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 and Medicine River in Alberta, and Clarke Lake in British Columbia) and in the United States (in the Piqua region of the State of Kansas in Woodson County and Crawford County).
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.
On January 23, 2014, we entered into an agreement with New Western Energy Corporation (“New Western”) to consummate a business combination. On April 30, 2014, the agreement and plan of merger were terminated by mutual consent of both the Company and New Western.
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 Company’s consolidated financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2013. 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 Company’s Form 10-K for the fiscal year ended December 31, 2013 has been omitted. The results of operations for the three month periods ended March 31, 2014 are not necessarily indicative of results for the entire year ending December 31, 2014. The Company did not record an income tax provision during the periods presented due to net taxable losses.
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. Management’s 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 reporting areas impacted by management’s judgments and estimates are fair values of the Company’s equity-linked instruments, 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.
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 March 31, 2014 and December 31, 2013.
Liquidity
We have incurred net operating losses and operating cash flow deficits over the last two years, continuing through 2014. 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 borrowing under loan agreements and to a lesser extent by operating cash flows, to execute on our business plan for the acquisition, exploration, development and production of oil and gas reserves. At March 31, 2014, we had cash and cash equivalents totaling approximately $1,000.
In October 2011, we established a revolving demand loan with National Bank of Canada (the “Bank”) through our wholly-owned subsidiary, Legend Canada.
On August 22, 2013, the Company entered into a Forbearance Agreement with the Bank, which conveyed the Bank additional control over the assets of the Company, increased the interest payments to prime rate of interest plus 4%, and indicated through sale of assets or other means full repayment of the existing credit facility in full by November 29, 2013. In addition, the Company had various conditions to adhere to, including ; (a) settlement of license liability with Alberta Energy Regulator, (b) engagement of marketing agent to facilitate the sale of Canadian properties to retire existing facility, (c) a release of various funds for operational upgrades and maintenance of select Canadian properties, (d) delinquent bank reporting to be completed and brought up to date, (e) dedication of funds from Hillair financing to Canadian facility and (f) continued and on-going monthly reporting on progress of activity within the Forbearance Agreement process. It is the Company’s belief that these conditions were met where required, with the only exception being the license liability and this was due to a change in regulation allowing relief. The Company closed the sale of Boundary Lake, Wildmere, and Inga properties in connection with the Forbearance Agreement in Q4 2013 and Q1 2014 and used the proceeds to partially repay the revolving demand loan.
In December 2013, t
he Bank elected to terminate the formal forbearance and has replaced it with a day to day effort to have the Company continue to sell assets, look for new sources of capital in order to determine the best course of action concerning the revolving demand loan.
On April 25, 2014, the Company received a Notice of Intention to Enforce Security from the Bank. Under the notice, the Bank states that it intends to enforce its rights against Legend Canada under the CA$6,000,000 Acknowledgement of Debt Revolving Demand Credit Agreement, dated August 15, 2011; the General Assignment of Book Debts, dated October 19, 2011; the CA$25,000,000 Fixed and Floating Charge Demand Debenture; the Pledge Agreement dated October 19, 2011; and the Negative Pledge and Undertaking dated October 19, 2011. On April 28, 2014 the Company received a Notice of Intention to Enforce Security from the Bank. Under the Company Notice, the Bank states that it intends to enforce its rights against the Company under the Letter of Guarantee, dated May 11, 2012; the General Security Agreement dated May 11, 2012; the Securities Pledge Agreement; the Subordination Agreement dated July 10, 2013; and the Set-off and Security Agreement dated July 10, 2013. The bank claims the Company is in default under the Legend Canada Security and the Company Security agreements. The Bank has demanded payment in full of all amounts owing under the Legend Canada Security Agreements and the Company Security Agreements. The Bank claims that the total amount due is $1,656,857.37 plus accruing interest, costs, expenses and fees including, without limitation, attorney’s fees.
During 2013, the Company issued two 8% Original Issue Discount Senior Secured Convertible Debentures to Hillair Capital Investments, L.P. (“Hillair”) payable on or before December 1, 2014. On May 1, 2014, the Company received a Notice of Event of Default from Hillair with respect to the 8% Original Issue Discount Senior Secured Convertible Debentures.
Hillair states that the Company is in default under the Debentures and has demanded payment in full of all amounts owing under the Debentures. Hillair further states that the total amount due is $2,111,200 plus accruing interest.
The Company is in negotiations with the Bank and Hillair in an attempt to resolve these issues. The Company may be required to sell some or all of its properties as a result of the actions by the Bank and Hillair.
The Company may seek additional financing to fund operations. However, such financings may not be available and the terms of the financing may be available only on unfavorable terms.
The uncertainties relating to the Company’s ability to repay the obligations to the Bank and Hillair (and to execute the Company’s business plan) continue to raise substantial doubt about the Company’s ability to continue as a going concern. 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 the Company be unable to continue as a going concern.
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 attributable to a cost center, in which case the gain or loss is recognized in income. In determining whether adjustments to capitalized costs result in a significant alteration, capitalized costs within the cost center are allocated between the reserves sold and reserves retained on the same basis used to compute amortization, unless there are substantial economic differences between the properties sold and those retained. When economic differences between properties sold and those retained exist, capitalized costs within the cost center are allocated on the basis of the relative fair values of the properties in determining whether adjustments to capitalized costs result in a significant alteration.
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. Impairment charges for the period ended March 31, 2014 were $nil ($111,023 for period ended March 31, 2013).
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 asset’s 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
Revenue from production on properties in which we share an economic interest with other owners is recognized on the basis of our interest. Revenues are reported on a gross basis for the amounts received before taking into account production taxes, royalties, and transportation costs, which are reported as production expenses. Revenue is recorded and receivables accrued using the sales method of accounting. 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 purchaser’s 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 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 awards at fair value and recognize it as compensation expense over the service period for awards expected to vest. Stock-based compensation expense is also recognized upon cancellation of awards that were initially expected to vest. Compensation cost (a non-cash expense) 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 $3,569 and $1,190,340 for the periods ended March 31, 2014 and 2013.
Net 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. Potentially dilutive common shares include warrants to purchase shares of common stock (32,413,067 shares for 2014 and 4,150,000 shares for 2013), options to purchase shares of common stock (600,000 shares for 2014 and nil shares for 2013), Notes payable convertible into common stock (31,515,457 shares for 2014 and nil shares for 2013). During the periods ended March 31, 2014 and 2013 potentially dilutive common shares were not included in the computation of diluted loss per shares as to do so would be anti-dilutive.
Fair Value Measurements
We measure fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. We utilize a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1: Observable market inputs such as quoted prices in active markets;
Level 2: Observable market inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs where there is little or no market data, which require the reporting entity to develop its own assumptions.
Fair Value of Financial Statements
The carrying amounts of financial assets and liabilities such as cash, accounts receivable and accounts payable approximate their fair values (determined based on level 1 inputs in the fair value hierarchy) due to the short term nature of these instruments. Due to conversion features and other terms, it is not practical to estimate the fair value of the Company’s note payable.
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:
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March 31, 2014
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December 31, 2013
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Proven property, net of impairment
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Accumulated depletion, depreciation, and amortization
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On January 28, 2014, the Company sold its Inga property located in British Columbia, Canada for CA$435,000. The proceeds from the sale were accounted for as an adjustment to the capitalized costs in the Canadian cost center with no gain or loss recognized.
NOTE 4 – ASSET RETIREMENT OBLIGATION
The following table reconciles the value of the asset retirement obligation for the periods ended March 31, 2014 and March 31, 2013:
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March 31, 2014
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March 31, 2013
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Opening balance, January 1
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Foreign currency translation adjustment
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NOTE 5 - STOCKHOLDERS’ EQUITY (DEFICIT)
In January 2014, the Company issued 4,763,333 shares of common stock to Northpoint Energy Partners LLC in exchange for consulting services. The stock had a fair value of $309,617. The fair value of the common stock was determined using the closing price of the shares on the date transferred.
In March 2014, the Company issued 1,220,798 shares of common stock with a fair value of $51,746 to Hillair in payment of accrued interest on convertible debt agreements. The fair value of the common stock was determined using the closed price of the shares on the date transferred.
Warrants
The following table summarizes outstanding warrants to purchase shares of our common stock as of March 31, 2014 and December 31, 2013:
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Shares of Common Stock
Issuable from Warrants
Outstanding as of
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March 31,
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December 31,
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Exercise
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Date of Issue
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2014
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2013
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Price
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Expiration
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As of March 31, 2014, none of the outstanding warrants had been exercised. The warrants issued on February 2011 expired without exercise.
Stock Incentive Plan
The Company has a 2011 Stock Incentive Plan which provides for the grant of options to purchase shares of the Company’s 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. There are 4,500,000 shares of common stock reserved for issuance under the 2011 Stock Incentive Plan. The Company also has a 2013 Stock Incentive Plan which provides for similar grants and has 10,000,000 shares of common stock reserved.
On May 15, 2014, the Company created the 2014 Stock Incentive Plan and reserved 40,000,000 shares of common stock for issuance thereunder. The 2014 Stock Incentive Plan also provides the issuance of stock awards and grant of options to purchase shares of the Company's common stock.
A summary of stock option activity is as follows:
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Outstanding Options
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Number of Shares
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Weighted Average Exercise Price
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Balance at January 1, 2014
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600,000
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$
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0.07
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Options granted
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-
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Options cancelled
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-
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Balance at March 31, 2014
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600,000
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$
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0.07
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Exercisable, March 31, 2014
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200,000
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$
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0.07
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Vested and expected to vest
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600,000
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$
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0.07
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There were no stock option grants during the period presented.
The remaining contractual term of options outstanding and exercisable at March 31, 2014 is 9.5 years. During the year ended December 31, 2013, 2,800,000 stock options originally granted during 2011 were cancelled, and the remaining compensation expense amounting to $1,190,340 was accelerated and recognized during 2013. The aggregate intrinsic value of stock options outstanding and exercisable at March 31, 2014 was nil. The intrinsic value of outstanding and exercisable stock options is calculated as the quoted market price of the stock at the balance sheet date less the exercise price of the option. There were no stock options exercised during the periods presented. At March 31, 2014, the Company had unrecognized compensation expense related to stock options of $19,033 to be recognized over a weighted-average period of 1.50 years.
NOTE 6 – NOTE PAYABLE TO BANK
Under a series of agreements with the Bank, as of December 31, 2013, we had a revolving credit facility with a maximum borrowing base of $2,018,951 through our wholly-owned subsidiary, Legend Canada. Outstanding principal under the loan initially included interest at a rate equal to the Bank’s prime rate of interest (currently 3%) plus 1%. 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. On August 22, 2013 the Company entered into a Forbearance agreement with the Bank, which conveyed the Bank additional control over the assets of the Company, increased the interest payments to prime rate of interest plus 4%, and indicated through sale of assets or other means full repayment of the existing credit facility in full by November 29, 2013. At December 31, 2013, the Company had closed a series of asset sales in efforts to work jointly with the Bank to meet the terms of the Forbearance agreement in the fourth quarter. At December 31, 2013, $2,018,951 was outstanding.
On April 25, 2014, the Company received a Notice of Intention to Enforce Security from the Bank. Under the notice, the Bank states that it intends to enforce its rights against Legend Canada under the CA$6,000,000 Acknowledgement of Debt Revolving Demand Credit Agreement, dated August 15, 2011; the General Assignment of Book Debts, dated October 19, 2011; the CA$25,000,000 Fixed and Floating Charge Demand Debenture; the Pledge Agreement dated October 19, 2011; and the Negative Pledge and Undertaking dated October 19, 2011. On April 28, 2014 the Company received a Notice of Intention to Enforce Security from the Bank. Under the Company Notice, the Bank states that it intends to enforce its rights against the Company under the Letter of Guarantee, dated May 11, 2012; the General Security Agreement dated May 11, 2012; the Securities Pledge Agreement; the Subordination Agreement dated July 10, 2013; and the Set-off and Security Agreement dated July 10, 2013. The Bank claims the Company is in default under the Legend Canada Security and the Company Security agreements. The Bank has demanded payment in full of all amounts owing under the Legend Canada Security Agreements and the Company Security Agreements. The Bank claims that the total amount due is $1,656,857.37 plus accruing interest, costs, expenses and fees including, without limitation and attorney’s fees.
NOTE 7 – LONG TERM DEBT
Long term debt includes a series of convertible notes payable to JMJ Capital which originated during 2013. Principal amounting to $27,500 plus interest at 12% is repayable on June 27, 2014; principal amounting to $27,500 plus interest at 12% is repayable on September 25, 2014, and principal amounting to $27,500 plus interest at 12% is repayable on December 9, 2014. The conversion price of the notes is the lesser of $0.05 or 60% of the lowest trading price of the Company’s common stock for 25 days prior to the conversion. At both March 31, 2014 and December 31, 2013, the principal balance of the notes amounted to $82,500. The debt discount associated with the beneficial conversion feature amounted to $2,361 and $55,004 at March 31, 2014 and December 31, 2013, respectively.
NOTE 8 – CONVERTIBLE DEBT
On July 10, 2013, the Company received $900,000 from issuing an 8% Original Issue Discount Senior Secured Convertible Debenture to Hillair in the amount of $1,008,000, initially convertible at a rate of $0.0561, and payable on or before December 1, 2014. On November 22, 2013, the Company received $550,000 from issuing an 8% Original Issue Discount Senior Secured Convertible Debenture to Hillair in the amount of $616,000, initially convertible at a rate of $0.0561, and payable on or before December 1, 2014. The July 10, 2013 Debenture is secured by the property in Woodson County Kansas, while the November 22, 2013 Debenture is secured by the McCune property in Crawford County Kansas. The July 10, 2013 Debenture is convertible into 17,967,914 shares of common stock. The November 22, 2013 Debenture is convertible into 10,980,392 shares of common stock.
In connection with each of the Debentures, the Company issued warrants to purchase shares of common stock with an exercise price of $0.0673, subject to further adjustments. The number of warrants issued in connection with the July 10, 2013 Debenture was 19,764,706 and the number of warrants issued in connection with the November 22, 2013 Debenture was 10,098,361.
The Company accounts for warrants and conversion features as either equity instruments or derivative liabilities depending on the specific terms of the agreements. Conversion features and warrants are accounted for as derivative financial instruments if they contain down-round protection, which preclude them from being considered indexed to the Company’s stock. The conversion feature and the warrants issued to Hillair contain such down-round protection, and were bifurcated from the host debt contract and recorded at fair value. The embedded features are subsequently adjusted to fair value at each reporting date, with the corresponding adjustment reflected as a non-operating credit / charge in the consolidated statement of operations. The fair value of the conversion feature and warrants recorded as a debt discount on the date of issuance amounted to $1,372,742.
At both March 31, 2014 and December 31, 2013, the principal outstanding payable to Hillair amounted to $1,624,000. The recorded amount of $960,649 and $612,527 at March 31, 2014 and December 31, 2013, respectively, is reported net of the debt discount (including the original issue discount).
On May 1, 2014, the Company received a default notice from Hillair. In its default notice, Hillair states that the Company owes $2,111,200 plus interest under the provisions of the Debentures.
NOTE 9 – EMBEDDED DERIVATIVE LIABILITIES
The following table is a reconciliation of embedded derivative liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2013:
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Embedded
Derivative
Liabilities
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Balances, December 31, 2013
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The embedded derivative liabilities we incurred in connection with the Convertible Debentures issued to Hillair. See Note 8. The Company valued the embedded derivative liabilities using the Black Scholes option pricing model using the following assumptions: term to expiration
0.67 years, historical volatility 100%, risk
-free interest rate 0.13%. No estimate was applied regarding the probability that the Company will issue equity securities at prices above or below the current contractual warrant exercise price and convertible debt conversion price resulting the occurrence of down-round protection.
NOTE 10 – SUBSEQUENT EVENTS
On May 1, 2014, the Company received a Notice of Default Event from Hillair with respect to its Debentures in total amount of $2,111,200 plus interest.
On April 30, 2014, the Company and New Western Energy Corporation (“New Western”) mutually terminated the Agreement and Plan of Merger between the parties dated January 23, 2014 (the “Agreement”). There were no early termination penalties incurred by the Company.
On April 25, 2014, Legend Energy Canada Ltd., (“Legend Canada”) a wholly-owned subsidiary of the Company received a Notice of Intention to Enforce Security (the “Legend Canada Notice”) from the Bank. Under the Legend Canada Notice, the Bank states that it intends to enforce its rights against Legend Canada under the CA$6,000,000 Acknowledgement of Debt Revolving Demand Credit Agreement, dated August 15, 2011; the General Assignment of Book Debts, dated October 19, 2011; the $25,000,000 Fixed and Floating Charge Demand Debenture; the Pledge Agreement dated October 19, 2011; and the Negative Pledge and Undertaking dated October 19, 2011 (collectively the “Legend Canada Security”).
On April 28, 2014 the Company receive a Notice of Intention to Enforce Security (the “Company Notice”) from the Bank. Under the Company Notice, the Bank states that it intends to enforce its rights against the Company under the Letter of Guarantee, dated May 11, 2012; the General Security Agreement dated May 11, 2012; the Securities Pledge Agreement; the Subordination Agreement dated July 10, 2013; and the Set-off and Security Agreement dated July 10, 2013 (collectively the “Company Security”).
The Bank claims that Legend Canada and the Company are in default under the Legend Canada Security and the Company Security agreements. The Bank has demanded payment in full of all amounts owing under the Legend Canada Security Agreements and the Company Security Agreements. The Bank claims that the total amount due is $1,656,857.37 plus accruing interest, costs, expenses and fees including, without limitation, attorney’s fees.
The Bank has the right to enforce its rights under the Legend Canada Security or the Company Security agreements until 10 days after the date the Notices were sent, which was April 25, 2014.
The Company is in negotiations with the Bank in an attempt to resolve these issues.