UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2016

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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)

Colorado   84-1570556
(State or other jurisdiction of
incorporation or organization)
  (IRS Employer
Identification No.)

 

 555 North Point Center East, Suite 410

Alpharetta, Georgia, 30022

(Address of principal executive offices)

(678) 366-4587

(Registrant’s telephone number, including area code)

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      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      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

Large accelerated filer     Accelerated filer  
Non-accelerated filer     Smaller reporting company  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes      No  

As of May 23, 2016, the registrant had 942,083,273 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 March 31, 2016

Table of Contents

      Page  
   
EXPLANATORY NOTE      2  
CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS     2  
PART I. FINANCIAL INFORMATION        
Item 1. Financial Statements (Unaudited)      3  
  Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015     3  
  Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015     4  
  Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015     5  
  Notes to Consolidated Financial Statements     6  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations     18  
Item 4. Controls and Procedures     23  
   
PART II. OTHER INFORMATION     24  
Item 1. Legal Proceedings     24  
Item 1A. Risk Factors     24  
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds     24  
Item 3. Defaults Upon Senior Securities     24  
Item 5. Other Information     24  
Item 6. Exhibits     24  
   
SIGNATURES     25  
     
EXHIBITS       26  

 

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, which was placed into bankruptcy during 2014. All references to “Wi2Wi” are to Wi2Wi Corporation, formerly 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 management’s 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 management’s 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:

  Our ability to pay off our Senior Secured Debentures to Hillair Capital Investments, L.P.;
     
  Our ability to fund our 2015 drilling and development plan;
     
  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;
     
  Our ability to retain the services of our Chief Executive Officer, President, Chief Financial Officer and other key employees, the loss of which could materially impair our business plan;
     
  Changes in estimates of our crude oil and natural gas reserves and depletion rates;
     
  Our ability to control or reduce operating expenses and manage unforeseen costs;
     
  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;
     
  Our ability to maintain our existing property leases and acquire rights on properties that we desire;
     
  Changes in commodity prices for crude oil and natural gas;
     
  Environmental risks from operations of our wells;
     
  Our ability to compete successfully against larger, well-funded, established oil and gas companies;
     
  Our ability to comply with the many regulations to which our business is subject; and
     
  Dilutive and other adverse effects on our existing shareholders and our stock price arising from future securities issuances.

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, 2015 filed with the Securities and Exchange Commission on April 7, 2016, 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

(unaudited)

    March 31,   December 31,
    2016   2015
ASSETS                
Current Assets                
Cash and cash equivalents   $ 663,160     $ 463,503  
Accounts receivable-trade     198,742       183,773  
Prepaid expenses     202,805       281,737  
Other current assets     180,140       137,475  
Total Current Assets     1,244,847       1,066,488  
                 
Property, plant and equipment net     3,326,438       3,610,854  
Assets held for sale     398,680       —    
Intangible assets     305,079       317,242  
Total Assets   $ 5,275,044     $ 4,994,584  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
Current Liabilities                
Accounts payable and accrued expenses   $ 659,570     $ 823,799  
Accounts payable-related party     30,000       240,000  
Accrued interest     143,530       106,505  
Accrued interest - related party     19,290       10,034  
Short term debt     256,819       249,348  
Current portion of long term debt     1,230,187       1,074,781  
Total Current Liabilities     2,339,396       2,504,467  
                 
Long term debt     2,239,725       2,040,518  
Asset retirement obligations     118,425       96,129  
Convertible debt - related party, net of debt discount of $279,949 and $89,323, respectively     1,570,239       564,677  
Total Liabilities     6,267,785       5,205,791  
                 
Stockholders’ Deficit                
Preferred stock – $0.001 par value, 100,000,000 shares authorized     —         —    
Series A convertible preferred stock - $0.001 par value; 0 and 600 shares issued outstanding, respectively     —         —    
Series B preferred stock – $0.001 par value; 9,643 shares issued and 9,643 outstanding     10        10  
Common stock – 4,900,000,000 shares authorized; $0.001 par value; 942,083,273 and 936,083,273 shares issued and outstanding, respectively     942,083       936,083  
Additional paid-in capital     44,849,747       44,844,948  
Accumulated deficit     (46,784,581 )     (45,992,248 )
Total Stockholders’ Deficit     (992,741 )     (211,207 )
Total Liabilities and Stockholders’ Deficit   $ 5,275,044     $ 4,994,584  

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

3  
 

 

Legend Oil and Gas, Ltd.

CONSOLIDATED STATEMENTS OF OPERATIONS
For the Period ended March 31, 2016 and 2015

 

    2016   2015
         
Revenue   $ 1,176,828     $ —    
                 
Operating expenses                
Cost of revenues     721,991       —    
General and administrative     925,340       629,763  
Depletion, depreciation, and amortization     190,307       —    
Accretion of asset retirement obligations     22,296       2,385  
Loss on disposal of property, plant and equipment     31,272       —    
Total operating expenses     1,891,206       632,148  
                 
Operating loss     (714,378 )     (632,148 )
                 
Other income (expense):                
Interest expense     (74,988 )     (309,978 )
Change in fair value of embedded derivative liabilities     —         (6,551,333 )
Total other expenses     (74,988 )     (6,861,311 )
                 
Loss from continuing operations     (789,366 )     (7,493,459 )
Loss from discontinued operations     (2,967 )     (1,417,617 )
Net loss   $ (792,333 )   $ (8,911,076 )
                 
Net loss per common share from continuing operations - basic and diluted   $ (0.00 )   $ (0.04 )
Net loss per common share from discontinued operations - basic and diluted   $ (0.00 )   $ (0.01 )
Weighted average number of common shares outstanding - basic and diluted     582,612,256       187,583,273  

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

4  
 

 

Legend Oil and Gas, Ltd.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

    For the Three Months Ended
    March 31,
2016
  March 31,
2015
CASH FLOWS FROM OPERATING ACTIVITIES:        
         
Net loss   $ (792,333 )   $ (8,911,077 )
Net loss attributable to discontinued operations     2,967     1,417,617
Adjustments to reconcile net loss to cash flows provided by (used in) operating activities:                
Stock-based compensation     10,800       —    
Depletion, depreciation, and amortization     190,307       —    
Accretion on asset retirement obligation     22,296       2,385  
Loss on disposal of property     31,272       —    
Amortization of discounts on notes payable     15,562       26,252  
Change in fair value of embedded derivative liabilities     —         6,551,333  
Changes in operating assets and liabilities:                
Accounts receivable     (14,969 )     —    
Prepaid expenses and other assets     235,820       (389,999 )
Other assets     (42,665 )     —    
Accounts payable     (244,141 )     88,336  
Accounts payable – related party     (90,000 )     (170,000 )
Accrued interest     37,818     (44,444 )
Accrued interest – related party     9,256       —    
Net cash flows used in operating activities – continuing operations     (628,009 )     (1,429,597 )
Net cash flows used in operating activities – discontinued operations     (2,967 )     115,110
Net cash flows used in operating activities     (630,976 )     (1,314,487 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
                 
Cash paid for property, plant and equipment     (28,000 )     —    
Net cash flows used in investing activities – continuing operations     (28,000 )     —    
Net cash flows provided by investing activities – discontinued operations     —         1,204,290  
Net cash flows (used in) provided by investing activities     (28,000 )     1,204,290  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
                 
Payments on short-term debt     (201,367 )     —    
Proceeds from short-term debt     70,000       —    
Proceeds from convertible debt – related party, net     990,000       —    
Net cash flows provided by investing activities – continuing operations     858,633       —    
Net cash flows used in investing activities – discontinued operations     —         (449,044 )
Net cash flows provided by (used in) financing activities     858,633       (449,044 )
                 
Net change in cash and cash equivalents     199,657       (559,241 )
Cash and cash equivalents, beginning of period     463,503       701,848  
Cash and cash equivalents, end of period   $ 663,160     $ 142,607  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                
Cash paid during the period for:                
Interest   $ 5,054     $ 572,851  
Taxes   $ —       $ —    
                 
NON-CASH INVESTING AND FINANCING ACTIVITIES                
                 
Financing for prepaid insurance   $ 156,888     $ —    
Debt issued for acquisition of property, plant and equipment   $ 448,848       —    
Reclassification of property, plant and equipment to assets held for sale   $ 398,680       —    
Reclassification of accounts payable to short-term debt   $ 40,850       —    
Capitalization of accrued interest on short-term debt   $ 793       —    

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.  

 

5  
 

 

Legend Oil and Gas, Ltd.


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.

 

6  
 

 

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.

 

7  
 

 

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.

 

8  
 

 

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.

 

 

9  
 

 

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  

 

 

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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  

 

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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.

 

 

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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  

 

 

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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  

 

 

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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.

 

15  
 

 

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 )

 

 

 

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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  

 

 

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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.

 

18  
 

 

ITEM 2 MANAGEMENT’S 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, 2015 and 2014. 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 management’s 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  

 

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.

 

On April 3, 2015, the Company entered into a Membership Interest Purchase Agreement with Sher Trucking, LLC (“Sher”), the majority owner, and two minority owners, which made up all of the members of Black Diamond Energy Holdings, LLC (“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 at 5% per annum, due April 3, 2016 and issued 148,500,000 shares of the Company’s common stock to the minority owners, then valued at $861,300.

 

Prior to the acquisition of Maxxon, our sole business focus was to acquire producing and non-producing oil and gas leases and to develop oil and gas properties that we owned or in which we had a leasehold interest.

 

Maxxon is our crude oil hauling and trucking subsidiary. We perform hauling services for large institutional drilling and exploration companies as well as crude oil marketers. Our current largest clients we perform such services for are Statoil ASA, Inland Oil & Gas Corporation, and Bridger Logistics, LLC. We serve principally the Bakken in North Dakota; however, during March 2016, we commenced hauling operations in Texas.

 

On April 5, 2016, the Company entered into an Amended and Restated Secured Promissory Note (the “Restructuring Note”) with Sher that restructured the secured promissory note ($2,854,000) plus accrued interest ($142,700), in addition to a restructuring fee ($250,000), (the “Restructuring”), totaling $3,246,700 due Sher. The Restructuring resulted in (1) the Company paying $1,000,000 to Sher, which was completed on April 8, 2016. Further, the Company entered into a debenture with Hillair dated April 7, 2016 that netted cash to the Company of $1,000,000 which was then paid by us to Sher; (2) the remaining balance on the Restructuring Note of $2,246,700 at 15% interest per annum, will be due and payable on April 3, 2018; (3) commencing with the quarter ending June 30, 2016, at each year end, we will pay Sher, within 10 days of issuing our quarterly report on Form 10-Q, 20% of net operating cash flows for the quarter as depicted on the Statement of Cash Flows for the particular quarter; and (4) the Sher Note will remain collateralized by the same collateral as the original promissory note to Sher.

  

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 Unaudited Consolidated Condensed Financial Statements and the Notes thereto contained elsewhere in this report. Comparative results of operations for the periods indicated are discussed below.

 

Oil and gas activities

 

The following table sets forth certain of our discontinued oil and gas operating information for the quarter ended March 31, 2015. 

 

    Three Months Ended March 31,        
    2016   2015   Change   % Change
Production Data :                                
Oil production (bbl)     —         4,473       (4,473 )     (100 %)
Average daily oil production (bbl/d)     —         49       (49 )     (100 %)
Total BOE     —         4,473       (4,473 )     (100 %)
Total BOE/d     —         49       (49 )     (100 %)
Revenue Data:                                
Oil revenue ($)     —         170,015       (170,015 )     (100 %)
Average realized oil sales price ($/bbl)     —         38       (38 )     (100 %)
Operating expenses:                                
Production expenses     —         205,167       (205,167 )     (100 %)
Average operating expenses ($/boe)     —         46       (46 )     (100 %)
Operating Margin ($/boe)     —         (12 )     12       (100 %)
Depreciation, depletion, and amortization     —         56,284       (56,284 )     (100 %)

 

 

19  
 

Production and Revenue

Revenues

    Three Months Ended March 31,        
    2016   2015   $ Change   % Change
Product revenues:                
Crude oil sales   $ —       $ 170,015       (170,015 )     (100 %)
Natural gas sales     —         —         —         —    
Natural gas liquids sales     —         —         —         —    
Product revenues     —         170,015       (170,015 )     —    

Production

 

    Three Months Ended March 31,        
    2016   2015   $ Change   % Change
Sales Volume :                
Crude Oil(bbl)     —         4,473       (4,473 )     (100 %)
Natural Gas(mcf)     —         —         —         —    
Natural Gas Liquids(bbl)     —         —         —         —    
Total BOE     —         4,473       (4,473 )     —    

 

Pricing

 

    Three Months Ended March 31,        
    2016   2015   $ Change   % Change
Sales Price:                
Crude Oil($/bbl)   $ —       $ 37.69       (37.69 )     (100 %)
Natural Gas($/mcf)     —         —         —         —    
Natural Gas Liquids($/bbl)     —         —         —         —    

Trucking activities

 

Our subsidiary, Maxxon had revenue of $1,176,828 for the quarter ended March 31, 2016. During the quarter, we hauled a total of 611,956 barrels of oil, averaging 6,725 barrels hauled per day. Our pricing to customers per barrel hauled is based on various break points in miles hauled.

 

Revenue and cost of trucking revenue

 

The following table summarized the revenue and cost of trucking revenue for the quarter ended March 31, 2016.

 

Trucking revenue   $ 1,176,828  
Cost of trucking revenue     721,991  
Gross margin   $ 454,837  

 

20  
 

 

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 for the quarter ended March 31, 2016 were $925,343. 

 

    Three Months Ended March 31,        
    2016   2015   $ Change   % Change
General and administrative expenses                                
Professional fees   $ (63,734 )   $ 202,640     $ (266,374 )   $ (131 %)
Salaries and benefits     483,273       209,123       274,150       131 %
Office and administration     505,804       218,000       287,804       132 %
Total   $ 925,343     $ 629,763     $ 268,343     $ 102 %

 

Depletion, depreciation, amortization and impairment

 

The Company incurred $190,307 for depreciation, depletion, and amortization for the three month period ended March 31, 2016. There was no corresponding depreciation, depletion, and amortization in the three months ended March 31, 2015 as the Company had not yet completed the acquisition of Maxxon.

 

Interest expense

 

Interest expense was $74,988 and $309,978 for the three month period ended March 31, 2016 and 2015, respectively. The decrease in interest expense is related to higher amortization of debt discounts on convertible notes in the three months ended March 31, 2015.

 

Discontinued Operations

 

During the three months ended March 31, 2016 the Company accounted for its oil and gas operations as discontinued operations. There were no revenues and minimal costs incurred during the three months ended March 31, 2016. Further, the quarter ended March 31, 2015 statement of operations and cash flows has been reclassified to depict the accounting for discontinued operations.

 

Change in Fair Value of Derivatives

 

The Company did not have any derivatives during the three months ended March 31, 2016. However, during the three months ended March 31, 2015, the change in fair value of derivatives was $6,551,333, as a result of the Company using the market price on the date of the conversion to value the embedded derivative liabilities associated with certain convertible debt and convertible preferred stock.

 

Net Loss

 

The Company recorded a net loss of $792,333 for three months ended March 31, 2016, as compared to the net loss of $8,911,076 for the same quarter in 2015. The decrease in losses is mainly due to recognition of the non-cash change in fair value of the embedded derivative liability and our loss from discontinued operations.

 

Liquidity and Capital Resources

 

Liquidity

 

We have incurred net operating losses and operating cash flow deficits over the past several years, continuing through the quarter ended March 31, 2016. We sold our oil and gas properties in 2015 and acquired a crude oil hauling company in North Dakota, and we have been funded primarily by a combination of equity issuances, debentures and borrowings under loan agreements and to a lesser extent by operating cash flows, to expand our trucking services beyond the Bakken in North Dakota. During the three months ended March 31, 2016, we had net operating losses of $792,333 as well as negative operating cash flows of $630,976. However, management believes that based on various cost reductions which will occur in the June 2016 timeframe, increased and normalized revenue within our core business, as well as expansion of trucking operations to Texas, positive cash flow will result through Maxxon adding overall value to the Company. If volumes and revenue do not increase as expected, we may be at break-even rates or lower, depending on hauling volumes and revenue. Should this be the case, we would require additional operating funding in amounts which are not yet determinable. At March 31, 2016, we had cash and cash equivalents totaling $663,160.

 

Many of our operating costs have decreased over the year due to the implementation of expense efficiencies, to levels we believe will effectively operate our business. We expect our additional cash requirements over the next 12 months to be approximately $1.8 million, including capital additions for tractors, as well as normal corporate general and administrative expenses.

 

However, should the Company seek additional financing to fund operations, such financings may not be available and the terms of the financing may only be available on unfavorable terms.

 

On April 5, 2016, the Company entered into an Amended and Restated Secured Promissory Note (the “Restructuring Note”) with Sher that restructured the secured promissory note of $2,854,000 plus accrued interest of $142,700, in addition to a restructuring fee of $250,000, (the “Restructuring”), totaling $3,246,700 due Sher. The Restructuring resulted in (1) the Company paying $1,000,000 to Sher, which was completed on April 8, 2016. Further, the Company entered into a debenture with Hillair dated April 7, 2016 that netted cash to the Company of $1,000,000 which was then paid by us to Sher; (2) the remaining balance on the Restructuring Note of $2,246,700 at 15% interest per annum, will be due and payable on April 3, 2018; (3) commencing with the quarter ending June 30, 2016, at each year end, we will pay Sher, within 10 days of issuing our quarterly report on Form 10-Q, 20% of net operating cash flows for the quarter as depicted on the Statement of Cash Flows for the particular quarter; and (4) the Sher Note will remain collateralized by the same collateral as the original promissory note to Sher.

 

21  
 

 

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.

 

Hillair Capital Investments

 

Hillair has been our principal funding source since 2014, and has provided debt capital convertible into various instruments, including common stock, warrants. Further, Hillair has acquired preferred stock as well as converted certain preferred stock into common stock. They have provided us total capital through debt and preferred stock instruments of over $12 million in face value since 2014.

 

    For the Three Months Ended March 31,
    2016   2015
Net cash used in operating activities   $ (630,976 )   $ (1,314,487 )
Net cash provided by (used in) investing activities     (28,000 )     1,204,290  
Net cash provided by (used in) financing activities     858,633       (449,044 )
Net change in cash during period   $ 199,657     $ (559,241 )

 

Cash from Operating Activities

 

Cash used in operating activities was $630,976 for the three months ended March 31, 2016, as compared to cash used by operating activities of $1,314,487 in the same quarter of 2015. The significant change in cash used in operating activities is due to the inclusion of Maxxon’s operations, which resulted in a gross margin of $454,837 compared to no revenues in the prior year.

 

Cash from Investing Activities

 

Cash used in investing activities for the three months ended March 31, 2016 was $28,000 as compared to cash provided by investing activities of $1,204,290 during the same quarter of 2015. The cash flows used in investing activities for 2016 include a $28,000 down-payment on the purchase of seven hauling trailers from Southwest Truck & Trailer, Inc. During the same 2015 period, cash received from the sale of two oil and gas properties in the first quarter of approximately $1.7 million and costs incurred of approximately $0.9 million for the development of oil and gas properties.

 

Cash from Financing Activities 

 

Total net cash provided by financing activities was $858,633 for the three months ended March 31, 2016, consisting of proceeds of notes payable to Hillair. Total net cash from financing activities in the same quarter of 2015 was $449,044. 

 

Off Balance Sheet Arrangements

 

We have no off balance sheet financing activities. 

 

Off Balance Sheet Arrangements

We have no off-balance sheet arrangements.

22  
 

 

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 not 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 Commission’s rules and forms, and (ii) is accumulated and communicated to our management, as appropriate, to allow timely decisions regarding required disclosure.

 

Such conclusion was reached based on the following material deficiencies noted by management:

 

a) We have a lack of segregation of duties and limited resources to devote to our framework for internal controls due to the small size of the Company.

 

b) Lack of controls that provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposal of the Company's assets that could have a material effect on the financial statements.

 

c) Management hired a corporate Controller and is seeking to expand and train the accounting staff of the Company.

 

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. Management’s 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 system’s 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 March 31, 2016, 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.

 

23  
 

 

PART II - OTHER INFORMATION

ITEM 1 LEGAL PROCEEDINGS

None.

ITEM 1A RISK FACTORS

No material changes.

ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 None.

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

 None.

ITEM 4 CONTROLS AND PROCEDURES

 None.

ITEM 5 OTHER INFORMATION

 None.

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;
· may apply standards of materiality that differ from those of a reasonable investor; and
· were made only as of specified dates contained in the agreements and are subject to subsequent developments and changed circumstances.

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.

24  
 

 

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.

    LEGEND OIL AND GAS, LTD.
     
Dated: May 23, 2016   By: /s/ Andrew S. Reckles
      Andrew S. Reckles
      Chief Executive Officer
      (Principal Executive Officer)
     
Dated: May 23, 2016   By: /s/ Warren S. Binderman
      Warren S. Binderman
      President and Chief Financial Officer
      (Principal Accounting and Financial Officer)
       
25  
 

 

EXHIBIT INDEX

Exhibit No.   Description   Location
     
4.1   Original Issue Discount Senior Secured Convertible Debenture Due March 1, 2018   Incorporated by reference herein from our report on Form 8-K dated April 7, 2016, and filed with the SEC on April 11, 2016
       
10.1   Securities Purchase Agreement dated April 7, 2016   Incorporated by reference herein from our report on Form 8-K dated April 7, 2016, and filed with the SEC on April 11, 2016
     
31.1   Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934   Filed herewith.
     
31.2   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   Filed herewith.
     
32.1   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   Filed herewith.
     
101.INS   XBRL Instance Document   **
     
101.SCH   XBRL Taxonomy Extension Schema Document   **
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document   **
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document   **
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document   **
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document   **

 

* * 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.

 

26  

 

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