|
|
|
|
1.54
|
|
|
|
10.52
|
|
|
|
12.06
|
|
|
|
|
|
|
Depreciation, depletion, and amortization
|
|
|
382,000
|
|
|
|
20,000
|
|
|
|
803,000
|
|
|
|
20,000
|
|
*
|
Oil and natural gas were combined by converting natural gas to oil equivalent on the basis of 6 mcf of gas = 1 boe
.
|
Production and Revenue
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2012
$
|
|
|
2011
$
|
|
|
Change
%
|
|
|
2012
$
|
|
|
2011
$
|
|
|
Change
%
|
|
Product revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil sales
|
|
|
443,000
|
|
|
|
50,000
|
|
|
|
786
|
|
|
|
947,000
|
|
|
|
96,000
|
|
|
|
888
|
|
Natural gas sales
|
|
|
118,000
|
|
|
|
|
|
|
|
|
|
|
|
284,000
|
|
|
|
|
|
|
|
|
|
Natural gas liquids sales
|
|
|
27,000
|
|
|
|
|
|
|
|
|
|
|
|
55,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
|
588,000
|
|
|
|
50,000
|
|
|
|
1,076
|
|
|
|
1,286,000
|
|
|
|
96,000
|
|
|
|
1,240
|
|
The increase in natural gas and natural gas liquids are the result of the Canadian asset acquisition in the fourth
quarter of 2011. Oil sales in our Kansas property increased from $50,000 in the second quarter of 2011 to $96,000 in the second quarter of 2012, and increased from $96,000 to $219,000 in the six months ended June 30, 2011 compared to the six
months ended June 30, 2012. The remaining increase in oil revenues is the result of adding the Canadian properties in October 2011.
-19-
Production
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
%
|
|
|
2012
|
|
|
2011
|
|
|
Change
%
|
|
Sales Volume:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude Oil(bbl)
|
|
|
5,402
|
|
|
|
512
|
|
|
|
955
|
|
|
|
11,230
|
|
|
|
1,045
|
|
|
|
975
|
|
Natural Gas(mcf)
|
|
|
82,958
|
|
|
|
|
|
|
|
|
|
|
|
175,397
|
|
|
|
|
|
|
|
|
|
Natural Gas Liquids(bbl)
|
|
|
457
|
|
|
|
|
|
|
|
|
|
|
|
878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total BOE
|
|
|
19,685
|
|
|
|
512
|
|
|
|
3,745
|
|
|
|
41,341
|
|
|
|
1,045
|
|
|
|
3,856
|
|
*
|
Oil and natural gas were combined by converting natural gas to oil equivalent on the basis of 6 mcf of gas = 1 boe
.
|
The overall increase in production was mostly related to the Canadian asset acquisition. The Kansas property oil production is doubled year over year
(512 bbls in 2011 compared to 1,067 in 2012, while the Canadian properties added 4,335bbls (48bbl/d) of oil production in the second quarter of 2012. All of the natural gas and natural gas liquids are from the Canadian properties that were
added in the fourth quarter of 2011.
Commodity Prices Realized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2012
$
|
|
|
2011
$
|
|
|
Change
%
|
|
|
2012
$
|
|
|
2011
$
|
|
|
Change
%
|
|
Sales Price:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude Oil($/bbl)
|
|
|
82.05
|
|
|
|
97.22
|
|
|
|
(13
|
)
|
|
|
84.46
|
|
|
|
91.49
|
|
|
|
(8
|
)
|
Natural Gas($/mcf)
|
|
|
1.46
|
|
|
|
|
|
|
|
|
|
|
|
1.61
|
|
|
|
|
|
|
|
|
|
Natural Gas Liquids($/bbl)
|
|
|
59.42
|
|
|
|
|
|
|
|
|
|
|
|
63.32
|
|
|
|
|
|
|
|
|
|
The average price per barrel of crude oil during the second quarter of 2012 was $82.05, down from $97.22 in the second
quarter of 2011, a decrease in price that mirrors the world oil pricing environment. The commodity pricing for the first half of 2012 has been relatively flat to date, with small decreases in prices year to date. We have no comparison price for the
gas and NGL revenue as they are from the Canadian assets acquired in the fourth quarter of 2011. The prices we receive for our oil and natural gas production are determined by the market and heavily influence our revenue, profitability, access to
capital and future rate of growth.
Lease Operating Expenses
Operating expenses increased on an absolute basis to $423,000 in the second quarter of 2012 from $49,000 in the second quarter of 2011. However, on a per
barrel basis, the operating expense decreased from $95.68/boe in the second quarter of 2011 to $21.49/boe in the corresponding period of 2012. A major charge in the second quarter was for an unscheduled workover of our Swan Hills property that
increased our expenses. For the six month period, the operating expenses totaled $851,000($20.59/bbl), compared to $83,000($79.43/bbl) for the comparative period in 2011.
General and Administrative Expenses
General and administrative expenses include:
professional fees; management fees; travel expenses; office and administrative expenses; and marketing and SEC filing expenses. General and administrative expenses were $912,000 for the second quarter of 2012, as compared to $104,000 for the same
period in 2011, an $808,000 increase. The period-to-period increase is largely a result of the increased size and scope of the Company following the 2011 Sovereign purchase, and structuring for future growth opportunities. More particularly, the
increase is due to: (i) an increase in compensation paid to our executive officers; (ii) an increase in fees paid to professionals in connection with restructuring the business and related matters; (iii) paying contract personnel to
assist with our operations; and (iv) an increase in SEC reporting activity and expenses.
-20-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2012
$
|
|
|
2011
$
|
|
|
Change
%
|
|
|
2012
$
|
|
|
2011
$
|
|
|
Change
%
|
|
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees
|
|
|
192,000
|
|
|
|
42,000
|
|
|
|
357
|
|
|
|
445,000
|
|
|
|
95,000
|
|
|
|
368
|
|
Salaries and benefits
|
|
|
196,000
|
|
|
|
41,000
|
|
|
|
378
|
|
|
|
431,000
|
|
|
|
81,000
|
|
|
|
432
|
|
Office and administration
|
|
|
185,000
|
|
|
|
21,000
|
|
|
|
781
|
|
|
|
339,000
|
|
|
|
50,000
|
|
|
|
578
|
|
Stock based compensation
|
|
|
339,000
|
|
|
|
|
|
|
|
|
|
|
|
708,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
912,000
|
|
|
|
104,000
|
|
|
|
777
|
|
|
|
1,923,000
|
|
|
|
226,000
|
|
|
|
751
|
|
The second quarter of 2012 saw salary and benefits and professional fee expenses decrease from the first quarter of 2012
as the Company worked to reduce costs and streamline internal operations. The decreases in salaries and professional fees were slightly offset by increased administration costs, mostly in the form of software licenses. Stock based compensation is a
significant item in the general and administrative, and the amount in the first two quarters of 2012 reflects the amortization of the fair value of options granted in 2011 and the addition of options granted in 2012 to new directors. Disclosure of
these stock based compensation transactions can be found in Note 5 to the Notes to Consolidated Financial Statements for the period ended June 30, 2012.
Depletion, depreciation, and amortization
The company incurred $382,000 for
depreciation, depletion, amortization for the three months ended June 30, 2012 ($20,000 for three months ended June 30, 2011) and $803,000 for the six months ended June 30, 2012 ($20,000 for six months ended June 30, 2011). The
increase for the periods presented is due to an increase in production.
Accretion expense
For the three months ended June 30, 2012 the company had accretion expense of $13,000 (nil in 2011) related to the Companys asset retirement
obligations. For the six months ended June 30, 2012, the accretion expense totaled $26,000(nil in 2011). The increases are the result of higher average obligations in 2012 as our asset base has grown in these periods.
Interest expense
Interest expense was $57,000 and $114,000 for the three and six months ended June 30, 2012 respectively (nil in 2011). The increase in interest
expenses from 2011 is due to the establishment of the revolving bank line in Canada, and the subsequent interest payments from having drawn on this line. There was no bank indebtedness in the first six months of 2011.
Change in contingent consideration
Due to the nature of the security related price guarantee in conjunction with the International Sovereign Canadian asset purchase in October 2011, there was deemed to be contingent consideration and
subsequent changes in fair value of this consideration. The amount of this consideration obligation was reduced to $0 at June 30, 2012 as a result of the Company issuing additional shares to Sovereign ($1,361,000 at March 31, 2012;
$1,404,000 at December 31, 2011). Disclosure of the contingent consideration related to those stock issuances can be found in Note 5 to the Notes to Consolidated Financial Statements for the period ended June 30, 2012, which is
incorporated by reference herein.
-21-
Net loss
The company recorded a net loss of $5,388,348 and $6,577,313 in the three and six months ended June 30, 2012, as compared to the net losses of $123,000 and $232,000 in the corresponding periods in
2011. The increase in the loss, offset by an increase in revenue due to the increased production levels, is mainly due to the addition of stock based compensation in 2012, a large expense for the contingent consideration related to the Sovereign
asset purchase, higher operating expenses associated with the higher production levels, the increase in general and administrative costs associated with the growth in the company, and increased depletion charges in 2012.
Liquidity and Capital Resources
Liquidity
We have incurred net operating losses and operating cash flow deficits
over the last two years, continuing through the second quarter of 2012. We are in the early stages of acquisition and development of oil and gas leaseholds, and we have been funded primarily by a combination of equity issuances and bank debt, and to
a lesser extent by operating cash flows, to execute on our business plan of acquiring working interests in oil and gas properties and for working capital for production. At June 30, 2012, we had cash and cash equivalents totalling approximately
$72,000.
In October 2011, we established a revolving demand loan with National Bank of Canada through our wholly-owned subsidiary, Legend
Canada. The credit facility had a maximum borrowing base of CA$6.0 million. On March 25, 2012, we received notification from the Bank of its decision to reduce and restructure our credit facility, following their interim review in the first
quarter of 2012. The Bank advised us that it decided to reduce the maximum borrowing base under the credit facility due to decreases in the market prices of natural gas and the resulting decrease in the value of our reserves securing the credit
facility. On March 27, 2012, we entered into an Amending Offering Letter with the Bank to amend the credit facility on the following terms: (a) the revolving demand loan was reduced from CA$6.0 million to CA$4.0 million, which is payable
in full at any time upon demand by the Bank; (b) the Bank provided a new CA$1.5 million bridge demand loan, which was payable in full at any time upon demand by the Bank, and in any event no later than May 31, 2012; and (c) we were
required to provide an unlimited guarantee of the credit facility for Legend Canada. Outstanding principal under the bridge demand loan bears interest at the Banks prime rate of interest plus 2.0% (the Banks current prime rate is 3.0%).
In connection with the Amending Offering Letter, on March 27, 2012, Legend Canada entered into a CA$1.5 million variable rate demand note to the Bank, and we paid CA$15,000 to the Bank as a non-refundable bridge fee. In May 2012, we entered
into an unlimited guarantee of the credit facility in favor of the Bank, and we also entered into a blanket security agreement, granting to the Bank a security interest in all of our personal property assets to secure the guarantee. On June 5,
2012, we entered an Amending agreement that extended the repayment of the bridge demand loan to December 1, 2012, with CA$250,000 monthly payments being made beginning July 15, 2012 and last payment on December 1, 2012. On
June 13, 2012, we received notification that as a result of our May 31, 2012 bank review, our revolving credit facility would remain at CA$4.0 million and that our next scheduled reviewed would be December 1, 2012.
As of the date of this Report, we have an outstanding balance under the revolving demand loan with the Bank in the amount of approximately $3,968,000
(CA$3,975,000) and approximately $1,248,000 (CA$1,250,000) under the bridge demand loan. The Bank may demand repayment of all amounts owed by Legend Canada to it at any time. There is no assurance that any portion of this credit facility will be
available to Legend Canada in the future.
The Amending Offering Letter with the Bank originally required that we complete an equity financing
of at least CA$1.5 million on or before May 31, 2012, the proceeds of which were required to be used to pay off the bridge demand loan. In conjunction with June 5, 2012, Amending agreement, the Company agreed to enter into an equity
financing, the proceeds of which would be used as required to make the periodic CA$250,000 payments. Subsequently on May 22, 2012, the Company entered into an agreement with Lincoln Park Capital (Lincoln Park) to sell up to $10.2
million in common stock during a three year term. This agreement permits the Company to sell stock to LPC at increments of 250,000 shares, with timing based on the Companys discretion. There is a $0.10 per share floor price that would prohibit
the Company from any sales below that price. At the date of this Report, the Company has sold and issued 2,769,268 common shares to Lincoln Park, and received $344,000 in funding.
-22-
Subsequent to June 30, 2012, and discussed in Note 7, the Company agreed on July 26, 2012 to sell
its oil and gas interests in the Red Earth, Alberta property for CA$750,000 in gross proceeds. This transaction is expected to close on or about August 7, 2012. The revolving bank line borrowing base will be reduced by CA$150,000 as a result of
this sale. It is managements intention to use the remaining net proceeds, after the costs of the sale, for the next scheduled monthly bridge loan payment and to retire current liabilities in working capital. From time to time, we may seek to
sell certain of our other oil and gas properties.
We believe that the combination of revenue from our on-going operations, proceeds from the
Red Earth sale and potential future asset sales, and our equity financing arrangement with Lincoln Park provide us the ability to make our scheduled monthly bridge loan payments. However, in the event we are unable to meet a bridge loan scheduled
payment or the repayment of the revolving demand loan at any time upon demand by the Bank, we will be in default of our obligations to the Bank. The Bank has a first priority security interest in all of our assets and can exercise its rights and
remedies against us as a secured creditor. Any such default by us or action by the Bank will have a material adverse effect on us and our business. If we are unable to negotiate favorably with the Bank, or if we are unable to secure additional
financing, whether from equity, debt, or alternative funding sources, this could have a material adverse effect on us and we may be required to sell some or all of our properties, sell or merge our business, or file a petition for bankruptcy.
In addition, Sovereign and the holders of our convertible preferred stock have put rights to require us to repurchase their
shares at a price of $2.00 per share. These put rights became exercisable on April 1, 2012. As of March 30, 2012, we received signed waivers from the holders of our convertible preferred stock of their put rights; however, these waivers
are contingent on Sovereign also agreeing to waive its rights. In addition, as of March 31, 2012, Sovereign executed a stand-still agreement agreeing not to exercise its put rights prior to June 15, 2012, and Sovereign has subsequently
verbally agreed to extend the stand-still agreement for an unspecified period of time. We currently do not have sufficient cash assets available to repurchase the shares of convertible preferred stock or the shares of common stock issued to
Sovereign in the event that the put rights are exercised, in which case we will be in default of our obligations under our purchase agreement with Sovereign and the terms of the convertible preferred stock in our Articles of Incorporation. The
exercise of any of these put rights would have a material adverse effect on our business and financial condition.
In the event that we are
able to resolve our obligations to the Bank and the put rights, we anticipate needing additional financing to fund our drilling and development plans in 2012. As described above, we have entered into an agreement with Lincoln Park to sell up to
$10.2 million in common stock. However, the timing for closing on funds is variable and there is no guarantee on the amount of proceeds we will receive. We may seek financing from other sources, which may also include the sale of certain of our oil
and gas properties. Our ability to obtain financing or to sell our properties on favorable terms may be impaired by many factors outside of our control, including the capital markets (both generally and in the crude oil and natural gas industry in
particular), our limited operating history, the location of our crude oil and natural gas properties and prices of crude oil and natural gas on the commodities markets (which will impact the amount of asset-based financing available to us) and other
factors. Further, if crude oil or natural gas prices on the commodities markets decline, our revenues will likely decrease and such decreased revenues may increase our requirements for capital.
Any new debt or equity financing arrangements may not be available to us, or may be available only on unfavorable terms. Additionally, these alternatives
could be highly dilutive to our existing shareholders, and may not provide us with sufficient funds to meet our long-term capital requirements. We have and may continue to incur substantial costs in the future in connection with raising capital to
fund our business, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain
securities we may issue, which may adversely impact our financial condition. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs (even to
the extent that we reduce our operations), we will be required to reduce operating costs, which could jeopardize our future strategic initiatives and business plans, and we may be required to sell some or all of our properties (which could be on
unfavorable terms), seek joint ventures with one or more strategic partners, strategic acquisitions and other strategic alternatives, cease our operations, sell or merge our business, or file a petition for bankruptcy.
Our financial statements the quarter ended June 30, 2012 were prepared assuming we would continue as a going concern, which contemplates that we
will continue in operation for the foreseeable future and will be able to realize assets and settle liabilities and commitments in the normal course of business. These 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 could result should we be unable to continue as a going concern.
-23-
Cash Flows
The following table summarizes our cash flows for the periods ended June 30, 2012 and June 30, 2011, respectively:
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
Net cash used in operating activities
|
|
$
|
(168,000
|
)
|
|
$
|
(175,000
|
)
|
Net cash used in investing activities
|
|
|
(142,000
|
)
|
|
|
(172,000
|
)
|
Net cash provided by financing activities
|
|
|
320,000
|
|
|
|
400,000
|
|
Effect of exchange rate changes
|
|
|
9,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash during period
|
|
|
19,000
|
|
|
|
53,000
|
|
Cash from Operating Activities
Cash used in operating activities was $168,000 for the six months ended June 30, 2012, as compared to cash used by operating activities of $175,000 in the three months ended June 30, 2011. The
slight decrease in cash used reflects the consistent operational base of the Companys assets and stabilization of the Sovereign assets that were added in the fourth quarter of 2011.
Cash from Investing Activities
Cash used for investing activities for the six months ended June 30, 2012 was $142,000 as compared to $172,000 during the six months ended June 30, 2011. The slight decrease is due to the
Company spending much of 2012 integrating the Sovereign assets and weathering a poor pricing environment, whereas in the first six months of 2011 the Company was making continuing incremental investments in increasing its oil and gas activities.
Cash from Financing Activities
Total net cash provided by financing activities was $320,000 for the six months ended June 30, 2012, which is a combination of stock issuances to Lincoln Park Capital and the proceeds from bank
financing. Total net cash provided by financing activities in the six months ended June 30, 2011 was in the form of common stock and warrants issuances in 2011.
Planned Capital Expenditures
As funds allow, we plan to resume our drilling program
on the Kansas properties. In the first quarter of 2012 we finished the 2011 fourth quarter drilling program. Based on the encouraging results from this late 2011 drilling and early 2012 activity, we intend to execute a development program over the
remainder of 2012 in the Kansas property.
With respect to the Canadian assets that we acquired in 2011, we have identified two low-risk
drilling locations on the Swan Hills, Alberta property, which is currently being developed with one producing vertical oil well. We anticipate that well costs would be approximately $4 million per well. It is our intent to drill the first of these
wells upon securing the financing necessary to proceed. We also anticipate potentially drilling at minimum one oil well on the Inga, British Columbia property, with drilling costs there expected to be approximately $1 million per well.
Off Balance Sheet Arrangements
We have
no off-balance sheet arrangements.
-24-
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management evaluated, with the participation of our President and our Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Report. Based on this evaluation, our President and our Chief Financial Officer concluded that our disclosure
controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended, (i) is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commissions rules and forms, and (ii) is accumulated and communicated to our management, as appropriate, to allow timely decisions regarding required disclosure. Our disclosure
controls and procedures include components of our internal control over financial reporting and, as such, are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Managements
assessment of the effectiveness of our internal control over financial reporting is expressed at the level of reasonable assurance that the control system, no matter how well designed and operated, can provide only reasonable, but not absolute,
assurance that the control systems objectives will be met (see the section below in this Item 4 entitled
Limitations on the Effectiveness of Internal Controls
).
Changes in Internal Controls Over Financial Reporting
There have been no changes in our
internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended) that occurred during the three months ended June 30, 2012, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Internal
Controls
Our management does not expect that our disclosure controls and procedures or our internal controls over financial reporting will
necessarily prevent all fraud and material error. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving our objectives and our President and Chief Financial Officer concluded that our disclosure controls
and procedures are effective at that reasonable assurance level. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by
management override of the internal control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
PART II - OTHER INFORMATION
ITEM 5 OTHER INFORMATION
The Company agreed on
July 26, 2012 to sell its oil and gas interests in the Red Earth, Alberta property for CA$750,000 in gross proceeds. The Company entered into a Royalty and General Rights Conveyance agreement for the sale dated August 7, 2012, a copy of
which is filed as Exhibit 10.1 to this Report. This transaction is expected to close on or about August 7, 2012. See Note 7 in our Notes to Consolidated Financial Statements in this Report.
-25-
ITEM 6 EXHIBITS
The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Report.
Certain of the agreements filed as exhibits to this Report contain representations and warranties by the parties to the agreements that have been made
solely for the benefit of the parties to the agreement. These representations and warranties:
|
|
|
may have been qualified by disclosures that were made to the other parties in connection with the negotiation of the agreements, which disclosures are
not necessarily reflected in the agreements;
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may apply standards of materiality that differ from those of a reasonable investor; and
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were made only as of specified dates contained in the agreements and are subject to subsequent developments and changed circumstances.
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Accordingly, these representations and warranties may not describe the actual state of affairs as of the date that these
representations and warranties were made or at any other time. Investors should not rely on them as statements of fact.
-26-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
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LEGEND OIL AND GAS, LTD.
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Dated: August 8, 2012
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By:
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/s/ Marshall Diamond-Goldberg
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Marshall Diamond-Goldberg
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President and Chief Executive Officer
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(Principal Executive Officer)
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Dated: August 8, 2012
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By:
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/s/ Kyle Severson
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Kyle Severson
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Chief Financial Officer
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(Principal Accounting and Financial Officer)
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-27-
EXHIBIT INDEX
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Exhibit
No.
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Description
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Location
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10.1
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Royalty and General Rights Conveyance, dated August 7, 2012, between Legend Energy Canada Ltd. and Range Royalty Limited Partnership
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Incorporated by reference to Exhibit 99
to the Form 8-K filed by the Company
on August 10, 2012.
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31.1
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Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934
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Filed herewith.
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31.2
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Certification of Principal Accounting and Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934
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Filed herewith.
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32.1
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Certification of Principal Executive Officer and Principal Accounting and Financial Officer pursuant to Rule 13a-14(b) or 15d-14(b) under the Securities Exchange Act of 1934 and to
18 U.S.C. Section 1350
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Filed herewith.
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101.INS
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XBRL Instance Document
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**
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101.SCH
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XBRL Taxonomy Extension Schema Document
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**
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase Document
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**
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101.LAB
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XBRL Taxonomy Extension Label Linkbase Document
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**
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase Document
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**
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase Document
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**
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**
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XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or
12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
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