UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended September 30, 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 November 10, 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 September 30, 2016

Table of Contents

    Page
EXPLANATORY NOTE   3
     
CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS   3
PART I. FINANCIAL INFORMATION    
Item 1. Condensed Consolidated Financial Statements (Unaudited)   4
  Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015     4
  Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015   5
  Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015   6
  Notes to Condensed Consolidated Financial Statements   7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   16
Item 4. Controls and Procedures   19
       
PART II. OTHER INFORMATION    
Item 1. Legal Proceedings   21
Item 1A. Risk Factors   21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   21
Item 3. Defaults Upon Senior Securities   21
Item 4. Mine Safety Disclosures   21
Item 5. Other Information   21
Item 6. Exhibits   21
       
SIGNATURES   22
     
EXHIBITS     23

 

 

  2  

 

 

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 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 debt to Sher Trucking, LLC and to Hillair Capital Investments, L.P.;
  •   Our ability to fund our 2016 and 2017 customer growth plans;
  •   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 the commodity prices of crude oil on a global level;
  •   Our ability to control or reduce operating expenses and manage unforeseen costs;
  •   Our ability to fund and acquire suitable levels of rolling stock assets subsequent to selling our collateralized rolling stock;
  •   Our ability to maintain our existing property leases and acquire rights on properties that we desire;
  •   Environmental risks from our crude oil trucking operations;
  •   Our ability to compete successfully against larger, well-funded, established crude oil trucking companies;
  •   Our ability to comply with the many US Department of Transportation 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.  

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PART I – FINANCIAL INFORMATION

ITEM 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Legend Oil and Gas, Ltd.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

    September 30,   December 31,
    2016   2015
      Note 2
                 
ASSETS                
Current Assets                
Cash and cash equivalents   $ 840,395     $ 463,503  
Accounts receivable     258,043       183,773  
Prepaid expenses     519,070       281,737  
Other current assets     234,642       137,475  
Total Current Assets     1,852,150       1,066,488  
                 
Property, plant and equipment, net     2,219,457       3,212,174  
Assets held for sale - discontinued operations     398,680       398,680  
Intangible assets     280,617       317,242  
                 
Total Assets   $ 4,750,904     $ 4,994,584  
                 
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
Current Liabilities                
Accounts payable and accrued expenses   $ 671,733     $ 953,833  
Accounts payable-related party     45,000       120,000  
Accrued interest     187,316       106,505  
Short term debt     374,609       249,348  
Current portion of long term debt     270,091       1,074,781  
Total Current Liabilities     1,548,749       2,504,467  
                 
Long term debt, net of deferred financing costs of $197,917 in 2016 and $0 in 2015     2,319,728       2,040,518  
Liabilities of discontinued operations     118,425       96,129  
Convertible debt - related party, net of debt discount and deferred financing costs of $596,205 in 2016 and $89,323 in 2015     5,288,270       564,677  
Total Liabilities     9,275,172       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 shares issued and outstanding     —         —    
Series B preferred stock – $0.001 par value; 9,643 shares issued and 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, at September 30, 2016 and December 31, 2015, respectively     942,083       936,083  
Additional paid-in capital     44,849,747       44,844,948  
Accumulated deficit     (50,316,108 )     (45,992,248 )
Total Stockholders’ Deficit     (4,524,268 )     (211,207 )
                 
Total Liabilities and Stockholders’ Deficit   $ 4,750,904     $ 4,994,584  

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

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Legend Oil and Gas, Ltd.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

    For the Three Months Ended   For the Nine Months Ended
    September 30,   September 30,   September 30,   September 30,
    2016   2015   2016   2015
                 
Revenue   $ 807,489     $ 1,148,708     $ 2,810,428     $ 3,474,466  
                                 
Operating Expenses                                
Cost of revenues     700,560       1,071,639       2,014,024       2,195,184  
General and administrative     906,392       337,211       2,912,688       3,445,526  
Depreciation and amortization     192,163       216,541       593,745       406,951  
Loss (gain) on sale of property, plant and equipment     1,076,991       (9,455 )     1,108,263       (9,455 )
Total Operating Expenses     2,876,106       1,615,936       6,628,720       6,038,206  
                                 
Operating Loss     (2,068,617 )     (467,228 )     (3,818,292 )     (2,563,740 )
                                 
Other Expense                                
Interest expense     (260,070 )     (430,765 )     (480,305 )     (1,134,296 )
Change in fair value of embedded derivative liabilities     —         —         —         (6,551,333 )
Total Other Expense     (260,070 )     (430,765 )     (480,305 )     (7,685,629 )
                                 
Loss from continuing operations     (2,328,687 )     (897,993 )     (4,298,597 )     (10,249,369 )
Loss from discontinued operations     —         (48,137 )     (25,263 )     (1,478,839 )
Net loss   $ (2,328,687 )   $ (946,130 )   $ (4,323,860 )   $ (11,728,208 )
                                 
Basic and diluted net loss per common shares   $ (0.00 )   $ (0.00 )   $ (0.00 )   $ (0.02 )
                                 
Weighted average number of common shares outstanding:                                
Basic and Diluted     942,083,273       878,400,629       940,725,609       582,612,256  

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

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Legend Oil and Gas, Ltd.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

    For the Nine Months Ended
    September 30,   September 30,
    2016   2015
         
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net loss   $ (4,323,860 )   $ (11,728,208 )
Loss attributed to discontinued operations     25,263     1,478,839  
Loss from continuing operations     (4,298,597 )     (10,249,369 )
Adjustments to reconcile net loss to cash flows used in operating activities:                
Depreciation and amortization     593,745       406,951  
Stock-based compensation     10,800       —    
Loss on legal settlement     20,000       —    
Loss (gain) on disposal of property, plant and equipment     1,108,263       (9,455 )
Amortization of discounts on notes payable     208,222       373,771  
Change in fair value of embedded derivative liabilities     —         6,551,333  
Changes in operating assets and liabilities:                
Accounts receivable     (74,270 )     892,354  
Prepaid expenses     390,634       (348,430 )
Other current assets     (97,167 )     (103,821 )
Inventory     —         207,437  
Accounts payable     (103,436 )     486,705  
Accounts payable-related party     (75,000 )     (577,000 )
Other current liabilities     —         (83,169 )
Accrued interest     85,411       181,574  
Net cash flows used in operating activities - continuing operations     (2,231,395 )     (2,271,119 )
Net cash flows used in operating activities - discontinued operations     (2,967 )     (39,319 )
Net cash flows used in operating activities     (2,234,362 )     (2,231,800 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Proceeds from sale of property, plant and equipment     158,355       21,355  
Cash paid for the purchase of Black Diamond Energy Holdings, net cash received of $435,339 in 2015     —         (1,064,661 )
Cash paid for purchase of fixed assets     (301,018 )     (487,468 )
Net cash flows used in investing activities - continuing operations     (142,663 )     (1,530,774 )
Net cash flows provided by investing activities - discontinued operations     —         1,079,705  
Net cash flows used in investing activities     (142,663 )     (451,069 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Proceeds from convertible debt - related party     4,567,454       1,200,000  
Proceeds from short term debt     170,000       2,310,000  
Payments on short term debt     (1,856,476 )     (961,713 )
Payments on long term debt     (127,061 )     —    
Net cash flows provided by financing activities     2,753,917       2,548,287  
                 
Net change in cash and cash equivalents     376,892       (134,582 )
Cash and cash equivalents, beginning of period     463,503       701,848  
Cash and cash equivalents, end of period   $ 840,395     $ 567,266  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                
Cash paid during the period for:                
Interest   $ —       $ 5,453  
Taxes   $ —         —    
                 
NON-CASH INVESTING AND FINANCING ACTIVITIES:                
Change in estimate of asset retirement obligations   $ —       $ 88,256  
Accrual of oil and gas development costs   $ —       $ 251,505  
Fair value of derivative liability extinguished upon conversion of preferred stock to common stock   $ —       $ 7,680,000  
Conversion of preferred stock to common stock   $ —       $ 600,000  
Debt and common stock issued/to be issued for the purchase of Black Diamond Energy Holdings   $ —       $ 3,715,300  
Financed debt issuance costs and original issue discounts   $ 913,021     $ —    
Financing for insurance policies   $ 627,967     $ —    
Debt issued for acquisition of property, plant and equipment   $ 484,961     $ —    
Reclassification of accounts payable to short term debt   $ 40,850     $ —    
Capitalization of accrued interest on short term debt   $ 4,600     $ —    

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

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Legend Oil and Gas, Ltd.

NOTES TO CONDENSED 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 and the Permian Basin in Texas. These crude oil hauling operations commenced through our acquisition of Black Diamond Energy Holdings, LLC (“Maxxon”) on April 3, 2015. Our business focus is to expand our crude oil hauling operations into other basins within Colorado, Texas and Oklahoma. 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.

Further, through October 27, 2015, we were also an oil and gas exploration, development and production company; this 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. Our oil and gas property interests were located in the United States (Kansas and Oklahoma). On October 27, 2015, we sold our oil and gas exploration operations and we have presented those operations as discontinued operations.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The condensed consolidated financial statements at and for the three and nine month periods ended September 30, 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

In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments necessary to present fairly the financial position, results of operations and cash flows of the Company. These adjustments are of a normal, recurring nature. However, the financial statements do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the Company’s Annual Report on Form 10-K. Please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for such disclosures. The condensed consolidated balance sheet as of December 31, 2015 was derived from the audited consolidated balance sheet as of that date. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto, included in the Company’s 2015 Annual Report on Form 10-K.

Reclassifications

Certain information from the three and nine months ended September 30, 2015, and at December 31, 2015, have been reclassified to conform with the current period’s presentation in connection with our discontinued operations.

In the Company’s statement of cash flows included in Form 10-Q for the three months ended March 31, 2016 and 2015, the Company classified its cash flows attributable to the repayment of notes payable as “net cash used in financing activities – discontinued operations” as a result of its decision to dispose of its oil and gas exploration segment as described in Note 1. During the three months ended June 30, 2016, management reevaluated the nature of the Company’s notes payable and determined that such note payable is attributable to continuing activities.  Accordingly, the condensed consolidated statements of cash flows for the nine months ended September 30, 2016 and 2015 present the cash flow activity relating to the Company’s notes payable as “net cash used in financing activities – continuing operations”.  The following table presents amounts which were included in the condensed consolidated statements of cash flows included in Form 10-Q for the three months ended March 31, 2016 and 2015 which have been reclassified to conform to the current presentation.

    As Originally
Stated 		  As Restated
Proceeds from notes payable   $ —       $ 360,000  
Payments on notes payable     —         (809,044 )
Net cash flows used in financing activities – continuing operations     —         (449,044 )
Net cash flows used in financing activities – discontinued operations     (449,044 )        

 

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Assets held for sale - discontinued operations

We own a drilling rig which we have classified as an asset held for sale, which is part of our discontinued operations. 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 and nine months ended September 30, 2016 and 2015, no impairment loss was recorded.

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. All potentially dilutive shares or convertible instruments outstanding for the nine month periods September 30, 2016 and 2015 were anti-dilutive. Potentially dilutive common shares include convertible preferred stock and convertible debentures.

    September 30,   September 30,
    2016   2015
Potentially dilutive of common stock equivalents:        
Preferred stock     327,499,200       —    
Convertible debt     179,315,879       46,533,333  
Common stock payable     —         57,682,644  

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 March, 2016, FASB issued accounting standards update (ASU) 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting , which relates to the accounting for employee share-based payments. The guidance in this update addresses several aspects of the accounting for share-based payments, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The new standard is effective for the Company beginning on January 1, 2017. The Company is evaluating the effect that ASU 2016-09 will have on its consolidated financial statements and related disclosures.

NOTE 3 – GOING CONCERN

The accompanying condensed 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 approximately $4.3 million for the nine months ended September 30, 2016. 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 to 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 – 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:

    September 30,   December 31,
    2016   2015
Trucks, trailers, and vehicles   $ 2,595,318     $ 3,488,246  
Furniture and equipment     232,129       186,770  
Property and equipment, at cost     2,827,447       3,675,016  
Accumulated depreciation     (607,990 )     (462,842 )
Property and equipment, net   $ 2,219,457     $ 3,212,174  

 

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The drilling rig, in the amount of $398,680 (net of accumulated depreciation of $66,320) was previously included in property and equipment, and has been reclassified to assets held for sale - discontinued operations, as the Company has ceased all drilling operations. During the third quarter of 2015, the Company fully impaired the value of their Treeline Diesel Center, LLC subsidiary assets with a carrying value of $224,835 (net of accumulated depreciation of $33,108).

In February 2016, the Company exchanged vehicles with a carrying value of $184,439 for new vehicles with a purchase price of $198,210. 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 $211,659. Accordingly, the Company recorded a loss on the disposition of the vehicles of $31,272 during the nine months ended September 30, 2016.

In September 2016, the Company sold 19 fleet vehicles with a net book value of $1,235,346 (net of accumulated depreciation of $428,654) through Ritchie Bros. Auctioneers (America) Inc. The Company received $158,355 in proceeds, resulting in a recorded loss on the sale of the vehicles of $1,076,991 during the nine months ended September 30, 2016.

The Company recorded depreciation expense for the three months ended September 30, 2016 and 2015 in the amount of $179,865 and $216,541, respectively, and $557,120 and $406,951, for the nine months ended September 30, 2016 and 2015, respectively.

NOTE 5 – INTANGIBLE ASSETS

The amount of intangible assets related to Maxxon acquisition and the amount of related accumulated amortization and impairment are as follows:

    September 30,   December 31,
    2016   2015
Non-compete agreement   $ 39,200     $ 39,200  
Trademark     47,800       47,800  
Customer relationships     267,000       267,000  
Total intangible assets     354,000       354,000  
Accumulated amortization of intangible assets     (73,383 )     (36,758 )
Net Intangible asset ending balance, September 30   $ 280,617     $ 317,242  

As of December 31, 2015, the Company assessed its goodwill for impairment and determined that goodwill was fully impaired. Accordingly, as of September 30, 2016, the Company removed goodwill and the corresponding accumulated impairment from the accompanying condensed consolidated financial statements. Amortization of intangible assets for the three months ended September 30, 2016 and 2015 was $12,298 and $0, respectively, and $36,625 and $0, for the nine months ended September 30, 2016 and 2015, respectively.

NOTE 6 – LIABILITIES OF DISCONTINUED OPERATIONS – ASSET RETIREMENT OBLIGATION

The asset retirement obligation recorded as of both September 30, 2016 and December 31, 2015 was related to the Van Pelt lease, a non-producing field and discontinued operation we acquired during 2015, and for which we still own the lease as of September 30, 2016. The asset retirement obligation at both September 30, 2016 and December 31, 2015 was $118,425 and $96,129, respectively, and has been included within liabilities of discontinued operations on the condensed consolidated balance sheets. The Company recorded $0 and $13,328 in accretion expense of the asset retirement obligation liability during the three months ended September 30, 2016 and 2015, respectively. The Company recorded $22,296  and $18,113 in accretion expense of the asset retirement obligation liability during the nine months ended September 30, 2016 and 2015, respectively.

NOTE 7 – RELATED PARTY TRANSACTIONS

As of December 31, 2015, there was an amount due to Northpoint Energy Partners (“NPE”), of which our CEO is a principal, in the amount of $120,000, as a result of the bonus accrual under the NPE letter agreement for CEO services, which was paid out during the nine months ended September 30, 2016. Additionally, there is an accrued bonus to NPE at September 30, 2016, which has not yet been paid, for services rendered during the nine months ended September 30, 2016.

Additionally, during the current year, we grouped together the December 31, 2015 accrued interest – related party in the amount of $10,034 within the accounts payable and accrued expenses line on the accompanying balance sheet.

  9  

 

 

NOTE 8 – Convertible debt – related party

On October 22, 2015, the Company consummated a Securities Purchase Agreement with Hillair Capital Investments, LP (“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. The debenture was convertible into 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 were $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 47,980,000 shares of common stock at a conversion price of $0.03 per share. The Amended SPA also extended the maturity date to March 1, 2018. All other terms of the debenture remain the same.

On March 25, 2016, we entered into a convertible debenture with Hillair totaling $410,788, due and payable on March 1, 2018. This debenture is convertible into 13,692,933 of our common shares at $0.03 per share. We received net proceeds of $360,000, net of original issue discount, legal and diligence fees, which were recorded as a debt discount within the convertible debt - related party line of the accompanying condensed consolidated balance sheet.

On April 6, 2016, we entered into a convertible debenture with Hillair totaling $1,159,206, due and payable on March 1, 2018. This debenture is convertible into 38,340,200 of our common shares at $0.03 per share. We received net proceeds of $1,000,000, net of original issue discount, legal and diligence fees, which were recorded as a debt discount within the convertible debt - related party line of the accompanying condensed consolidated balance sheet.

On May 27, 2016, we entered into a convertible debenture with Hillair totaling $460,082, due and payable on March 1, 2018. This debenture is convertible into 15,336,080 of our common shares at $0.03 per share. We received net proceeds of $400,000, net of original issue discount, legal and diligence fees, which were recorded as a debt discount within the convertible debt - related party line of the accompanying condensed consolidated balance sheet.  

On July 5, 2016,  we entered into a convertible debenture with Hillair totaling $330,000, payable in full on March 1, 2018. This debenture is convertible into 11,000,000 of our common shares at $0.03 per share. We received net proceeds of $300,000, net of original issue discount, legal and diligence fees, which were recorded as a debt discount within the convertible debt - related party line of the accompanying condensed consolidated balance sheet.  

On July 27, 2016,  we entered into a convertible debenture with Hillair totaling $550,000, payable in full on March 1, 2018. This debenture is convertible into 18,333,333 of our common shares at $0.03 per share. We received net proceeds of $475,000, net of original issue discount, legal and diligence fees, which were recorded as a debt discount within the convertible debt - related party line of the accompanying condensed consolidated balance sheet.  

On August 21, 2016,  we entered into a convertible debenture with Hillair totaling $385,000, payable in full on March 1, 2018. This debenture is convertible into 12,833,333 of our common shares at $0.03 per share. We received net proceeds of $340,000, net of original issue discount, legal and diligence fees, which were recorded as a debt discount within the convertible debt - related party line of the accompanying condensed consolidated balance sheet.  

On September 30, 2016, we entered into a convertible line of credit facility with Lorton Finance Company (“Lorton”), an affiliate of Hillair, due on September 30, 2019. The aggregate amount of this facility is $2,000,000, with the initial draw by us of $1,150,000. There is an amount remaining on the facility at September 30, 2016, of $850,000 . The portion of this credit facility is convertible on future draws we make above the initial draw of $1,150,000. These subsequent draws, when made, convert into our Series B Preferred Stock in amounts equivalent to five percent (5%) of the amount of the draw divided by the $1,000 stated value of the Series B Preferred Stock.  Each of these preferred shares is convertible into our common stock at $0.03 per share. The facility bears interest at the rate of 20% per annum, payable monthly beginning March 31, 2017. Beginning September 30, 2017, the Company is obligated to make monthly principal payments of $47,917. The facility is secured by titles to 19 trucks owned by the Company’s subsidiaries. After taking into account legal and diligence fees, and the payment in full of our line of credit with State Bank & Trust Company (see Note 9) in the amount of $274,955, the net proceeds received by the Company was $787,500.

The total debt discount and deferred financing costs for the convertible debentures amount to $596,205 and $89,323 (net of accumulated amortization of $170,816 and $14,677) as of September 30, 2016 and December 31, 2015, respectively. The Company amortized to interest expense, the debt discounts and deferred financing costs associated with its convertible debentures in the amount of $91,951 and $0 for the three months ended September 30, 2016 and 2015, respectively, and $156,139 and $0 for the nine months ended September 30, 2016 and 2015, respectively.

  10  

 

 

NOTE 9 – NOTES PAYABLE

Notes payable consist of the following: September 30,
2016 		  September 30,
2015
             
a) On April 5, 2016, the Company entered into an agreement with Sher Trucking, LLC (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. This note accrues interest at 15% per annum, with all principal and interest due upon maturity. The remaining amount outstanding on the note as of September 30, 2016 and December 31, 2015 was $2,099,546 and $2,854,000, respectively. The restructuring fee of $197,917 (net of accumulated amortization of $52,083) is being amortized to interest expense through the term of the agreement. The note is due on April 3, 2018. The note will remain collateralized by the same collateral assets (tractors and trailers) as the original promissory note to Sher. On October 27, 2016, Sher released the collateral, as more fully described in Note 13, due to our payment of $300,000, which also allowed us to obtain full title to the 12 secured trucks. This note is now unsecured and, effective October 27, 2016, the balance on this note is $1,601,629.    $   1,901,629     $ 2,854,000
                   
b) During 2016, the Company entered into various insurance financing agreements.  The agreements are payable in nine monthly payments and accrue interest at various rates (ranging from 3.45% and 4.61%). These financing agreements are unsecured; however, should there be a default, the Company’s insurance policies would be subject to cancellation.        315,744       —
                   
c)   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 bore interest at 4% and was due on December 16, 2016. The note was collateralized by certain property of Maxxon. On September 30, 2016, the secured line of credit facility was repaid with the proceeds from the related party line of credit facility with Lorton, and this agreement with State Bank and Trust Company was terminated.       —       100,000
                   

 

  11  

 

 

 

d) On March 29, 2016, the Company entered into a trailer purchase agreement with Southwest Truck & Trailer, Inc. The Company purchased 7 trailers valued at $278,636.  The Company paid $28,000 as a down payment and entered into a financing agreement with a third party for 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.  The note is secured by the related trailers acquired with a net book value of $255,251 (net of accumulated depreciation of $23,385).       206,131       —
                   
e) 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 as a down payment and entered into a financing agreement with a third party for the remaining balance of $184,968. The financing requires monthly payments of $5,138 for the next 3 years and has a 0% interest rate.  The note is secured by the related trailers acquired with a net book value of $196,690 (net of accumulated depreciation of $20,679).       157,132       —
                   
f) On October 19, 2015, the Company entered into a secured note agreement with a financial institution for the purchase of a vehicle in the amount of $118,110. The note 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 balance of $135,278 with interest at 3.99% and is due on April 1, 2021. The new note is secured by the new vehicle acquired with a net book value of $105,655 (net of accumulated depreciation of $13,286).       122,908       116,411
                   
g) On November 12, 2015, the Company entered into a secured note agreement with a financial institution for the purchase of a vehicle in the amount of $57,106. The note bore 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 balance of $76,380 with interest at 3.90% and is due on April 5, 2021. The new note is secured by the new vehicle acquired with a net book value of $70,552 (net of accumulated depreciation of $8,718).       69,381       55,843
                   
h) 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 of the trucks.  The note bears interest at 7%, is secured by those trucks with a net book value of $79,053 (net of accumulated depreciation of $17,354), and is due on January 1, 2018.         57,470       89,511
                   

 

  12  

 

 

 

i) On May 19, 2016, the Company entered into a secured note agreement with a financial institution for the purchase of a vehicle valued at $53,355. The Company paid $4,000 as a down payment and financed the remaining amount of $49,355. The note was issued with a 7.49% interest rate and is due on May 19, 2020. The loan is secured by the related vehicle with a net book value of $48,646 (net of accumulated depreciation of $4,710).     46,110       —
                   
j) In January 2016, the Company entered into a forbearance 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.     23,523       —
                   
k) 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.     27,055       45,805
                   
l) 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 note was in default as of September 30, 2016, but the Company has not received a waiver nor a default notice from NWTR.         26,664       26,664
                   
m) On May 4, 2016 the Company entered into an agreement with Drivestar to repay $20,000 of incurred expenses related to the cancellation of a trailer sale. The note requires monthly payments of $2,585 through December 15, 2016 and has a 9% interest rate.       7,640       —
                   
n) 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.       3,041       3,041
                   

 

  13  

 

 

 

o) 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. This note was fully repaid as of September 30, 2016.         —       73,372 
  Total       2,964,428       3,364,647 
                   
  Less short term debt               (374,609 )           (249,348)
                   
  Less current portion of long term debt               (270,091 )        (1,074,781)
                   
  Long term debt     $ 2,319,728     $ 2,040,518 

NOTE 10 – 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. As of September 30, 2016 and December 31, 2015 the Company designated 600 shares and 9,643 shares of its 100 million shares of blank check preferred stock as Series A Convertible Preferred and Series B Convertible Preferred, respectively.

Convertible Preferred Stock

On October 22, 2015, the Company consummated a Securities Exchange Agreement with Hillair, its majority shareholder, 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. The shares are convertible into 327,499,200 shares of our common stock at $0.03 per share.

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.

NOTE 11 – DISCONTINUED OPERATIONS

The amounts of net assets related to the discontinued operations of the Company’s oil and gas operations as of September 30, 2016 and December 31, 2015 were $280,255 and $302,551, respectively. The table below summarizes the operations of the Company’s oil and gas activities for the three and nine months ended September 30, 2016 and 2015.

    For the Three Months Ended   For the Nine Months Ended
    September 30,
2016 		  September 30,
2015 		  September 30,
2016 		  September 30,
2015
Revenues   $ —       $ 81,843     $ —       $ 322,569  
Production expenses     —         (115,780 )     (2,967 )     (398,826 )
Operating expenses     —         —         —         (29,877 )
Depletion, depreciation and amortization     —         (34,443 )     —         (119,454 )
Accretion of asset retirement obligation     —         (13,328 )     (22,296 )     (18,113 )
Loss on sale of oil and gas properties     —         —         —         (892,131 )
Impairment loss on oil and gas properties     —         —         —         (452,277 )
Other Income     —         33,571         —         109,270  
Loss from discontinued operations   $ —       $ (48,137 )   $ (25,263 )   $ (1,478,839 )

 

  14  

 

 

NOTE 12 – 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.

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 continuing until February 12, 2020.

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 a restructured lease agreement 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 use the funds contained in the security deposit in the amount of $6,000 per month as rent expense (in lieu of cash payments) 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 use the revised amount 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 payment will be $10,000 per month, the maximum rental payment under the restructured lease agreement.

NOTE 13 – SUBSEQUENT EVENTS

The Company has evaluated events and transactions subsequent to September 30, 2016 and through the date these condensed consolidated financial statements were included in this Form 10-Q and filed with the SEC.

On October 27, 2016, we entered into a debenture agreement with Lorton to draw an additional $300,000 against the available line of credit facility. In exchange for this debenture, Lorton paid Sher, directly, for which the payment paid down $300,000 of principal and fully released the collateral (12 trucks) against the note payable to Sher. Due to the conversion feature associated with the Lorton credit facility, this draw results in our issuance of approximately 15 shares of Series B Preferred Stock to Lorton.

On October 31, 2016, we entered into a convertible debenture with Hillair totaling $440,000, payable in full on March 1, 2018. This debenture is convertible into 13,333,333 of our common shares at $0.03 per share. We received net proceeds of $390,000, net of original issue discount, legal and diligence fees.

 

  15  

 

 

ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is based upon our condensed 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 year ended December 31, 2015. 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 condensed 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

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. In April 2016, we restructured this note to Sher, which is further described in detail within Note 9 to the Unaudited Condensed Consolidated Financial Statements.

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. This is a discontinued operation, as we sold our oil and gas assets in October 2015.

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 largest customers are multi-billion dollar market cap companies, most of which are either publicly held, or large, multi-national private companies. We principally serve the Permian basin in Texas, as well as the Bakken in North Dakota.

Results of Operations

The following is a discussion of our condensed consolidated results of operations, financial condition and capital resources. You should read this discussion in conjunction with our Unaudited Condensed Consolidated 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

Our oil and gas activities were discontinued in October 2015.

Trucking activities

Our subsidiary, Maxxon, had revenue of $807,489 and $2,810,428 for the three and nine months ended September 30, 2016. The increase in total barrels hauled during the three months ended September 30, 2016, compared to the same period in 2015, is due to the acquisition of new customers as a result of the Company’s expansion to Texas and New Mexico, but offset by a substantial decrease in price per barrel due to the global depression in the oil markets. In order to maintain our customer base, we needed to significantly reduce our rates per hauled barrel. The average hauling price per barrel received by Maxxon during the three and nine months ended September 30, 2016 was $1.37 and $1.67, down from $2.42 and $1.85 per barrel in the same period of 2015.

The following table summarizes our barrels hauled for each of the three and nine month periods ended September 30, 2016 and 2015: 

    Three months ended
September 30, 		  Change   %
Change 		  Nine months ended
September 30, 		  Change   %
Change
    2016   2015           2016   2015        
Barrels hauled     588,968       474,542       114,426       24 %     1,681,855       1,876,848       (194,993 )     -10 %

 

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Revenues and cost of revenues

Gross margin during the three months ended September 30, 2016 is higher, relative to the same period in 2015, due to operational expenses related to repair and maintenance costs for our subsidiary Treeline Diesel Center, LLC, in 2015. Treeline ceased operations in 2015, with all assets being impaired in 2015. The decrease in gross margin during the nine months ended September 30, 2016, compared to the same period in 2015, is due to the addition of multiple vehicle lease agreements in 2016 to expand the size of our fleet. The decrease in gross margin during the three months ended September 30, 2016, compared to the overall nine months ended September 30, 2016, is due to lower hauling rates to acquire new customers, additional fleet vehicle lease agreements, and higher repair and maintenance costs.

The following table summarizes the revenues and cost of revenues for the three and nine months ended September 30, 2016 and 2015:

   

Three months ended
September 30,

         

Nine months ended
September 30,

       
    2016   2015   Change   %
Change 		  2016   2015   Change   %
Change
Revenue   $ 807,489     $ 1,148,708     $ (341,219 )     -30 %   $ 2,810,428     $ 3,474,466     $ (664,038 )     -19 %
Cost of revenues     700,560       1,071,639       (371,079 )     -35 %     2,014,025       2,195,184       (181,159 )     -8 %
Gross margin   $ 106,929     $ 77,069     $ 29,860           $ 796,403     $ 1,279,282     $ (482,879 )      
Gross margin %     13 %     7 %                     28 %     37 %                

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 during the three months ended September 30, 2016, are significantly higher than the same period in 2015, principally due to the increase in employees and office expenses related to the expansion of Maxxon’s oil hauling operations to Texas and New Mexico, and the relocation of its headquarter to Colorado. The decrease during the nine months ended September 30, 2016, compared to the same period in 2015, is a result of professional fees, which increased in 2015 due to transaction related costs for the acquisition of Maxxon, and decreased in 2016 due to cost cutting measures implemented by management, as well as a settlement paid in the amount of $2,000, for a previously accrued amount of approximately $80,000. Thus professional fees were credited by the difference between the accrued amount and settlement amount.

   

Three months ended
September 30,

          Nine months ended
September 30, 		       
    2016   2015   Change   %
Change 		  2016   2015   Change   %
Change
General and administrative expenses                                                                
Professional fees   $ 102,408     $ 114,523     $ (12,115 )     -11 %   $ 201,491   $ 747,679     $ (546,188 )     -73 %
Salaries and benefits     471,228       197,736       273,492       138 %     1,544,792       1,498,886       45,906       3 %
Office and administration     332,756       24,952       307,804       1234 %     1,166,405       1,198,961     (32,556 )     -3 %
Total   $ 906,392     $ 337,211     $ 569,181           $ 2,912,688     $ 3,445,526     $ (532,838 )      

Depreciation and Amortization

The Company incurred $192,163 for depreciation and amortization for the three months ended September 30, 2016, compared to $216,541 for the same period during 2015. This slight decrease is related to the sale of 19 fleet vehicles with a net book value of $1,235,346 (net of accumulated depreciation of $428,654) through Ritchie Bros. Auctioneers Inc in September 2016. Depreciation and amortization for the nine months ended September 30, 2016 is $593,745 compared to $406,951 for the same period during 2015, reflective of the acquisition and consolidation of Maxxon.  

Interest expense

Interest expense was $260,070 for the three months ended September 30, 2016, compared to $430,765 for the same period in 2015. Interest expense for the nine months ended September 30, 2016 is $480,305, compared to $1,134,296 in 2015. Interest expense decrease for the periods presented are principally the result of the conversion by Hillair of certain debt to preferred and common stock, as well as an offset by an increase in amortization of original issue discounts and deferred financing costs.

Discontinued Operations

During the nine months ended September 30, 2016, the Company accounted for its oil and gas operations as discontinued operations. There were no revenues and minimal costs incurred during the three and nine months ended September 30, 2016. During the three months ended September 30, 2015, there was little activity, as most activity of our discontinued operations occurred in the first three months of 2015. Further, the three and nine months ended September 30, 2015 condensed consolidated statements 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 nine months ended September 30, 2016. However, during the nine months ended September 30, 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.

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Net Loss

The Company recorded a net loss of approximately $4.3 million for the nine months ended September 30, 2016, as compared to a net loss of approximately $11.7 million for that same nine month period in 2015.  The decrease in losses is mainly due to recognition of the non-cash charge related to the derivative liability discussed above, and the discontinued operations related to our oil and gas activities.  Further, when evaluating the net loss for the 2015 nine month period, after reducing the derivative charge as well as our discontinued operations, the same period loss was approximately $3.7 million.  The increase in our loss for the nine month period ended September 30, 2016 compared to the same period in 2015, when extracting the above factors, was approximately $0.6 million.  This increase for the 2016 period was the result of a loss on the sale of assets of approximately $1.1 million, which was slightly offset by cost cutting measures implemented by management. The decrease in our loss for the three month period ended September 30, 2016 compared to the same period in 2015, is primarily a result of our strategy to decrease the price per barrel charged by Maxxon to attract and gain new customers to overcome the global oil depression.

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 September 30, 2016. We sold our oil and gas properties in 2015 and acquired a crude oil hauling company, 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, to the Permian Basin located in Texas and New Mexico. During the nine months ended September 30, 2016, we had net operating losses of $4,323,860 as well as negative operating cash flows of $2,234,362. However, management believes that based on various cost reductions, increased and normalized revenue within our core business, as well as continued expansion of trucking operations to Texas and New Mexico, 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 September 30, 2016, we had cash and cash equivalents totaling $840,395. We have currently forecasted losses of approximately $200,000 per month, which are expected to decrease as we obtain new customers and drive our top line revenue, which should also reduce our net losses.

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 $2.4 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.

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 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 $13.5 million in face value since 2014.

    For the Nine months ended
September 30,
    2016   2015
Net cash used in operating activities   $ (2,234,362 )   $ (2,231,800 )
Net cash used in investing activities     (142,663 )     (451,069 )
Net cash provided by financing activities     2,753,917     2,548,287  
Net change in cash during period   $ 376,892     $ (134,582 )

 

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Cash from Operating Activities

Cash used in operating activities was $2,234,362 and $2,231,800 for the nine month periods ended September 30, 2016 sand 2015, respectively. For 2015, cash used in operating activities includes Maxxon’s operations as of April 3, 2015, resulting in six months of operating activity with Maxxon during the nine month period ended September 30, 2015, compared to nine months of operating activity with Maxxon during the same period in 2016. Operating cash flow uses in 2016 have been reduced significantly from the same period of 2015 due to relatively strong cost controls put into place by management during 2016.

Cash from Investing Activities

Cash used in investing activities for the nine months ended September 30, 2016 and 2015 was approximately $142,700 and $451,000, respectively. The cash flows used in investing activities for 2016 include payment in full of approximately $183,400, on the purchase of three tractors, a $60,400 down payment on the purchase of thirteen crude hauling trailers, and capitalized expenses related to these purchases, which were partially offset by $158,400 in proceeds for the sale of assets. During the same 2015, period from continuing operations, payments were made on the purchase of fixed assets in the amount of approximately $0.5 million and cash paid for the purchase of Black Diamond of approximately $1.1 million (net of cash received of approximately $0.4 million). During 2015, the cash flows provided by discontinued operations consisted of cash received from the sale of two oil and gas properties of approximately $1.67 million, offset by the costs incurred of approximately $.6 million for the development of oil and gas properties.

Cash from Financing Activities

Total net cash provided by financing activities was $2,753,917 for the nine months ended September 30, 2016, consisting of proceeds of notes payable to Hillair and Lorton, an affiliate of Hillair, offset by payments on short term debt. Total net cash provided by financing activities in the same period in 2015 was $2,548,287, consisting principally of amounts received from Hillair for the acquisition of Maxxon, as well as funds provided for the purchase of twelve fleet trucks.

Off Balance Sheet Financing Activities

We have no off balance sheet financing activities.

Off Balance Sheet Arrangements

We have no off-balance sheet arrangements. 

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 weaknesses 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.

Management is in the process of remediating these weaknesses, with the hire of a controller in May 2015, and is continuing to expand the accounting department.

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 ).

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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 September 30, 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.  

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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 MINE SAFETY DISCLOSURES

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.  

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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: November 10, 2016   By: /s/ Andrew S. Reckles
      Andrew S. Reckles
      Chief Executive Officer
      (Principal Executive Officer)
     
Dated: November 10, 2016   By: /s/ Warren S. Binderman
      Warren S. Binderman
      President and Chief Financial Officer
      (Principal Accounting and Financial Officer)

 

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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
         
4.2   Original Issue Discount Senior Secured Convertible Debenture Due March 1, 2018   Incorporated by reference herein from our report on Form 8-K dated May 27, 2016, and filed with the SEC on September 3, 2016
         
4.3   Original Issue Discount Senior Secured Convertible Debenture Due March 1, 2018   Incorporated by reference herein from our report on Form 8-K dated July 5, 2016, and filed with the SEC on July 7, 2016
         
4.4   Original Issue Discount Senior Secured Convertible Debenture Due March 1, 2018   Incorporated by reference herein from our report on Form 8-K dated July 27, 2016, and filed with the SEC on August 1, 2016
         
4.5   Original Issue Discount Senior Secured Convertible Debenture Due March 1, 2018   Incorporated by reference herein from our report on Form 8-K dated August 22, 2016, and filed with the SEC on August 23, 2016
         
4.6   Original Issue Discount Senior Secured Convertible Debenture Due September 30, 2019   Incorporated by reference herein from our report on Form 8-K dated  September 30, 2016, and filed with the SEC on October 6, 2016
         
4.7   Original Issue Discount Senior Secured Convertible Debenture Due September 30, 2019   Incorporated by reference herein from our report on Form 8-K dated September 30, 2016, and filed with the SEC on October 6, 2016
         
4.8   Original Issue Discount Senior Secured Convertible Debenture Due September 30, 2019   Incorporated by reference herein from our report on Form 8-K dated October 27, 2016, and filed with the SEC on November 2, 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
         
10.2   Securities Purchase Agreement dated May 27, 2016   Incorporated by reference herein from our report on Form 8-K dated May 27, 2016, and filed with the SEC on September 3, 2016
         
10.3   Securities Purchase Agreement dated July 5, 2016   Incorporated by reference herein from our report on Form 8-K dated July 5, 2016, and filed with the SEC on July 7, 2016
         
10.4   Securities Purchase Agreement dated July 27, 2016   Incorporated by reference herein from our report on Form 8-K dated July 27, 2016, and filed with the SEC on August 1, 2016
         
10.5   Securities Purchase Agreement dated  August 22, 2016   Incorporated by reference herein from our report on Form 8-K dated August 22, 2016, and filed with the SEC on August 23, 2016

 

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10.6   Securities Purchase Agreement dated  September 30, 2016   Incorporated by reference herein from our report on Form 8-K dated September 30, 2016, and filed with the SEC on October 6, 2016
         
10.7   Security Agreement dated  September 30, 2016   Incorporated by reference herein from our report on Form 8-K dated September 30, 2016, and filed with the SEC on October 6, 2016
         
10.8   Subsidiary Guarantee dated  September 30, 2016   Incorporated by reference herein from our report on Form 8-K dated September 30, 2016, and filed with the SEC on October 6, 2016
         
10.9   Letter Agreement dated  September 30, 2016   Incorporated by reference herein from our report on Form 8-K dated September 30, 2016, and filed with the SEC on October 6, 2016
         
10.10   Addendum to Securities Purchase Agreement dated September 30, 2016   Incorporated by reference herein from our report on Form 8-K dated October 27, 2016, and filed with the SEC on November 2, 2016
         
10.11   Securities Purchase Agreement dated  October 31, 2016   Incorporated by reference herein from our report on Form 8-K dated October 31, 2016, and filed with the SEC on November 2, 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.

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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.

 

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