NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 – ORGANIZATION AND DESCRIPTION OF OPERATIONS
Description of Business
Legend Oil and Gas, Ltd. (the "Company" or "Legend")
is a crude oil hauling and trucking company with principal operations in the Bakken region of North Dakota. These crude oil hauling
operations commenced through our acquisition of Black Diamond Energy Holdings, LLC ("Maxxon") on April 3, 2015. Further,
through October 27, 2015, we were also an oil and gas exploration, development and production company, which are presented as discontinued
operations. Our oil and gas property interests were located in the United States (Kansas and Oklahoma). Our current business focus
is to expand our crude oil hauling operations into other basins within Colorado, Texas and Oklahoma. Through October 2015, our
business was to acquire producing and non-producing oil and gas interests and develop oil and gas properties that we owned or in
which we had a leasehold interest. We sold our oil and gas exploration operations on October 27, 2015. Currently, our operations
are managed by employees based principally in North Dakota and Denver, Colorado, with the Company's contract CEO and CFO based
out of Georgia. Our former oil and gas exploration workers were outsourced to consultants and independent contractors.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements for the three month period
ended and at March 31, 2016 include the accounts of the Company, and our wholly-owned subsidiary, Black Diamond Energy Holdings,
LLC and its wholly-owned subsidiaries Maxxon Energy, LLC and Treeline Diesel Center, LLC. Intercompany transactions and balances
have been eliminated in consolidation.
Basis of Presentation
The accompanying consolidated financial statements of the Company,
have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”)
and the rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited
financial statements and notes thereto contained in Legend’s latest Annual Report filed with the SEC on Form 10-K. In the
opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial
position and the results of operations for the interim periods presented have been reflected herein. The results of operations
for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements
that would substantially duplicate disclosures contained in the audited financial statements for the most recent fiscal year, as
reported in the Form 10-K filed with the SEC on April 7, 2016, have been omitted.
Use of Estimates
The preparation of financial statements in
conformity with 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, 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 revenues and expenses,
estimates used in the impairment of property, plant and equipment, and the estimated future timing and cost of asset
retirement obligations. Actual results could differ from the estimates as additional information becomes known.
Cash and Cash Equivalents
We consider all highly liquid short-term investments with original
maturities of three months or less to be cash equivalents.
Concentrations
During the three month period ended March 31, 2016, crude hauling
revenue from Statoil ASA (“Statoil”) and Inland Slawson represents 84% and 9%, respectively, of our crude oil hauling
business. We believe that the loss of Statoil as a customer would result in a material adverse effect to our company's financial
results.
Financial instruments which potentially subject the Company
to concentrations of credit risk include cash deposits placed with financial institutions. The Company maintains its cash in bank
accounts which, at times, may exceed federally insured limits as guaranteed by the Federal Deposit Insurance Corporation (FDIC).
At March 31, 2016, $669 of the Company's cash balances were uninsured. The Company has not experienced any losses on such accounts.
Accounts Receivable
Accounts receivable typically consist of crude oil hauling
customer receivables, and are presented on the consolidated balance sheets net of allowances for doubtful accounts. The Company
establishes provisions for losses on accounts receivable for estimated uncollectible accounts and regularly review collectability
and establishes or adjusts 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 either March 31, 2016
or December 31, 2015.
Prepaid Expense
Prepaid expenses consist primarily of prepaid insurance premiums.
The Company amortizes these prepayments to expense over the life of the policy.
Assets held for sale
Long-lived assets that are expected to be recovered through
a sale or disposition are classified as held for sale. Assets classified as held for sale are evaluated for impairment using the
lower of fair value less disposal costs and carrying value. Assets held for sale are not depreciated. During the three months ended
March 31, 2016 and 2015, no impairment loss was recorded.
Equipment
Equipment is stated at cost less accumulated depreciation and
amortization. Maintenance and repairs are charged to expense as incurred. Renewals and betterments which extend the life or improve
existing equipment are capitalized. Upon disposition or retirement of equipment, the cost and related accumulated depreciation
are removed and any resulting gain or loss is reflected in operations. Depreciation is provided using the straight-line method
over the estimated useful lives of the assets, which are 5-7 years.
Intangibles
Intangible assets are comprised of a customer list, a trademark
and a non-compete agreement obtained in the acquisition of Maxxon during the year ended December 31, 2015. The intangible assets
are amortized on a straight-line basis over the assets’ respective life, ranging from 36 months to 120 months.
Impairment of Long-Lived Assets
The Company reviews the carrying value of its long-lived assets
annually or whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may no longer
be appropriate. The Company assesses recoverability of the carrying value of the asset by estimating the future net undiscounted
cash flows expected to result from the asset, including eventual disposition. If the future net undiscounted cash flows are less
than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset's carrying value
and estimated fair value.
Asset Retirement Obligation
The Company records 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. The asset retirement obligation
and the accompanying consolidated balance sheet at both March 31, 2016 and December 31, 2015, is related to our nonproducing Van
Pelt lease in Oklahoma.
Oil Hauling and Service Revenue Recognition
Our wholly-owned subsidiary, Maxxon, recognizes revenue based
on the relative transit time of the freight transported and as other services are provided. Accordingly, a portion of the total
revenue that will be billed to the customer once a load is delivered is recognized in each reporting period based on the percentage
of the freight pickup and delivery service that has been completed at the end of the reporting period. The Company records revenues
on the gross basis at amounts charged to its customers because the Company is the primary obligor, a principal in the transaction,
it invoices its customers and retains all credit risks, and maintains discretion over pricing. Additionally, the Company is responsible
for the selection of third-party transportation providers. Independent contractor providers of revenue equipment are classified
as purchased transportation expense in the consolidated statements of operations.
Income Taxes
The Company recognizes income taxes on an accrual basis based
on a 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 or 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 likely than not be realized. A valuation allowance for the full amount
of the net deferred tax asset was recorded for the three month period ended march 31, 2016 and December 31, 2015. Should they occur,
interest and penalties related to tax positions would be recorded as interest expense. No such interest or penalties have been
incurred as of either March 31, 2016 or December 31, 2015. The Company is no longer subject to federal examination for years before
2008.
Stock-based compensation
The Company measures 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. Legend’s
policy is to issue new shares when options are exercised. Compensation cost from the issuance of stock options and stock grants
is recorded as a component of general and administrative expenses in the consolidated statements of operations, and amounted to
$30,000 and -0- for three months ended March 31, 2016 and 2015, respectively.
The Black-Scholes option pricing model is used to estimate
the fair value of employee stock option awards at the date of grant, which requires the input of highly subjective assumptions,
including expected volatility and expected life. Changes in these inputs and assumptions can materially affect the measure of estimated
fair value of our share-based compensation. These assumptions are subjective and generally require significant analysis and judgment
to develop. When estimating fair value, some of the assumptions will be based on, or determined from, external data and other assumptions
may be derived from our historical experience with stock-based payment arrangements. The appropriate weight to place on historical
experience is a matter of judgment, based on relevant facts and circumstances.
The Company estimates volatility by considering the historical
stock volatility. The Company has opted to use the simplified method for estimating expected term, which is generally equal to
the midpoint between the vesting period and the contractual term.
Net Loss Per Common 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 convertible preferred stock and convertible debentures.
|
|
March 31,
2016
|
|
March 31,
2015
|
Potentially dilutive of common stock equivalents:
|
|
|
|
|
|
|
|
|
Options
|
|
|
—
|
|
|
|
—
|
|
Convertible Debt
|
|
|
61,672,933
|
|
|
|
20,348,718
|
|
Convertible preferred stock
|
|
|
327,499,200
|
|
|
|
—
|
|
Derivative Financial Instruments
The Company evaluates financial instruments for freestanding
or embedded derivatives. Derivative instruments that do not qualify for permanent equity classification as the instruments have
been determined not to be indexed to the Company’s stock are recorded as liabilities at fair value, with changes in value
recognized as other income (expense) in the consolidated statements of operations in the period of change. Derivative liabilities
are categorized as either short-term or long-term based upon management’s estimates as to when the derivative instrument
may be realized or based upon the holder’s ability to realize the instrument.
Fair Value Measurements
The Company follows FASB ASC 820, Fair Value Measurement (“ASC
820”), which clarifies fair value as an exit price, establishes a hierarchal disclosure framework for measuring fair value,
and requires extended disclosures about fair value measurements. The provisions of ASC 820 apply to all financial assets and liabilities
measured at fair value.
As defined in ASC 820, fair value, clarified as an exit price,
represents the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants. As a result, fair value is a market-based approach that should be determined based on assumptions that market
participants would use in pricing an asset or a liability.
As a basis for considering these assumptions, ASC 820 defines
a three-tier value hierarchy that prioritizes the inputs used in the valuation methodologies in measuring fair value.
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.
Recently Issued Accounting Pronouncements
From time to
time, new accounting pronouncements are issued by the Financial Accounting Standards Board or FASB or other standard setting bodies
and adopted by the Company as of the specified effective date. Unless otherwise discussed below, the Company believes that the
impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results
of operations upon adoption.
In May 2014,
FASB issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers
(ASU 2014-09)
to provide guidance on revenue recognition. ASU 2014-09 requires a company to recognize revenue when it transfers promised
goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange
for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s
guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration
to include in the transaction price and allocating the transaction price to each separate performance obligation. In August 2015,
FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 for all entities by one year. ASU 2014-09 is effective
for the Company in the first quarter of 2018. ASU 2014-09, as amended by ASU 2015-14, is effective for the Company in the fiscal
year beginning after December 15, 2017, and interim periods within those years with early adoption permitted up to the first
quarter of 2017. Upon adoption, ASU 2014-09 can be applied retrospectively to all periods presented or only to the most current
period presented with the cumulative effect of changes reflected in the opening balance of retained earnings in the most current
period presented. The Company is currently evaluating the impact of adopting ASU 2014-09 on its financial statements. The Company
does not believe the impact of adopting ASU 2014-09 will be significant.
In April 2015,
FASB issued Accounting Standards Update No. 2015-03,
Interest—Imputation of Interest (Subtopic 835-30): Simplifying
the Presentation of Debt Issuance Costs
(ASU 2015-03). ASU 2015-03 requires that debt issuance costs related to a recognized
debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent
with debt discounts. ASU 2015-03 is effective for the Company in the first quarter of 2016 with early adoption permitted. The Company
does not believe the impact of adopting ASU 2015-03 on its financial statements will be significant.
In November 2015,
FASB issued ASU 2015-17,
Balance Sheet Classification of Deferred Taxes
, which simplifies the presentation of
deferred taxes by requiring that deferred tax assets and liabilities be presented as noncurrent on the balance sheet. ASU 2015-17
is effective for the Company in the fiscal year beginning after December 15, 2016, and interim periods within those fiscal years.
The Company does not believe the impact of adopting ASU 2015-17 will be significant.
In February 2016,
the FASB issued ASU No. 2016-2,
Leases
. ASU 2016-2 is aimed at making leasing activities more transparent and comparable,
and requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding
lease liability, including leases currently accounted for as operating leases. ASU 2016-2 is effective for the Company in the fiscal
year beginning after December 15, 2018, and interim periods within those fiscal years with early adoption permitted. The Company
is currently evaluating the impact of adopting ASU 2016-2 on its financial statements, and expects it will impact its current operating
leases on its financial statements.
Subsequent Events
The Company has evaluated all transactions through the date
the consolidated financial statements were issued for subsequent event disclosure consideration.
NOTE 3 – GOING CONCERN
The accompanying consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course
of business. The Company has incurred significant losses from continuing operations of $789,366 for the three months ended March 31, 2016 and $14,989,835 for the year ended December 31, 2015 and had negative working capital of $695,869 at March 31, 2016 and
$1,437,979 at December 31, 2015. Additionally, the Company is dependent on a small number of customers in obtaining its revenue
goals. Further, obtaining additional debt and/or equity financing to roll-out and scale its planned principal business operations
may be limited due our losses from operations. These factors raise substantial doubt about the Company's ability to continue as
a going concern.
Management's plans in regard to these matters consist principally
of seeking additional debt and/or equity financing combined with restructuring its current debt obligations, and expected cash
flows from our crude oil hauling company and assets that it may acquire. There can be no assurance that the Company's efforts will
be successful. The financial statements do not include any adjustments that may result from the outcome of this uncertainty.
NOTE 4 - ACQUISITION OF MAXXON
On April 3, 2015, the Company entered into a Membership Interest
Purchase Agreement ("MIPA") with Sher Trucking, LLC ("Sher"), Albert Valentin ("Valentin") and Steven
Wallace ("Wallace"), which made up all of the members of Maxxon to purchase all of the outstanding membership interests
of Maxxon. The Company paid $1,500,000 in cash to Sher; issued a secured promissory note to Sher in the amount of $2,854,000; issued
90,817,356 shares of the Company's common stock to Valentin, valued at $526,741; agreed to issue 57,682,644 shares of the Company's
common stock to Wallace valued at $334,559 which was issued in December 2015. The principal amount of the note to Sher bears interest
at five percent (5%) per annum and is due and payable in full on April 3, 2016. The note is secured by certain rolling stock trucks
and trailers owned by subsidiaries of Maxxon. The Company also paid $125,000 to Sher after closing as an advance against an anticipated
purchase price adjustment related to the working capital changes of Maxxon. The post-closing payment was included in final purchase
price as a result of the working capital adjustments.
Purchase price on April 4, 2015
|
|
|
Cash paid
|
|
$
|
1,625,000
|
|
Promissory note
|
|
|
2,854,000
|
|
Fair value of common stock issued
|
|
|
861,300
|
|
Total purchase price
|
|
|
5,340,300
|
|
Fair value of net assets at April 4, 2015
|
|
|
|
|
Cash
|
|
$
|
435,339
|
|
Accounts receivable
|
|
|
1,063,629
|
|
Inventory
|
|
|
207,437
|
|
Prepaid and other current assets
|
|
|
199,132
|
|
Property and equipment
|
|
|
3,188,615
|
|
Intangibles
|
|
|
354,000
|
|
Goodwill
|
|
|
438,106
|
|
Total assets
|
|
|
5,886,258
|
|
|
|
|
|
|
Accounts payable
|
|
|
(455,632
|
)
|
Other current liabilities
|
|
|
(90,326
|
)
|
Total liabilities
|
|
|
(545,958
|
)
|
Net assets acquired
|
|
$
|
5,340,300
|
|
NOTE 5 – PROPERTY AND EQUIPMENT
The amount of capitalized costs related to property and equipment
and the amount of related accumulated depreciation and impairment are as follows:
|
|
March 31,
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
Drilling rig
|
|
$
|
—
|
|
|
$
|
465,000
|
|
Trucks, trailers, and vehicles
|
|
|
3,764,315
|
|
|
|
3,488,246
|
|
Furniture and equipment
|
|
|
444,713
|
|
|
|
444,713
|
|
Property and equipment, at cost
|
|
|
4,209,028
|
|
|
|
4,397,959
|
|
Accumulated depreciation
|
|
|
(657,755
|
)
|
|
|
(562,270
|
)
|
Accumulated impairment
|
|
|
(224,835
|
)
|
|
|
(224,835
|
)
|
Property and equipment, net
|
|
$
|
3,326,438
|
|
|
$
|
3,610,854
|
|
The Company has assigned a useful life of 5 years to all
assets. The drilling rig was previously included in property and equipment, and has been reclassified to assets held for
sale, as the Company has ceased all drilling operations. The Company recorded depreciation expense of $178,145 and $0 during
the three months ended March 31, 2016 and 2015, respectively.
During the three months ended March 31, 2016, the Company
exchanged vehicles with a carrying value of $184,439 for new vehicles with a purchase price of $198,211. In addition, the
vehicles traded were financed with an outstanding principal balance of $166,614 owed at the date of the exchange, which was
extinguished in full. The Company assumed liabilities for the new vehicles of $211,658. Accordingly, the Company recorded a
loss on the disposition of the vehicles of $31,272.
In March 2016, the Company purchased 7 tanker trailers from
a third party. The trailers’ purchase price was $278,636. The Company paid $28,000 as a down payment and financed the remaining
balance of $250,636. The financing requires monthly payments of $6,962 for the next 3 years and has a 0% interest rate.
During the third quarter of 2015, the Company closed the repair
facility operation for its subsidiary, Treeline Diesel Center LLC. As of December 31, 2015, the Company impaired the value of the
assets of $224,835.
NOTE 6 - INTANGIBLE ASSETS
During the year ended December 31, 2015, the Company completed
its acquisition of Maxxon. The Company performed an assessment of the net assets acquired and identified it had acquired significant
customer relationships, a trademark and a non-compete agreement with the sellers of Maxxon. Below is a summary of the cost attributable
to the acquired intangibles.
|
|
March 31,
|
|
December 31,
|
|
|
2016
|
|
2015
|
Non-compete agreement
|
|
$
|
39,200
|
|
|
$
|
39,200
|
|
Trademark
|
|
|
47,800
|
|
|
|
47,800
|
|
Customer relationships
|
|
|
267,000
|
|
|
|
267,000
|
|
Goodwill
|
|
|
438,106
|
|
|
|
438,106
|
|
Total intangible assets
|
|
|
792,106
|
|
|
|
792,106
|
|
Accumulated amortization of intangible assets
|
|
|
(48,921
|
)
|
|
|
(36,758
|
)
|
Accumulated impairment of intangible assets
|
|
|
(438,106
|
)
|
|
|
(438,106
|
)
|
Net Intangible assets ending balance, March 31
|
|
|
305,079
|
|
|
|
317,242
|
|
After completing the purchase price allocation for the acquisition
of Maxxon, the Company noted that its total purchase price of $5,340,300 exceeded the net assets acquired of Maxxon by $438,106
and accordingly, recorded goodwill for the excess amount. As of December 31, 2015, the Company assessed its goodwill for impairment
and determined that goodwill was impaired. Accordingly, the Company recorded impairment and loss of $438,106 to fully impair the
recorded goodwill.
During the three months ended March 31, 2016, the Company recorded
$12,163 in amortization expense on its intangible assets.
NOTE 7 – ASSET RETIREMENT OBLIGATION
During 2015, the Company sold all of its producing
properties. The asset retirement obligation recorded as of both March 31, 2016 and December 31, 2015 was related to the Van
Pelt lease, a non-producing field, that the Company acquired during 2015, and which the Company still owned as of year-end.
The asset retirement obligation at both March 31, 2016 and December 31, 2015 was $118,425 and $96,129, respectively. The
Company recorded $22,296 and $2,385 in accretion expense of the asset retirement obligation liability during the three months
ended March 31, 2016 and 2015, respectively.
NOTE 8 – RELATED PARTY TRANSACTIONS
During the year ended December 31, 2015, the related party
amounts due to NPE were reduced by payments of $180,400, with additions for brokerage fees on the acquisition of Maxxon of $55,000,
with a remaining balance due NPE of $451,600. In July 2015, NPE agreed to forgive the payable of $451,600. As of December 31, 2015,
there was an amount due to NPE of $120,000, as a result of the bonus accrual under the NPE letter agreement for CEO services, which
was paid out during the three months ended March 31, 2016.
On May 1, 2015, Hillair converted all of its 600 Series A Convertible
Preferred Stock to 600 million shares of common stock.
During the year ended December 31, 2015, the Company entered into various secured debt debentures with Hillair to
finance the Company’s oil and gas operations and acquisitions, in the aggregate amount of $9,824,976. These debentures
accrued interest from 8% - 8.5% per annum and were secured in the Company’s oil and gas properties.
On October 22, 2015, the Company consummated a Securities Exchange
Agreement with Hillair, its controlling shareholder, pursuant to which it issued 9,643 shares of Series B Convertible Preferred
Stock (the "Series B Preferred Shares") with conversion price of $0.03 in exchange for the cancellation of debentures
held by Hillair with a total carrying value of $9,824,976 (the "Exchanged Debentures"). The shares can be converted into
327,499,200 shares of the Company's common stock.
Also, on October 22, 2015, the Company consummated a Securities
Purchase Agreement with Hillair pursuant to which it issued an Original Issue Discount Senior Secured Convertible Debenture in
the aggregate amount of $654,000, payable in full on March 1, 2017 and accrues interest at 8% per annum. The debenture is convertible
into up to 21,800,000 shares of common stock at a conversion price of $0.03 per share. After taking into account the original issue
discount, legal and diligence fees of $104,000 reimbursed to Hillair, the net proceeds received by the Company was $550,000.
On January 29, 2016, the Company and Hillair amended the Securities
Purchase Agreement (the “Amended SPA”) to increase the aggregate amount available to the Company. The Amended SPA increased
the amount from $654,000 to $1,439,400. As a result, the Company received $630,000 in new proceeds, net of original issue discount,
legal and diligence fees of $155,400 which were recorded as a debt discount. The debenture is convertible into up to 381,313,333
shares of common stock at a conversion price of $0.03 per share. The Amended SPA also extended the maturity date from March 1,
2017 to March 1, 2018. All other terms of the debenture remain the same.
On March 25, 2016, the Company consummated a Senior Convertible
Debenture with Hillair in the amount of $410,788. The debenture has a maturity date of March 1, 2018 and accrues interest at 8%
per annum. The debenture is convertible into up to 13,692,933 shares of common stock at a conversion price of $0.03 per share.
The Company received net proceeds of $360,000, net of original issue discount, legal and diligence fees of $50,788 which were recorded
as a debt discount.
During the three months ended March 31, 2016 and 2015, the
Company amortized the debt discounts associated with its convertible debentures in the amount of $15,562 and $26,252, respectively.
These amounts were recorded as interest expense.
NOTE 9 – NOTES PAYABLE
Notes payable consist of the following:
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
|
|
|
|
a)
|
On October 28, 2013, a vendor filed a complaint against the Company seeking to collect $68,913, plus interest at 12% for services rendered on or before November 30, 2012. This claim has been satisfactorily resolved between the parties, and Legend is remitting $2,500 per month in settlement of this claim, until such balance is fully repaid. During the three months ended March 31, 2016, the Company made principal payments of $7,500 and capitalized $757 of interest expense to the principal balance. During the year ended December 31, 2015, the Company made principal payments of $30,000 and capitalized $5,199 of interest expense to the principal balance.
|
|
$
|
39,063
|
|
|
$
|
45,805
|
|
b)
|
On April 1, 2014, the Company issued a note payable to New Western Energy Corporation (“NWTR”) for $75,000 as part of the plan for merger with NWTR. The note has no interest provision and was due on February 28, 2015. On January 6, 2015, the Company entered into a settlement with NWTR to repay the remainder of principal in 5 installments starting on February 15, 2015. The Company made aggregate principal and interest payments of $38,336 during the year ended December 31, 2015. No payments have been made to NWTR during the quarter ended March 31 2016. The note was in default as of March 31, 2016, but the Company has not received a default notice from NWTR.
|
|
|
26,664
|
|
|
|
26,664
|
|
c)
|
On June 19, 2014, a vendor filed a complaint against the Company seeking to collect $35,787, plus interest at 12% for services rendered. This claim has been satisfactorily resolved between the parties, and Legend previously remitted $2,000 per month in settlement of this claim, until such balance was fully repaid. During the three months ended March 31, 2016, the Company repaid this note, including accrued interest, in full. During the year ended December 31, 2015, the Company made principal payments of $22,000 and capitalized $1,402 of interest expense to the principal balance.
|
|
|
2,782
|
|
|
|
3,041
|
|
d)
|
On October 20, 2014, the Company issued a note payable for the purchase of drilling rig for $315,000. The note bears interest at 6% per annum and was due on April 12, 2016. The Company is required to make monthly payment of $18,343. The Company made aggregate principal and interest payments of $55,029 and $219,208 for the three months ended March 31, 2016 and year ended December 31, 2015. This note is fully repaid at the date of this report.
|
|
|
19,160
|
|
|
|
73,372
|
|
e)
|
On
April 3, 2015, as part of the Maxxon acquisition, the Company issued a secured promissory note to Sher Trucking in the amount
of $2,854,000. The note bears interest at 5% per annum and was due in full on April 3, 2016. On April 5, 2016, the Company
entered into an agreement with Sher that restructured the secured promissory note ($2,854,000), with a restructuring fee
($250,000) plus accrued interest ($142,700) (the “Restructuring”), totaling $3,246,700 to Sher. The
terms of that Restructuring are that (1) the Company will paid $1,000,000 to Sher by April 8, 2016 (the Company entered into
a debenture with Hillair that nets to $1,000,000 in cash proceeds to the Company, which was paid by us directly to Sher; (2)
the remaining balance on the Sher Note of $2,256,700 at 15% interest per annum, will be due and payable on April 3, 2018; (3)
the Company included a restructuring fee of $250,000 in the principal balance of the note which is due on April 3, 2018; and,
(4) the Sher Note will remain collateralized by the same collateral as the original promissory note to Sher.
|
|
|
2,854,000
|
|
|
|
2,854,000
|
|
f)
|
On November 1, 2015, the Company purchased three trucks from A&H Sterling Energy, LLC. The trucks were financed by A&H Sterling Energy, LLC with an outstanding promissory note in the aggregate amount of $96,407 owed to Cunard Holdings LLC. The Company assumed the outstanding promissory note as part of the acquisition. The note bears interest at 7% and is due on January 1, 2018.
|
|
|
78,996
|
|
|
|
89,511
|
|
g)
|
On October 19, 2015, the Company entered into secured note agreement with a financial institution for the purchase of a vehicle in the amount of $118,110. The notes bore interest at 5.99% and was due on December 3, 2020. In February 2016, the Company traded in the vehicle for a new vehicle. As part of the trade in, the note was settled and a new note was issued with a principal of $135,278 with interest at 3.99% and is due on April 1, 2021.
|
|
|
135,278
|
|
|
|
116,411
|
|
h
)
|
On November 12, 2015, the Company entered into a secured note agreement with a financial institution for the purchase of vehicle in the amount of $57,106. The notes bears interest at 3.99% and was due on November 12, 2020. In February 2016, the Company traded in the vehicle for a new vehicle. As part of the trade in, the note was settled and a new note was issued with a principal of $76,380 with interest at 3.90% and is due on April 5, 2021.
|
|
|
76,380
|
|
|
|
55,843
|
|
i)
|
On December 16, 2015, the Company entered into a secured line of credit facility with State Bank and Trust Company in the aggregate amount of $275,000. The facility bears interest at 4% and due on December 16, 2016. The note is collateralized by certain property of Maxxon. During the three months ended March 31, 2016, the Company drew $70,000 and paid interest of $1,369 on this line of credit.
|
|
|
170,000
|
|
|
|
100,000
|
|
j)
|
In January 2016, the Company entered into a forebearance agreement to transfer amounts owed on a credit card to Origin Bank into a note agreement, in the aggregate amount of $40,850. The note bears interest at 4% per annum and is payable in 12 monthly payments beginning April 15, 2016 of $3,000 per month with the remaining balance and accrued interest due on April 15, 2017.
|
|
|
40,850
|
|
|
|
—
|
|
k)
|
In March 2016, the Company entered into a financing agreement to purchase trailers from a third party. The trailers’ purchase price was $278,636. The Company paid $28,000 as a down payment and financed the remaining balance of $250,636. The financing requires monthly payments of $6,962 for the next 3 years and has a 0% interest rate.
|
|
|
250,636
|
|
|
|
—
|
|
l)
|
During the three months ended March 31, 2016, the Company entered into various insurance financing agreements in the aggregate amount of $146,786. The agreements are payable in nine monthly payments and accrue interest at 4.61% per annum. The Company made payments of $114,830 in principal and interest on these financing agreements.
|
|
|
32,921
|
|
|
|
—
|
|
|
Total
|
|
$
|
3,726,731
|
|
|
$
|
3,364,647
|
|
|
Less short term debt
|
|
|
256,819
|
|
|
|
(249,348
|
|
|
Less current portion of long term debt
|
|
|
1,230,187
|
|
|
|
(1,074,781
|
)
|
|
Long term debt
|
|
$
|
2,239,725
|
|
|
$
|
2,040,518
|
|
NOTE 10 – 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, 2015. There were no embedded derivative liabilities recorded during the three months ended March 31, 2016.
|
|
Embedded
Derivative
Liabilities
|
Balance, January 1, 2015
|
|
$
|
1,128,667
|
|
Fair value of warrants issued
|
|
|
—
|
|
Fair value upon conversion of preferred stock to common stock
|
|
|
(7,680,000
|
)
|
Change in fair value
|
|
|
6,551,333
|
|
Balance, March 31, 2015
|
|
$
|
—
|
|
The Company used the market price of $0.0128 for its common
stock on the date of conversion of the Series A Convertible Preferred Stock to calculate the fair value of the embedded derivative
extinguished during the year ended December 31, 2015.
The Company valued the embedded derivative liabilities using
a Black-Scholes model. A summary of quantitative information with respect to valuation methodology, estimated using a Black-Scholes
model, and significant unobservable inputs used for the Company’s embedded derivative liabilities for the year ended December
31, 2015 is as follows:
Expected dividend yield
|
|
|
—
|
|
Strike price
|
|
|
$0.001-0.01
|
|
Expected stock price volatility
|
|
|
196.27-218.76
|
%
|
Risk-free interest rate
|
|
|
1.52-1.78
|
%
|
Expected term (in years)
|
|
|
4-5
|
|
NOTE 11 – STOCKHOLDERS’
EQUITY (DEFICIT)
On December 21, 2015, the Company obtained stockholder approval
to amend the Company's Articles of Incorporation to effect an increase in the amount of authorized shares of from 1,100,000,000
to 5,000,000,000. The Company increased the number of authorized shares of common stock from 1 billion shares, with a par value
of $0.001, to 4.9 billion shares, with a par value of $0.001 and 100 million shares designated as blank check preferred stock.
On November 13, 2014, the Company designated 600 shares of
its 100 million shares of blank check preferred stock as Series A Convertible Preferred Stock.
On October 21, 2015, the Company designated 9,643 shares of
its 100 million shares of blank check preferred stock as Series B Convertible Preferred Stock.
Convertible Preferred Stock
On October 22 2015, the Company consummated a Securities Exchange
Agreement with Hillair pursuant to which it issued 9,643 shares of Series B Convertible Preferred Stock (the “Series B Preferred
Shares”) in exchange for the cancellation of debentures held by Hillair with a total principal value of $9,642,546 and accrued
interest of $182,430.
As of December 31, 2014, the Company had issued and outstanding
600 shares of its Series A Convertible Preferred Stock. This convertible preferred stock has a 0% dividend rate. The shares of
preferred stock are convertible into 600 million shares of the Company¹s common stock at $0.0001 per share, and have a non-dilution
provision. The shares were converted to 600 million shares of common stock in May 2015.
Common Stock Issuances
In April 2015, the Company issued 90,817,356 shares of common
stock to Albert Valentin as part of its purchase of Maxxon. The stock had a fair value of $526,741. The fair value of the common
stock was determined using the closing price of the shares on the grant date.
In December 2015, the Company issued 57,682,644 shares of common
stock to Steven Wallace as part of its purchase of Maxxon. The stock had a fair value of $334,559. The fair value of the common
stock was determined using the closing price of the shares on the grant date.
On March 2, 2016, the Company issued common stock to an employee.
A total of 6 million shares were issued with a fair value of $10,800 using the closing market price on the date of issuance.
Warrants
There was no warrant activity during the year ended December
31, 2015.
Options
There was no option activity during the year ended December
31, 2015.
NOTE 12 – DISCONTINUED OPERATIONS
The amounts of net assets and liabilities related to the discontinued
operations of the Company’s oil and gas operations as of March 31, 2016 and December 31, 2015 were $0 and $0, respectively.
The table below summarizes the operations of the Company’s oil and gas activities for the three months ended March 31, 2106
and 2015.
|
|
March 31, 2016
|
|
March 31, 2015
|
|
|
|
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
170,015
|
|
Production expenses
|
|
|
—
|
|
|
|
205,167
|
|
Operating expenses
|
|
|
2,967
|
|
|
|
29,877
|
|
Depletion, depreciation, and amortization
|
|
|
—
|
|
|
|
53,899
|
|
Loss on sale of oil and gas properties
|
|
|
—
|
|
|
|
892,131
|
|
Impairment loss on oil and gas properties
|
|
|
—
|
|
|
|
406,558
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(2,967
|
)
|
|
$
|
(1,417,617
|
)
|
NOTE 13 – COMMITMENTS AND CONTINGENCIES
The Company is not aware of any pending or threatened legal
proceedings, nor is the Company aware of any pending or threatened legal proceedings, affecting any current officer, director or
control shareholder, or their affiliates.
As part of its regular operations, the Company may become party
to various pending or threatened claims, lawsuits and administrative proceedings seeking damages or other remedies concerning its’
commercial operations, products, employees and other matters. Although the Company can give no assurance about the outcome of these
or any other pending legal and administrative proceedings and the effect such outcomes may have on the Company, the Company believes
that any ultimate liability resulting from the outcome of such proceedings, to the extent not otherwise provided for or covered
by insurance, will not have a material adverse effect on the Company’s financial condition or results of operations.
The Company owes $9,266 in property taxes, penalties, and interest
to the state of North Dakota from operations during the year 2012. We entered into a payment plan with the state of North Dakota
whereby we pay them $500 per month until the above balance is fully repaid.
On October 28, 2013, a vendor filed a complaint against the
Company seeking to collect $68,913, plus interest for services rendered on or before November 30, 2012. This claim has been satisfactorily
resolved between the parties, and Legend is remitting approximately $2,500 per month in settlement of this claim, until such balance
is fully repaid. During the period ended March 31, 2016, the Company made principal payments of $7,500. The Company recorded interest
of approximately $757 on the settlement liability for the period ended March 31, 2016. As of March 31, 2016, the Company had a
principal balance of $22,369 outstanding on the settlement liability.
On May 18, 2015, the Company entered into a trailer lease agreement
with Polar Service Centers. The Company leased seven trailers at a monthly rent of $17,500 for 28 months commencing on June 1,
2015 and continue until September 30, 2017. The Company evaluated the lease for capitalization and concluded the lease did not
meet the criteria of a capital lease.
On February 15, 2016, the Company entered into a trailer
lease agreement with Wallwork Truck Center. The Company leased 10 trailers at a monthly rent of $17,335 for 48 months
commencing on February 12, 2016 and continue until February 12, 2020.
Future minimum lease payments for the trailer lease as of the
three months ended March 31, 2016 are as follows:
2016
|
|
$
|
313,519
|
|
2017
|
|
|
365,526
|
|
Thereafter
|
|
|
450,722
|
|
Total net minimum payments
|
|
$
|
1,129,767
|
|
The
Company leases office space on a month-to-month basis, with monthly rental payments due of approximately $2,200. The
Company leases office space, a diesel repair shop, and employee housing under non-cancelable lease agreements. The leases
provide that we pay taxes, insurance, utilities, and maintenance expenses related to the leased assets. During March 2016, we
entered into an agreement in principle with the property owner/landlord, where the facility lease has been restructured to a
60 month lease commencing April 1, 2016.
The restructured
lease indicates that we will not pay any cash lease payments while we deplete our $120,000 security deposit held by the
landlord, which is included in other assets on the accompanying balance sheets. The revised lease and its payment structure
will be such that we will receive a credit of $6,000 per month while WTI oil prices remain below $60.00 per barrel, for any
30 day period. When the price of WTI oil goes above $60.00 per barrel but less than $80.00 per barrel for any 30 day period,
we will receive a credit against our deposit of $7,500 per month. Upon the price of WTI oil being above the $80.00 per barrel
level for a 30 day period, the Company’s rent credit and/or payment will be $10,000 per month, the maximum rental
payment under the restructured lease agreement.
NOTE 14 – INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes.
The Company established a valuation allowance for the full
amount of the net deferred tax asset as management currently does not believe that it is more likely than not that these assets
will be recovered in the foreseeable future. The increase in the valuation allowance was approximately $220,000 and $2.9 million
at March 31, 2016 and December 31, 2015, respectively. The net operating loss at March 31, 2016 was approximately $15.4 million,
and at December 31, 2015 the net operating loss was approximately $14.6 million, and begins to expire in 2020 and fully expires
in 2035.
NOTE 15 – SUBSEQUENT EVENTS
On April 5, 2016, the Company entered into an agreement with
Sher that restructured the existing secured promissory note ($2,854,000) plus accrued interest ($142,700) and a $250,000 restructuring
fee, (the “Restructuring”), with an amended and restated note totaling $3,246,700. The terms of that Restructuring
are that the Company will pay $1,000,000 to Sher by April 11, 2016.
In order to pay the $1,000,000 to Sher, the Company entered
into a convertible debenture with Hillair on April 6, 2016, totaling $1,150,206, with interest accruing at 8% per annum, due and
payable on March 1, 2018. The Hillair debenture will be convertible into 38,340,200 shares of the Company's stock at
$0.03 per share.
The remaining balance on the Sher Note of $2,246,700 at
15% interest per annum will be due and payable on April 3, 2018. Further, commencing with the quarter ending June
30, 2016, and at each year end, we will pay Sher, within 10 days of issuing our quarterly report on Form 10-Q or annual
report on Form 10-K, 20% of any positive net operating cash flows for the quarter as presented on the Statement of Cash Flows
for the particular quarter. The Sher Note will remain collateralized by the same collateral as the original promissory
note to Sher, subject to sales of such collateral by the Company reducing the principal balance of the note with proceeds of
such collateral sales. As a result of the restructuring, the note has been reclassified to long-term debt on the Company's
March 31, 2016 and December 31, 2015 balance sheet.
On April 8, 2016, the Company entered into a trailer purchase
agreement with Southwest Truck & Trailer, Inc. The Company purchased 6 trailers valued at $217,369. The Company paid $32,400
at closing and entered into a financing agreement for the remaining balance. The agreement calls for monthly payments of $5,138
for 36 months commencing on April 8, 2016 with the balance due on April 8, 2019.